Income Tax Appellate Tribunal - Bangalore
The Asst. Commissioner Of Income-Tax vs S. Prabhakar Kamath And 3 Ors. on 30 April, 2007
Equivalent citations: (2008)116TTJ(BANG)817
ORDER
1. The revenue has filed these appeals against the order of learned CIT(A), Bangalore dated 24th March, 2003.
2. The first grievance of the revenue is that the learned CIT(A) has erred in holding that the income from house property from the commercial complex is required to be assessed in the individual hands as co-owners equally in terms of Section 26 of the IT Act.
3. As per the Assessing Officer, 4 persons namely S Prabhakar Kamath, S Jaya P Kamath, K Rama Bhandary and K Usha Bhandary together came to an understanding in the joint venture formed in 1988 and purchased a plot of land with an unfinished foundation of building situated at Kodialbail Village, Mangalore in 1988. They pooled their resources, opened a bank account, obtained licences and approvals for construction of the commercial complex in the plot purchased later known as "Krishna Prasad" building, obtained loans and did all other acts together as found in an AOP and completed the construction of the Said commercial complex in or around 1992. Common books of accounts 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 asst. year 1995-96 onwards, 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 AOP, therefore, the Assessing Officer issued notice Under Section 148. The members of the AOP have filed their individual returns by including the income from the commercial complex as co-owners under 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 1/4th 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 AOP in existence and income from the commercial complex of 'Krishna Prasad' are chargeable to tax in the hands of AOP. Thus, the entire income including the rental income has been taxed as business income in the hands of AOP.
4. Before the learned CIT(A) it was contended that share of all the 4 co-owners is equal and therefore, rental income should be assessed in the individual hands of the co-owner as per Section 26 of the I T Act. Before the learned CIT(A) it was also contended that there was no AOP in existence.
5. The learned CIT(A) has considered the decision of the Apex Court in the case of CIT v. Shivsagar Estate 257 ITR 59. In that case, property was owned by 65 co-owners. The revenue contended that it is to be taxed in the hands of AOP. The Bombay High Court in the case of CIT v. Shiv Sagar Estates (AOP) 201 ITR 953 held that rental income is to be taxed in the individual hands and not in the hands of AOP. For subsequent year, the Bombay High Court followed its earlier decision. The subsequent decision was appealed before the learned Apex Court. The Apex Court dismissed the appeal on the ground that revenue has not filed any appeal against the earlier order. The learned CIT(A), therefore, held that income from house property is required to be assessed in the individual hands of the co-owners equally in terms of Section 26 of the Act. During the course of proceedings before us, the learned DR submitted that the property was purchased for commercial exploitation. All the co-owners have pooled their resources; hence, the entire income is to be taxed in the hands of AOP.
6. On the other hands, the learned AR submitted copy of the sale deed through which the plots were purchased. The learned AR drew our attention to Claus 5 of the deed in which it has been mentioned that the purchasers shall have equal undivided share in the entire schedule property. Hence, it cannot be said that shares of the co-owners are not specified. It was therefore argued that income from house property is to be rightly taxed in the hands of the individual co-owners.
7. We have heard both the parties. It is an admitted position that rental income from the property has been assessed in the hands of the individual co-owners upto asst. year 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 asst. year 1994-95 is assessable in the hands of individual co-owners, then it cannot take a different stand for the subsequent years, particularly in view of Section 26 of the IT Act. It will be relevant to reproduce Section 26 of the IT 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 Section 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-owner if their shares are ascertainable and such income cannot be taxed in the hands of the AOP. The Hon'ble jurisdictional High Court in the case of CIT V. Sona and Sons in ITR No. 65/2002 had an occasion to consider the income derived by an AOP from letting out the house property is to be assessed under the head 'income from house property' or 'income from business'. The learned High Court vide order dated 30th January, 2003 answered the issue by observing as under:
7. Coming to the facts of the present case, admittedly, the commercial complex has been constructed by the assessee and the rental income is being derived by the assessee alone in its own right. Therefore, for the purpose of Section 22 of the Act, as explained and declared by the Supreme Court, the assesses has to be viewed as an owner. That being the legal position, irrespective of the fact 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. The latter aspect is also squarely covered by a decision of a three Judges Bench of the Supreme Court in the case of East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax, West Bengal wherein it is held:
Income tax is undoubtedly levied on the total taxable income of the tax payer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in Section 6 indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in Section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head.
