TaxTMI 
TaxTMI 
1976 (4) TMI 66
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....the assessment was made Date of assessment 1 2 3 4 5 6 (1) 3315/72-73 1967-68 30/6/1966 143(3)/147(b) 25/2/1972 (2) 8-/72-73 1968-69 30/6/1967 143(3)/161 31/8/1971 (3) 81/72-73 1969-70 30/6/1968 -do- -do- (4) 82/72-73 1970-71 30/6/1969 -do- -do- (5) 83/72-73 1971-72 30/6/1970 -do- 27/9/1971 (6) 1021/73-74 1972-73 30/6/1971 -do- 30/11/1971 3. ITA No. 3367/1972-73 is an appeal filed by Seth Puran Chand one of the co-owners of the AOP, in respect of which the assessment dt.25th Feb., 1972was made on M/s. S.B. Sugar Mills, Bijnor (through Shri P.S. Gupta, Receiver) under s. 143(3)/147(b). This appeal was field on the bias of the copy of an order sever on Seth Puran Chand. This appeal is akin to ITA No. 3315/72-73, which was filed by the Receiver contesting the same assessment. 4. ITA Nos. 1329/73-74 and 3146/73-74 filed by the ITO relate to the same asst. yr. 1972-73 made on M/s. S.B. Sugar Mills, Bijnor (Through Shri P.S. Gupta, Receiver), which is being contested by the assessee also in ITA No. 1021/73-74. The ITO filed two identical appeals in respec....
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....y, etc. stated to have been installed by him in the S.B. Sugar Mills. The status shown in both these returns was 'individual for each co-owner". The ITO, however, framed the assessment on31st Aug., 1971taking the status of assessee as "Association of Person". Similar was the treatment given for the asst. yrs. 1969-70 to 1972-73, for which the status determined by the ITO was that of "AOP". Similar was the treatment given for the asst. yrs. 1969-70 to 1972-73, for which the status determined by the ITO was that of "AOP". He was of the view that the ratio of the Supreme Court's decision in the case of N.V. Shanmugham & Co. vs. CIT 81 ITR 310 (SC), was applicable to the case of the assessee and since the lease money was being earned by the Official Receiver on behalf of co-owners, who had a common interest crated by an order of the Court, the income was assessable in the status of an "AOP". On the same basis, he reopened under s. 147(b) the assessment already completed for the asst. yr. 1967-68. The relevant notice under s. 147 was issued on6th Jan., 1972, in response to which the assessee filed a return on18th Feb., 1972. In the assessment made under s. 143(3)/147(b) on25th Feb., 197....
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....Chand, Kundan Lal, Sheo Prasad, Banarsi Dass, Kanshi Ram and Munna Lal. The family disrupted and with effect from31st Aug., 1936, the S.B. Sugar Mills was converted into a partnership business of the six brothers each with 1/6th share. According to cl. 11 of the relevant partnership deed, (p.5/PB-I), the management of the mills was to be in the hands of one of the partners who was to be designated as 'Managing Proprietor'. For the year 1936-37 (1st Sept., 1936 to 31st Aug., 1937) Banarsi Dass was nominated the Managing Proprietor and he continued to function as such till 31st Aug., 1941, when he was replaced by Kundan Lal by common agreement. 7.3. On13th May, 1944, Sheo Prasad (since deceased) instituted a suit in the Court of the Subordinate Judge, First Class,Lahore, for dissolution of partnership and rendition of accounts against Kundan Lal. He was jointed by the other brothers as defendants to the suit. The Court by its order dt3rd Aug., 1944appointed one Mr. P.C. Mahajan, Pleader, as Receiver. At the instance of the parties the High Court appointed w.e.f.5th April, 1945Kanshi Ram as Receiver in replacement of Mr. Mahajan. 7.4. Meanwhile, the District Magistrate, Bijnor t....
