# N. V. SHANMUGHAM AND CO v. COMMISSIONER OF INCOME-TAX, MADRAS ,4pril 23, 1970

- **Citation:** [1971] 1 S.C.R. 340
- **Court:** Supreme Court of India
- **Decided:** 1971
- **Bench:** J. 0. Shah, K •. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/n-v-shanmugham-and-co-v-commissioner-of-income-tax-madras-4pril-23-1970-5041
- **Pages:** 8

## Headnote

lncome-tax .,4ct,
1922, s. :41 (!)-Receivers appoimed by Court to
carry on business of dissolved. fir1n-Erstwliile partners
acquiescing in
.carrying on of bus_iness· by receivers and receiving fron1 thenz their shares
..of the profits earned-Aasessnzent of income of buYiness .,,,.hether to he 011
.erstwlrite partntrs as individuals ·or as constituting an association of indivi·
.duals-Receivers whetf!i!r an e1ss0Clation of persons-Natttre of liab[/ity of
receivers under s. 41(1).
.The appellant was a partnership firm constituted under a deed April
.20, 1955. On a, suit for dissolution being filed by one of the partners and
an application being made for the appointment of a receiver, the Court
appomted three receivers two of whom were the erstwhile partners of the
.ffim and the third an advocate. The Court ordered the receivers to con·
.tinue the business .for the purpose of winding up with the power to realise
.the outstandings and discharge the dues of. the firm.
The profits were to
be divided among tfihe parties according to terms. of the partnership deed
.dated April 20, 1955. The business yielded profits in .the assessment years
1958-59 and 1959-60. In response to notices issued.to the Income-tax
·Officer the receivers filed returns for these years showing
'nil' income.
They showed the profits in >ection D of the return. They claimed that
· .the income should be assessed in the hands of the beneficiaries as they
were already assessees having other sources o'f income. The Income-tax
Officer rejected the contention and held that the business was carried on
;by an ·association of persons' and as such no question of assessing ihe .individual partners on their share of income at the rates applicable to them
would arise. The Appellate Assistant Commissioner confirmed the order
.of the Income-tax Officer. The Tribunal took the opposite view but the
High Court in reference answered the question referred
to it, namely
·whether the income "could be assessed on the receivers as an association
-0f persons under s. 10 or under s. 41 of the Act'', in favour df the reveRue.
ln appeals· to this Court by certificate,
·
HELD: (i) The fact that there were three receivers was wholly irre-
'levaat for the purpose of asse>Sment and did not make them an association of receivers.
In respect of business profits, all assessments of tax is
<loae under s. 3 read with s. 10 df the Act. Section 3 imposes the charge
and s. 10 provides for determining the profits and gains of business. Section 41 does not impose any separate charge but only ·empower the
Revenue to levy and collect tax due from a person or persons, from his or
their representative. The primary liability to pay the tax in the present
·arse was that of the real owners of the bus.iness i.e. the erstwhile partn'ers
of the firm.
'fhe·te was thus no question of- assessing the receivers as an
association of pers()ns. The re·ceivers were not Hable "u0der s. 10 or s. 41
<lf the Act"; their liability arose under s. 41
read with s.
10. [343 E-H;
344 A-BJ
/
(ii) The control and management of the receivers was a unified one.
The receivers had joined in a common purpose and they acted jointly.
When they did so they acted on behalf of the persons who we re the
owners of the bu5iness. The receivers did not and could not llave repre-
'SCnted the individual . interest of the various owners of the business; that
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Sl!AN.MUGHAM v. C.I.T. (Hegde, J.)
341
.would have resulted in chaos. The profits were eamed on behalf of the
persons who had a common interest created by the order of the co1¥1 and
were on Iha! account an "assooiation of persons". [345 B-C]
The fact that one of the erstwhile partners had objected to the conti·
nuance ot the partnership could not lead to a contcary conclusion.
All
the owners of the business including the person who objected to the con·
tinuance of the b1o1Siness were given month by month some amounts from
the proceeds of the business and none of them had declined to rece

## Text

(
340
N. V. SHANMUGHAM AND CO.
v.
