1. This appeal by the revenue is directed against an order dated Sept.
30,1985 whereby the Appellate Assistant Commissioner of Income-tax (AAC), A.R.V. Ahmedabad set aside the assessment on the Respondent made by the Income-tax Officer (ITO), Ward D, Mehsana Under Section 143(3) of the Income-tax Act, 1961 (the Act),'as a measure of protective assessment'. The ITO had held that the respondent was not a validily and legally constituted Association of Persons (AOP), a status which the respondent had claimed, but that its constitution simply represented 'a sham arrangement of the diversion of income of main AOP or trust in the group of a chain of paper AOPs'. As against it, the AAC has held that 'since in this case under appeal, it is admitted by the appellant that they are an AOP and since there is no evidence to treat them otherwise' the respondent was entitled to be treated as an AOP.That controversy has now come to us through this appeal.
2. Before we proceed to solve the controversy, presently before us in this appeal, we would like to make a brief reference to the facts and circumstances which led this appeal along with 79 other similar appeals to be heard by us on Sept. 1, 1987.
3. During the last few months it was being experienced that similar appeals, directed against the same or similar order(s) of the AAC, involving the same or similar facts, same or similarly worded documents of constitution of AOPs and same or similarly worded order of the ITO and raising common grounds were coming up for hearing on different dates before different Benches of the Tribunal. At one of such dates of hearing Mr. V.S. Banthia, Sr. DR for revenue and Mr. Divatia, a senior advocate appearing for the assessees suggested that all such appeals be fixed for hearing on one day to be heard by one Bench. With a view to facilitate the parties and not only to save avoidable loss of labour, time and expenses but also to avoid the possibility of difference of opinion by different Benches of the Tribunal over the same point or points on same or similar facts leading to confusion and then necessitating clarification by further multiplicity of litigation the suggestion proposed by the learned representatives of the parties was accepted. Therefore, all pending appeals of this group, which could be located by the Registry, were transferred to this Bench and were fixed for hearing on Sept. 1,1987. That is how the present appeal was heard by us along with 79 other appeals of this group. Here we would further put it on record that though at different dates of hearing of these appeals by different Benches Mr. Divatia, Sr. Advocate had put in appearance on behalf of the respondents yet on Sept. 1,1987 when the present appeal as also other appeals were called for hearing neither Mr. Divatia, Advocate nor any other representative of the respondents appeard before us despite our repeated calls and also waiting for some time since the date of hearing was fixed for hearing these appeals only by the consent of the learned representatives of the parties and no other matter was fixed on that day we were left with no other alternative but to hear the appeals ex parte. Thus devoid of the advantage of hearing Mr. Divatia or for that matter any other authorised representative of the respondent we had to take on ourselves the responsibility of scrutinizing the material on record and of appreciating the arguments of Mr. Banthia, Sr. DR from the angle of a litigant who had fought and lost his claim before the ITO but who had again fought and won it before the AAC. We must record our appreciation of Mr. Banthia's and his teams taking considerable pains in bringing all the relevant material on our record.
4. Now coming to the merits of the case we find that the material brought on our record brings out the following facts: 5. The respondant was constituted as an AOP under a deed of constitution dated April 6, 1981. It was formed by four members viz.
Bholidas Bhagwandas Patel HUF, Arvind Amrit Lal Patel, Chagan Lal Bholidas Patel and Dashrathbhai Bholidas Patel, adopting the name of "Lasar & Company". The main objects of this AOP, as declared by Clause 4 of the deed of constitution were as follows: (i)To carry on business or businesses either in proprietorship or in partnership or otherwise as builders, contractors, organisers, developers and also trading in all items related to above mentioned businesses.
(ii) To hold, acquire and possess immovable property including open plots and to organize, develop and/or construct thereon shops, godowns, flats, bungalows, etc. with a view to deal in and/or to earn income by letting them out or giving on lease and licence.
(iii) To carry on any other venture or activity yielding income, profits or gains.
6. Any person, real or artificial, was made eligible to become its member (Clause 5). Such membership could be acquired by an application or by transfer of membership, or by any other mode decided by the AOP.A minor could also become its member, but through his guardian only.
