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TMI Blog1976 (4) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 3 4 5 6 (1) 3315/72-73 1967-68 30/6/1966 143(3)/147(b) 25/2/1972 (2) 8-/72-73 1968-69 30/6/1967 143(3)/161 31/8/1971 (3) 81/72-73 1969-70 30/6/1968 -do- -do- (4) 82/72-73 1970-71 30/6/1969 -do- -do- (5) 83/72-73 1971-72 30/6/1970 -do- 27/9/1971 (6) 1021/73-74 1972-73 30/6/1971 -do- 30/11/1971 3. ITA No. 3367/1972-73 is an appeal filed by Seth Puran Chand one of the co-owners of the AOP, in respect of which the assessment dt.25th Feb., 1972was made on M/s. S.B. Sugar Mills, Bijnor (through Shri P.S. Gupta, Receiver) under s. 143(3)/147(b). This appeal was field on the bias of the copy of an order sever on Seth Puran Chand. This appeal is akin to ITA No. 3315/72-73, which was filed by the Receiver contesting the same assessment. 4. ITA Nos. 1329/73-74 and 3146/73-74 filed by the ITO relate to the same asst. yr. 1972-73 made on M/s. S.B. Sugar Mills, Bijnor (Through Shri P.S. Gupta, Receiver), which is being contested by the assessee also in ITA No. 1021/73-74. The ITO filed two identical appeals in respect of the same assessment, the only difference being that in ITA No. 1429/73-74, the respondent's name was shown as M/s. S.B. Sugar Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment on31st Aug., 1971taking the status of assessee as "Association of Person". Similar was the treatment given for the asst. yrs. 1969-70 to 1972-73, for which the status determined by the ITO was that of "AOP". Similar was the treatment given for the asst. yrs. 1969-70 to 1972-73, for which the status determined by the ITO was that of "AOP". He was of the view that the ratio of the Supreme Court's decision in the case of N.V. Shanmugham & Co. vs. CIT 81 ITR 310 (SC), was applicable to the case of the assessee and since the lease money was being earned by the Official Receiver on behalf of co-owners, who had a common interest crated by an order of the Court, the income was assessable in the status of an "AOP". On the same basis, he reopened under s. 147(b) the assessment already completed for the asst. yr. 1967-68. The relevant notice under s. 147 was issued on6th Jan., 1972, in response to which the assessee filed a return on18th Feb., 1972. In the assessment made under s. 143(3)/147(b) on25th Feb., 1972, the status taken was that of an "AOP". GROUNDS OF APPEAL 6. The grounds of appeal taken by the appellants may be summarised as below :-- (1) The assessments on the official ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x brothers each with 1/6th share. According to cl. 11 of the relevant partnership deed, (p.5/PB-I), the management of the mills was to be in the hands of one of the partners who was to be designated as 'Managing Proprietor'. For the year 1936-37 (1st Sept., 1936 to 31st Aug., 1937) Banarsi Dass was nominated the Managing Proprietor and he continued to function as such till 31st Aug., 1941, when he was replaced by Kundan Lal by common agreement. 7.3. On13th May, 1944, Sheo Prasad (since deceased) instituted a suit in the Court of the Subordinate Judge, First Class,Lahore, for dissolution of partnership and rendition of accounts against Kundan Lal. He was jointed by the other brothers as defendants to the suit. The Court by its order dt3rd Aug., 1944appointed one Mr. P.C. Mahajan, Pleader, as Receiver. At the instance of the parties the High Court appointed w.e.f.5th April, 1945Kanshi Ram as Receiver in replacement of Mr. Mahajan. 7.4. Meanwhile, the District Magistrate, Bijnor took over the mill under the Defence of India Rules and appointed Kundan Lal and his son to work the mill as agents of the U.P. Govt. for the year 1944-45. This lease was renewed for the year 1945-46. 7.5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till further orders. 4. And it is ordered that Shri Kanshi Nath who is appointed CIT for the purpose of winding up the affairs of the Mills, in this case, shall prepare accounts of the credits, properties and effects and stocks now belonging to the said mills and then submit the report to the Court. After the report has been submitted and objections heard and decided, the Court would fix a date for the sale of the assets of the Mills. The CIT shall receive instructions from the Court from time to time." 7.10. Against the decision of the Civil Judge, Bijnor three appeals, one each by Kanshi Ram, Banarsi Dass and Munna Lal, were preferred before the Allahabad High Court. There were disposed of by them by a common order dt.15th March, 1952. As a result, Kundan Lal's suit stood decreed for declaration that the partnership should be dissolved with effect from13th May, 1944and that the six brothers had shares in the said partnership. The suits relating to the other reliefs stood dismissed. However, by an order dt. 17th Dec., 1962 in Civil Appeal Nos. 94 to 97 of 1960, the Supreme Court restored the decree of the trial Court (vide p. 1-16/PB-II). 