COMMISSIONER OF INCOME-TAX, MADRAS
,4pril 23, 1970
[J. 0. SHAH, K •. S. HEGDE AND A. N. GROVER, 'JJ.)
lncome-tax .,4ct,
1922, s. :41 (!)-Receivers appoimed by Court to
carry on business of dissolved. fir1n-Erstwliile partners
acquiescing in
.carrying on of bus_iness· by receivers and receiving fron1 thenz their shares
..of the profits earned-Aasessnzent of income of buYiness .,,,.hether to he 011
.erstwlrite partntrs as individuals ·or as constituting an association of indivi·
.duals-Receivers whetf!i!r an e1ss0Clation of persons-Natttre of liab[/ity of
receivers under s. 41(1).
.The appellant was a partnership firm constituted under a deed April
.20, 1955. On a, suit for dissolution being filed by one of the partners and
an application being made for the appointment of a receiver, the Court
appomted three receivers two of whom were the erstwhile partners of the
.ffim and the third an advocate. The Court ordered the receivers to con·
.tinue the business .for the purpose of winding up with the power to realise
.the outstandings and discharge the dues of. the firm.
The profits were to
be divided among tfihe parties according to terms. of the partnership deed
.dated April 20, 1955. The business yielded profits in .the assessment years
1958-59 and 1959-60. In response to notices issued.to the Income-tax
·Officer the receivers filed returns for these years showing
'nil' income.
They showed the profits in >ection D of the return. They claimed that
· .the income should be assessed in the hands of the beneficiaries as they
were already assessees having other sources o'f income. The Income-tax
Officer rejected the contention and held that the business was carried on
;by an ·association of persons' and as such no question of assessing ihe .individual partners on their share of income at the rates applicable to them
would arise. The Appellate Assistant Commissioner confirmed the order
.of the Income-tax Officer. The Tribunal took the opposite view but the
High Court in reference answered the question referred
to it, namely
·whether the income "could be assessed on the receivers as an association
-0f persons under s. 10 or under s. 41 of the Act'', in favour df the reveRue.
ln appeals· to this Court by certificate,
·
HELD: (i) The fact that there were three receivers was wholly irre-
'levaat for the purpose of asse>Sment and did not make them an association of receivers.
In respect of business profits, all assessments of tax is
<loae under s. 3 read with s. 10 df the Act. Section 3 imposes the charge
and s. 10 provides for determining the profits and gains of business. Section 41 does not impose any separate charge but only ·empower the
Revenue to levy and collect tax due from a person or persons, from his or
their representative. The primary liability to pay the tax in the present
·arse was that of the real owners of the bus.iness i.e. the erstwhile partn'ers
of the firm.
'fhe·te was thus no question of- assessing the receivers as an
association of pers()ns. The re·ceivers were not Hable "u0der s. 10 or s. 41
<lf the Act"; their liability arose under s. 41
read with s.
10. [343 E-H;
344 A-BJ
/
(ii) The control and management of the receivers was a unified one.
The receivers had joined in a common purpose and they acted jointly.
When they did so they acted on behalf of the persons who we re the
owners of the bu5iness. The receivers did not and could not llave repre-
'SCnted the individual . interest of the various owners of the business; that
B
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Sl!AN.MUGHAM v. C.I.T. (Hegde, J.)
341
.would have resulted in chaos. The profits were eamed on behalf of the
persons who had a common interest created by the order of the co1¥1 and
were on Iha! account an "assooiation of persons". [345 B-C]
The fact that one of the erstwhile partners had objected to the conti·
nuance ot the partnership could not lead to a contcary conclusion.
All
the owners of the business including the person who objected to the con·
tinuance of the b1o1Siness were given month by month some amounts from
the proceeds of the business and none of them had declined to receive the
same ... They were therefore an "association of persons" within. the mean·
ing of s. ~ of the Act having joined together for the purpose ()f produc·
in1 income, profits or gains. [345 G-H; ~47 F]
Commissioner of Income-tax, . Ahmedabad, v. Balwantrai
ltthalal
Vaidya Qrs. 34 J.T.R. 187, C.R. Nagappa v. Commissioner of Income-tax
C
73 J.T.R. 626, In re B. N. Elias & Ors. 3 I.T.R. 408 and Mohamed Noorullah v. C.I.T. Madras 42 J.T.R. 115, referred. to.
·
Commissioner of Income-tax, Bombay v. Indira Balkrishna 39 J.T.R.
