2010 (6) TMI 163 - HC - Income Tax

AOP - meaning of previous year - association of persons borne out of joint venture agreement - application of section 3(1)(f) versus section 3(1)(b) of the Income-tax Act 1961 Reopening of an assessment u/s 147 Held that - what was the actual income received from such new source could not be ascertained until the arrival of the last day of the accounting year of such new source of business and for that reason, such income was shown in the next assessment year of Sancheti Enterprises. Thus, it was not possible to assess the actual income from the said new source until March 31, 1982. It is now settled law that an income-tax liability becomes crystallized on the last day of the previous year and thus, the income from such source was crystallized on March 31, 1982. At the relevant period, in case of income of association of persons, it was only such association, which was to be assessed, and there was no question of taxation on share of income of the association in the hands of any member of the association. On the other hand, in the case of registered partnership firm, not only the firm pays tax on the income of the firm but also a partner thereof pays tax on his share of income from the firm. Thus, the Tribunal erred in law in applying the provisions of section 3(1)(f) of the Act to the case of the assessee who was a member of association of persons. It appears from the materials on records that the assessee in its return for the year 1983-84 disclosed the added amount as its income and such return was submitted on August 17, 1983 whereas the search and seizure of Contemporary Tea Co. Ltd. was made on November 21, 1983. Therefore, it was wrong to allege that the suppression was detected at the time of search and seizure. Decision if favor of assessee, ITAT order set aside.

Summary

Issues Involved:
1. Applicability of Section 3(1)(f) vs. Section 3(1)(b) of the Income-tax Act, 1961.
2. Justification for invoking Section 147/148 of the Income-tax Act.

Detailed Analysis:

1. Applicability of Section 3(1)(f) vs. Section 3(1)(b) of the Income-tax Act, 1961:
The Tribunal held that Section 3(1)(f) of the Income-tax Act was applicable to the association of persons formed from the joint venture agreement. However, the appellant contended that Section 3(1)(b) was the correct provision. The court examined the provisions of Section 3 as it stood at the relevant time, which allowed for different "previous years" for separate sources of income. The court referenced the Supreme Court decision in CIT v. Lady Kanchanbai [1970] 77 ITR 123 (SC), which supported the possibility of having different previous years for separate sources of income.

The court found that M/s. Sancheti Enterprises had entered into an agreement with Contemporary Tea Co. Ltd. for consultancy services, which was a separate source of income. The income from this new source could not be ascertained until the end of the accounting year, thus justifying its inclusion in the next assessment year. The Commissioner of Income-tax (Appeals) had previously accepted this view, and the order had attained finality as no appeal was preferred against it.

The Tribunal's reliance on Section 3(1)(f), which applies to partners in a partnership firm, was found to be erroneous since M/s. Sancheti Enterprises was an association of persons and not a partnership firm. The court concluded that the Tribunal erred in law by applying Section 3(1)(f) to the case.

2. Justification for Invoking Section 147/148 of the Income-tax Act:
The appellant contended that there was no justification for invoking Section 147 of the Act. The Tribunal had reversed the decision of the Commissioner of Income-tax (Appeals) on merits but did not address the issue of the justification for invoking Section 147. The court decided to address this issue.

The reason for reopening the assessment was the alleged suppression of income received from Contemporary Tea Co. Ltd., which came to the notice of the Assessing Officer during a search and seizure operation. However, the court found that the assessee had disclosed this income in its return for the year 1983-84, submitted before the search and seizure. Furthermore, the Commissioner of Income-tax (Appeals) had already addressed this issue in favor of M/s. Sancheti Enterprises in a previous order, which had attained finality. Thus, there was no justification for reopening the assessment under Section 147.

Conclusion:
The court answered both issues in the negative. It held that the Tribunal erred in applying Section 3(1)(f) instead of Section 3(1)(b) and that there was no justification for reopening the assessment under Section 147. Consequently, the court allowed both appeals, set aside the Tribunal's orders, and restored the orders passed by the Commissioner of Income-tax (Appeals). No order as to costs was made.