Every member was to contribute such amount of capital as might be mutually agreed upon amongst the members, but such contribution thereof was not to carry any interest. Every member was given right to cast one vote, to receive such assets during the continuation or on dissolution of the AOP as were available at the relevant time and to have such rights, benefits and privileges as may be agreed upon to be given or conferred. Such membership could be lost by retirement, death, insolvency, in competency, expulsion, dismissal or removal by majority and by resignation, if accepted without adversely affecting the continuance of the AOP itself. Proper books of accounts including a final profit and loss account were to be kept and maintained at a place to be decided by majority and the accounting period was to expire on 31st December of the year concerned. It was specifically provided that net loss was to be allocated to all members including the minors, if any. No member, however, was to have any definite specific right in any of the assets of the AOP or income thereof. The majority was given absolute discretion either to accumulate the profits surplus or gains or to distribute the same amongst members in such proportions they may like to choose. A member was to hold, possess or enjoy only such rights as might be conferred upon it/him by the majority. The objects and purposes of the AOP were to be carried out as per resolutions of the AOP passed by the majority in the meeting and two members present in the meeting notwithstanding the total membership of the AOP, were considered sufficient to constitute the quoram of any meeting. The chairman of the meeting was to have the casting vote in case of a lie and the decision of the meeting was to have binding force. But the constitution of the AOP could be amended, altered or modified and the AOP could be dissolved only by two third majority of the members.
Disputes relating to or arising out of or under the deed of constitution were to be decided by a sole Arbitrator, agreed upon by the disputing parties or by two Arbitrators each of the two contesting parties appointing one.
7. Clause 19 of the deed of constitution informs us that the members of the respondent AOP held a meeting to decide the matters, relating to, inter alia, the appointment of not more than two persons to administer and execute the object of the AOP who was/were to be called 'Manager or Managers' and who need not necessarily be the members of respondent AOP. Such Manager(s) was/were to have ample powers, as enumerated in Clause 20 to carry out the objects of the AOP. By a unanimous decision Shri Chagan Lal Bhogilal Patel, member, was appointed 'Manager' for the time being. It is not gathered from the deed of documents as to when the meeting, referred to in Clause 19 was held and the decision of appointing Shri Chagan Lal Bhogilal as 'Manager' referred to in Clause 21 was taken, whether prior to the execution of the deed of constitution or simultaneously with it.
8. Having thus brought itself into existence on April 6, 1981 by its deed of constitution of the even date the respondent entrusted the job of administering and executing its object to its duly appointed manager, Shri Chaganlal Bhogilal Patel. During the accounting period under consideration the said manager, it appears, brought a loss of Rs. 100 only. The copy from the account books filed along with the return shows that the said amount of Rs. 100 was debited to profit and loss account (drawn up to 27-10-1981) on account of expenditure incurred on stamp (Rs. 10), stationery (Rs. 18.85), Vahan Vewhar (Rs. 21.65) and 'pagar' (Rs. 50). The total capital contributed by all the four members amounted to Rs. 200 only. In the'Notes' appended below the statement showing computation of net taxable income, also filed along with the return, it was, inter alia, mentioned that all the above mentioned expenses were incurred wholly, exclusively and necessarily for commercial expediency and were therefore allowable. The offer to be assessed at maximum marginal rates Under Section 167A of the Act was also made.
9. Not satisfied with the particulars submitted in support of its claim to be assessed in the status of AOP and suspecting the genuineness of its constitution as AOP as being an assessable entity the ITO issued notices Under Sections 142(1) & 143(2) and summons Under Sections 131 & 133(6) of the Act from time to time calling upon the manager of the AOP to appear before him, supply necessary informations on certain points and to produce relevant documents. Such notices and/or summons appear to have been issued on 25-10-83,4-1-85,10-1-85,15-1-85 and 4-3-85.In particular the ITO demanded information regarding books of accounts of other subsidiary entities, deeds of constitution of such other entities and Bank Pass Books. By his summons Under Section 133(6) dated 15-1-85 he required information regarding addresses of the AOPs/or firms wherein the respondent and/or its manager was a partner/member, Copies of the assessment orders in the case of such AOPs/firms, if at all assessed and names and addresses of the persons representing such bigger AOPs or firms along with the copies of their deed of constitution. By his summons Under Section 131 dated 4-3-85 the ITO demanded production of books of accounts pertaining to A.Y. 1982-83 of such AOPs wherein Shri Chaganlal Bhogilal Patel, manager, was a member, Bank Pass Books, details of the proceedings and resolutions passed by all such AOPs, details of particulars of all such AOPs, wherefrom the respondent was entitled to income as beneficiary and whose returns might have been signed and verified by Shri Chaganlal Bhogilal Patel and copies of memorandums or deeds of constitution of such bigger AOPs.
