1989 (2) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee constituted an association of persons or a body of individuals.
2. Whether individual assessments should be made for each co-sharer based on the amounts received by them due to a diversion of income by overriding title.
3. The necessity of issuing a notice under section 139(2) when changing the status of the assessee from a firm to an association of persons.

Issue-wise Detailed Analysis:

1. Whether the assessee constituted an association of persons or a body of individuals:
The Tribunal initially held that the assessee did not constitute an association of persons or a body of individuals. However, the High Court referred to a previous case, CIT v. Friends Enterprises [1988] 171 ITR 269 (AP), where similar facts led to a conclusion against the assessee. The court reaffirmed that the facts of the present case were identical to the Friends Enterprises case, thus concluding that the assessee did indeed constitute an association of persons.

2. Whether individual assessments should be made for each co-sharer based on the amounts received by them due to a diversion of income by overriding title:
The Tribunal had ruled in favor of the assessee, stating that individual assessments should be made for each co-sharer. However, the High Court found that the Tribunal's decision was inconsistent with the established legal principles and previous rulings, thus ruling in favor of the Revenue. The court concluded that the amounts received by each co-sharer should not be individually assessed based on the concept of income diversion by overriding title.

3. The necessity of issuing a notice under section 139(2) when changing the status of the assessee from a firm to an association of persons:
The assessee argued that before making an assessment in the status of an association of persons, a notice under section 139(2) should have been issued. The Tribunal had held that the assessment was not illegal despite the lack of such a notice, as all affected persons were already before the authority. The High Court examined various precedents, including CIT v. Associated Cement and Steel Agencies [1984] 147 ITR 776 (Bom) and CWT v. J. K. Srivastava and Sons [1983] 142 ITR 183 (All), which supported the assessee's contention. However, the High Court disagreed with these precedents, stating that there was no provision in the Income-tax Act or Rules requiring such a notice. The court emphasized that all affected parties were already before the Income-tax Officer and had raised objections, thus negating the need for an additional notice under section 139(2).

Conclusion:
The High Court answered both questions in the negative, ruling in favor of the Revenue and against the assessee. The court concluded that the assessee constituted an association of persons and that individual assessments based on income diversion were not warranted. Additionally, the court found no legal requirement for issuing a notice under section 139(2) when changing the status of the assessee. The request for certification under section 261 of the Income-tax Act was also rejected.