# ~ [ ' 515. . G. MURUGESAN & BROS v. I . . ' C.I.T., MADRAS

- **Citation:** [1973] 3 S.C.R. 515
- **Court:** Supreme Court of India
- **Decided:** 1973-02-08
- **Case number:** Civil Appeal Nos. 685 to 690 of 1970
- **Bench:** KS· JlEGDE, P: J~G~Nmohan Reddy, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/515-g-murugesan-bros-v-i-c-i-t-madras-5841
- **Pages:** 7

## Headnote

Jncome-ta.~-·Assocwtton.
1
of. Pcrds~ns'-
1
What constitutes-Volition on
I ,
f members an essentm mgre tent- n case of realisation of divlpar~ 0 there is · no' act of management-The statement of members that
~I ~ad s/arted tfrawing dividends Separately must be accepted in abse11ce
~~~acts. to the conrrt~'-Tircy must be asses.red as 'Individuals.'
F~r the years 1957-58, to 19.62~63 the assessee,s were assescd by the.
Jocome·tax Officer as an Association of Persons. They bad filed their
returns for the first two of these years as 'Association of persons' but jn
!959-60 they claimed that they had di~·idcd their interest in the shares
(
held by ~hem and therefore· in respect of them they should be thereafter
assessed as 'Individuals' •. The Appellate Assistant Commissioner upheld
the order of the Income-tax Officer. The Tribunal however held that the
assessecss should be assessed as 'Individuals' and not as Association of
Persons'. The Hjgh Court in reference answered in favour of the Revenue.
D ln appeal by c'ertificate it was urged on behalf of the assessees appcllant3
that the facts that a joint gift of shares was made in favour of more than
ooo pcrsor. or those shares were registered jointly in
their names
or
even the fact that the clividcnG was realised together did not go to show
tlut the stmrc-hoklcr' or the beneficiaries did act as an 'Association of
Perr.ons.'
HELD: (i) For forming on 'Assoc'iation of Persons' the rnembers of
the association must join together for the purpose of producing ~teome.
~- ·~ssociation of Per..ons' can be formed
only when two or mor.:
md!~tdu~ls voluntarily combine together for a certain purpose. Hence
~oiJllo~ on the. part of the members of the association is an essential
lngrcdtcnt.
{519F·G]
~~ the case of receiving diviJ.::nd~ from shares where there is no
r ~ueshon of any management it is difticult to draw an inference that
J0 or more shareholders fun~t ioned 11s un 'Association of Persons', from
cef mere f~c~ that they jointly own one or more shares and jointly reve the dtvH!eods declared. These circ'Umstances do not by themselves
go 10 Lhow that they acted liS an 'Association of Persons'. [5l9G·H1
i!. (ii) For the years 1957·58 and 1958-59 the usscssccs were rig~tly
\\b~sed as an 'Association of Persons' because of their own admisston
G
fc~. was an import.ant piece of cvid.:nce. [519H; 5:!0A-BJ
tn}1") For the years 1959-60 and 1962-63 they ha.J s~:citk':llly s!at.:d
the they were no more functioning a! an 'A~sociation of rcrsons • In
to
~~'>e of an •Association ol Persons' It is always open to rts ~embers
l ~thdraw from the same No one' can b., compcl!t:d to co!"ll!lue a.s
P<tti ~her of an association.
For withdrawing from an assocratao:n no
•'\! ilr form n<.'(!d be obs~rved. (520C-D]
11 Ir ~~~ ti~.P~esent C'ase the question rdat~d. only hto rea!isa:~lis~f t~i:/~&~:
<lends as r.vr~~l member.s of the assocratton c oose_. ~ion The assese~·
a~rr
lndJ\rJual!l there is an cnJ of the as.~o~.:ta • : •
I
'tv
rernai~~ t~at tbbey had realised their ~iviJcnJd~ inothcefh~lrdicl~i~~ Nd'n~clof
unrc ul!ed. There was notlung to tspr v
·
t. .
\
- ~· ,
516
SUPREME COURT REPORTS
(1973] 3S.C.R.
the facts proved could be said to be inconsistent with the claim made
by them.