7.11. During the period which passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the mill while it is under lease to some lessee, yet the over all work concerning the mill, and the partners as a whole, e.g. the Income-tax and other cases concerning the mill and work in connection with the construction of labour quarters, tube-well and other building etc. has to be attended and done by the Receiver. The Receiver has always been submitting reports whenever called upon to do so on the various matters concerning the mills and has been making compliance of the orders given to him now and then by the learned Court above all, the important duty to keep an eye on and what over the property and machinery etc. of the mill is cast on the Receiver. The allegation that the Receiver has nothing to do except the taking over formal possession of the mills from the old lessee and handing over to the new lessee after every lease term of five years is wrong. The Receiver is at the disposal of the learned Court to take over the Physical possession of the mills, whenever so needed." ASSESSMENT ON THE OFFICIAL RECEIVER IN THE STATUS OF ASSOCIATION OF PERSONS :-- 8.1. It was in an assessment order dt. 31st Aug., 1971 for the asst. yr. 1969-70 that the ITO first discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court's decision in the case of CIT vs. Buldana District Main Cloth Importers Group and observed that even if the unit was induced by the order of Government, it would make no difference, the ITO took particular notice of the fact that the lease of the S.B. Sugar Mills had been confined to only its ex-partners and that three of them had obtained the lease during the period 1st July, 1946 to 30th June, 1971. 8.4. The assessee took the matter in appeal to the AAC and took, broadly speaking, three principal points. The first was that the assessment on the AOP was ab-initio void or no return had been filed by an AOP and no AOP had been made a party to the proceedings. The second point was that the ratio of Shunmugham & Co.'s case was not in application, for, in the instant case, the Official Receiver was not carrying on any business and the lease was not business income. Receiver was stated to be acting only as a conduit pipe for the distribution of the income of the co-owners. It was argued that, in this context, the individual shares of the co-owners were taxable in their hands as individuals and the Receiver's liability was only for the purpose of ascertainment of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lease rent received by the official receiver was, according to him, income from other sources and not from business. He argued further that the ratio of the Supreme Court's decision in Shunmugham & Co.'s case was not applicable on the facts of the present case, because the co-owner, who were merely in receipt of the lease money, could not be said to have combined themselves with the common purpose of producing any income. In this connection, he submitted that the joint co-owners may have acquiesced in the appointment of the lessee by the Official Receiver but it would not be correct to say that the appointment of the Receiver had been made at their instance. he submitted that there was no volition of the co-owners in the matter. According to him, it was the Lahore High court who gave the mills to Seth Banarsi Dass over the period 1st July, 1946 to 30th June, 1951, that again, it was at the instance of the District Magistrate, Bijnor that the Court Receiver gave the lease of the mills to Shri Kundan Lal during the period 1st July, 1951 to 30th June, 1956 and likewise for the subsequent periods. He emphasised that the erstwhile partners were at loggerheads, each trying to restrain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of lease rent was, therefore, assessable under the head "Other sources" and not "Profits and Gains of Business or Profession". Thirdly, the erstwhile partners had become merely tenants-in-common, who had not, on their own volition, combined with the common purpose of producing an income. Hence, they did not constitute an AOP in consequence, the Official Receiver also could not be assessed as an AOP in respect of the net lease income received by him on their behalf. In support of this contention, he relied on the following case laws :-- (1) Sh. Zainuddin Ahmad & Ors. vs. CIT (30 ITR 30 (Patna). (2) N.S. Choodamani & Anr. vs. CIT (35 ITR 676 (Ker). (3) M.M. Ipoh vs. CIT (46 ITR 301 (Mad) (4) CIT, Agricultural, Income Tax vs. Raja Ratan Gopal (59 ITR 728 (SC) (5) State ofMadrasvs. Subramania Iyer (61 ITR 613 (Mad) (6) State ofMadrasvs. Pattamal (62 ITR 585 (Mad) (7) B.T.R. Punja & Ors. vs. CIT (Agricultural) 63 ITR 442 (Mysore). (8) A.M.C.M. Chettiare & Ors. vs. CIT (69 ITR 330 (Mad). (9) G. Murugesan & Bros. vs. CIT (88 ITR 432 (SC). Fourthly, he argued that the AOP itself had not filed any return and it had also not been made party to the disputed assessment proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the period over which the partnership business was run, the business was being carried on by the 'Managing Proprietor', who functioned on behalf of the other partners. He submitted that running of the business through one of the co-owners thereafter (who was appointed by the Receiver as the lessee of the S.B. Sugar Mills for a period of five years at a time) was in substance the same device of running the business as in the past. He emphasised that the lessee had necessarily to be one of the erstwhile partners and no outside was being considered for the purpose. He also emphasised that in every case, where the lessee was appointed by the Official Receiver, the erstwhile partners had consented to such appointment, either directly or impliedly. He argued that there was common purposes, community of interest and an element of volition present all along. 