9911796707
TMI Blog2007 (4) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... did all other acts together as found in an association 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the property has been assessed in the 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 111-112/1999 (CIT v. Bhoopalam Commercial 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 sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of the co-owners are definite 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 inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am also not in agreement 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. All the four members 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint venture. 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 P. Kamath 6,00,000 6,10,000 7,50,000 7,90,000 Nil Rama R. Bhandary 85,000 1,75,000 1,90,000 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Miss. Swathi Rao M/s Deepa S. Rao 44,267.35 HUF of Late Y. Subba Rao 42,656.85 Miss Usha Kamath 6,35,895.17 Mas. S. Mukund Kamath 6,61015.39 24,94,946.81 Rent deposits : From State Bank of India 1,24,200.00 Outstanding Charges Professionalcharges 1,000.00 Pai Brothers 90,000.00 91,000.00 Co-owners current account Sri. S. Prabhakar Kamath 12,824.13 Smt. Jaya P. Kamath 12,824.15 Smt. K. Rama R. Bhandary 12,824.13 Smt. K. Usha U Bhandary 12,824.14 51,296.55 Total 35,62,347.36 Total 35,62,347.36 Place : Mangalore Date : 27th August, 1992 Income and Expenditure account for the year ended 31-3-1992 Expenditure Rs. P. Rs. P. Income Rs. P. To interest paid (see note enclosed) for the year ended 31-3-1992 1/5th of interest paid during construction period (from 14-11-1987 to 31-3-1991) 41,804.00 By rent received By interest received from banks By water charges collected 1,03,500.00 1,508.00 500.00 To Municipal Taxes 7,491.40 49,295.40 To Bank charges 3,878.55 To professional charges 37.50 To Excess of income over expenditure : (transferred to current accounts) 1,000 Kamath 25% S. Prabhakar 12,824.13 Smt. S. Jaya P. Kamath 25% 12,82 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) has held that the decision of the apex court in the case of Indira Balkrishna [1960] 39 ITR 546. In that case, co-widows of a Hindu, having income from property, dividend, interest etc., and such income was received jointly. No act done to produce income. Therefore, the apex court held that the same cannot be taxed in the hands of the association of persons. In the case before the apex court, the only finding was that the ladies have not exercised their right to separate enjoyment. However, the decision of the apex court in the case of Indira Balkrishna [1960] 39 ITR 546 is not applicable as in the instant case, property has been purchased for the purpose of joint venture. The learned jurisdictional High Court in the case of B. T. Manjappa Gowda v. State of Karnataka [1984] 150 ITR 303 (Karn) had an occasion to consider as to whether the income from property 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appa in the property.' On these facts the Tribunal found that the integrity and management of the estates have continued undisturbed throughout the period. The violation of various members necessary was only all too apparent with the entrustment of the management to M. S. M. M. Firm for a proper management. It implied a prior agreement to which the guardian of the minor must have given her consent too. It was on these findings of fact the Supreme Court came to the conclusion that the parties formed an association of individuals to earn income from the trading venture. In the present case, there cannot be any such finding." The learned authorised representative has relied on the decision of the apex court in the case of CIT v. H. Holck Larsen [1986] 160 ITR 67. In that case, the assessee traded in shares. In that case, the High Court was of the view that the 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot also lead to an inference that they were being managed by them all as joint property. The borrowing in the joint names was at best a matter of convenience and might be at the instance of the bank which had advanced monies to the petitioners. Even then all the four persons would be jointly and severally liable. However, this would not outweigh the other material facts which indicated that the properties were held and enjoyed separately by the four persons. The facts that the properties stood in the individual names, and for the purpose of carrying on the agricultural operations purchases of manure were made separately and supplies of sugarcane and areca had been made separately and accounts had been maintained in the individual names, were circumstances indubitably indicating a course of conduct showing the real intention of the parties that the activities 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in the promotion of a joint enterprise with the object of producing income, profits or gains. In the case before the apex court, the four nephews of the Raja succeeded to the estate as co-sharer and each one of them was entitled to one-fourth share of the income from the estate. They did not form a unit for the promotion of any joint enterprises to earn income, profits or gains. Under these circumstances, it was held that the income cannot be taxed in the status of an association of persons. In the instant case, the four persons have not succeeded to any estate. It is not the case that they have not made any effort for the construction of commercial complex. The efforts have been made. Hence, the decision as quoted by the learned authorised representative is not applicable. Now it is a settled position that an association of persons is one in which 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, viz., the Bajoria group, on buying these shares from the assessee acquired a controlling interest in McLeod & Co. Ltd. or in the companies managed by that company. The object of the sale as given by the assessee has, therefore, remained unproved, whereas the fact that the purchases of the shares were made at a time when they were not expected to give a good return as investment and were actually sold at a very good profit leads to the reverse inference that the purchases and sales of these shares were an adventure in the nature of trade. Even the sequence of events does not bear out the contention of the assessee. Sri C. L. Kanoria first resigned on March 17, 1952, and he sold his shares while his resignation was still pending for approval by the Government. The sale took place on May 27, 1952, at a time when the resignation not having received the approval 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then the profit arising from the sale of property is to be assessed in the hands of the association of persons as all the members have joint together in the joint venture, common books of account have been maintained. The members of the association of persons has acted on behalf of each other as the investment by all of them is not equal and no interest has been paid to the person who has invested excess. Hence, it is held that profit from the sale is to be assessed as business income in the hands of the association of persons. Since common grounds of appeal have been raised for all the four assessment years, therefore, all the four appeals are disposed of as per observations above. In the result, the appeals filed by the Revenue are partly allowed. The assessee has filed cross objections. The first grievance raised in the cross-objection is that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment and such reason should be recorded in writing. In the instant case, both these conditions are satisfied and therefore, the learned Commissioner of Income-tax (Appeals) has rightly upheld the reopening of the assessment. The next grievance of the assessee is that the Assessing Officer, who has not given copy of reasons to the assessee, should have disposed of the objections, if any, raised on such reopening before proceeding with the assessment. For this proposition, the learned authorised representative relied on the decision of the apex court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19. The decision of the apex court on which the learned authorised representative has relied has been delivered on November 25, 2002. Hence, when the Assessing Officer passed the order, i.e., on March 27, 2002, the decision of the 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 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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