Madhya Pradesh High Court
Milan Supari Stores vs Income-Tax Officer And Ors. on 29 January, 1990
Equivalent citations: [1990]184ITR106(MP)
JUDGMENT A.G. Qureshi, J.
1. This order shall govern the disposal of M.P. No. 317 of 1988 (Milan Supari Stores, Indore v. ITO, 'C' Ward, Indore, and 3 Ors.), M. P. No. 318 of 1988 (Milan Supari Stores, Indore v. ITO, 'C' Ward, Indore, and 4 Ors.) and M. P. No. 420 of 1989 (Milan Supari Stores, Indore v. Asst. CIT, Indore, and 6 Ors.).
2. The petitioner in M. P. No. 317 of 1988 is a registered partnership firm known as Milan Supari Stores. Respondent No. 4 in this petition is Sarvottam Supari Stores. The petitioner in M. P. No. 318 of 1988 is also Milan Supari Stores and respondents Nos. 4 and 5 are Sarvottam Supari Stores and Hilman Traders, respectively. The petitioner in M. P. No. 420 of 1989 is also the same firm, i.e., Milan Supari Stores, but respondents Nos. 5, 6 and 7 are Hilman Traders, 12, Daulat Gary, Indore, Sarvottam Supari Stores, 167, Ranipura, Indore, and Hilman Traders, 96, Siyaganj, Indore.
3. According to the petitioner in all the three petitions, the petitioner firm is a registered partnership firm and Mohamad Munaf is one of its partners. The petitioner firm carries on the business of sale and purchase of supari, pan masala, tobacco and allied products. Respondent No. 4 in M. P. No. 317 of 1988, respondents Nos. 4 and 5 in M. P. No. 318 of 1988 and respondents Nos. 5, 6 and 7 in M. P. No. 420 of 1989 are also partnership concerns carrying on business of the same nature as that of the petitioner. However, their dealings are separate and independent of each other. The petitioner firm has been registered in the year 1972-73. The other firms which have been mentioned above as respondents in the three petitions are also registered separately and as registered firms they are being assessed under the Income-tax Act separately. The names of the partners of the petitioner firm are as under (1) Abdul Razak, (2) Abdul Majeed, (3) Noor Mohammad, (4) Mohammad Iqbal, (5) Mohammad Munaf and (6) Habib Moosa.
4. The petitioner firm is being assessed by the Income-tax Department in the status of a registered firm. The assessment orders of different years have also been filed as annexures. The other respondent-firms in the three petitions have been assessed separately as registered firms in previous years. According to the petitioner, the petitioner firm and the said firms have never associated with each other in order to form an association of persons. They constitute separate and distinct business entities and the business of each firm is carried on separately. Each of the said firms registered with the Income-tax Department as a separate firm and they have been assessed separately in the status of registered firms. It has further been averred that except for the fact that amongst the partners of the said firms, some are brothers, doing business with certain other strangers, the entities of the different firms have always been independent and distinct. All the brothers who are partners in the aforesaid firms are living jointly with their respective families at their residence at 12, Daulat Ganj, Indore.
5. According to the petitioner, a raid was conducted on December 17, 1986, at the premises of the aforesaid firms. During the raid, the income-tax authorities seized certain stocks and allied things at the premises where the godown of Sarvottam Supari Stores and Hilman Traders was situated. The competent income-tax authority, on April 10, 1987, passed an order under Section 132(5) of the Income-tax Act against (1) Habib Moosa, (2) Noor Mohammad, (3) Milan Supari, (4) Sarvottam Supari, (5) Hilman Traders and (6) New Hilman Traders as an association of persons. The petitioners and the said other firms filed objections to the said protective assessment orders contending, inter alia, that they do not constitute an association of persons.