8.10. In reply to the points made out by the learned Counsel, Shri H.G. Malik, the learned Departmental Representative argued that the mere fact that the Official Receiver had not in the past been assessed in the status of AOP was no bar to his being correctly assessed in the status of AOP. He submitted that there was no estoppel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by claim and which they were not averse to pocket, were earned on behalf of "an AOP". The profits were earned on behalf of persons who had a common interest created by the order of the Court and were on that account "an AOP". The existence of specific or definite interest in the profits did not make the earnings any the less by "an AOP". The liability to tax depends upon the earnings of profits by a unit and not upon the ultimate division of the profits." (81 ITR 310, 315) He submitted that the AOP was a distinct assessable "persons" which was chargeable to tax, as per the provisions of s. 4(1) r/w s. 2(31). 8.11. The learned Departmental Representative sought to make out an additional point. He argued that the term "persons", as defined in s. 2(31) of the IT Act, 1961 includes "a BOI". He argued that if the Official Receiver was not considered liable to be assessed as an AOP, he would still be assessable in the status of a "BOI". Relying on the following two decisions, he argued that the Tribunal was competent to charge the status accordingly :-- (1) Chiranjilal vs. CIT (56 ITR 715 (Allahabad). (2) Mangat Ram Hazari Lal & Anr. vs. CIT (67 ITR 788 (Punjab). 8.12. We may at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (88 ITR 432) on which the Revenue and the assessee have mainly built up their respective case required to be gone into at depth. In the earlier of two decisions the Supreme Court, after having reviewed some of their earlier decisions, on the question of assessability in the status of AOP, reiterated that the expression "AOP" as used in the IT Act, means an association in which two or more persons join in a common purpose or common action, and the association must be one, the object of which is to produce income, profits or gains. On the facts of the particular case, the Supreme Court held that, though one of the erstwhile partners had objected to the continuance of the partnership business, the business had, in fact been continued in pursuance of the orders of the Court and all the owners of the business including the persons who had objected to its continuance, were given, month by month, some amounts from the proceeds of the business. This was held by them to mean that the erstwhile partners had acquiesed in the continuance of the business. They finally observed as follows :-- "On the facts proved, it must be held that in law the erstwhile partners of the firm carried on the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfully make a note of the following observations of the Supreme Court in N.V. Shummugham & Co.'s case, which may dispel any doubts as to whether the Official Receiver can have a status different from that of the persons he represents :-- "The circumstance that there were three receivers, was wholly irrelevant for the purpose of the assessment. There was no question of the assessing the receivers as an AOP. The real question is whether the persons whom the receivers represented constituted an AOP". Again, at page 314, they observed as follows :-- "Sec. 41 of the Act does not impose any separate charge. It only empowers the revenue to levy and collect tax due from a person or persons, from his or their representatives. Hence, either no question of either the receivers being an AOP or their being liable "under s. 10 or s. 41 of the Act". The liability of the receivers arose under s. 41 r/w s. 10". In this case it was made abundantly clear that the Receiver would be assessed in the status of an AOP only in respect of profits earned on behalf of persons who had a common interest and had combined for the purpose of producing the said profits or income. It clearly implies that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the income by way of lease rent was not business income. A copy of the judgment of the Allahabad High court is available at Pages 48 to 68/PB-II. In this judgment the Allahabad High Court was pleased to note that the Court had not given the Receiver any direction or continue the erstwhile firm's business and that the leasing out of the factory was with a view to exploit the ownership of the factory as such without intending to use it as a commercial asst. They observed that this had also been dictated by a desire to give the machinery etc. in a serviceable condition so as to enable the Receiver to realise its proper value at the time of sale. As the Receiver did not carry on any business, the factory ceased to be a commercial asst in the hands of the Receiver and the income received by him was not business income. In view of this decision we have to ignore the fact that the Official Receiver had declared in the returns filed by him the income receivable by the co-owners by way of lease rent under the head 'profits and gains of business or profession'. The income was assessable under the head "Other Sources". 