Patna High Court
Commissioner Of Income-Tax vs Chandmal Rajgarhia on 2 February, 1995
Equivalent citations: 1995(43)BLJR516
Author: K. Venkataswami
Bench: K. Venkataswami
JUDGMENT K. Venkataswami, C.J.
1. In all these cases the assessee is the same but the assessment years are different. Though the questions of law for the different assessment years, in form, are differently worded, in substance, the question of law referred to this court is the same. For the assessment years 1975-76 and 1977-78 corresponding to Tax Cases Nos. 205 of 1981 and 65 of 1984, respectively, the common question of law referred to this court for opinion under Section 256(2) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act" only), reads as follows :
" Whether in the facts and circumstances of the case, the Tribunal was in error in holding that the income from the mining business of the "assessee was not assessable as income of an association of persons ?"
2. Likewise for the assessment years 1976-77, 1973-74 and 1971-72 corresponding to Tax Cases Nos. 62, 63 and 64 of 1984, respectively, the common question of law referred to this court for opinion under Section 256(2) of the Act is the same which reads as follows :
" Whether the Tribunal was correct in annulling the assessment of the assessee-association of persons and in directing that the income of the association of persons should be divided between Sri and Srimati Rajgarhia and assessed in their hands ?"
3. For the rest of the cases referred to under Section 256(1) of the Act, the common question of law referred to this court for opinion reads as follows :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income of the assessee from mica mining business should not be assessed as a unit in the status of association of persons but should be divided between Sri and Smt. Rajgarhia and assessed in their respective hands ?"
4. The brief facts leading to the references as mentioned above may now be noted. The assessee in all these cases is Messrs. Chandmal Rajgarhia, Giridih. In a partition suit filed by the two major sons of Sri Chandmal Rajgarhia, the mica mining business was allotted jointly to Chandmal Rajgarhia and his wife, each having an equal share. For all the assessment years in question, the Income-tax Officer assessed the assessee in the status of an association of persons and levied income-tax accordingly in the hands of the association of persons rejecting the contention of the assessee that the income should be divided between the two members of the association of persons and assessment should be made separately as the mining business carried on by them was not as a result of a joint enterprise but it was allotted by virtue of an award in the partition suit. The assessee contended before the Income-tax Officer that the income may be computed in the hands of the association of persons but tax must, however, be levied separately on the members of the association of persons. That was not accepted by the Income-tax Officer.
5. Aggrieved by the order of the Income-tax Officer making the assessment in the hands of the association of persons, the assessee in certain cases moved the appellate authority without success. On further appeal to the Income-tax Appellate Tribunal, the assessee's contention was accepted and the Tribunal annulled the levy of tax in the hands of the association of persons. Aggrieved by that, the Revenue, at the first stage, moved the Tribunal under Section 256(1) of the Act to state the case and refer the question of law for the decision of this court. On rejection by the Tribunal, the Revenue moved this court under Section 256(2) of the Act and got the question of law referred for the decision of this court.
6. In certain other matters, in view of the prior orders of the Tribunal, the Appellate Assistant Commissioner himself gave relief on appeals and the Revenue preferred appeals to the Tribunal and the Tribunal, following its earlier orders, accepted the Appellate Assistant Commissioner's order setting aside the assessments of the Income-tax Officer levying tax in the hands of the association of persons. In the light of the prior orders under Section 256(2) of the Act, the Tribunal itself by the subsequent orders referred the common question of law for the decision of this court in respect of the assessment years as mentioned above at the outset.