[5200-EJ
The answer, therefore, in respect of the years 1959-60 to ·t962-63
must be i,h favour of the assessees. [521C·DJ

## Text

~ ..
[ '
515.
. ..
G. MURUGESAN & BROS .
v.
I .
. '
C.I.T., MADRAS
February 8, 1973
[KS· JlEGDE, P: J~G~NMOHAN REDDY AND H. R. KHANNA, JJ.]
Jncome-ta.~-·Assocwtton.
1
of. Pcrds~ns'-
1
What constitutes-Volition on
I ,
f members an essentm mgre tent- n case of realisation of divlpar~ 0 there is · no' act of management-The statement of members that
~I ~ad s/arted tfrawing dividends Separately must be accepted in abse11ce
~~~acts. to the conrrt~'-Tircy must be asses.red as 'Individuals.'
F~r the years 1957-58, to 19.62~63 the assessee,s were assescd by the.
Jocome·tax Officer as an Association of Persons. They bad filed their
returns for the first two of these years as 'Association of persons' but jn
!959-60 they claimed that they had di~·idcd their interest in the shares
(
held by ~hem and therefore· in respect of them they should be thereafter
assessed as 'Individuals' •. The Appellate Assistant Commissioner upheld
the order of the Income-tax Officer. The Tribunal however held that the
assessecss should be assessed as 'Individuals' and not as Association of
Persons'. The Hjgh Court in reference answered in favour of the Revenue.
D ln appeal by c'ertificate it was urged on behalf of the assessees appcllant3
that the facts that a joint gift of shares was made in favour of more than
ooo pcrsor. or those shares were registered jointly in
their names
or
even the fact that the clividcnG was realised together did not go to show
tlut the stmrc-hoklcr' or the beneficiaries did act as an 'Association of
Perr.ons.'
HELD: (i) For forming on 'Assoc'iation of Persons' the rnembers of
the association must join together for the purpose of producing ~teome.
~- ·~ssociation of Per..ons' can be formed
only when two or mor.:
md!~tdu~ls voluntarily combine together for a certain purpose. Hence
~oiJllo~ on the. part of the members of the association is an essential
lngrcdtcnt.
{519F·G]
~~ the case of receiving diviJ.::nd~ from shares where there is no
r ~ueshon of any management it is difticult to draw an inference that
J0 or more shareholders fun~t ioned 11s un 'Association of Persons', from
cef mere f~c~ that they jointly own one or more shares and jointly reve the dtvH!eods declared. These circ'Umstances do not by themselves
go 10 Lhow that they acted liS an 'Association of Persons'. [5l9G·H1
i!. (ii) For the years 1957·58 and 1958-59 the usscssccs were rig~tly
\\b~sed as an 'Association of Persons' because of their own admisston
G
fc~. was an import.ant piece of cvid.:nce. [519H; 5:!0A-BJ
tn}1") For the years 1959-60 and 1962-63 they ha.J s~:citk':llly s!at.:d
the they were no more functioning a! an 'A~sociation of rcrsons • In
to
~~'>e of an •Association ol Persons' It is always open to rts ~embers
l ~thdraw from the same No one' can b., compcl!t:d to co!"ll!lue a.s
P<tti ~her of an association.
For withdrawing from an assocratao:n no
•'\! ilr form n<.'(!d be obs~rved. (520C-D]
11 Ir ~~~ ti~.P~esent C'ase the question rdat~d. only hto rea!isa:~lis~f t~i:/~&~:
<lends as r.vr~~l member.s of the assocratton c oose_. ~ion The assese~·
a~rr
lndJ\rJual!l there is an cnJ of the as.~o~.:ta • : •
I
'tv
rernai~~ t~at tbbey had realised their ~iviJcnJd~ inothcefh~lrdicl~i~~ Nd'n~clof
unrc ul!ed. There was notlung to tspr v
·
t. .
\
- ~· ,
516
SUPREME COURT REPORTS
(1973] 3S.C.R.
the facts proved could be said to be inconsistent with the claim made
by them.
[5200-EJ
The answer, therefore, in respect of the years 1959-60 to ·t962-63
must be i,h favour of the assessees. [521C·DJ
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 685 to
690 of 1970.
.