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....to 4 1/6th each. 2. Seth Kanshi Ram is held liable to render accounts to the plaintiff and other defendants in respect of joint stores and lubricants in Exhibits 1 and 7. 3. Shri P.N. Mathur shall continue to be the receiver till further orders. 4. And it is ordered that Shri Kanshi Nath who is appointed CIT for the purpose of winding up the affairs of the Mills, in this case, shall prepare accounts of the credits, properties and effects and stocks now belonging to the said mills and then submit the report to the Court. After the report has been submitted and objections heard and decided, the Court would fix a date for the sale of the assets of the Mills. The CIT shall receive instructions from the Court from time to time." 7.10. Against the decision of the Civil Judge, Bijnor three appeals, one each by Kanshi Ram, Banarsi Dass and Munna Lal, were preferred before the Allahabad High Court. There were disposed of by them by a common order dt.15th March, 1952. As a result, Kundan Lal's suit stood decreed for declaration that the partnership should be dissolved with effect from13th May, 1944and that the six brothers had shares in the said partnership. The suits relating to....
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....emuneration @ Rs. 800 per month. At para 3 of his application he stated that his functions were (vide p.154-155/PB-I). The relevant portion is reproduced below :- "That the Receiver has not been empowered to interfere with the internal management of the mill while it is under lease to some lessee, yet the over all work concerning the mill, and the partners as a whole, e.g. the Income-tax and other cases concerning the mill and work in connection with the construction of labour quarters, tube-well and other building etc. has to be attended and done by the Receiver. The Receiver has always been submitting reports whenever called upon to do so on the various matters concerning the mills and has been making compliance of the orders given to him now and then by the learned Court above all, the important duty to keep an eye on and what over the property and machinery etc. of the mill is cast on the Receiver. The allegation that the Receiver has nothing to do except the taking over formal possession of the mills from the old lessee and handing over to the new lessee after every lease term of five years is wrong. The Receiver is at the disposal of the learned Court to take over the Phys....
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....ed that as in that case, in the present case also none of the erstwhile partners wanted to break the unit of control of the business or its continuity and the business also was such as could not be carried on without their consensus. He next referred to the Supreme Court's decision in the case of CIT vs. Buldana District Main Cloth Importers Group and observed that even if the unit was induced by the order of Government, it would make no difference, the ITO took particular notice of the fact that the lease of the S.B. Sugar Mills had been confined to only its ex-partners and that three of them had obtained the lease during the period 1st July, 1946 to 30th June, 1971. 8.4. The assessee took the matter in appeal to the AAC and took, broadly speaking, three principal points. The first was that the assessment on the AOP was ab-initio void or no return had been filed by an AOP and no AOP had been made a party to the proceedings. The second point was that the ratio of Shunmugham & Co.'s case was not in application, for, in the instant case, the Official Receiver was not carrying on any business and the lease was not business income. Receiver was stated to be acting only as a conduit ....
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....f points, some of which were overlapping. Their arguments are summarised in the next two sub-paragraphs. 8.7. Shri C.S. Aggarwal argued that the Receiver was managing only the lease money and not the mill, which was being run by the lessee, at his own risk. The lease rent received by the official receiver was, according to him, income from other sources and not from business. He argued further that the ratio of the Supreme Court's decision in Shunmugham & Co.'s case was not applicable on the facts of the present case, because the co-owner, who were merely in receipt of the lease money, could not be said to have combined themselves with the common purpose of producing any income. In this connection, he submitted that the joint co-owners may have acquiesced in the appointment of the lessee by the Official Receiver but it would not be correct to say that the appointment of the Receiver had been made at their instance. he submitted that there was no volition of the co-owners in the matter. According to him, it was the Lahore High court who gave the mills to Seth Banarsi Dass over the period 1st July, 1946 to 30th June, 1951, that again, it was at the instance of the District Magistr....
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....1 in the case of Seth Banarsi Dass (HUF) for the asst. yr. 1954-55 (vide p. 32-40/PB-II). This decision of the Tribunal was uphold by theAllahabadhigh court by an order dt.5th May, 1972in Miscellaneous IT Reference No. 416 of 1957 (vide p. 48-63/PB-II). The income by way of lease rent was, therefore, assessable under the head "Other sources" and not "Profits and Gains of Business or Profession". Thirdly, the erstwhile partners had become merely tenants-in-common, who had not, on their own volition, combined with the common purpose of producing an income. Hence, they did not constitute an AOP in consequence, the Official Receiver also could not be assessed as an AOP in respect of the net lease income received by him on their behalf. In support of this contention, he relied on the following case laws :- (1) Sh. Zainuddin Ahmad & Ors. vs. CIT (30 ITR 30 (Patna). (2) N.S. Choodamani & Anr. vs. CIT (35 ITR 676 (Ker). (3) M.M. Ipoh vs. CIT (46 ITR 301 (Mad) (4) CIT, Agricultural, Income Tax vs. Raja Ratan Gopal (59 ITR 728 (SC) (5) State ofMadrasvs. Subramania Iyer (61 ITR 613 (Mad) (6) State ofMadrasvs. Pattamal (62 ITR 585 (Mad) (7) B.T.R. Punja & Ors. vs. CIT (Agr....