7. Learned counsel appearing for the Revenue submitted that the Tribunal was not right in annulling the assessment of the Income-tax Officer levying income-tax in the hands of the association of persons and directing the Income-tax Officer to assess income-tax in the hands of the members of association of persons, namely, Sri Chandmal Rajgarhia and Smt. Chandmal Rajgarhia. According to learned counsel, Section 4 read with Section 2(31) of the Act does not give any option to the authority to assess the members of association of persons when the "association of persons" is a unit for purposes of assessment before the taxing authority,
8. In support of the above contention, learned counsel has placed reliance on three judgments--one of the Madras High Court, another of the Karnataka High Court and the third of the Kerala High Court, namely, Estate of A. Mohamed Rowther (by power agent) v. CIT [1963] 49 ITR 39 ; Late Bhoomiamma (K.) (Smt.) v. CIT [1992] 194 ITR 723 and CIT v. C. Karunakaran [1988] 170 ITR 426.
9. In Estate of A. Mohamed Rowther v. CIT [1963] 49 ITR 39, a Division Bench of the Madras High Court, while considering the scope of the phrase "association of persons", in the course of the judgment, has observed as follows (at page 46) :
" It is now settled law that mere co-ownership is not sufficient to justify an assessment by the Department, treating the co-owners as an association of persons (see Indira Balakrishna v. CIT [1956] 30 ITR 320 (Bom)). This co-ownership is not destroyed even if it so happens that the management of the joint undivided estate is entrusted to the care of a manager by a court or if the properties vest in custodia legis by reason of the appointment of the receiver (see Mazumdar (S. C.) v. CIT [1947] 15 ITR 484 (Patna)). But there is nothing impracticable or impossible for co-owners or for co-heirs to attract the characteristics of an association of persons under the Indian Income-tax Act if the facts and circumstances of the case so warrant. An association of persons is a unit of assessment under the Indian Income-tax Act, 1922. The precise meaning of the expression has come up for consideration on several occasions before the courts. The word "association" indicates plainly the voluntary combination for a common endeavour and not a mere legal status resulting from operation of law. Co-owners, co-heirs or co-legatees do not constitute such association in respect of the income of the joint or common asset by reason only of their jural relationship. But, if they unite themselves with the objective of earning income, they constitute an association of persons for assessment purposes "and they cannot take advantage of their legal position to resist assessment on that basis. The essential criterion that attracts the label of "association of persons" in the Income-tax Department is the unity of the income-making purpose rather than the unity of title in the income-yielding asset, In Late Bhoomiamma (K.) (Smt.) v. CIT [1992] 194 ITR 723, a Division Bench of the Karnataka High Court has considered the following question of law referred to it for its decision (at page 725) :
" Whether, on the facts and in the circumstances of the case, the Tribunal was competent in directing the Income-tax Officer to compute income as if it belonged to an association of persons and later on to distribute the same among the members even though there was no assessment made in the hands of the association of persons on the said income ?"
10. In that case it appears that the Appellate Tribunal found that the capital gain was the income of the association of persons and in spite of that it directed the Income-tax Officer to divide the said income amongst the individuals comprising the association of persons. The association of persons, aggrieved by that decision of the Tribunal, moved the High Court. In the reported judgment the learned judges, after finding a distinction between the charging Section 3 of the old Act read with Section 2(9) and the charging Section 4 of the present Act read with Section 2(31), observed that the idea of the present Section 4 seems to make the provision simpler and to divest the authorities of any discretion to treat the income of one unit as the income of another unit. The concept of association of persons has been recognised as a taxable unit for which purpose a statutory status is recognised. On the scope of Section 4 of the present Act, the learned judges held as follows (at page 729) :
" Under Section 4 of the present Act, tax shall be charged in respect of the total income of the previous year of every person, which means, in the case of an association of persons, it will read as, that tax shall be charged in respect of the total income of every association of persons. No option to treat the income of the association of persons as the income of the members of the association of persons individually is forthcoming (except for the purpose of Section 86 with which we are not concerned here). The above reasoning of ours finds full support from a Bench decision of the Andhra Pradesh High Court in Choudry Brothers v. CIT [1986] 158 ITR 224. The Andhra Pradesh High Court also has referred to an earlier decision of the Patna High Court in Mahendra Rumor Agrawalla's case [1976] 103 ITR 688 and that of the Punjab and Haryana High Court in Rodamal Lalchand v. CIT [1977] 109 ITR 7. The Andhra Pradesh High Court observed at page 229 thus :