Appeals by certificate from the judgment and order dated 27th
June 1968 by the Madras High Court at Madras in Tax case
No. 308 of 1964.
M. C. Setalvad and T. A. Ramachandran, for the appellant.
B
N, D. Karkhanis, S; P. Nayar and R, N. Sachthey, for the resC
pondents.
The Judgment of ·the Court was. delivered by
HEGDE, J.
These are connected appeals by certificate.
They
are directed against the decision of the High Court of Madras in a
\{eference under Section 66 ( 1) of the Indian Income-Tax Act,
D
1921. (to be hereinafter referred to as the Act) .
The question of law referred for ascertaining the opinion of
the High <::ourt was :
.
.
"Whether on the facts and in the circumstances of
the case, the Department was justified in assessing the
assessee in the status of an Association of Persons?"-
In this case we are concerned with the assessment of the assessee
for 1h_e assessment years 1957-1958 to 1962-63. In
all these
years tfie .assessees were assessed as an 'Association of the persons'. The contention of the assessees is that in the years, in
question, they should have been assessed as 'individuals' and not
as an 'Association of Persons'. Therefot:e, the only question that
calls for decision is as to the status of the assessee · during the
relevant assessment yea~.
For deciding the question formulated above, it is necessary to
divide the assessment years into two groups. For th~ assessment
years 1957-58 and 1958-59 the assessees themselves- submitted
their return in the status of 'Association of Persons', but for the
later years, they submitted their retUrns as 'individuals'. In their
returns ·for the assessment years 1959-60, they staled that they
have divided their interest in the shares and therefore they should
pe thereafter assessed as 'individuals'. It is· necessary ~ mentio~
one other circumstance before we proceed to set ourthe relevant
facts. The income in which we are concerned in this case arises
under two heads. Part of the income arises from house propertY
E
P'
G
G. MURUGESAN v. C.I.T. (Hegde, ].)
517
A
and the remaining income arises from dividends from shares. ~
f~r as the income from house property is concerned, the High
Court has answered the question in favour of the assessee; the
Revenue. has not appealed against that decision. Hence we nee~
nc't go into that aspect. . All that we have to decide in the present
esse is whether the dividend income which i$ the subject-matter
B
cf these appeals should be assessed in the hands of the appellant$
<1~ an 'Association of Persons' or as 'individuals'.
c
D
I
F
G
H
Now, we shall refer to· the material facts as could be ~athered
from the case stated by that Tribunal. One Simiamam Nadar
(who will be hereinafter referred to as 'N adar')
and his son
Ganesan partitioned their family properties on December 4, 1940.
Thereafter, Nadar started a firm of his own on June 27, 1955.
Later Nadar executed a settlement deed in favour of his four
grandsons,_ namely, .G. Murugesan, ·G. Kathiresan, G. Raja
Shankar and G. Vettrivel. The property covered by the said
settlement deed included a house property, which had been let
out. Under this settlement deed, the donees are to enjoy during
the life time the properties gifted and thereafter the same was to
devolve on their children. Sometime thereafter Nadar purchased
a number of shares iri Joint Stock Companies in the name of 'G.
Murugesan & Brothers'.
For each of such purcbase,
a debit
entry was made in the books of the firm. The share applic:;ations
(lddressed to· the companies for the transfer of the shares from the
prior owners ,to the name of G. Murugesan and Brothers were
s.igned by Padamavathy Ammal, the mother of donees as their
guardian.
The donees were minors at the time most of these
transactions; took place. Murugesan became a major on March
3, 1955.
After 1959, Murugesan himself signed all transfer
applications both on his behalf as well as on behalf of his brothers.
The youngest of the brothers became a major on 15th December,
1962. The income from the house property and the
dividend
income from shares were credited to an account called "G. Murugesan & Brothers" in the books of Nadar's Firm. In those books.
there are separate accounts for G. Murugesan; G. Kathiresan, G.