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....ad relied. He argued that the Supreme Court's subsequent decision in the case of G. Murugesan & Bros. 88 ITR 43 (SC) did not alter the position that persons combining to produce income were assessable in the status of AOP. The learned Departmental Representative emphasised that even during the period over which the partnership business was run, the business was being carried on by the 'Managing Proprietor', who functioned on behalf of the other partners. He submitted that running of the business through one of the co-owners thereafter (who was appointed by the Receiver as the lessee of the S.B. Sugar Mills for a period of five years at a time) was in substance the same device of running the business as in the past. He emphasised that the lessee had necessarily to be one of the erstwhile partners and no outside was being considered for the purpose. He also emphasised that in every case, where the lessee was appointed by the Official Receiver, the erstwhile partners had consented to such appointment, either directly or impliedly. He argued that there was common purposes, community of interest and an element of volition present all along. 8.10. In reply to the points made out by th....
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....d, the assessment on the AOP as such, was not permissible, the learned Departmental Representative argued that this point stood covered by the Supreme Court's decision in N.V. Shunmugham & Co.'s case, in which they were pleased to observe as follows :- "The profits to which those owners by claim and which they were not averse to pocket, were earned on behalf of "an AOP". The profits were earned on behalf of persons who had a common interest created by the order of the Court and were on that account "an AOP". The existence of specific or definite interest in the profits did not make the earnings any the less by "an AOP". The liability to tax depends upon the earnings of profits by a unit and not upon the ultimate division of the profits." (81 ITR 310, 315) He submitted that the AOP was a distinct assessable "persons" which was chargeable to tax, as per the provisions of s. 4(1) r/w s. 2(31). 8.11. The learned Departmental Representative sought to make out an additional point. He argued that the term "persons", as defined in s. 2(31) of the IT Act, 1961 includes "a BOI". He argued that if the Official Receiver was not considered liable to be assessed as an AOP, he would s....
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....rt again held that the investitute or an express grant of authority to conduct the common affairs was essential for the concerned persons to be assessed in the status of AOP. 8.13. Two decisions of the Supreme Court in the cases of M/s. M.V. Shunmugham & Co. (81 ITR 310) and G. Murugesan & Brothers (88 ITR 432) on which the Revenue and the assessee have mainly built up their respective case required to be gone into at depth. In the earlier of two decisions the Supreme Court, after having reviewed some of their earlier decisions, on the question of assessability in the status of AOP, reiterated that the expression "AOP" as used in the IT Act, means an association in which two or more persons join in a common purpose or common action, and the association must be one, the object of which is to produce income, profits or gains. On the facts of the particular case, the Supreme Court held that, though one of the erstwhile partners had objected to the continuance of the partnership business, the business had, in fact been continued in pursuance of the orders of the Court and all the owners of the business including the persons who had objected to its continuance, were given, month by m....
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....lso this aspect was not absent. In this respect, it was held in that case that even if the association is induced by an order of the Court or of the Government, the assessment of the income, profits or gains produced by joint efforts would assessable in the hands of the AOP. 8.16 We may at this stage, respectfully make a note of the following observations of the Supreme Court in N.V. Shummugham & Co.'s case, which may dispel any doubts as to whether the Official Receiver can have a status different from that of the persons he represents :- "The circumstance that there were three receivers, was wholly irrelevant for the purpose of the assessment. There was no question of the assessing the receivers as an AOP. The real question is whether the persons whom the receivers represented constituted an AOP". Again, at page 314, they observed as follows :- "Sec. 41 of the Act does not impose any separate charge. It only empowers the revenue to levy and collect tax due from a person or persons, from his or their representatives. Hence, either no question of either the receivers being an AOP or their being liable "under s. 10 or s. 41 of the Act". The liability of the receivers aro....