'A group of persons came together and acted together for doing business and earning profits. They, therefore, constitute an association of persons only. Under Section 4 of the Income-tax Act, 1961, the unit for the purpose of assessment in this case can only be an association of persons. Section 4 of the Income-tax Act, 1961, charges the income earned by such an association of persons called "person" within the meaning of the definition clause of Section 2(31), with liability to suffer income-tax. It is no doubt true that an association of persons is a body of persons. But from this, it does not necessarily follow that in the matter of assessing the income earned by an association of persons, the Income-tax Officer has an option either to assess that body of persons called the association of persons or its individual members. Under Section 4 of the Income-tax Act, 1961, the Income-tax Officer is left with no choice to assess the association of persons or alternatively the individual persons comprising that association of persons. Under Section 4 of the Act, he has to levy tax only on the appropriate unit of income-tax. It, therefore, becomes necessary to find out which is the appropriate unit of income-tax in this case. The income was earned in this case not by the individuals but by an association of persons. Willy-nilly the Income-tax Officer had to levy tax on the association of persons which is the only appropriate unit of income-tax assessment in this case. In fact, the Income-tax Officer in a case of this nature would be acting contrary to law if he assesses as the assessee suggests before us on the facts of individual, personal income.' Again, at page 231, the Bench pointed out that a perusal of Section 4 of the 1961 Act would clearly show that the Income-tax Officer has been left with no discretion unlike the case under Section 3 of the old Act. The relevancy of the last phrase found in Section 3 of the old Act, i.e., ("or the members of the association individually') has been discussed at page 233.
An earlier decision of the same High Court was dissented from because the said decision had not considered the change in the language of Section
4."
11. Ultimately, the learned judges answered the question in the negative and against the Revenue.
12. In CIT v. C. Karunakaran [1988] 170 ITR 426, a Division Bench of the Kerala High Court, while considering the phrase "association of persons", observed as follows (at page 429) :
" A commercial adventure of co-owners of assets with a view to obtaining and dividing the profits among them ordinarily assumes the characteristic of a partnership and is generally so regarded in law. If, however, their relationship falls short of a partnership by reason of any legal infirmity or for whatever cause, their activities in the pursuit of profit may still assume, albeit not in the strictly legal sense, some of the attributes of a firm or partnership, and they will be treated as an association of persons for the purpose of assessment. In Mohammad Aslam v. CIT [1936] 4 ITR 412, the Allahabad High Court pointed out that an association of persons has some of the attributes of a firm or partnership though not in the strictly legal sense of the term. In CIT v. Indira Balkrishna [1960] 39 ITR 546, 551, the Supreme Court stated :
'... an association of persons must be one 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'. "
13. Placing reliance on these judgments, learned counsel appearing for the Revenue contended that the judgment of the Tribunal cannot be sustained.
14. Learned counsel appearing for the assessee brought to our notice one circumstance by which, according to him, even if these cases are decided in favour of the Revenue, it is not possible to levy tax in the hands of the association of persons as the Tribunal has already decided and directed the income-tax authorities to divide the income and tax the members of the association of persons. Once the members constituting the association of persons are taxed separately then the association of persons cannot be taxed once again. Explaining the above circumstance, he submitted that in respect of each assessment year three appeals were filed before the Tribunal, one by the association of persons and two by the individuals comprising the association of persons. The Tribunal, while allowing all the appeals, held that assessment in the hands of the association of persons should be annulled and the. assessments should be made in the hands of the individuals comprising the association of persons. The Tribunal, accordingly, gave a direction to the taxing authorities. Learned counsel further submitted that the present references are only against the orders passed in the appeals filed by the association of persons and the Revenue has not sought any reference against the orders passed in the appeals preferred by the members constituting an association of persons, Therefore, those orders having become final cannot be reopened. That being the position it must be taken that the income has already been assessed in the hands of the individuals comprising the association of persons and, therefore, the same'income cannot be taxed in the hands of the association of persons even if the tax references are answered in favour of the Revenue. In support of this, he placed reliance on the following decisions: CIT v. Pure Nichitpur Colliery Co. [1975] 101 ITR 79 (Patna), Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 (Guj) and CIT v. V. H. Sheth [1984] 148 ITR 169 (Bom).