546 and Commissioner of lncome-:ax, Poona v. Bu/dana Distt. Main Cloth
Importers Group, 42. l.T.R. 172, applied.
C1v1i, APPELLATE JuR1so1cT10N : Civil Appeals Nos. 294 and
D
295 of 1967.
Appeal from the judgment and order dated November 30,
1965 of the Madras High Court in Tax Case No. 215 of 1962
(Reference No. 120 of 1962).
M. C. Chagla, K. Srinivasan and T. A. Ramachandrqn, for
E
the appella,'ll.t (in both the appeals).
F
B. Sen, G. C. Sharma and B. D. Sharma, for the respondent
{in both the appeals).
The Judgment of the Court was delivered by
Jlegde, J.
These companion appeals by certificate under s.
66A ( 2) of the Indian Income Tax Act, 1922 (in short 'the Act')
are directed against the decision of the Madras High Court in. a
tax reference under s. 66 ( 1) of the Act, relating to the assessment
y.~ars 1958-59 and 1959-60.
Messrs. N. V. Shanmugam and Co., a firm, was carrying on
G
business in the manufacture and sale.of snuff under a deed of part·
nership dated April 20, 1955. Its partners were S. P. Ramiah
Nadar, Murugavel Nagar and Shanmughavel Nadar. S. P. Mohan;
a minor had been admitted to the benefits of the partnership, . his
share in the net profits being 1/6th. The deed of partnership provided that the partnership could not be dissolved before August 31,
H
1955. But it was op.~n to the partners to continue the partner·
ship or enter into a-fresh partnership on fresh terms and . conditions.
On September 17, 195 6, Ramiah Nadar filed a suit in the
city Civil Court, Madras for the dissolution of the partnership
L 12Sup .Cl/70 -8
.
342
SUPREME COURT REPORTS
[1971]1 S.C.R.
with effect from August 31, 1956 and for laking of accounts. He
also applied for the appointment of a receiver to take charge of the
business. On September 21,.1956, the Coμrt appointed three receivers two of whom were the partners of the firm namely Ramiah
Nadar and Murugav!!l Nadar and the third was an Advocate by
name Ram Mohan. The business of the firm had been stopped
from September I, 1956 to September 21, 1956. The CClurt
directed the receivers "to reoJJl:n and conduct the snuff business for
the purpose of winding up, with powers to realise the outstandings
and discharge the dues of the firm" subiect to the foliowing among
. other terms.
Clause 4 : The receivers can carry on the business of
the partnership normally
Clause 6 : All parties to have access to the books
of th.' firm and to the business premises ..
Claure 7 : All parties are entitled to get informa8
c
tion relating to the conduct of the business from the re-
. D
ceivers.
Clause 8 : The profits if any earned from 1-9-.1956
will be treated as an asset of tbe firm subject to be divided between the parties in the manner set out in para-
. graph 10 of tit: deed dated 20-4-1955. The receiver
or receivers shall not be entitled to any share in the profits for the management.·
Clause 9 : The receivers will pay every month
Rs. 1,5001- to plaintiff, Rs. 1,500/- to the !st defendant,
Rs. 750/- to 2nd defendant and Rs. 750/- to 3rd defedant by his guardian from November I, 1956 (owners
of the dissolved firm) .
Sometime later the court appointed a Commissioner for taking
the accounts of the firm and for arranging the sale of the business
as a going concern; but no sale took place. In the assessment
year 1958-59, th~ business yielded a profit of Rs. 93,739/-. In
the assessment ytlllr, 1959-60, there was a profit of Rs. 1,54,393/-.
In response. to a notice from the Income-tax Officer, the receivers
filed :"Qi!" returns but showed the profits earned in the busine's in
Section D of the r.:tum.
But they asserted that the income should
be assessed in the hands of the beneficiaries as they are already
assessees having other sources of income.