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....h Banarsi Dass, the Tribunal had no doubt held for the asst. yr. 1956-57 by their order dt.2nd March, 1968in ITA No. 1978 (Del)/1963-64 that the lease money was assessable as business income. But there is a later decision dt. 5th May, 1972 of the Allahabad, High Court in this very case, though it is for the asst. yr. 1954-55, that the income by way of lease rent was not business income. A copy of the judgment of the Allahabad High court is available at Pages 48 to 68/PB-II. In this judgment the Allahabad High Court was pleased to note that the Court had not given the Receiver any direction or continue the erstwhile firm's business and that the leasing out of the factory was with a view to exploit the ownership of the factory as such without intending to use it as a commercial asst. They observed that this had also been dictated by a desire to give the machinery etc. in a serviceable condition so as to enable the Receiver to realise its proper value at the time of sale. As the Receiver did not carry on any business, the factory ceased to be a commercial asst in the hands of the Receiver and the income received by him was not business income. In view of this decision we have to ignor....
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....artner, other than the fortunate one who had been able to put the highest bid for the lease of the mills, was several excluded from all operations for the running of the leased mills. Secondly, the profits and losses arising from the running of the business of the S.B. Sugar Mills, were under the partnership deed dt.31st Aug., 1936, to be shared equally between the then six partners. On the dissolution of the firm, when the property of S.B. Sugar Mills vested with the Official Receiver and he started leasing out the mills to be highest bidder amongst the erstwhile partners, the position changed materially. Therefore, the profits or losses in the carrying on of the business of M/s. S.B. Sugar Mills became the sole concern of the lessee; the other co-owners of the mill properties had nothing to do with the profits or loss arising from the running of the Sugar Mills. Their income was limited to a share in the lease rent, received from the lessee through the Official Receiver. It will be certainly absurd to suggest that those amongst the erstwhile partners, who failed to secure the lease of the mills for the Official Receiver, continued to enjoy the same benefits as in the pre-dissolut....
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....ecessarily go to the highest bidder. For example, it was Shri Devi Chand, who gave the highest did of Rs. 6.65 lakhs for the lease of the mills during the period 1st July, 1961 to 30th June, 1966, but it went to the next highest bidder, Seth Banarsi Dass, whose offer was Rs. 6.50 lakhs. As Shri Devi Chand could not pay the amount bid by him and Shri Banarsi Dass had to pay what he had bid, the latter got the lease. The Official Receiver's role has already been examined by us at paragraphs 7.1 to 7.14, we do not think that he had done anything to produce income other than in the manner of an auctioneer. Hence, we have to hold that one of the essential conditions of assessment of income in the status of AOP viz., common effort of two or more person for producing income, is lacking in the instant case. 8.21. The next question (vide item (d) at paragraph 8.17 above) is whether an assessment could be made in the status of AOP even if the assessee had business income. After what we have found in regard to question (c), this issue assumes only academic importance. We have already held that there was no common effort by the co-owners of the assets of M/s. S.B. Sugar Mills for producing ....
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.... view. Hence, we suggest that no assessment should be made in the hands of the Official Receiver as such but he may be assessed separately on behalf of each co-owner in respect of his share in the next lease income received through the Official Receiver. The quantification of such net income may be made in the assessment order of any one of the co-owners and the allocation of the divisible income also shown therein. This will be in consonance with our finding that the co-owners did not constitute an AOP in any of the relevant accounting years and that the Official Receiver is not assessable in the status of AOP. This leaves only one more issue to be considered. This is, the addition at point made out by the learned Departmental Representative that the Official Receiver should at least be directed to be assessed in the status of an AOP. We do not consider it advisable to entertain this plea made for the first time towards the concluding stage of the arguments. The point raised cannot, in our view, be decided without entertaining fresh evidence. 9. Validity of the proceedings under s. 147(b) for the asst. yr. 1967-68. We are of the view that the Supreme Court's decision in N.V. Sh....