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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 ..... 1 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), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut later filed a revised return, scaling down the total income to Rs. 4,37,189, after providing for Rs. 1,66,250 as compensation payable by the co-owners to Seth Banarsi Dass for the use of machinery, etc. stated to have been installed by him in the S.B. Sugar Mills. The status shown in both these returns was individual for each co-owner". The ITO, however, framed the assessment 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. 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be referred to hereinafter as "PB-II". 7.2. Till 1936, the S.B. Sugar Mills was owned and run as a business by a joint Hindu family, comprising six sons of Lala Mool Raj viz., Devi Chand, Kundan Lal, Sheo Prasad, Banarsi Dass, Kanshi Ram and Munna Lal. The family disrupted and with effect from31st Aug., 1936, the S.B. Sugar Mills was converted into a partnership business of the six 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 Receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills, Bijnor, stood dissolved with effect from13th May, 1944. The plaintiff s share is declared to be 1/6th of defendant No. 1 Seth Banarsi Dass as 1/3rd and of defendants 2 to 4 1/6th each. 2. Seth Kanshi Ram is held liable to render accounts to the plaintiff and other defendants in respect of joint stores and lubricants in Exhibits 1 and 7. 3. Shri P.N. Mathur shall continue to be the receiver 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id remuneration for their work. On5th Sept., 1968, the then official receiver made a representation to the District Judge, Bijnor justifying the continuance of his remuneration @ Rs. 800 per month. At para 3 of his application he stated that his functions were (vide p.154-155/PB-I). The relevant portion is reproduced below : "That the Receiver has not been empowered to interfere with the internal management 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject of producing profit from business assets jointly owned by them. Referring to the Supreme Court s decision in the case of Mohd. Nurullah vs. CIT, he observed that as in that case, in the present case also none of the erstwhile partners wanted to break the unit of control of the business or its continuity and the business also was such as could not be carried on without their consensus. He next referred to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision in N.V. Shunmugham Co. s case 8.6. The learned Counsel for the assessee, Shri C.S. Aggarwal and Shri H.G. Malik made out before us two sets of points, some of which were overlapping. Their arguments are summarised in the next two sub-paragraphs. 8.7. Shri C.S. Aggarwal argued that the Receiver was managing only the lease money and not the mill, which was being run by the lessee, at his own risk. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-owners. In support of this contention, he relied on the order dt. 19th Nov., 1962 passed by the Tribunal, Delhi Bench A in ITA No. 3363 of 1960-61 in the case of Seth Banarsi Dass (HUF) for the asst. yr. 1954-55 (vide p. 32-40/PB-II). This decision of the Tribunal was uphold by theAllahabadhigh court by an order dt.5th May, 1972in Miscellaneous IT Reference No. 416 of 1957 (vide p. 48-63/PB-II). The income 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two other decisions of the Supreme Court in the cases of Mohd. Noorullah and Buldana District Main Cloth Importers Group, on which the ITO had relied. He argued that the Supreme Court s subsequent decision in the case of G. Murugesan Bros. 88 ITR 43 (SC) did not alter the position that persons combining to produce income were assessable in the status of AOP. The learned Departmental Representative emphasised that even during 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the higher appellate authorities. 8.10. On the last question made out by the learned Counsel that the shares of beneficiaries being defined, the assessment on the AOP as such, was not permissible, the learned Departmental Representative argued that this point stood covered by the Supreme Court s decision in N.V. Shunmugham Co. s case, in which they were pleased to observe as follows : "The profits to which those owners 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the production of income or acquisition of gain so as to constitute an AOP. In A.M.C.M. Chettiar vs. CIT (69 ITR 330), the Madras High Court again held that the investitute or an express grant of authority to conduct the common affairs was essential for the concerned persons to be assessed in the status of AOP. 8.13. Two decisions of the Supreme Court in the cases of M/s. M.V. Shunmugham Co. (81 ITR 310) and G. Murugesan Brothers (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in G. Murugesan s case, the Supreme Court highlighted the volitional aspect of the association, but in the earlier case of Shunmugham also this aspect was not absent. In this respect, it was held in that case that even if the association is induced by an order of the Court or of the Government, the assessment of the income, profits or gains produced by joint efforts would assessable in the hands of the AOP. 8.16 We may at this stage, respectfully 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 questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y each of the co-owners, other than Seth Banarsi Dass, has been assessed under the head Other sources . In the case of Seth Banarsi Dass, the Tribunal had no doubt held for the asst. yr. 1956-57 by their order dt.2nd March, 1968in ITA No. 1978 (Del)/1963-64 that the lease money was assessable as business income. But there is a later decision dt. 5th May, 1972 of the Allahabad, High Court in this very case, though it is for the asst. yr. 1954-55, that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering with the rights and duties of the "Managing Proprietor". After the dissolution of the partnership, every erstwhile partner, other than the fortunate one who had been able to put the highest bid for the lease of the mills, was several excluded from all operations for the running of the leased mills. Secondly, the profits and losses arising from the running of the business of the S.B. Sugar Mills, were under the partnership deed dt.31st Aug., 1936, 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 fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the highest bid and followed it up with an outright payment. It may be incidentally mentioned that the lease did not necessarily go to the highest bidder. For example, it was Shri Devi Chand, who gave the highest did of Rs. 6.65 lakhs for the lease of the mills during the period 1st July, 1961 to 30th June, 1966, but it went to the next highest bidder, Seth Banarsi Dass, whose offer was Rs. 6.50 lakhs. As Shri Devi Chand could not pay the amount bid 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment, because of the clear provisions of s. 4 of the IT Act, 1961, r/w s. 2(41) of the said Act. We agree with this view. Hence, we suggest that no assessment should be made in the hands of the Official Receiver as such but he may be assessed separately on behalf of each co-owner in respect of his share in the next lease income received through the Official Receiver. The quantification of such net income may be made in the assessment order of any one 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s claim of Rs. 1,66,250 as an admissible deduction against lease income for each of the asst. yrs. 1968-69 to 1971-72 was resisted by the ITO on the ground that the same did not represent a liability admitted by the other co-owners, who had not accepted the decision given on 1st Jan., 1969 by the Civil Judge, Bijnor in favour of the lessee, Seth Banarsi Dass. He, therefore, added Rs. 1,66,250 as a protective measure and recorded that if the liability was 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 forme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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