Pointing out at certain formal defects in the summons/notices Shri Chaganlal B. Patel informed the ITO that the respondent was not a member/partner in any other AOP/firm and that the informations regarding the constitution of such other AOPs/firms and of their members/partners was not in its possession. He, however, submitted two lists. The first list contained the names of 18 AOPs whose returns of income had been signed, verified and filed by Shri Chaganlal Bhogilal.
All theseAOPs had returned loss at Rs. 100each,theironly sources of income being as beneficiaries of certain settlements. The second list mentioned the names of 35 AOPs wherein Shri Chaganlal Bhogilal Patel was working as manager, as stated by him in this list.
10. After having considered the material placed before him the ITO came to the conclusion that as the deed of constitution was not written on properly stamped paper, the same was inadmissible in evidence and that the conferment of absolute powers to run all the show on the so called majority, which could be made by even two members at a particular meeting, made the entire transaction a bogus and sham arrangement made with the object and purpose of diverting the income of main AOP or Trust through the mode of chain of AOPs. Even holding thus he thought it fit and proper to accept the return submitted as a measure of protective assessment. Aggrieved by this protective assessment the respondent appealed to the AAC.11. Relying on the decision in the case of Punjab Province v.Federation of Pakistan [1957] 32 ITR 198 (FC) the AAC held that it is not necessary for an Association of Persons to be constituted and evidenced by a written deed and therefore there is no necessity for an AOP to be formed through a stamped deed only and not otherwise. He thus overruled the first objection of the ITO. Regarding the second ground of the ITO the AAC, referring to the Supreme Court decisions in the cases of CIT v. Indira Balkrishna [1960] 39 ITR 546, G.Murugesan & Bros. v. CIT [1973] 88 ITR 432 (SC) and Raja Mohammad Azam Khan v.State of UP [1971] 82 ITR 392 (All.) pointed out that there were four requirements for the formation of a valid AOP viz, (i) there should be two or more persons (it) they must join in common purpose or action, (iii) such association must be for the purpose of producing income, profits or gains and (iv) there should be volition on the part of the members to join and finally held that all the abovementioned ingredients were present in the case of the respondent and, therefore, it was a valid AOP. With regard to ITO's finding that it was all a sham arrangement to evade tax or to reduce tax liability of the main or bigger AOP or Trust as was indicated by the vesting of power in two members only, the AAC held that the observations of the ITO were irrelevant as that all was the internal arrangement of the respondent made for its proper and smooth functioning. Holding thus the AAC directed the ITO to treat and assess the respondent as an AOP.12. Not only supporting the assessment order tooth and nail and at the same time assailing the order under appeal with equal vehemence but also placing written submissions and certain lists on our record Mr.
Banthia stressed with much industry that the activities of the present AOP when read along with similar activities of its sister and parent AOPs the following facts are clearly established and speak by themselves about the claimed genuine character of the relevant deeds of constitution evidencing their creation or existence during the accounting period under consideration.
13. The members of the Bholidas Patel Family, headed by Shri Chaganlal Bholidas Patel, made up their mind to enter into construction business and to construct the Co-operative Housing Society of Samrat Nagar at Ghodasar. In order to put their said idea into practice the members of the said one family floated as many as 30 construction companies, by permutations and combinations. All these 30 construction companies/AOPs, though prefixed by different names, adopted a common name as 'Family settlement' as their suffix. For the sake of convenience these 30 entities may be called as'First Line of Trusts'.