Raja Shankar and G. Vetrivel. Private income and expenses of
these persons were credited or debited to these individual
accounts. At the end of each year the balance in the account of
G. Murugesan & Brothers is transferred in equal proportion to the
individmi.l accounts of the four persons mentioned above. There
was a partition between Ganesan and his sons on 3rd February
1958, but that does not include the house property or the shares
g,ifted by Nadar to his grandsons. As mentioned ear!ier for the
assessment years 1957-58 and ·1958-59, the assessees submitted
their returns in the status of 'Association of Persons' and thereafter they submitted their returns as individuals.
....
518
SUPREME COURT REPORTS
(1973) 3 S.C.R.
On the basis of the above facts, the Income Tax Officer
assessed the assessee durin:g all the years mentioned earlier in the
status of 'Association of Persons'. His orders were confirmed by
the· Appellate Assistant Commissioner.
But on a further appeal
t~ the Appellate Tribu1,1al, the Tribunal held that the assessee
should be assessed as 'individuls' and not as 'Association of Persons'. At the instance of the Commissioner, the question set out
earlier was referred to the High Court. TheJJigh Court answered that question in the affirmative and in favour of the Revenue.
The High Court was of the opinion that because of the fact
that the shares were purchased jointly in the name of G. Murugesan & Brothers, the transfer applications were filed by Padmavathy acting as guardian of all the assessees, and further, after
Murugesan became major, he collected the dividends jointly on
behalf of the assessees, the assessees should be considered to have
acted as an 'Association of Persons'. That conclusion is challenged before us by Mr. Setalvad, appearing on behalf of the assessees.
Counsel urges that the facts that a joint gift of shares was made
in favour of more than one persons or those shares were registered jointly in their names or even the fact that the dividend wa~
realised together do not go to show that the shareholders or the
beneficiaries did act as an 'Association of Persons'.
On the
other hand, it is contended on behalf of the Revenue by Mr.
Karkhanis that the facts proved in this case clearly establish that
the assessee functioned as an 'Association of Persons'.
The expression 'Association of Persons' is not a term of art.
That expression has come up for coniideration before this Court
in more than one case.
In Commissioner of Income-tax, Bombay, North, Kutch and Saurashtra v. lndra Balkrishna (39 I.T.R.
546), this Court after referring to the various
judgments,
observed thus :
"It is enough for our purpose to refer to three decisions : ln
re. B. S. EUas (1935) 3 I.T.R. 408; Commissioner of Incometax v. Laxmidas Devidar (1937) 5
I.T.R. 548;
and In re:
Dwarkanath Harishchandra Pitale (1937) 5 I.T.R. 716.
In re:
B
c
D
E
F
B. N. Elias Derbyshire, C.J., rightly pointed out that the word
G
"associate" means, according to the Oxford Dictionary, "to joiR
in common purpose, or to join in an action. Therefore, an
association of persons, must be one in which two o_r more persons
join in a common purpose or cominon 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
H
gains.
This was the view expressed by Beaumont, C.J., in Com-·
missio~r of Income-tax v. JAbhm~das Devidas, at page 589·
(1937) 5 I.T.R., an(! also ln re: Dwarkanath. Harishchandrli
A'
B
c
.D
F
G
H
G, MURUGESAN v. C.I.T. (Hegde, J.)
519
Pita/e. In re : B. N. Elias, Costello; J., put the test in more forceful language. He said : "It may well be that the intention of the
Legislature was to hit combinations of individuals who were
engaged together i~ same joint enterprise but did not in law
constitute partnerships . . . . when we find, . . . . . . . . . . . . that
there is a combination of persons formed for the promotion of a
jcint enterprise . . . . . . . . then I think no difficulty arises whatever in the way of saying that . . . . these persons did coll!titute
an association. . . . . . . . . .. /'.
We think that the aforesaid decision correctly lay down the
cr:.~dal test for determing what is an 'Association persons within
the meaning of section 3 of the Income-tax Act, and they have
bc,~n accepted and followed in a number of later decisions of
dHferent High Courts to all of which it is unnecessary to call intention .. It is, however, necessary to add some words of caution here.
There is no formula of universal application as to what facts, bow
many of them and of what nature, are necessary to come to a
conClusion that there is an association of persons within the meaning of section 3; it must depend on the particular facts and circum·
stances of each case as to whether the conclusion can be drawn
or not,"
Tn the course of that judgment, this Court also observed :
"With regard to the shares, dividend3, and interest
on deposits there was no finding of any act of joint
management. Indeed, the main item consists of the dividends and it is difficult to understand what act of
management the windows performed in respect thereof
which produced or helped to produce income.''