The income derived by the company from shops and stalls is income received from property and falls under the specific head described in Section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets
8. The facts of the present case and the questions of law raised herein are identical to those considered by us in ITA Nos. 111-112/1999 (CIT v. Bhoopalan Commercial Complex A Industries (P) Ltd. D.D. 30.1.2003) wherein it is held that irrespective of the fact that one of the objects of the assessee company is to derive income by leasing sites and constructions thereon has, 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.
8. The other grounds of appeal raised by the revenue are as under:
i) The learned CIT(A) 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 co-owners as the investment in the above property is in the nature of acquisition of capital asset by them.
ii) The learned CIT(A) 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 sources" in the individual hands as co-owners.
iii) The learned CIT(A) has erred in maintaining that all the 4 co-owners are found to be having definite and ascertainable share which is equal in the present case and that such co-owners shall not be assessed as an AOP in respect of their definite and ascertainable shares from the house property income and therefore, the necessary ingredients of an Association of Persons are lacking in this case.
iv) The learned CIT(A) has erred in placing reliance on the decision of the Supreme Court in CIT v. Indira Balakrishna as the ratio of decision in this case is not applicable to the assessee's case.
v) The learned CIT(A) failed to appreciate that the Hon'ble Supreme Court in the case referred supra defined an AOP as being "Therefore, 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" and that the above definition is squarely and applicable in toto to the present case.
vi) The learned CIT(A) failed to appreciate that the elements for the term AOP are clearly satisfied owing to the fact that the property has been acquired by the 4 persons to exploit it commercially, by investing large sums of money to alter the nature of the property, the transfer of portions of the property for valuable consideration being a recurring feature are clearly pointers to the fact that the elements of inherent in the assessee's activity are of the nature of commerce, business and trade. The various operations done by the association of persons are similar to the kind carried on in the same way as those engaged in such line of business and classifiable as income under the head "profits from business".
vii) The learned CIT(A) erred in holding that since the shares of the members are definite and ascertainable the provisions of Section 26 are applicable. The CIT(A) ignored the fact that the reference to Section 26 of the IT Act, 1961 is specific only to cases where the shares of the co-owners are definite and ascertainable in relation to the income from house property computed Under Section 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.
9. The learned Assessing Officer informed the assessee that from the details filed by individual members of AOP 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 AOP and not in the hands of individual members of AOP. Previous owners of the property intended to exploit the property purchased by the AOP 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 intention was to commercially exploit such property. The Assessing Officer, therefore, required the assessee to explain as to why the assessment should not be made in the status of AOP and the income from capital gain shown by individual co-owners be not taxed as their business income in the hands of AOP. Before the Assessing Officer, it was contended that licence for construction of commercial building was obtained in the name of all the 4 persons as co-owners. On completion, all the 4 members have been assessed to municipal, tax as co-owners. For the previous year relevant to asst. year 1992-93, the first floor of the building was let out to State Bank of India and such lease was made by all the 4 co-owners. The building so constructed was referred for valuation. 1/4th of the difference between the cost of construction shown by the assessee and as determined by the Valuation Cell was added in the hands of each co-owner. It was therefore argued that the status as co-owner was not disputed upto asst. year 1994-95. The co-owners have contributed their own funds to a larger extent for construction of the building. Sums of money have been borrowed from very close relatives. No. bank loan or commercial loan has been taken for construction of the building. No. advance was collected from any of the prospective buyers either during the period of construction or 3 years thereafter. The co-owners have not advertised or made an offer for sale at any point of time during construction for 3 years after construction. The co-owners only made efforts to let out the property. On being unable to gainfully let out the property for over 3 years after completion, the co-owners have been forced to sell the shops to prospective buyers. The capital gain has been shown by each of the co-owner in the income tax return. It was, therefore, argued that the income cannot be taxed in the hands of the AOP.
10. The learned Assessing Officer, after considering the above submissions, recorded his finding as under:
I have gone through the submissions of the assessee and facts on record. I do not agree with the assessee that there was no AOP in existence and the income from the commercial complex 'Krishna Prasad' are chargeable to tax as co-owners in their individual capacity. I am also not in agreement with the assesse'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 AOP for exploiting the business opportunities and the intention of the AOP 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 AOP and assess their income under the head of income "income from business or profession.