6. Thereafter, the Income-tax Officer served notices purporting to be under Section 148 of the Income-tax Act on the petitioners styling the petitioners as welt as the other aforementioned firms as an association of persons calling upon them to file returns for the years 1979-80 to 1982-83 excluding Hilman Traders and New Hilman Traders. The notices are filed as annexures E, E-1, E-2 and E-3 in M. P. No. 317 of 1988. Similarly, notices were also issued under Section 148 of the Income-tax Act calling upon the petitioner and the other firms to file returns as an association of persons for the assessment years 1983-84 to 1985-86, excluding New Hilman Traders. The notices are annexed as annexures E, E-1 and E-2 in M. P. No. 318 of 1988, as such notices for filing returns for the years 1979-80 to 1982-83 have been challenged in M. P. No. 317 of 1988 and notices pertaining to the years 1983-84 to 1985-86 have been challenged in M. P. No. 318 of 1988.
7. During the pendency of M. P. No. 317 of 1988 and M. P. No. 318 of 1988, respondent No. 1 again issued a notice dated February 22, 1989, purporting to be under Section 148 of the Act in the name of the petitioner and Sarvottam Supari Stores and Hilman Traders, etc., styling them as an association of persons for the assessment year 1986-87 calling upon the petitioner and other said firms to file returns for the said assessment year. Prior to issuance of the notice, respondent No. 1 also issued a show-cause notice calling upon the petitioners and others to show cause why, notwithstanding the status of a registered firm, all the five firms should not be treated as having become a member of the association of persons. The petitioners sent a reply to that notice. The notices and reply have been filed with Petition No. M. P. 420 of 1989 and marked as annexures F, F-1 and F-2. The petitioner and other firms have already filed their returns for the assessment year 1986-87 for which notice under Section 148 of the Income-tax Act has been issued. The petitioners have challenged the aforementioned two notices for the assessment year 1986-87 by filing M. P. No. 420 of 1989. As such, the issues involved in all the three petitions being identical and the legal issue arising out of the notices in the three petitions being the same, they are being disposed of by this common order.
8. According to the petitioner in all the three petitions, the notices purporting to be under Section 148 of the Income-tax Act are ab initio void and without jurisdiction. The notices do not disclose any reason on which the belief of the first respondent that income chargeable to tax has escaped assessment is based. Before issuance of the notices under Section 148 of the Act, the Income-tax Officer must have either reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment, there has been an escapement of tax or alternatively the Income-tax Officer must have information in his possession which affords him reason to believe that income chargeable to tax had escaped assessment for the assessment year in question. In the absence of the aforesaid, the Income-tax Officer has no jurisdiction to issue notice under Section 148 of the Act.
9. In the instant cases, the prerequisites for proceeding under Clause (a) of Section 147 of the Income-tax Act are absent. The petitioner has disclosed the source of income in the returns and all material facts necessary for assessment. All the relevant and material facts being thus on record and within the knowledge of the assessing authority, the assessment orders have been passed in the previous years. As such for want of any material with the income-tax authorities to attract Clause (a) of Section 147 of the Income-tax Act, the notices under Section 148 of the Income-tax Act could not be issued. Even the provisions of Clause (b) of Section 147 of the Income-tax Act are not available. Having once assessed the petitioner and other firms as registered firms, the Department has no jurisdiction to reopen those assessments on the basis that they are not firms but an association of persons.
10. It has further been averred that respondent No. 1 having passed an order under Section 132(5) of the Income-tax Act in regard to Habib Moosa and Noor Mohammad in respect of the same assets sought to be assessed, cannot in the next breath make a protective assessment in regard to the same alleged assets in the hands of an imaginary association of persons. Under Section 132(4A) of the Income-tax Act, there is a presumption that any books of account, other documents, money, bullion, jewellery or other valuable articles or things if found in the possession or control of any person, then such things belong to that person in whose possession they are found. In view of the aforesaid presumption also, a protective assessment is not contemplated nor is warranted under the Act. Having once held that two persons are responsible for the seized articles in accordance with Section 132(5) of the Act, no other person or entity can be roped in hypothetically to seek assessment and/or reassessment against them. Therefore, a prayer has been made in all the three petitions for quashing the notices issued in the three petitions under Section 148 of the Income-tax Act and further for passing an order restraining the first and second respondents from taking any proceedings under the said notices or for making any assessment or reassessment or recomputation in pursuance thereof in respect of the petitioners.