15. In the latest case CIT v. V. H. Sheth [1984] 148 ITR 169 (Bom), it has been held as follows (at page 170) :
" In other words, once the assessment of a partner or a member of an association has been made by taxing directly his proportionate share from the firm or association, the Income-tax Officer is precluded from assessing the firm in the status of an unregistered firm or an association of persons. The circular clarifies that although the Supreme Court's aforesaid decision is under the Indian Income-tax Act, 1922, the Board is advised that it will equally apply to assessments made under the Income-tax Act, 1961.
This circular set out in the above paragraph is binding on the Income-tax Department as per the decisions of the Supreme Court in the cases of Navnit Lal C. Javeri v. K. K. Sen, AAC of I.T. [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913. In view of this, it is clear that the Income-tax Officer was not entitled, in the facts and circumstances of the case, to tax the assessee as an association of persons. In view of this conclusion, question No. 1 sought to be referred becomes academic because the same position would prevail whether the revised return was valid or not. "
16. The above proposition is not disputed by learned counsel for the Revenue, Therefore, we are not referring to other cases. His submission, however, is that pursuant to the decision of the Tribunal in the appeals preferred by the individuals comprising the association of persons, no assessment orders have been passed, therefore, it cannot be assumed that the individuals forming the association of persons have already been taxed on the proportionate income derived by them from the association of persons. Even otherwise, this court will not refuse to answer the question merely on the assumption that the individuals forming the association of persons must have been taxed on their proportionate income derived from the association of persons.
17. We have considered the rival submissions and the decisions cited at the Bar. On the facts we find that the assessee before the Income-tax Officer was an association of persons comprising Smt. and Sri Chandmal Rajgarhia. Under Section 4 read with Section 2(31) of the Act, an association of persons is a unit assessable to tax. There cannot be any dispute on this.
18. It is argued that the business of mining is carried on by Messrs. Smt. and Sri Rajgarhia as a result of a decree in the partition suit and not as a result of any volition on their part and, therefore, the tax must be levied separately. We are not in a position to accept the same for it cannot be disputed that they have united themselves with the object of earning income and as such they constitute an association of persons for assessment purposes. Again it cannot be disputed that the essential requirements to attract the label of "association of persons" in the Income-tax Department is the unity of the income-making purpose rather than the unity of title in the income-yielding asset and that requirement having been satisfied in the present cases, the assessee cannot challenge the tax levied in the hands of the association of persons. It is also relevant to bear in, mind that the charging section of the present Act, namely, Section 4 read with Section 2(31) of the Act takes away the discretion in the authorities to treat the income of one unit (association of persons) as the income of another unit (members constituting the association of persons).
19. By applying the ratio laid down in the decisions of the Madras, Karna-taka and also Kerala High Courts on this subject as noticed above, we have no difficulty in answering the question in favour of the Revenue.
20. We also accept the contention of learned counsel for the Revenue that the decision of the Tribunal rendered in the appeals preferred by the members of the association of persons will not bar us from answering the question. It is well settled law that the jurisdiction exercised by the High Court under Section 256 in dealing with the income-tax references is in the nature of an advisory one and, as such, it is a strictly limited one. Further, this court only answers the questions referred to it giving reasons therefor, leaving further orders to be passed by the Tribunal in accordance with the answers given by this court. That being the position, we are not impressed by the argument advanced by learned counsel for the assessee.
21. For the reasons stated above, we answer the questions in favour of the Revenue and against the assessee. No costs.
S.N. Jha, J.
22. I agree.