11. Before the learned CIT(A) it was contended that all the 4 members have joined as co-owners at the time of purchase of the property. Around 25,000 sq ft was the constructed area and out of which 9,000 sq ft was let out. Constructed area to the extent of 9000 sq ft has been sold and the co-owners are having around 5000 sq ft, which is not let out. Each co-owner has disclosed the investment made by them in the property in their individual returns for the respective asst. years. In the case of Some of the co-owners, the Assessing Officer made additions on account of unexplained investment for the construction of the above commercial complex. This shows that the Assessing Officer treated the construction of the building as done by the co-owners. The essential ingredients of an AOP are not present in the instant case. The Assessing Officer himself made assessment for the asst. years 1992-93 to 1994-95 in the hands of individual co-owners. It was argued before the learned CIT(A) that a period of 14 years was taken for completing the construction. This shows that the intention of the co-owners was not just to construct and sell either in parts or in full. A portion of the property has been sold for the purpose of meeting the cost of construction. IF the intention is profit motive then there was no need to let out any part.
12. The learned CIT(A) held that the requirement for constituting an AOP as mentioned by the Apex Court in the case of CIT v. Indira Balakrishna 39 ITR 546 are not satisfied. On the basis of the following judgement, the learned CIT(A) held that capital gains on sale of joint property cannot be clubbed together for assessments either as AOP or BOI:
1. CIT v. Deghamwala Estates 109 ITR 416
2. CIT v. Deghamwala Estates 121 ITR 684
13. During the course of proceedings before us, the learned DR submitted that all the members joined together for the construction of a commercial complex. For constructing such commercial complex, they have maintained common books of accounts. A common name was given to the commercial complex, a common bank account was opened, and resources were raised not by individual co-owner but were raised in the name of common name. The activities carried out by the co-owners constitute an adventure in the nature of trade and therefore is to be treated as business. All the 4 members have joined together to do such business and therefore, the Assessing Officer has rightly taxed it in the hands of AOP. The learned DR relied on the judgement of the Apex Court in the case of Smt. Indramani Bai and Anr. V. CIT 200 ITR 594 In that case, two ladies purchased land and carved out that land into 4 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 AOP.
14. During the course of proceedings before us, the learned AR has filed a paper book containing 151 pages. The learned AR drew our attention to Clause 5 of the purchase deed. In Clause 5 it has been mentioned that each one of the co-owner shall have equal undivided share in the entire schedule property. The learned Ak 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 the case that the purchaser of the property has given a consolidated cheque in the name of one of the co-owners. Each co-owner has been given separate share by the purchaser. It was further Submitted that the loans were raised by each co-owner and such loans were pooled together for the construction of the property. It is not the case of the revenue that the property was sold after construction. It was argued that the decision of the Apex Court in the case of Indramani Bai (supra) is not applicable. The learned AR submitted that the following judicial pronouncement may be taken on record for disposal of the appeals:
1. Commissioner of Gift-tax v. R Valsala Amma 82 ITR 828 (SC);
2. Commissioner of Agricultural Income-tax v. Raja Ratan Gopal 59 ITR 728 (SC-FB);
3. CIT v. Smt. Saraswati Bai and Ors. 137 ITR 656 (PAH);
4. B T Manjappa Gowda and Ors. v. State of Karnataka 150 ITR 303 (Kar.);
5. CIT v. Har Prashad and Ors. 178 ITR 591 (P&H);
6. Smt. Bhagirathi Bai & Shantha Bai v. Commissioner of Agricultural Income-tax 120 ITR 843.
15. We have heard both the parties. Sale deed was executed on 11th January, 1988 between S Prabhakar Kamath, Smt. S Jaya P Kamath, Smt. K Rama R Bhandary and Smt. K Usha U Bhandary termed as purchasers and M/s Albuquerque Associates, Mr. Colin Peter Albuquerque, Flt. Lieutenant Adrian Christopher Albuquerque, Mr. Franz Gerard Albuquerque, Mrs. Diana Cecilia Albuquerque, Mrs. Rosanna Veronica Albuquerque and Mrs. Ramona Vivienne Albuquerque termed as Sellers for sale of property in respect of site No. 31 and 32. In the sale deed it is mentioned that the sellers could not develop the schedule property in the manner desired though the construction was already started in the schedule property as originally planed for constructing a commercial complex therein as per building licence No. E4/BA/124/86-87 dated 23.11.87 and commencement certificate as per C.C. No. 853/85-86 dated 3.9.1986. The intention of the purchaser is available in the deed. It is mentioned in the deed as under:
And Whereas the purchasers herein were on the look out to purchase the schedule property as joint venture to develop the same by constructing a commercial complex thereon came to know the intention of the vendors to sell the schedule property and negotiated with the vendors to purchase the same.