The Income-tax Officer
rejected that contention.
He caqre..tc the conclusion that the busi-
. ness was carried on bv an '!lssoCiation of JJl:rsons' and as such no
question of. a~essing the individual partners on their share of in·
come at the rateapplicabli:: to them waufd arfse, a:s wntended by
JI
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~HANMUGHAM v. C.I.T. (Hegde, }.)
343
A
the receivers.
The Appellate Assistant Commissioner rejected
tHe appeal of the assessees and confirmed the order of the Incometax Officer; but on a further appea~ the Tribunal came to the conclusion that the profits earned should be
as~essed to tax in the
hands of the individual partners at the rates applicable to them.
At the instance of the Commissioner of Income-tax, Madras, the
B
Tribunal submitted the following question under s. 66 ( 1) of -the·
Act for the opinion of the High Court :
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"Whether the income of the business in snuff could
be. assessed on the receivers as an aSsC>ciation of persons
under s. 10 or under s. 41 of the Act."
The High Court answered that Question in favour of the:
Revenue.
The real point.in controversy between the Revenue and the·
assessees is whether the profits earned in th.e business should 1?C
considered as profits earned by an "assoeiation of persons" or
whether it should be considered as havil)g been earned by. individuals.
The receivers appointed by the court were merely the
representatives of the real owners of the business i.e. the erstwhile·
partn;rs of the firm.
The primary liability to pay the tax due was·
that of the real owners. The tax may be levied and recovered from
the Receivers under s. 41 ( 1) of the Act.
To borrow the expression from the Income-tax Act, 1961, they are only representative
assessees.
The fact that there were three receivers did not make
them an assodation of receivers.
The three receivers jointly represented the real owners. The circumstance that there were three·
receivers was wholly irrelevant for the purpose of the assessment.
There was no auestion of assessing.the receivers as an "association
of persons". The real question"fs whether the 1>'rsons whom the
receivers represl'nte~eoti~tituted an "association of . persons".
Further in~·
of bu~ines~ profits, all assf\"sment of tax is done·
un~~;:-3' read withs. 10 of the Act. Section 3 impO!es the~har~e
· ·and s. 10 to the extent relevant for our pre•ent purpose provides
that 'tax shall be payable by the assessee und,er the head "Profits
and gains of busine<>s" in resoect of the profits or gains of business
carried on by him subiect to the allowances allowed under sub-s.
(2) of that section.
Section 41 empowers the Revenue to levv·
the tax that could hav.~ been levied on the person who earned the
profits on one or the other of h.is reore•entatives mentioned in th~t
section and recover the ·same from that reore•entative "in the like
manner and to the same amount as it would be leviable uoon and
recoverable'' from the oersnn on whm.~ behalf •uch nrofit• art)
recoverable and all the provisions of the Act shall apply accord-·
inelv.
Section 41 of the Act doe~ not imonse anv senarate ch•ree.
It onlv emnowers the Revenue to levy anc\ C"llect a taJC clnP. from
a person or persons, from his or their repr~'!ntative.
He!l~e there .
344
SUPREME COURT REPORTS
[1971] l S.C.R.
is no question of either tbe receivers being an "association of
persons" or their being liable "under ·s. 10 or s. 41 of the Act".
The.liability of the receivers arose under s. 41 read withs, 10.
The Tribunal wanted the opinion of the High Court.on the question
whether the profits in question should be considered to have been
earned by an "association of persons" or by individuals. We shall
proceed to answer tha,t question.
Mr. M. C. ChagJa, learned Cciunlil.ll for the assessee contended
that the liability of receivers is co-extensive with that of the beneficiarie> and cannot in any case. be a larger or wider liability. If
the assessment is made on a receiver whatever the nature of the
profit, whatever the mode of compuation, his liability to pay tax
must be determined in accordance with s.41 of the Act; that
section is mandatory; the tax payable by him on the profits earired.
can only be ascertained in accordance with the special previsions
laid down in that section; it is not open to the department to ignore
the provisions of s.41 and levy tax on receivers in the same way
as en ·asses<ee who does not fulfil the character of a receiwr.