11. The petition has been resisted by the Revenue on the ground that it is true that the petitioners and the respondent-firms in the petitions were assessed in the status of "registered firms", but after the search and seizure operation carried out at the business premises of the petitioner firm, Milan Supari Stores, Sarvottam Supari Stores, Hilman Traders and the residential premises of the partners of these firms in December, 1986, and on scrutiny of the material and information gathered during the search operation, it was noticed that the firms, named Milan Supari Stores, Sarvottam Supari Stores, Hilman Traders, etc., were doing business in the status of an association of persons for the assessment years 1983-84 to 1985-86. Consequently, after recording the reasonable belief, the notices under Section 148 of the Income-tax Act were issued. It is, therefore, denied that the petitioners and other firms have never associated with each other in order to form an association of persons and for the same reasons notices for the subsequent year were also issued. The copies of the reasonable belief for assessment for the years 1983-84 to 1985-86 have been filed in M. P. No. 318 of 1988 as annexures-R-1, R-1.2 and R-1.3. It has also been denied that the petitioner firm and other firms constitute separate and distinct business entities and conduct business separately. In fact, all the firms mentioned in the petitions have the status of association of persons as per order passed under Section 132(5) of the Income-tax Act, 1961.
12. As regards the communication of the reasons to the petitioners for issuance of notice under Section 148 of the Income-tax Act, it has been stated that the Income-tax Officer is not under any obligation to communicate reasons to the petitioner and other persons. It is denied that the notices under Section 148 of the Income-tax Act are ab initio void and without jurisdiction. The notices have been issued after the Income-tax Officer has recorded the reasonable belief as required by Clause (a) of Section 147 of the Income-tax Act. It is also denied that the petitioner firm had disclosed the sources of its income in its return and the material facts necessary for assessment. It is also denied that the earlier orders were passed after perusing the full record and considering the material facts in respect of the petitioner firm. It is denied that there was no omission or failure on the part of the assessee in making full disclosure while making full and true disclosure. The notices under Section 148 of the Act are based on the material gathered during the search operation and the Income-tax Officer came to the conclusion that the petitioner and the other firms were doing the business as an association of persons. It is also denied that the stock seized during the raid does not relate to the previous years. The provisions of Section 132(5) have rightly been invoked by the Income-tax Officer. It is also denied that once an order is passed under Section 132(5) of the Income-tax Act wherein two persons were held responsible for the seized articles, no other person or entity can be roped in. It has also been pleaded that the petitioner has an opportunity to show cause against the notices before the assessing authority and can avail of the other remedies.
13. Learned counsel for the petitioners in all the three petitions, Shri Chaphekar, has argued that a registered firm once registered with the income-tax authority cannot be treated as an association of persons without first cancellation of the registration of the firm under the provisions of the Income-tax Act. He has also argued that from the material on record as disclosed by the income-tax authority, no notice to the petitioner treating them as an association of persons could at all have been issued.
14. On the other hand, Shri V. S. Samvatsar states that from annexures R-1.1, R-1.2 and R-1.3 filed in M. P. No. 318 of 1988, it is clear that the action of the Revenue is justified because the cash of the firm was found at the residence of one partner. The partners are common and the nature of the trade is also the same. The assessee also could not identify the entire stock belonging to each firm. Therefore, it is a clear case wherein the inference of an association of persons could be validly drawn.