It is clear that the purchasers joined together to purchase the property as joint venture. Another property was purchased vide deed dated 22nd January, 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 different asst. years by all the 4 co-owners is as under:
Name 31.3.1988 31.3.1989 31.3.1990 31.3.1991 31.3.1992 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 2,60,000 3,25,000 Usha R Bhandary 85,000 1,75,000 2,05,000 2,95,000 3,75,000 Credit balance upto 2.1.92 in the case of SP Kamath is Rs. 8,25,750/- Credit balance upto 09.09,91 in the case of Jaya P Kamath is Rs. 8,30,000/-
In respect of first purchase of property, the entire consideration has been paid up to May, 1988. The sources of investment as per the accounts submitted for purchase of property are as under:
Jaya P Kamath Rs. 7,50,000/- Rama R Bhandary Rs. 1,10,000/- Usha R Bhandary Rs. 1,10,000/- Radha V Kini Rs. 2,00,000/-
From the above details, it is clear that all the co-owners have not made equal investment in the schedule property. It will be relevant to reproduce the income and expenditure account and balance sheet prepared in respect of 'Krishna Prasad'. On the basis of such income and expenditure account, each co-owner has returned their income:
Balance Sheet as at 31st March, 1992 Liabilities As at 31.3.92 Assets As at 31.3.92 Co-Owners Capital Account: Rs. P. Fixed Assets:
Sri S Prabhakar Kamath 25,101-00 a. Land : At Smt. S Jaya P Kamath 25,101-00 R.S. No. 445/3A, TS Smt. K Rama R Bhandary 25,101-00 No. 284/3A1 (Portion) & Smt. K Usha U Bhandary 25.101-00 1,00,404-00 TS No. 284/3A2 Loan From Co-Owners: (Portion) in Kodialbail Smt. K Rama R Bhandary 3,25,000.00 Village, Mangalore. Sale Smt. K Usha U Bhandary 3,75,000.00 Deed registration as Sri S Prabhakar Kamath 500.00 7,00,500-00 document No. 1463 of Loan From Others: 1987-88 entered at Mrs. Radha V Kini 2,55,975.50 Pagtes 77-162 volume Nizar Ramdas Pai 3,37,139.40 921 of book 9 dated Jeandas Foundation 2,61,238,15 16.1.1988. 11,35,011.00 Mrs. M Annapoorna Pai TS No. 284/3A RS 4.290.00 11.39.301.00 A/c No. I 50,000.00 No.445/3A Sale deed -do- A/c No.II 1,02,732.80 registration as Narasimdas BenefitTrust1,04,026.20 document No. 1584 of Miss Swathi Rao 1990-91 book No. 8 M/G Deepa S Rao 44,267.35 dt. 22.1.1991. HUF of Late Y Subba Rao 42,656.85 b) Water Pump: Miss Usha Kamath 6,35,895.17 Current Assets: Canara Mas.S Mukund Kamath 6,61.015.39 24,94,946.81 Bank, Market Road, SB 46,805.18 A/c No.6457 Rent deposits : State Bank of India, 29,605.43 From State Bank of India 1,24,200.00 Lalbagh C.A. No. P783 31.290.00 1.07.693.61 Deposit with K.E.B. outstanding Charges: Building Under Professional charges 1,000.00 Construction: 20,71,082.04 Pai Brothers 90.000.00 91,000.00 (By name 'Krishna Prasad') co-Owners Current Account: Interest Carried Sri S Prabhakar Kamath 12,824.13 Forward Under Smt. S Jaya P Kamath 12,824.15 Explanation To Smt. K Rama R Bhandary 12,824.13 51,296.55 Under Section 24(1)(VI) 29,965.60 Smt. K Usha U Bhandary 12.824.14 (Rs. 7,491.40 p.a.) Interest Relating To Incomplete Portion of The 2.14.300.11 Building: 35,62.347.36 Total: 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 Internet paid (See note enclosed) for the By Rent received 1,03,500.00 year ended 31.3.1992 By interest received 1,508.00 from banks 500.00 1/5th of interest paid By water charges collected during construction 41,804.00 period (from 14.11.1987 to 31.3.1991) To Municipal Taxes To Bank charges To professional 7,491.40 49,295.40 charges 3,878.55 To Excess of income 37.50 over expenditure: (Transferred to co- 1,000.00 owners current accounts) S Prabhakar Kamath 25% Smt. 5 Jaya P Kamath 25% Smt. K Rama R Bhandary 25% Smt. K Usha U Bhandary 257% 12,824.13 12,824.15 12,824.13 Place: Mangalore Date: 27th August. 92 12.824.14 51,29,6.95 Total: 1,05,508.00
While filing computation of income, it is mentioned that the total interest paid for the previous year ended 31st March, 1992 is Rs. 1,54,831/-. Such interest has been paid only to the persons from whom loans have been raised. The interest paid during financial year 1991-92 is as under:
Mrs. Radha V Kini Rs. 29,448/- Ramdass Pai Rs. 25,462/- Usha Kamath Rs. 45,936/- Mukund Kamath Rs. 48,207 J. Foundation Rs. 4,435/- M Annapoorna Rs. 195/- --do- Rs. 400/- Narsimdas Benefit Trust Rs. 405/- Miss Swathi Rs. 172/- HUF of Late Y Subba Rao Rs. 166.-
