V RAMASWAMY MUDALIAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference under section 66(2) of the Income Tax Act, 1922 relates to the assessment years, 1939-40 and 1941-42 to 1946-47, the relative year of account ending on the 12th of April of each year of assessment. One Arunachalam Chettiar (senior) and his son, Arunachalam (junior), constituted members of a Hindu undivided family. They were residents in India. The family had considerable properties in India and outside, comprising tea and rubber estates, coconut gardens and several money-lending businesses. Arunachalam Chettiar (junior) died in 1934, leaving behind him his widow, Umayal Achi. Arunachalam Chettiar (senior), who survived his son, died on February 22, 1938. On his death, the claimants to the properties were his two widows, Lakshmi Achi and Nachiar Achi, and widowed daughter-in-law, Umayal Achi. Some time prior to his death, that is, on February 8, 1938, Arunachalam Chettiar (senior) executed a will, making certain dispositions. Under the will, the executors were directed to arrange for the adoption of a son to each of the three ladies (such multiple adoption being presumably sanctioned by the custom of the Nattukottai Chettiar community). The will directed that, after the payment of legacies, the three adopted sons were to divide the properties equally. Umayal Achi, however, did not accept the will. She filed a suit in the Sub-Court, Devakottai, claiming a half share in the estate, left by her deceased father-in-law. The claim was laid on the basis of the rights conferred by the Hindu Women's Right to Property Act, 1937, under which the widow of the pre-deceased son of an individual who died after the coming into force of the Act was entitled to certain rights. Pending the suit, that is, on August 18, 1938, two advocates, Ramaswami Iyengar and Subramania Iyer, were appointed joint receivers to manage the properties involved in the suit. As a part of their management, the receivers continued the various businesses, which Arunachala (senior) had carried on in his lifetime The suit was resisted by the two widows of Arunachala (senior), who denied the right of Umayal Achi to inheritance. The trial court found that the will executed by the deceased was a genuine one, but that Umayal Achi would be entitled to one half share in all the properties in India and in the moveable properties situate outside India, subject to the payment of the legacies mentioned in the will. As regards the immovable properties situate outside India, the court held that succession to the properties would be governed by the law of the place where the properties were situate. In accordance with the judgment, a preliminary decree was passed on October 26, 1940. There were appeals against the decrees to this court this court modified the decree of the lower court, restricting it to the non-agricultural and moveable properties situate in India. The judgment of the High Court is reported in Umayal Achi v. Lakshmi Achi. Umayal Achi filed an appeal against the decree of the High Court to the Federal Court. The Federal Court, by its judgment dated January 8, 1945, held that Umayal Achi would be entitled to one-half share in the separate non-agricultural properties left by the deceased and in the moveables. The court directed that there should be an ascertainment by the Subordinate Judge as to what were the separate properties that belonged to the deceased, in which the lady would have a right to a share. (The judgment of the Federal Court is reported in Umayal Achi v. Lakshmi Achi). In June, 1945, each of the three ladies adopted a son, as directed by the will. It is stated that there was an ante adoption agreement in each case, defining the rights inter se between the son to be adopted and the respective adoptive mother. Aggrieved by the judgment of the Federal Court, Umayal Achi filed an appeal to the Privy Council, after obtaining leave for the sameWhile the appeal was pending in the Privy Council, the ladies, on behalf of themselves and their respective adopted son, entered into a compromise, under which each of the widows, representing herself and her adopted son, agreed to take one-third share of the entire estate, left by the deceased. The compromise was dated December 17, 1947. It is claimed that the ladies subsequently divided what they obtained under the compromise with their adopted sons in accordance with the ante adoption agreement. In October, 1954, the receivers were discharged