15. In view of the aforesaid arguments, first of all we have to see as to in what circumstances an inference of association of persons can be drawn. In the case of Commr. of Agrl. I.T. v. Raja Ratan Gopal, [1966] 59 ITR 728, the Supreme Court has held that to constitute an association of individuals, two or more individuals should have joined in the promotion of a joint enterprise with the object of producing income, profits or gains. In the case of G. Murugesan and Bros. v. CIT, [1973] 88 ITR 432, the Supreme Court has held that for forming an "association of persons", the members of the association must join together for the purpose of producing an income. An "association of persons" can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the members of the association is an essential ingredient. It is always open to its members to withdraw from the association. No one can be compelled to continue as a member of the association. No particular form need be observed for withdrawing from an association. In the case of realisation of dividends, if the individual members of an association choose to realise their dividends as individuals, there is an end of the association.
16. In the case of CIT v. Indira Balkrishna, [1960] 39 ITR 546, the Supreme Court has held that the word "associate" means "to join in common purpose, or to join in an action". Therefore, "association of persons", as used in Section 3 of the Income-tax Act, means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.
17. As such, in view of the aforesaid decisions of the Supreme Court, interpreting the term "association of persons" as used in Section 3 of the Income-tax Act, the Supreme Court has consistently taken the view that if two or more persons with a common purpose act jointly with a motive to produce income, profits or gains, then they can be treated as an association of persons. The Supreme Court has also held that there is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3 ; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not--see CIT v. Indira Balkrishna, [1960] 39 ITR 546 (SC).
18. Therefore, in the light of the aforesaid position of law, it has to be examined whether the petitioner firm along with the respondent-firms in the three petitions constituted an association of persons with the intention of earning profits or doing business for gain jointly. It is common ground that all the firms are registered separately as partnership firms and are being assessed to tax separately. Their opening and closing balances of stock, cash, etc., are regularly kept and placed before the assessing authorities. The collection of the entire income from the estate by one of the sharers or even by a common manager would not make the owners assessable as an association of persons as has been held in Commr. of Agrl. I.T. v. Raja Ratan Gopal, [1966] 59 ITR 728 (SC). The Supreme Court, at page 732 of the aforesaid judgment, considering the earlier case in Mohammed Noorullah v. CIT, [1961] 42 ITR 115 (SC), has held that the test for coming to a conclusion that there is an association of individuals is that two or more individuals should have joined in the promotion of a joint enterprise with the object of producing income, profits or gains. Then considering the facts of the case it was found that when the nephews of Raja Khaja Pershad succeeded to the estate as co-sharers and each one of them was entitled to 1/4th share of the income from the estate, they did not form a unit for the promotion of any joint enterprise to earn income, profits or gains. The collection of the entire income from the estate by one of the sharers or even by a common employee will not make that income an income from a joint venture. Each of the sharers gets his income as an individual and not as an association of individuals. As such, merely because some persons are common in different firms and they are inter-related, would not by itself be a reason for treating them as an "association of persons". Similarly common residence by the brothers cannot also be a ground for treating the different firms as an association of persons. However, according to the Revenue, although the different firms were being treated as separate firms for the purpose of assessment in the years before the raid and they were also assessed accordingly, but the cash of the firms was found at the residence of one partner and the majority of the partners are common, the nature of the trade in all the firms being the same and especially the stock found at the residence of different partners could not be identified, therefore, there was sufficient material to come to the conclusion that the different firms are actually an association of persons shown as different entities for the purpose of assessment.