From the above facts, it is clear that all the four persons have not contributed equally either at the time of purchase of the property or during the construction of the complex. The members who have contributed in excess of their share have not been given interest and no interest has been charged from the members who have contributed less than their 1/4th share. In the joint accounts maintained, interest has been debited only in respect of the loans. If individual members raised the loans then the name of the individual members should have appeared in the consolidated balance sheet. This shows that each member acted on behalf of other and loans were raised collectively and a common bank account was opened. This shows that all the four members pooled their resources together for the construction of the commercial complex. They never acted as co-owners for equally contributing their shares. It is true that assessments have been completed in the hands of co-owners but that will not debar the revenue to assess the income in the hands of the right person. The learned Apex Court in the case of ITO v. Ch. Atchaia 218 ITR 239 had held that under the Income Tax Act, 1961, the Assessing Officer has no option to assess AOP or its members individually. If the members have been assessed individually then it is not barred to assessment of AOP. It has been held that the income is to be taxed in the hands of the right person. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income.
16. The learned CIT(A) has held that the decision of the Apex Court in the case of India Balakrishna (supra) is applicable. In that case, co-widows of 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 AOP. 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 Apex Court in the case of Indira Balakrishna is not applicable as in the instant case, property has been purchased for the purpose of joint venture.
17. The learned jurisdictional High Court in the case of PT Manjappa Gowda (supra) had an, occasion to consider as to whether the income from property is to be assessed in the hands of AOP or in the hands of individual members. In this case, properties of HUF were partitioned by leaps and bounds. Minors were allotted land and they were not able to cultivate their lands while other members were having small properties and it was not economical for them to cultivate independently. Assessee managed properties of all members. Income was divided equally amongst all members. The learned High Court observed that such management is generally happening in every peasant family in the rural areas. The assessee was father of the minors and it was his duty to manage the property belonging to minor children. In the absence of a joint venture agreed upon by all the members, the cultivation of the property by assessee and distribution of net income amongst all the individuals cannot lead to the conclusion that cultivation by the manager was pursuant to a joint venture agreed upon by all the individuals. The facts in the case before the Karnataka High Court are distinguishable from the facts of the instant case. In the instant case, loans have been raised and all the members have agreed for a joint venture. In this judgement, the learned jurisdictional High Court has referred to the decision of the Apex Court at page 309. It will be relevant to reproduce the observations of the jurisdictional High Court:
The decision of the Supreme Court in MM Ipoh v. CIT , on which strong reliance was placed by Sri Babu, in our opinion, stands on a different footing. In that case, the family owned extensive properties scattered over many countries. There was a partition in the larger family and later on a division in the smaller family. In the smaller division, the minor was represented by the mother and the facts, in brief, were these (pp.116,117):
'MM Ipoh properties' which were allotted to Meyyappa (I) at the partition in 1940 became, on the birth of Chettiappa, properties of a coparcenary, and it is common ground that Chettiappa acquired a share in the income which Meyyappa (I) received from the M.S.M.M. firm; the 'MM Ipoh Properties' were used in a trading venture and were managed by the MSM M Firm: the selling agency was common between MSMM firm and 'MM Ipoh'; the stocks and expenditure of the MM Ipoh firm were not separately determined; and common books of account were maintained for the management of the MM Ipoh properties and MSMM firm dealings.
Alagammal-mother of Chettiappa-had executed a deed of partition dated April 13, 1950, as the guardian of Chettiappa. By the deed she acknowledged having received the share of Chettiappa in the property.