(2.) IN the meanwhile, proceedings for the assessment of income from the businesses and properties left by the deceased were initiated against the receivers. For the assessment year 1939-40, the officers of the INcome-tax Department assessed the receivers under section 41 of the INcome Tax Act, 1922. They held that the shares of the widows being in dispute should be held to be indeterminate, and therefore levied the maximum tax on the total income under the first proviso to section 41. That assessment was duly taken on appeal to the Appellate Tribunal. By its order dated January 28, 1943, the Appellate Tribunal held that the three widows were the legal heirs of the deceased, that their shares could not be said to be indeterminate, though it might be that they had not yet been determined by the court and that, therefore, the levy of tax at the maximum rate was not justified. There was, however, some defect in the order of the Appellate Tribunal, as, in the final paragraph, it did not give effect to the finding referred to above. This was rectified, on an application under section 35, on February 11, 1946. The order on the rectification petition made it clear that the assessment was to be made on the shares of each of the widows. By the earlier order referred to above, the Tribunal directed the INcome-tax Officer to compute the income, in accordance with the findings given. The INcome-tax Officer held that, on the material dates, the beneficiaries of the estate were only the two widows of Arunachalam Chettiar (senior), the rights of Umayal Achi having come into existence under the compromise long thereafter. The Officer, therefore, allocated the income equally in two shares between the widows, and assessed the receivers to tax thereon. On this point, the Appellate Assistant Commissioner concurred with the INcome-tax Officer. This was not accepted by the receivers, who filed an appeal to the Appellate Tribunal. That appeal was heard along with the appeals for subsequent years, to which we shall make reference presentlyFor the years subsequent, namely, 1941-42 to 1945-46, during which period neither the adoptions nor the compromise bad come into existence, the INcome-tax Officer likewise held that the income should be divided into two shares for the purpose of assessment. INdividual assessments on Lakshmi Achi and Nachiar Achi were made directly. As stated already, the adoption was made by the widows on June 16, 1945, that is, during the year of account relative to the assessment year 1946-47. The INcome-tax Officer assessed the income received by the receivers from April 13, 1945, to June 16, 1945, on two individuals, namely, Lakshmi Achi and Nachiar Achi, and the income for the subsequent period, namely, from June 17, 1945, to April 17, 1946, on the three persons, namely, Lakshmi Achi, Nachiar Achi and Umayal Achi. The assessee contested the propriety of the assessment on the ground that it should have been made on 6 units, namely, the widows and their respective adopted sons. The basis of the contention was (1) that Umayal Achi's rights should be held to date back to the date when the succession opened, and (2) that the rights of the respective adopted sons should date back to the dates of death of their adoptive fathers. The Appellate Assistant Commissioner rejected the contention of the assessee, and confirmed the assessment as made by the INcome-tax Officer. Appeals were, thereupon, filed by the receivers to the Appellate Tribunal. The only matter, which formed the subject-matter of the appeals, was as to the number of shares in which the assessment on the receivers should be divided. There was no objection on the part of either the assessee or the Department to the assessment itself being made under section 41. There was an appeal on behalf of the Department either that the assessment under section 41 was wrong, and that the proper way of assessing the profits from the businesses carried on by the receivers was to assess them directly under section 10The Appellate Tribunal, which heard the appeals for the assessment years 1941-42 to 1946-47, along with the appeal for the assessment year 1939-40, called for a report from the INcome-tax Officer as to whether the businesses which the deceased carried on were continued by the receivers during the relevant years. The INcome-tax Officer reported in the affirmative, namely, that the businesses of the deceased were carried on by the receivers jointly. On that finding, which the Appellate Tribunal accepted, it came to the conclusion that the proper way of making the assessment was to assess the receivers directly under section 10 as an association of persons. IN that view, the Tribunal cancelled the assessment made under section 41, and directed the INcome-tax Officer to make fresh assessment under section 10 on the receivers as an association of persons in respect of the businesses carried on by them

(3.) BEFORE proceeding to answer the question referred, it is necessary to ascertain the scope of section 41, under which the Department had chosen to assess the receivers for all the years. Section 41, omitting the words which are not necessary for the present purpose, runs thus