This 'First Line of Trusts' were to have 5 beneficiaries trusts. Thus the first line of trust had 150 beneficiaries. These beneficiary trusts were formed by permutation and combination of the members of Bhogilal Patel's family and/or their close relatives and may be called Second Line of Trusts. These 150 beneficiary trusts were again to have two beneficiary AOP each. Thus 300 more AOPs, as beneficiaries of Second Line of Trusts were brought into existence again by permutation and combination of the members of the same Bholidas Patel Family and/or their relatives. The final position is stated to have come to this:1. First Line of Concerns 30 construction companies (called Trusts) N.B. The relevant list of the three lines of concerns are placed on pp.
14-15 of the paper book.
14. All the above 480 concerns, whether called under the name of 'Family Settlement' or 'AOP' are stated to be belonging to one group called by the name of 'Popular Group', a group formed by the members of one family only i.e., Shri Bholidas Patel Family. Thus was 'Samrat Nagar' built by this 'Popular Group'.
15. Through the written submissions we have been informed that in the very initial year of their formation/constitution all the three lines of trusts/AOPs, were held as sham and colourable devices to evade taxes, though on technical grounds they had to be assessed at maximum marginal rates by the ITO as a measure of protective assessments. The appeal of the second line of settlement had failed before the CIT(A) while the appeals of the third lines of settlement were accepted by the AAC.16. After hearing Mr. Banthia and after having examined the material placed before us we entertain no doubt with regard to the true character of the respondent as non-assessable entity. In our judgment the ITO was perfectly justified, in the facts and circumstances of the instant case, to have declared the respondent as a non-genuine entity not assessable in the status of an AOP and further holding that it was brought into existence as a sham arrangement only to serve as a tool or device to evade taxes or to reduce tax-liability of the main AOP or trust.
17. The facts which we have narrated in quite detail and which are fully borne out of the material available on record clearly suggest that the respondent, though was professed to have been constituted with the main object of producing income, profits or gains by carrying on some business, venture or activity, did not in fact, carry on any of such activity. The particulars of the profit and loss account tell their own story and clearly inform that out of the capital contribution of Rs. 200 a sum of Rs. 100 was expended obviously in connection with the execution of the deed of constitution. After the execution of this deed there was absolutely no activity in the direction of producing income, gain or profit, a fact which is clearly borne out of the reading of the notes appended below the statement showing the computation of net taxable income and the submissions made by the representative of the respondent before the AAC.18. We need not stresss that 'association' does necessitate the exercise of volition of those who form the association (vide Estate of Khan Sahib Mohd.Oomer Sahib v. CIT [1958] 33 ITR 767 (Mad.) affirmed by Supreme Court in Mohamed Noorullah v. CIT [1961] 42 ITR 115 and they should 'earn'(and not only receive) income by reason of such association (vide Sheikh Zainuddin Ahmad v. CIT [1956] 30 ITR 36 (Pat.). What is required is not that they should 'receive' income but that they should 'earn' it by reason of their association, (vide N.S.Choodamani v. CIT [1959] 35 ITR 676 (Ker.). That is also the ratio of the decisions cited by the AAC in his order as is gathered from the following extract from the decision in the leading case on the subject i.e., Indira Balkrishna (supra): It is enough on our purpose to refer to three decisions: In re B.N. Elias.CIT v. Laxmidas Devidas and In re Dwarkanath Harischandra Pitale. In re B.N. Elias Derbyshire, C.J., rightly pointed out that the word'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action. 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 impose a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C.J. in CIT v. Lakshmidas Devidas, at page 589 and also in In re Dwarkanath Harischandra Pitale. In re BJV. Elias Costello, J., put the test in more forceful language. He said: 'It may well be that the intention of the Legislature was to hit combination of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships...when we find...that there is a combination of persons formed for the promotion of a joint enterprise...then I think no difficulty arises whatever in the way of saying that...these persons did constitute an association....
19. But the above essential ingredient of an AOP is completely missing in the present case. Admittedly the respondent had no other source of income.Again.it, as a unit, or any of its member on its behalf carried on no business, volition or venture. The respondent produced no income, gain or profit. Formed with the obvious purpose of 'receiving' income from certain trusts of the same group, as and when such income was to be distributed, the status or character of AOP cannot be conferred upon the respondent. We, therefore, hold that since the respondent did not produce any income, profits and gains by carrying on any business, volition or other activity, worth the name, it cannot be recognised as an AOP for the purposes of the Act.
