2024 (10) TMI 1288 - HC - Income Tax

Addition in the hands of syndicate v/s assessee - appellant's share of profit derived by various syndicates maintaining that share of profit is taxable in the hands of syndicate or in the hands of the assessee - ITAT deleted addition - Whether, such syndicate did not have any PAN and that they were not filing statutory tax returns, fully establishing mens rea on the part of the assessee and taxing share of profits of such colourable devices (syndicates) in the hands of the assessee in all practicality is in the spirit of the 'Doctrine of lifting of corporate veil' in larger public interest? HELD THAT - As per the findings given by the CIT (A) and reproduced by the ITAT which remained uncontroverted by the Revenue, even in respect of some of the syndicates, separate assessments have already been framed by the various AO u/s. 144/153C r.w.s. 153A of the Act and while making assessments in the hands of such syndicates, the amount of undisclosed income earned by these syndicates, have already been determined. It is also pertinent to mention that it is a well settled legal position that as per clause (a) of proviso to section 86 of the Act r.w.s 67A of the Act, if the assessee is a member in AOP/BOI and income earned from such AOP/BOI have been offered to tax, then, the share received by the assessee from such AOP/BOI after payment of due taxes cannot be taxed again in the hands of the recipient assessee. CIT (A) as well as the ITAT referred to the legal position rendered in the case of ITO vs. Ch. Achatalya 1995 (12) TMI 1 - SUPREME COURT and took the view that the income derived by various syndicates in which the assessee was found one of the members, was required to be assessed in the hands of such syndicates only and a direct assessment in the hands of the assessee could not have been made in respect of such income derived by the syndicates. Thus, as per the scheme of the Act, the issue is covered in favour of the assessee as per clause (a) of the first proviso to section 86 r.w.s. 67A of the Act. We are totally in agreement with the conclusion reached by both the lower appellate authority i.e. CIT (A) as well as the ITAT holding that, the assessee was a member of an association of persons or body individuals, share of members of such association of persons or body individuals were determinate and known. Such association of persons or body individuals were chargeable to tax on their total at the maximum marginal rate or any higher rate. In such a factual position and circumstances, the share of profit/income received by the assessee from association of persons or body individuals/syndicates fall under the clause (a) of the first proviso to section 86 r.w.s 67A of the Act and, thus, the AO was not justified in making the addition in the hands of the assessee on account of his share in profits of syndicates and on account of his share of inadmissible expenses incurred by the syndicates. Therefore, we are in agreement that, CIT (A) was right in deleting the addition in the hands of the assessee and, consequently, the sole ground of the Revenue being devoid of merits is not sustainable. Thus, when tested on the anvil of the afore-noted legal principles, we are of the opinion that in these appeals no substantial question of law arises from the order of the Tribunal. This Court refrains from entertaining these appeals as there is no perversity in the order passed by the ITAT since the ITAT has dealt with all the grounds raised by the appellant in the order impugned and has passed a well reasoned and speaking order taking into consideration all the material available on record. Tribunal being a final fact finding authority, in the absence of demonstrated perversity in its finding, interference with the concurrent findings of the CIT (A) as well as the ITAT therewith by this Court is not warranted. No hesitation in holding that no question of law, more so a substantial one, arises from the order of the Tribunal requiring consideration of this court. There is no merit in these appeals as the Tribunal has not committed any error in deleting the additions which was made by the AO as the same cannot be said to be erroneous and prejudicial to the interest of revenue. Thus, present set of cases does not involve any substantial question of law so as to meet the provisions of Section 260-A of the Act for admitting these appeals.

Summary

Issues Involved:

1. Whether the ITAT erred in deleting the addition of the appellant's share of profit derived by various syndicates, maintaining that the share of profit is taxable in the hands of the syndicate and not in the hands of the assessee.
2. Whether the lack of PAN and statutory tax returns by the syndicates establishes mens rea on the part of the assessee, justifying taxation of the syndicates' profits in the assessee's hands under the 'Doctrine of lifting of corporate veil.'

Detailed Analysis:

Issue 1: Taxability of Share of Profit in Syndicates

The primary issue in these appeals was whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the additions made by the Assessing Officer (AO) concerning the appellant's share of profit derived from various syndicates. The AO had added these profits to the assessee's income, arguing that they were taxable in the assessee's hands. However, the ITAT concurred with the CIT (A) that, under the provisions of Section 86 read with Section 67A of the Income Tax Act, 1961, the share of profit from an Association of Persons (AOP) or Body of Individuals (BOI) should be taxed in the hands of the syndicate itself, not the individual member. The CIT (A) had held that the syndicates are separate taxable entities, and their income should be assessed at the maximum marginal rate in their hands. The ITAT supported this view, emphasizing that taxing the same income in the hands of the assessee would result in double taxation, which is against the settled legal principle that the right income should be taxed in the right person's hands.

Issue 2: Doctrine of Lifting the Corporate Veil

The Revenue argued that the lack of PAN and statutory tax returns by the syndicates indicated mens rea on the part of the assessee, warranting the application of the 'Doctrine of lifting of corporate veil.' However, the ITAT and the CIT (A) found that the legal provisions under Section 86 and Section 67A were clear in excluding the member's share of income from an AOP or BOI from their total income when the syndicate is taxed at the maximum marginal rate. The ITAT reiterated that the AO did not have the discretion to choose between taxing the syndicate or its members, as per the Supreme Court's decision in ITO vs. Ch. Atchaiah. The Tribunal found no justification for applying the doctrine in this case, as the syndicates were already assessed separately, and the income was taxed accordingly.

Conclusion:

The High Court upheld the decisions of the CIT (A) and the ITAT, agreeing that the assessee's share of profit from the syndicates should not be included in the assessee's income. The court found no substantial question of law arising from the ITAT's order, as it was consistent with the legal provisions and precedents. Consequently, the appeals were dismissed, affirming that the additions made by the AO were not justified. The judgment reinforced the principle that income should be taxed in the hands of the correct entity, and the provisions of the Income Tax Act should be applied as intended by the legislature.