For forming an 'Association of Persons', the members of the· association must join together for the purpose of producing an iricome.
An ·Association of Persons' can be formed only when two or more
individuals voluntarily combine together for a certain purpose.
Hence volition on the part of the .member of the association is an
r.ssential ingredient. It is· true that even a m!nor can join an
'Association of Persons' if his lawful guardian gives his consent.
In the case of receiving dividends from shares, where there is no
question of any management, it is difficult to draw an inference
that two more shareholders functioned as an 'Association .of Per-
~ns' from the mere fact that they jointly own one or more sharr.s.
and jointly receive the dividends d.eclared. Those circumstances
do not by themselves go to show that they acted as an 'Association
of Persons'.
But unfortunately for the assessee for the assessment years
1957-58 and 1958-59, they themselves had submitted their retums
in the status of 'Association of Persons'. Those returns were
s2o
SUPREME COURT REPORrS
[1973) 3 S.C.R.
niether withdrawn nor did they file fresh returns as 'individuals'.
It·was fonhe first time in the appeal, it was argued on their behalf
1hat they should not have been assessed as 'Association of Persons'.
The question whether the assessees functiond as on 'Association of
_Persons' during those years was best known to them. Their
rui.mission in that regard is an important piece of evidence. They
have made no attempt to show that the said admission was made
under erroneous impression 'of law or is otherwise vitiated. Hence
for those years they were rightly assessed as _an 'Association of
Persons'. But so far as the other assessment years are concerned,
A
B
the same result does not follow. They themselves have specifically c
stated that they are no more functioning as 'Association of Per-
~ons•: In the case of 'association of persons' it is always open to
its members ~o withdraw from the same. No one can be compelled
to continue as a member of an association. For withdrawing
from an association there is no particular form need be observed.
As seen earlier, herei.D. we are concerned only with the realisation
D
of dividends. If the individ11al members of the association choose
to realise their dividends as inili;viduals, there is an end of the
association. The assessee's assertion that they haye realised their
-dividends in their individual capacity remains unrebutted. There
is nothing to disprove that claim. Nope of the facts proved can be
said to be inconsistent with the claim made by them .
E
. . For the reasons mentioned above, we are unable to agree with
the High Court that during the assessment years 1959-60 to 196263, the assessees should be. held, as having functioned as an
F
"association of persons'. Mr. Karkhanis in support of the contention of Revenue relied on the decision of the Bombay High Court
iD. S. C. Gambatta v. Commissioner of Income-tax, Bombay (14
I.T.R. 748). Therein, the only question was whether when an
action is taken by an Income-tax Officer under Section 23A,
should the dividend deemed ·to have been declar~ to the shareholders must be considered has been taken by a husband and wife
who were the joint holders of a share as an 'Association of Persons''
or by the husband alone who under the Articles of·Association was
G
to act on behalf of the joint holders. The contention of the
Revenue was that the husband alone was the shareholder. On the
B
other hand the contention of the assessee was that they were an
•Ass<><:iation of Persons' and that contention was accepted by the
B
c
G, MURUGESAN V. C.l.T, (Hegde, J.)
521
Court. The ratio of that decision has no bearing on the point in.
issueJn the present case. We are also not able to agr~ with Mr.
K.arkhanis that the decision of this Court inN. V. Shanmugham &:
Co. v. Commissioner of Income-Tax, Madras (81 I.T.R. 310)
lends any support for the contention of the Revenue. On the
other hand, therein this Court relied upon the deeision of this
Court in Commissioner of Incomi-tax, Bombay North, Kutch·&
Saurashtra v. Indra Balkrishna (39 I.T.R. 546):
In the result, Civil-Appeals Nos. 685 & 686 of 1970 are dis·
missed with no order as to oo;ts. Civil Appeals Nos. 687-690
of 1970 are allowed with costs-<>ne bearing fee. Consequently
the answer given by the High Court in those four appeals is discharged and in its plac~, we answer the question, in the negative
and in favour of the assessee.
G.C.