TMI Blog2007 (4) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of persons and completed the construction of the said commercial complex in or around 1992. Common books of account were also maintained. On completion of the building, a part of it was given on rent in the earlier years but during the previous year relevant to the assessment year 1995-96 onwards, the assessee started selling shops on ownership basis from the commercial complex and earned substantial business profits. Since no return of income was filed by the association of persons, therefore, the Assessing Officer issued notice under section 148. The members of the association of persons have filed their individual returns by including the income from the commercial complex as co-owners under the different heads of income like income from house property, capital gains on the profits from sale of shops and income from other sources by claiming onefourth share in the income of the co-ownership property. The learned Assessing Officer after considering the submissions of the assessee, held that there was an association of persons in existence and income from the commercial complex of Krishna Prasad are chargeable to tax in the hands of the association of persons. Thus, the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the individual co-owners up to the assessment years 1994-95. For the years under consideration, each co-owner has returned the income from house property in their individual hands. Thus, when the Revenue has taken a stand that rental income after the assessment year 1994-95 is assessable in the hands of the individual co-owners, then it cannot take a different stand for the subsequent years, particularly in view of section 26 of the Income-tax Act. It will be relevant to reproduce section 26 of the Income-tax Act : Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income. As per section 26, any income which is chargeable under the head Income from house property is to be assessed in the hands of co-owners if their shares are ascertainable and such income cannot be taxed in the hands of the association of pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Complex and Industries P. Ltd. [2003] 262 ITR 517 (Karn)) wherein it is held that irrespective of the fact that that one of the objects of the assessee-company is to derive income by leasing sites and constructions thereon, the income has to be necessarily assessed under the head Income from house property . Following the decision of the jurisdictional High Court, it is held that the rental income which is chargeable under the head Income from house property is to be taxed in the individual hands. The other grounds of appeal raised by the Revenue are as under : (i) The learned Commissioner of Income-tax (Appeals) has erred in holding that the income arising from capital gains on sale of part portions of the complex is also required to be assessed in the individual hands as coowners as the investment in the above property is in the nature of acquisition of capital asset by them. (ii) The learned Commissioner of Income-tax (Appeals) has erred in holding that the income from interest on bank deposits arising out of proceeds of sale of capital asset, rental income etc., is required to be assessed under the head Income from other sources in the individual hands of coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finite and ascertainable in relation to the income from house property computed under sections 22 to 25 and does not in any way affect the treatment of income accruing under the other heads such as capital gains, other sources etc. The learned Assessing Officer informed the assessee that from the details filed by individual members of association of persons showing their income under the head Long-term capital gain in respect of the property sold shows that the whole transaction of capital asset constitutes an adventure in the nature of trade and hence, the profit derived from such sales is assessable under the head Income from business and in the hands of association of persons and not in the hands of individual members of association of persons. Previous owners of the property intended to exploit the property purchased by the association of persons for commercial purposes and got a plan sanctioned for construction of a multi-storied complex. The previous owners were not able to complete the project of constructing a commercial complex though the construction work was commenced. Such properties were purchased by all the members together and intention was to commercially expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee s views that the income from the business venture are chargeable to tax under different heads of income like Income from house property , Income from capital gains , and Income from other sources . The commercial building was a business venture of the assessee-association of persons for exploiting the business opportunities and the intention of the association of persons is also evident from the sale deed. This property was not meant to be kept as a capital asset but further developed and also earned income out of sales. The assessee has in fact come out almost every other heads of income except the business income and this was the income under which the income should have been accounted because of the nature of business of the assessee. This, along with the additional reasons intimated to the assessee I hold the status of the assessee as association of persons and assess their income under the head of income Income from business or profession . Before the learned Commissioner of Income-tax (Appeals) it was contended that all the four members have joined as co-owners at the time of purchase of the property. Around 25,000 sq. ft was the constructed area and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers have joined together to do such business and therefore, the Assessing Officer has rightly taxed it in the hands of the association of persons. The learned Departmental representative on the judgment of the apex court in the case of Smt. Indramani Bai v. Addl. CIT [1993] 200 ITR 594. In that