On these facts the Tribunal found that the integrity and management of the estates have continued undisturbed throughout the period. The volition of various members necessary was only all too apparent with the entrustment of the management to MSMM 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.
18. The learned AR has relied on the decision of the Apex Court in the case of CIT v. H Hoick Larsen 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 assessee entered into the transaction to nurse his investments. In the instant case, it has not been established that the co-owner sold the property in order to avoid the depreciation of their investment. On the other hand, the rental income, which was being earned, was not sufficient to repay the loans and the loans were raised for the purpose of the construction of the complex. Hence, it was necessary for them to sell part of the building for which they have raised loans. If their intention was to treat the construction of building as an investment, then they could have diverted their income for repaying the loans. It will be relevant to say that the following members were having the following income for the asst. year 1992-93:
1. S. Prabhakar Kamath Rs. 17,51,000/-
2. Rama R Bhandary Rs. 1,42,880/-
Hence, the ratio of law laid down in the case of H Hoick Larsen is not applicable as the facts in the instant case is distinguishable.
19. The learned AR has relied on the decision of the Apex Court in the case of R Valsala Amma (supra). In that case, the persons were holding property in equal shares as tenants in common. The gift was made through one document. The issue before the Apex Court was as to whether the donors could be assessed as association or body of individuals. The Apex Court held that the donors were holding the property as tenants in common and not a joint tenants and therefore, the gift cannot be charged to tax in the hands of the Association of Persons. This case is not applicable as this is a case under Gift Tax Act where property jointly held as tenants in common was gifted. In the instant case, there has been an activity of constructing a commercial complex and common account was maintained.
20. The learned AR has relied on the decision of the jurisdictional High Court in the case of Smt. Bagirathi Bai v. Commissioner of Agricultural Income Tax, Karnataka 120 ITR 843. The learned High Court held as under:
Held, that in order to find out whether there was a joint venture by an association of persons all the facts and circumstances have to be taken into consideration. The mere fact of the loan being taken jointly by the four persons would not ipso facto lead to the conclusion that acquisition of properties would be by the persons jointly and would not 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.
21. 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 Commissioner of Agricultural Income Tax v. ML Bagla 80 ITR 173. To hold that the agricultural income is taxable in the capacity of association of persons, it was necessary that such association of individuals held property in the capacity mentioned in definition Under Section 2(11) of the U.P. Agricultural Income Tax Act. Since the lands were being held as individual, therefore, it was held that income cannot be assessed in the status of AOP In the case before the jurisdictional High Court, properties stood in the individual's name. However in the instant case, properties stood in the joint name and all the four persons were having undivided share. There is no separate account maintained for the purchase of building material or for the receipt of rental income and other income, as the decision of jurisdictional High Court is not applicable.
22. The learned AR has relied on the decision of the PAH High Court in the case of Smt. Saraswathi Bai and others 137 ITR 656. In that case, the 3 ladies purchased plots with the intention of constructing a house for their residence. Later on, the idea was abandoned, as the locality was not found suitable for their residence. Subsequently, residential flats were purchased. The learned High Court held that there is no good reason to reject the version of the ladies stating that the purchase of plot is for the purpose of constructing a residential house. Under these circumstances, the P&H High Court held that profit from the sale of plot of land cannot be assessed in the hands of AOP and such solitary transaction cannot be treated as adventure in the nature of trade. The facts of this case are not applicable in the instant case. It is clear from the deed vide which the property was purchased that the purchaser was interested in joint venture of constructing a commercial complex.
23. The learned AR has relied on the decision of Apex Court in the case of Raja Ratan Gopal (supra). In that case, heirs were entitled to 1/4th share each of estate. Income was divided equally. The issue before the Apex Court was as to whether the heirs could be assessed as an association of individuals under the Hyderabad Agricultural Income Tax Act, 1950 in respect of the income from the estate. The learned Apex Court 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 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 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. Under these circumstances, it was held that the income cannot be taxed in the status of AOP. 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 AR is not applicable.
24. 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 MM Ipoh amd Ors. v. CIT 67 ITR 106 had an occasion to consider the assessability of income in the hands of AOP. In the case before the learned Apex Court, there were partitions of the property, but there was no division by leaps and bounds. Only the shares in the income of the owners were entered in the books of accounts. There was common management of the property and there was even a common selling agency. Under these circumstances, it was held by the Apex Court that the income is to be assessed in the hands of the AOP.