20. The learned AAC seems to have completely missed the real point at issue. It is no doubt true that the deed of constitution was not legally required to have been written on a particular stamped paper and that the vesting of powers on two or more of its members was an internal arrangement made by the members of the respondent. But the real issue was that the respondent was claiming a status for the purpose of assessment under the Act. Once that fact was kept in mind the findings of the ITO that the respondent simply served as a device to evade taxes might have been seriously considered. Then it must have been considered patiently as to what activity did this AOP carry on during the accounting period and if it did not cany on any business, volition or other activity for producing income, gains or profit then why and for what purpose was it formed and constituted with clauses conferring absolute discretion on such number of members only who could have made the quorum of any meeting, in the matter of distribution of income? Why no member was to have any right or interest on any of the assets or property of the AOP or its income Had the case been approached from that angle the irresistible conclusion would have been that on the merits of its own individual case the respondent could be rejected as an invalidly constituted AOP irrespective of any other purpose to be served by it. Taken on its own facts and merits we reject the respondant as being a validly and legally constituted AOP so as to be an assessable entity under the Act.
21. Now coming to the issue relating to the respondent's being a device and simply a tool for tax evasion we are in no doubt that it is so.
Apart from the facts submitted by Mr. Banthia in his written submission which we, in the facts and circumstances of the case, are led to believe, it is an admitted position that in response to the notices/summons issued by the ITO Shri Chaganlal Bholidas Patel, Manager submitted a list of as many as 18 AOPs whose returns of income were signed and verified by him. This list is available at page 28 of the paper book. This list shows that all the 18 AOPs, were having their source of income as beneficiaries of certain settlements of the same group and all had returned a loss of Rs. l00 each. By another list at page 29Shri Chagan Lal Bholidas Patel had declared that he was the manager of as many as 35 AOPs. On a study of several relevant deeds of constitution of the AOPs we find that they were prepared under same or similar circumstances on almost same lines and in same language.
Despite repeated demands relevant particulars of the main AOP or Trust were not supplied to the ITO by Shri Chahganlal Bhogilal Patel. All these facts, we think, sufficiently indicate that the formation of AOPs/family settlements, in such a large number, carrying on no business, volition or other activity to produce income, profit or gain was made as a device or ruse to evade tax or to reduce tax-liability of the main Trust/AOP which actually carried on the business of construction and produced income, profits or gains. We may add that where there is a case of device or ruse to evade taxes a series of transactions serve as components or parts of and go to make, a whole transaction. In such a case no single transaction can be taken in isolation so as to judge the genuineness and validity or legality of the whole. It is the cumulative effect of the aims, objects and purposes of various transactions that shall have to be taken into account in order to find out the truth and see the real face of the transaction behind the veil. Judged thus we find the respondent not only an invalidly, unlawfully and illegally constituted entity for evading taxes on its own individual facts and merits but also as making simply a tool to serve the purpose of evading tax effects on the main trust or AOP, formed by and mainly consisting of the members of the Bhogilal Patel Family. As the above discussion shows and the material placed before us indicates it was all an ill advisedly produced brain child of Shri Chaganlal Bhogilal Patel. Under these circumstances, therefore, we do not think that the order of the ITO was an illegitimate child of the facts and circumstances of the case and material on record. The respondent is thus found no less than a part of a device for evading taxes.
22. In the final analysis we find absolutely no reasons at all to sustain the order under appeal. We, therefore, set aside the same accordingly. In our opinion the respondent was not at all a validly and legally constituted assessable entity but we cannot go beyond the order of the ITO, making protective assessment Under these circumstances we can do no better than to restore his order.
24. I agree with the reasoning and conclusion arrived by my learned brother. There is no AOP in existence in this year within the meaning of Sub-clause (v) of Section 2(31) of the IT Act, giving the meaning of person on which charge is created under Section 4 of the Act. Hence the return of income even if filed is required to be treated as non est and ignored as in substance done by the ITO.