case two ladies purchased land and carved out that land into four plots. Such plots were sold within a few months after the purchase. The transactions were treated as adventure in the nature of trade and the profit was held as assessable in the hands of association of persons. During the course of proceedings before us, the learned authorised representative has filed a paper book containing 151 pages. The learned authorised representative drew our attention to clause 5 of the purchase deed. In clause 5 it has been mentioned that each one of the co-owners shall have equal undivided share in the entire schedule property. The learned authorised representative has also filed copies of few sale deeds through which the properties have been sold. It was submitted that each co-owner has received his share of sale price separately from the purchaser of the property. It is not the case that the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Another property was purchased vide deed dated January 22, 1991, from the same purchasers. The subsequent purchase was in respect of 2 cents of land in respect of a plot of 26 cents of land out of which 24 cents of land were earlier purchased. In respect of 2 cents of land, the sellers obtained the licence for constructing the commercial complex vide the same number as has been mentioned in the first purchase deed. This shows that the sellers wanted to construct a commercial complex and obtained permission from the concerned authorities. The consideration involved in the first purchase deed is Rs. 9,60,000 and the stamp duty is Rs. 1,15,200. The subsequent purchase deed is of Rs. 35,000 and the stamp duty involved is Rs. 4,300. In the paper book, the details of investment made by individual members is given along with date. The investment at the end of the different assessment years by all the four co-owners is as under : Name 31-3-1988 31-3-1989 31-3-1990 31-3-1991 31-3-1992 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) S. P. Kamath - - 75,000 3,55,000 Nil Jaya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with KEB 29,605.43 31,290.00 1,07,693.61 Smt.K. Rama R. Bhandary 3,25,000 Building under construction 20,71,082.04 Smt.K. Usha U. Bhandary 3,75,000 (By name Krishna Prasad ) Sri S. Prabhakar Kamath 500.00 7,00,500.00 Interest carried forward under Explanation to under section 24(1)(vi) (Rs. 7,491.40 p. a.) 29,965.60 Loan from others Interest relating to incomplete portion of the building : 2,14,300.11 Mrs. Radha V. Kini 2,55,975.50 Nizar Ramdas Pai 3,37,139.40 Jeandas Foundation 2,61,238.15 Mrs. M. Annapoorna Pai A/c No. 1 50,000.00 -doA/c No. II 1,02,732.80 Narasimdas Benefit Trust 1,04,026.20 Miss. Swathi Rao ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt. K. Usha U. Bhandary 25% 12,824.14 51,296.95 Total 1,05,508.00 Total 1,05,508.00 Place : Mangalore Date : 27th August 1992 While filing computation of income, it is mentioned that the total interest paid for the previous year ended March 31, 1992, is Rs. 1,54,831. Such binterest has been paid only to the persons from whom loans have been raised. The interest paid during the financial year 1991-92 is as under : (Rs.) Mrs. Radha V. Kini 29,448 Ramdass Pai 25,462 Usha Kamath 45,936 Mukund Kamath 48,207 J. Foundation 4,435 M. Annapoorna 195 -do- 400 Narsimdas Benefit Trust 405 Miss Swathi 172 HUF of Late Y. Subba Rao 166 From the above facts, it is clear that all the four persons have not contributed equally either at the time of purchase of the property or during the construction of the complex. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is to be assessed in the hands of association of persons or in the hands of individual members. In this case, properties of Hindu undivided families were partitioned by metes and bounds. Minors were allotted land and they were not able to cultivate their lands while other members were having small properties and it was not economical for them to cultivate independently. The assessee managed properties of all members. Income was divided equally amongst all members. The learned High Court observed that such management is generally happening in every peasant family in the rural areas. The assessee was father of minors and it was his duty to manage the property belonging to minor children. In the absence of a joint venture agreed upon by all the members, the cultivation of the property by the assessee and distribution of net income amongst all the individuals cannot lead to the conclusion that cultivation by the manager was pursuant to a joint venture agreed upon by all the individuals. The facts in the case before the Karnataka High Court are distinguishable from the facts of the instant case. In the instant case, loans have been raised and all the members have agreed for a joint v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dominant motive of the assessee in acquiring and selling the new shares and renouncing some of the right shares was to prevent the inevitable erosion of his capital. If the assessee had not acted in the manner he did, his original investments would have depreciated in value. It was therefore held by the High Court that the assessee entered into the transactions to nurse his investments. In the instant case, it has not been established that the co-owner sold the property in order to avoid the depreciation of their investment. On the other hand, the rental income which was being earned, was not sufficient to repay the loans and the loans were raised for the purpose of construction of the complex. Hence it was necessary for them to sell part of the building for which they have raised loans. If their intention was to treat the construction of building as an investment, then they could have diverted their income for repaying the loans. It will be relevant to say that the following members were having the following income for the assessment year 1992-93 : 1. S. Prabhakar Kamath Rs. 17,51,000 2. Rama R. Bhandary Rs. 1,42,880 Hence, the ratio of law laid down in the case of CIT v. H. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities were as individuals and militated against an inference of there being an association of persons. While holding so, the learned jurisdictional High Court has referred to the decision of the Karnataka High Court considered by the apex court in the case of CAIT v. M. L. Bagla [1971] 80 ITR 173. To hold that the agricultural income is taxable in the capacity of association of persons, it was necessary that such association of individuals held property in the capacity mentioned in definition under section 2(11) of the U. P. Agricultural Income-tax Act. Since the lands were being held as individual, therefore, it was held that income cannot be assessed in the status of an association of persons. In the case before the jurisdictional High Court, properties stood in the individual s name. However, in the instant case, properties stood in the joint name and all the four persons were having undivided share. There is no separate account maintained for the purchase of building material or for the receipt of rental income and other income, as the decision of the jurisdictional High Court is not applicable. The learned authorised representative has relied on the decision of the Punjab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich two or more persons joined in a common purpose or common action. The association must be one the object of which is to produce income, profits or gains. The learned apex court in the case of M. M. Ipoh v. CIT [1968] 67 ITR 106 had an occasion to consider the assessability of income in the hands of association of persons. In the case before the learned apex court, there were partitions of the property, but there was no division by metes and bounds. Only the shares in the income of the owners were entered in the books of account. There was common management of the property and there was even a common selling agency. Under these circumstances, it was held by the apex court that the income is to be assessed in the hands of the association of persons. The apex court in the case of Dalhousie Investment Trust Co. v. CIT [1968] 68 ITR 486 had an occasion to consider as to whether the profit from the sale of shares is to be treated as business income or capital gain. In that case, the shares were purchased by the appellant at a time when the market price was continuously falling. For making such purchase, the assessee took loans. Dividend declared on such shares was at a very low rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval of the Government, the control of McLeod Co. Ltd. group of companies was still with the Kanoria Group. The resignation was accepted on October 16, 1952, about five months after the sale of the shares. There is no evidence to show that, as a result of this sale, the control in the McLeod Co. group of companies passed to the Bajoria group, though M/s. C. L. Bajoria and Baijnath Jalan did subsequently join the directorate of McLeod Co. Ltd. On these facts, it is not possible to hold that the Tribunal was incorrect in recording its conclusion that the sale of these shares by the assessee was not the result of control of the McLeod Co. Ltd. passing from the hands of Kanoria group to the Bajoria group. In fact, the Kanoria group was holding a majority of 21,046 shares out of 40,000 shares in McLeod Co. Ltd. even at the time when these shares were sold on May 27, 1952. The assessee thus having failed to prove the objects of the sale of these shares, the inference that the shares were sold with the sole object of earning profits is justified. In the instant case also, loans have been raised for constructing the commercial complex. The rental income being earned was not s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner of Income-tax (Appeals) has erred in upholding the reopening of the assessment under section 147 of the Act. In the instant case, returns of income were not filed by the assessee in the status of the association of persons. The Assessing Officer has recorded the reasons for the reopening of the assessment. It is not the case of the assessee that assessment for the four assessment years were made under section 143(3) in the hands of the individual members. The learned apex court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239 has held that income is to be assessed in the hands of the right person. The apex court, while holding a consequential validity of section 3 of the Indian Income-tax Act, 1922, vide which the Assessing Officer was given an option either to assess the individual members or the association of persons, has held as under : Under the Indian Income-tax Act, 1922, primarily the return of income would be made by an association of persons where the association has earned income and the Income-tax Officer would also call upon the association to submit a return of its income and would ordinarily proceed to assess tax on the return so ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he apex court was not available. In the case before the apex court, the assessee challenged the validity of notices issued under sections 148 and 143(2) of the Income-tax Act. During the pendency of the appeals before the Delhi High Court, assessment for the assessment years 1995-96 and 1996-97 were completed and appeals were filed. In respect of such assessments completed, the learned apex court observed that (page 20 of 259 ITR) : in so far as the appeals filed against the order of assessment before the Commissioner (Appeals), we direct the appellate authority to dispose of the same expeditiously . Thus, the learned apex court in respect of the case where assessments were completed before the judgment was delivered ; the learned apex court directed the disposal of the appeal. In the instant case, appeals have been disposed of by the learned Commissioner of Income-tax (Appeals) after considering the objections of the assessee. Hence, on this ground, the assessment cannot be quashed. The third grievance of the assessee is that notice under section 143(2) has been issued beyond the period of 12 months from the date of filing of the return and accordingly, the assessment order sho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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