8.19. The next question (b) is whether even after the dissolution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, to be shared equally between the then six partners. On the dissolution of the firm, when the property of S.B. Sugar Mills vested with the Official Receiver and he started leasing out the mills to be highest bidder amongst the erstwhile partners, the position changed materially. Therefore, the profits or losses in the carrying on of the business of M/s. S.B. Sugar Mills became the sole concern of the lessee; the other co-owners of the mill properties had nothing to do with the profits or loss arising from the running of the Sugar Mills. Their income was limited to a share in the lease rent, received from the lessee through the Official Receiver. It will be certainly absurd to suggest that those amongst the erstwhile partners, who failed to secure the lease of the mills for the Official Receiver, continued to enjoy the same benefits as in the pre-dissolution days. While their income prior to the dissolution would be equal to that of the "Managing Proprietor" after the dissolution their hare would be limited to the share in the lease money, but the lessee would be entitled to not only to the share of the lease money but also whatever profits he may earn in running the sugar manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by him and Shri Banarsi Dass had to pay what he had bid, the latter got the lease. The Official Receiver's role has already been examined by us at paragraphs 7.1 to 7.14, we do not think that he had done anything to produce income other than in the manner of an auctioneer. Hence, we have to hold that one of the essential conditions of assessment of income in the status of AOP viz., common effort of two or more person for producing income, is lacking in the instant case. 8.21. The next question (vide item (d) at paragraph 8.17 above) is whether an assessment could be made in the status of AOP even if the assessee had business income. After what we have found in regard to question (c), this issue assumes only academic importance. We have already held that there was no common effort by the co-owners of the assets of M/s. S.B. Sugar Mills for producing income and hence, they did not constitute an AOP. As a result, it follows that the assessment on the Receiver, representing these co-owners, cannot be made in the status of AOP. This is respective of whether or not the co-owners have income from business or from any other source. However, we have to answer the academic question in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the co-owners and the allocation of the divisible income also shown therein. This will be in consonance with our finding that the co-owners did not constitute an AOP in any of the relevant accounting years and that the Official Receiver is not assessable in the status of AOP. This leaves only one more issue to be considered. This is, the addition at point made out by the learned Departmental Representative that the Official Receiver should at least be directed to be assessed in the status of an AOP. We do not consider it advisable to entertain this plea made for the first time towards the concluding stage of the arguments. The point raised cannot, in our view, be decided without entertaining fresh evidence. 9. Validity of the proceedings under s. 147(b) for the asst. yr. 1967-68. We are of the view that the Supreme Court's decision in N.V. Shunmugham & Co.'s case did contain some information on the basis of which the ITO could legitimately initiate action under s. 147(b). He had not acted because of a mere change of opinion. Hence, we have to uphold the validity of the proceedings under s. 147(b) for the asst. yr. 1967-68. 10. Whether Lease money is business income--We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ultimately accepted, necessary relief, according to law, would be allowed. 11.4. On appeal, the AAC held that liability had been incurred with effect from1st Jan., 1969, the date of the order passed by the Civil Judge. Bijnor and that since this date fell beyond the accounting years relevant to the asst. yrs. 1968-69 and 1969-70, no relief for these two years was admissible. He, however, directed that the claim relating to the asst. yrs. 1970-71 and 1972-73 be allowed. In this connection, he noted that in case the liability is subsequently remitted, the amount remitted would be liable to the assessed to tax under s. 41(1). 11.5. The AAC's order on this point has been contested both by the assessee and the Revenue. The former is aggrieved in that no relief has been allowed for the asst. yrs. 1968-69 and 1969-70, while the latter contends that the liability for the asst. yrs. 1970-71 and 1971-72 has not yet been incurred and hence no relief should have been allowed for these two years also. 11.6. In our view, the liability is embedded in the very lease deed and cannot be said to have been incurred only with effect from1st Jan., 1969. Besides, the assessee follows the mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X
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