Commissioner of Income-tax, Ernakulam Vs. Devadasan and Others. - Court Judgment

GOVINDAN NAIR J. - Acting under section 66 of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal, Madras Bench, has referred the following question to this court :

'Whether the assessee did constitute an association of persons carrying on business for gain ?'

This reference was originally numbered as I.T.R. No. 32 of 1963. But, when the case came up for hearing, this court found that the power of attorney executed by the heirs of Cherutty was necessary for deciding the question referred to us and accordingly called for a fuller statement of the case under sub-section (4) of section 66 of the Indian Income-tax Act, 1922, by order dated 12th August, 1964. We have now before us the additional statement as well as the copy of the power of attorney. And, as a result of the discussion at the Bar, it is now clarified that the only income with which we are concerned in this reference is the income derived by the felling of trees from a forest area that had been taken on a 'verumpattom lease' by Cherutty, the deceased. Cherutty died on October 15, 1956, and we are concerned in this reference with the question of assessment for the two years 1959-60 and 1960-61.

The heirs of Cherutty had executed a power of attorney on October 24, 1956, in favour of one Devadasan who is also one of the heirs of Cherutty. This power is annexure 'D' and paragraphs 1 and 2 reading as under, enumerating the powers of Devadasan, are the material ones for answering the question raised.

'1. To be in possession and custody of all the property, movable and immovable, owned by the aforesaid deceased and to which we, along with the said attorney, are entitled as co-owners thereof;

2. To carry on and conduct the business known as C. C. Brothers for the common benefit of all of us and for the said purpose to do all such acts and things as may by necessary or expedient at his discretion.'

The Tribunal in its order observed :

'He further held that the assessee had extracted timber from its own estate for the purpose of planting pepper, coffee, etc., on a part of the thousand acre estate which had been taken on lease for five years in 1956. He brought to tax the sums of Rs. 30,225 and Rs. 58,176 as income from this source in the two years. The Appellate Assistant Commissioner confirmed these findings.'

And in paragraph 5 it said :

'One thousand acres, as we stated above, had been taken on lease in 1956; forty acres of it were paddy-growing land. The rest had to be cleared for cultivation. Sixty acres of this were cleared in the accounting year relating to 1959-60 and one hundred acres in the next.'

After referring to the decision of the Supreme Court in Commissioner of Income-tax v. Indira Balkrishna, the Tribunal came to the conclusion that there is no reason to hold that the heirs of the deceased Cherutty form an 'association of persons' to be assessed as such in relation to the income which we have referred to. In the additional statement of the case, in paragraph 7, it is stated :

'The document dated October 24, 1956, thus merely confers upon the eldest son, Devadasan, the power to manage the properties of the other co-owners. The shares of the co-owners are definite and ascertainable. There is no pooling of their shares in any fresh enterprise. There is therefore nothing in the document to indicate that an association of persons was formed by the parties in the document.'

The test to be applied has been laid down by the Supreme Court in Commissioner of Income-tax v. Indira Balkrishna :

'... an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.'

This test has been applied by the Supreme Court again in the decision in Mohamed Noorullah v. Commissioner of Income-tax and affirmed in the decision in Commissioner of Agricultural Income-tax v. Raja Ratan Gopal.

In the last of this series of decisions, it was held that there was no 'association of persons' and their Lordships observed :

'In the present case, the said test is not satisfied. The four nephews of Raja Khaja Pershad succeeded to the estate as co-sharers and each one of them was entitled to 1/4 share of the income from the estate. They did not form a unit for the promotion of any joint enterprise to earn income, profits or gains. The collection of the entire income from the estate by one of the shares or even by a common employee will not make that income an income from a joint venture. Each of the shares get his income as an individual and not as an association of individuals.'

The income derived from the felling of the trees from the land on 'verumpattom lease', it is admitted, is not income derived from C. C. Brothers, a business referred to in the power of attorney. From the available material it appears that the income is what has been derived from the felled trees that were cut to make the land cultivable. It is not possible to spell out any joint venture solely from this operation. All that is said in the power of attorney, which incidentally is the only documentary evidence in this regard and the only material, is that immovable properties must be in the custody and possession of the power-holder. Each of the heirs takes a specific share and the heirs enjoy the property as tenants-in-common is not disputed. The Tribunal has not found that there has been an 'association of persons' formed for a common purpose or for a common object. In fact, the finding is to the contrary and this is reiterated in the statement of the case. There is no material available that would justify upsetting the conclusion reached by the Tribunal. The question referred is answered in the negative, i.e., in favour of the assessee and against the department. There will be no order as to costs.

Question answered in favour of the assessee.