19. In our opinion, the aforesaid facts, i.e., the cash being found at the residence of one of the partners and the stock being found, which according to the Revenue having not been identified in respect of each firm, would not constitute material under Clause (a) of Section 147 of the Income-tax Act because there is no nexus between the cash and stock found at the time of the raid with the escapement of the tax in the previous years for which notices under Section 148 of the Income-tax Act have been given. The petitioner and the respondent firms were registered as separate and distinct entities with the Income-tax Department. In the assessment years 1979-80 to 1982-83 and for the years 1983-84 to 1985-86, the firms had filed their returns as separate entities. The assessment orders were passed by the competent income-tax authorities after examining the books of account and hearing the parties. The raid was conducted at the business premises of the firms and residences of the partners on December 17, 1986. The stock found during the raid in the basement of the residence of the partners consists of supari, katha, zarda and various other items which are undoubtedly perishable goods. Therefore, it is difficult to hold that this stock relates back to the dealings of the firms in the previous years. Similarly, there is no basis to hold that unaccounted cash found in the possession of one of the partners constituted the earnings of the firms as an association of persons in the previous years. The Revenue has not been able to point out as to what facts were suppressed by the firms and what material facts constituted the full and true disclosure by the different firms, in the previous years. Similarly, returns have been filed for the years 1986-87 by the firms as separate and distinct entities. The details of the accounts and all the material facts have also been filed with the returns. Therefore, for the aforesaid reasons, notice under Section 148 could not be issued for that year also. Only because at the time of the raid in a particular year some unaccounted stock or money was found in the possession of one of the partners of the firms or the stock found could not be separately identified as belonging to different firms, would not automatically lead to the conclusion that the stock was accumulated as a result of the suppression of the full and true material facts by the firms in the previous years. The stock being perishable, by no stretch of imagination could it relate back to earlier years.
20. If certain persons have filed a return showing the status of a firm and the firm is registered with the Department and an assessment has been made by the Department, then only because in a subsequent year some unexplained stock is found in the possession of the firm or unexplained money is found in the possession of any one of the partners, then that itself will not be a valid reason for reopening the assessment for the previous years. There should be some positive evidence to arrive at a conclusion that in the assessment years earlier to the finding of unexplained stock or money, the assessee-firm had failed to disclose fully and truly all the material facts and the existence of such facts should lead to the formation of an opinion that income has escaped assessment. In the instant case, the orders of the Revenue authorities do not disclose that there was any omission in the disclosure of true and material facts by the respective firms during the assessment years in question. Unless that requirement is satisfied and that material is in the possession of the Revenue authorities, a notice under Section 148 of the Income-tax Act is clearly without jurisdiction.
21. The notices have been challenged on another ground also. According to Shri Chaphekar, the income-tax authorities have completely ignored the provisions of Section 186 before passing the impugned orders, wherein if the Income-tax Officer is of the opinion that during the previous year no genuine firm is in existence as registered, he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for that assessment year or the cancellation can be made under Clause (2) of Section 186. Therefore, the first step before passing an order treating the petitioner and the respondent-firms as an association of persons, issue of notice under Section 186 was necessary which has not been given. That is why the order itself is without jurisdiction. We find force in this argument because the provisions of Section 186 of the Income-tax Act clearly provide for the cancellation of registration in the event of the existence of facts leading to an opinion that a genuine firm was not in existence as registered. In the instant case, undisputedly no action under Section 186 of the Income-tax Act was taken. For this reason also, the orders impugned cannot be held to be in accordance with law.
22. In the result, for the aforesaid reason, i.e., not taking action under Section 186 of the Income-tax Act and also for absence of any material to show that income had escaped assessment for the relevant years or had been under-assessed or assessed at too low a rate because of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the years, the Income-tax Officer had no material before him leading him to a belief, as required by Section 147(a) of the Income-tax Act. The facts discovered in the year 1986 cannot relate back to the previous years. The facts and circumstances of the case clearly show that there was no escapement in the previous years because of the failure on the assessees' part to disclose fully and truly all material facts necessary for the assessment of tax for the relevant years. It is practically a settled position of law that "material facts" used in Clause (a) of Section 147 of the Income-tax Act refer only to primary facts which have been disclosed by the assessee showing the sale, purchase and profit supported by account books. As such, in the absence of any case of suppression, misrepresentation or falsification of documents, it cannot be said that the provisions of Section 147(a) of the Income-tax Act are attracted.
23. Consequently, all the three petitions filed by the petitioner are allowed. The notices impugned issued against the petitioners are quashed. However, there will be no order as to costs. The security deposit, if any, shall be returned to the petitioner after verification.