According to the Counsel when an assessment is made under s.41
of the Act, it must be done und.:r one of the heads mentioned
in Chap. III of the Act and the provisiom laid down with reg·ard
to computaticn of the income-tax must be carried out; Section .,i1
will come into play after the income has been so computed. In
support of this contention, he relied on th.: decision of the Bombay High Court in Commissioner of Income-tax, Ahmedabad v.
Balwantrai lethalalVaidya and ors.,(') which decision has been
appmved by this Court in C. R. Nagappa v. Commissioner of In-
.come Tax.(") Proceeding further the Counsel urged that
the
asse>sment of the receivers should have been on the same basis as
the erstwhile partners of the firm would have been assessed in
respect of the profits in question. According to him, the business
in question could not have been conducted by the erstwhile partners as an "association of persons". He urged that the erstwhile
partners of the firm were fighting amongst the!llselves; some of
them wanted to carry on the business while one of them wanted·
to close down the same.
Hence they could not have carried
on the business as an "association of persons".
He urged that
an "association of persons" as used in s.3 of the Act means · an
association in which two or more persons voluntarily join in a
"common purpose" or "common action". He further urged that in
. a business said to be carried on by an "association of persons",
there must be unity of control and unity of management; as no
such unity existed amongst the erstw_!lile partners 9,f the firm, it
cannot be said that the receiv.:rrtepresented an "association of
persons".
(I) 34. LT.R. 187.
(2) 73, J.T.R., 626.
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SHANMUGHAM v. C.I.T. (Hegde,J.)
345
We are unable to accede to the contentions of the learned
Counsel for tht; assessee. It is not denied that the ousiness was
carried on by the receivers on behalf of erstwhile partners of the
firm and that considerable profits were earned from the business.
The control and the management of the business was in the hand~
of the receivers. That control .and management was a unified one.
The receivers had joined in a common purpose- and they act!d
jointly. When they did so they acted on behalf 'Of the persons
who were the owners of the business. The receivers did not and
could not have repr~sented the individual interest of the various
owners' of the business. If they had done so there would have
been chaos in the business. The profits to which those owners
lay daim and which. they were not averse to pocket, were earned
on behalf of. an ''ass0ciation of persons". The profits were earned
on behalf of the persons who had a common interest created by
the order of the eourt and were on that account of an "association
of persons". The existence of specific or defined interest in the
profits did not make the earning any the less by an 'association of
persons'. Liability to taJC. depends upon the earning of profits by
a unit and not upon the ultimate division of the profits. The expression "association of persons" is not defined in the Act. At one
stage, there was conflict of judicial opinion about the true meaning of that expression.
That conflict can now be said to have
been settled by some of the decisions of this Court to which we
shall refer presently
In Commissioner of income-tax, Bombay v. lndira Bal·
krishna ( 1) this Court accepted the observations . of Sir Harold
Derbyshire C.J. in ln re B. N. Elias and ors.('). that the word,
"associate" means "to join in common purpose or to join in an
action". Therefore "association of persons" as used in s. 3 of the
Act means an association in which two or more persons join in a
common purpose or common action, and as the words occur in a
section which impo~es a tax· on income, the asscciation must be one,
the obj.~ct of which is to produce income, profits or gains. It is
true that in the instant case before the receivers were appointed,
one of the erstwhile partners objected to the continuance of the
partnership. But there is nothing in the record to show that he
objected to the continuance of the busiress. AlLthe same we shall
assume that he did not want at that stage that the business should_
be continued. But in fact business was continued in pursuance of
the orders of the court. All the owners of the business including
the person who objected to the· continuance of tr..~ business were .
given, month by month, some amounts from the proceeds of the
business. It was not said that any of them declined to receive the
same. That means all of them acquiesced in the continuance of
(I) 39, l.T.R. 546.
(2) 3, J.T.R. 40-'.
' - ~
,:_~
l.
345
SUPREME COURT REPORTS
[1971] 1 S.C.R.
the business. Each on.~ of the assessees wants to share the profits
A
earned en behalf of all of them but when it comes to the question
of paying tax, they want to deny that the business was ~onducted
on behalf of all of them. It is true considerations of equity are
irrelevant in interpreting taxing provisions but while considering
the que;tion who carried on a business, the course of conduct of
the concerned parties is relevant.