25. The Apex Court in the case of Dalhousie Investment Trust Co. v. CIT 68 ITR 486 had an occasion to consider as to whether the profit from the sale of shares is to be treated as business income or capital gain. In that case, the shares were purchased by the appellant at a time when the market price was continuously falling. For making such purchase, the assessee took loans. Dividend declared on such shares was at a very low rate. The learned Apex Court observed as under:
The assessment order of the Income Tax Officer also shows that the shares were not only purchased in a rapidly falling market, but, in order to make these purchases, the assessee had taken loans amounting to about Rs. 8 lakhs at interest varying from 31/2 per cent to 5%. The dividend being declared was at a very low rate, so that the return on this investment, after taking into account the interest paid and super-tax to be paid, came to a very small percentage, being less than 1 per cent. This circumstance that the shares were purchased at a time when their prices were falling and the return on investment was not at all substantial while loans had been taken to purchase these shares strongly points to a conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchases of these shares were with the object of selling them subsequently at a profit. The shares were, in fact, sold at considerable profit subsequently and that is how the question of charging that profit to tax as revenue receipt has arisen. The explanation sought to be given by the assessee that the shares were, in fact, being held as investment and were sold simply because the control of McLeod & Co. Ltd. went out of the hands of the directors of the assessee has not been proved, according to the supplementary statement of the case submitted by the Tribunal. In fact, the Tribunal was not satisfied that even the purchasers, 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 CL Kanoria first resigned on 17th March, 1952, and he sold his shares while his resignation was still pending for approval by the Government. The sale took place on 27th May, 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 16th October, 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 A Co. group of companies passed to the Bajoria group, though M/s CL Bajoria and Baijnath Jalan did subsequently join the directorate of McLeod & Co. Ltd. On these facts, it is not possible to hold that the Tribunal was incorrect in recording its conclusion that the sale of these shares by the assessee was not the result of control of the McLeod &. Co. Ltd. passing from the hands of Kanoria group to the Bajoria group. In fact, the Kanoria group was holding a majority of 21,046 shares out of 40,000 shares in McLeod & Co. Ltd. even at the time when these shares were sold on 27th May, 1952. The assessee thus having failed to prove the object of the sale of these shares, the inference that the shares were sold with the sole object of earning profit is justified.
26. In the instant case also, loans have been raised for constructing the commercial complex. The rental income being earned was not sufficient to repay the loan along with interest. It is also stated in the statement of facts that part of the commercial complex was not given on rent even for a period of 3 years. This shows the intention of the parties constructing the commercial complex. Their intention was to sell part of the commercial complex for earning profit. None of them have made efforts to pool their resources after 31st March, 1992 to repay the loans. Hence, it was never the intention of the parties to hold the entire commercial complex as an investment.
27. The Apex Court in the case of Khan Bahadur Ahmed Alladin and Sons v. CIT 68 ITR 573 had an occasion to consider as to whether the resale of part of land and building can be treated as adventure in the nature of trade. In that case, loans were taken to pay purchase money. Interest on loans was far in excess of income from property. The Apex Court held that the transaction is an adventure in the nature of trade. Applying the ratio of law as laid down by the Apex Court in deciding as to whether the transaction is an adventure in the nature of trade or an investment, it is clear one has to consider (a) the intention of the parties at the time of purchase; (b) whether own resources used or loans taken; (c) whether the returns from the asset acquired is sufficient to repay the interest. Applying the above, it is clear that the construction of commercial complex was an adventure in the nature of trade. Once it is held that it is an adventure in the nature of trade, then the profit arising from the sale of property is to be assessed in the hands of the AOP as all the members have joined together in the joint venture, common books of accounts have been maintained. Member of AOP has acted on behalf of other as the investment by all of them is not equal and no interest has been paid to the person who has invested in excess. Hence, it is held that profit from the sale is to be assessed as business income in the hands of the AOP.
28. Since common grounds of appeal have been raised for all the four assessment years, therefore, all the four appeals are disposed off as per observations above. In the result, the appeals filed by the revenue are partly allowed.