On the facts proved, it must
B
h held that in law the erstwhile partners of the firm carried on
the bu 0i.ness through their representatives.
In Mohamad Ncoru/lah v. C.I.T. Madras(') this Court had
to consider whether the assessment in that case was rightly made
on an "association of persons". Therein, 0, a Mohamaden who
was carrying on the business of manufacture and sale of beedies
of a particular brand, died intestate on Decombe! 17, 1942 leaving as his heirs, N, a son by his predeceased wife, L his widow and
his four children by L. The widow L and one D carried on the
business after the death of O.N, through his next friend, applied
c
for leave to sue for partition in forma pauperis and pending these
D
p:oceedings on March 17, 1943, two advocates were appointed
as joint receivers of all the properties of 0, by consent of all the
parties.
The consent on behalf of the minor was given by his
. next friend. The widow L filed another suit for partition on May
10, 1943 but applied for the continuance of the joint receivers.
N opposed the application on the ground that he wanted different
pe;so111 to be appointed as receivers., By an order dated May
25, 1943. the Court ordered the continuance of the joint receivers.
The receivers continued in charge of the business till November,
1946 when the business was put up for sale by auction and was
purchased by N.
The Income-tax Officer assessed the profits of
the busir.~ss for the calendar years 1943-46 in the hands of the
receivers as the income of an "association of persons" consisting
of the heirs of 0. The Appellate.Assistant Commissioner as well
as the Tribunal upheld the finding of the Income-tax Officer. On
a reference under s.66 (1) of the Act, the High Court agreed
with the view taken by the authorities under the Act. This Court
upheld the view taken by the High Court. This decision was
tried to be distinguished by Mr. Chagla on the ground that in
that case all the parties had consented to the appointment of the
receivers. None of the heirs of the deceased owner of the bminess
wanted to break the unity of the business or its continuity and the
business was of such a nature that it could not be carried on without consensus; therefore, the continuance of the business by the
receivers was rightly considered as continuance of business by the
heirs of the deceased.
According to the Counsel such was not
position in the present case. For the reasons already stated, we
(I) 42. LT.R. 115.
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SHANMUGHAM v. C.I.T. (Hegde, I.)
347
see no merit in that contention. We have earlier come to the
conclusion that the business was continued with consent of all the
owners.
Hence for the purpose of this case it is not necessary
to go into the question as to what would have been the position
if the business had been continued without the copsent of ·an the
owners. ·The facts of this case directly fall within the rule laid
down by this Court in Commissioner of Income-Tax, Poona v.
Buldana Distt. Main Cloth
Importers Group('). The facts cf
that case were : In 1945, the Deputy Commissioner of Buldana
evolved a scheme for the distribution of cloth in his district and,
with the sanction of the C.P. Government appointed a group of
four persons as sole agents for the import of cloth from mills in
various places in India and for its distribution to retailers. Fct
diff~rent___periods · the group which. imported cloth was differently
constitufea: H. & Co., which was a common member maintained
the books relating to the business. Every time there was a change
in the constituents of'the group, a separate set of books was maintained and the profits from those enterprises were divided between
· the various persons who formed the group at the material time.
The Appellate Tribunal found that the import and distribution of
cloth was done on a joint basis, the purchasers were joint, so were
the sales and the profits were ascertained on a joint basis and then
distribuied according to the capital contributed by each member of
the group. This Court held that the group was an "association of
persons" and could be assessed on its profits as such to income-tax
and excess profits tax. It further held that it made no difference
that the business was carried on because the Deputy Commissioner
of the district had appointed the members consituting the group
to import and distribute the cloth. Therein the members of the
group did not voluntarily join the group. They were put together
hy the Deputy Commissioner and asked to act together, which they
did. Similar is the position in the present case.
For the reasons mentioned above, our answer to the question
referred is that the profits in question were earned from a business
carried on by an "association of persons".
In the result these )lppeals fail and 'they are dismissed with
costs. One hearing fee.
·G. C.
Appeals dismissed.
'(1) 42 I.T.R. 172.