29. The assessee has filed cross objections. The first grievance raised in the cross objection is that the learned CIT(A) 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 AOP, The Assessing Officer has recorded the reasons for the reopening of the assessment. It is not the case of the assessee that assessment for the four asst. years were made Under Section 143(3) in the hands of the individual members. The learned Apex Court in the case of ITO v. Ch. Atchaia 218 ITR 239 has held that income is to be assessed in the hands of the right person. The Apex court, while holding a consequential validity of Section 3 of the IT Act, 1922 vide which the Assessing Officer was given an option either to assess the individual members or the AOP, has held as under:
Under the Indian Income-tax Act, 1922, primarily the return of income would be made by an association of persons where the association has earned income and the Income Tax Officer would also call upon the association to submit a return of its income and would ordinarily proceed to assess tax on the return so made. But for diverse reasons, assessment of the income of the association may not be possible or it may be that such assessment may lead to evasion of tax. It would be open to the Income Tax Officer then to assess the individual members on the shares received by them. The duty of the Income Tax Officer is to administer the provisions of the Act in the interests of public revenue, and to prevent evasion or escapement of tax legitimately due to the State. Though an executive officer engaged in the administration of the Act, the function of the Income Tax Officer is fundamentally quasi-judicial. The Income Tax Officer's discretion to bring to tax either the income of the association collectively or the shares of the members of the association Separately is not final; it is subject to appeal to the Appellate Assistant Commissioner and to the Tribunal. Exercise of this power is from its very nature contemplated to be governed not by considerations arbitrary but judicial. The nature of the authority exercised by the Income Tax Officer in a proceeding to assess to tax income, and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, constitute adequate enunciation of principles and policy for the guidance of the Income Tax Officer in exercising his option under Section 3. Section 3, therefore, does not offend Article 14 of the Constitution.
The requirement under the Act for reopening of assessment is that the Assessing Officer should have reasons to believe that income has escaped assessment and such reason should be recorded in writing. In the instant case, both these conditions are satisfied and therefore, the learned CIT(A) has rightly upheld the reopening of the assessment.
30. The next grievance of the assessee is that the Assessing Officer, who has not given copy of reasons to the assessee, should have disposed off the objections, if any, raised on such reopening before proceeding with the assessment. For this proposition, the learned A.R. relied on the decision of the Apex Court in the case of GKN Driveshafts (India) Ltd. v. ITO 259 ITR 19. The decision of the Apex Court on which the learned AR has relied has been delivered on 25th November, 2002. Hence, when the Assessing Officer passed the order i.e. on 27.3.2002, 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 Section 148 and 143(2) of the IT Act. During the pendency of the appeals before the Delhi High Court, assessment for the asst. years 1995-96 and 1996-97 were completed and appeals were filed. In respect of such assessments completed, the learned Apex Court observed that "in so far as the appeals filed against the order of assessment before the Commissioner (Appeals), we direct the appellate authority to dispose off the same expeditiously". Thus, the learned Apex Court in respect of the case where assessments were completed before the judgement was delivered; the learned Apex Court directed the disposal of the appeal. In the instant case, appeals have been disposed off by the learned CIT(A) after considering the objections of the assessee. Hence, on this ground, the assessment cannot be quashed.
31. The 3rd grievance of the assessee is that notice Under Section 143(2) has been issued beyond the period of 12 months from the date of filing of the return and accordingly, the assessment order should have been set aside.
32. Proviso to Section 148 has been inserted by Finance Act, 2006 with retrospective effect from 1st October, 1991. As per this proviso, it has been made clear that in case a return has been furnished during the period 1st October, 1991 and ending on 30th September, 2005, notice issued Under Section 143(2) after the expiry of 12 months will be deemed to be valid notice. The learned P&H High Court in the case of Punjab Cooperative Supply and Marketing Federation Ltd. v. Union of India 290 ITR 50 has held that proviso added to Section 148 is constitutionally valid. It has been further held by the same High Court in the case of CIT v. Boparia Industrial Corporation P. Ltd. 208 CTR 415 that alleged technical defect in issuing notice Under Section 143(2) stands cured by the insertion of proviso to Section 148. Following this judicial pronouncement, it is held that notice Under Section 143(2), even if issued after 12 months in the instant case, is valid as per proviso to Section 148.
33. The last grievance of the assessee is that the assessment should have been cancelled, as the same has been assessed in the status of AOP after the same was disrupted. No evidence has been placed before us to say that the AOP has been disrupted. Section 177 provides that where an AOP is dissolved, the Assessing Officer shall make an assessment of a total income of the AOP as no such dissolution has taken place and all the provisions of the Act shall apply. Considering the provisions of Section 177(1) of the IT Act, the Assessing Officer is authorized to make the assessment on the AOP ignoring the dissolution, if any.
34. Since the cross objection for all the four assessment years are the same, therefore, all the cross objections for the four assessment years are disposed off as per observations indicated above.
In the result, the cross objections are dismissed.