Pradeep Trust Vs. Commissioner of Income Tax - Court Judgment

Bhaskar Bhattacharya, J.

1. These two appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act) were heard together and we propose to deliver this common judgment for the disposal of the two appeals.

2. I.T.A. No. 15 of 2002 relates to the assessment year 1982-83 and the I.T.A. No. 16 of 2002 relates to the assessment year 1983-84 and are directed against the common order passed by the Income Tax Appellate Tribunal.

3. The I.T.A. No. 15 of 2002 has been admitted for hearing on the following two questions:

1. Whether on facts and circumstances of the case the Tribunal was right in law in holding that Section 3(1)(f) of the Income Tax Act is applicable on the association of persons born out of joint-venture agreement instead of right section i.e. Section 3(1)(b) of the Income Tax Act 1961?

2. Whether on facts and circumstances of the case the Income Tax Appellate Tribunal was right in law for not passing any order on cross objection on the points of initiation of proceedings under Section 147/148 of the Income Tax Act when it is necessary to pass a speaking order giving judgment on all points raised by the assessee whereby the liabilities of tax on the assessee is casted by virtue of the said proceeding under Section 148?

4. The I.T.A. 16 of 2002 was admitted on the following question:

Whether on facts and circumstances of the case the Tribunal was right in law in holding that Section 3(1)(f) of the Income Tax Act is applicable on the association of persons born out of joint-venture agreement instead of right section i.e. Section 3(1)(b) of the Income Tax Act 1961?

5. The facts giving rise to filing of these two appeals may be summed up thus:

1) The Assessee is a private trust created under the deed of trust dated July 18, 1978 and is assessed in the status of 'Association of persons'. For the Assessment year 1982-83, the previous year of the Assessee was the Dewali year ended October 27, 1981.

2) An agreement was entered into between one Ashoke Sancheti and the Assessee on April 2, 1979 to carry on a joint venture business under the name of 'M/s. Sancheti Enterprises' with a stipulation that the profit and loss of the business would be shared in the ratio of 60:40. By a subsequent agreement dated January 2, 1981, the said share was varied to the extent of 10:90. For the Assessment Year 1982-83, the previous year of M/s. Sancheti Enterprises was the calendar year ended December 31, 1981.

3) For the purpose of carrying on business with one M/s. Contemporary Tea Company Ltd, M/s. Sancheti Enterprises opened a branch named 'Sancheti Enterprises Service Department' at Siliguri on April 1, 1981. The remuneration received from Contemporary Tea Company Ltd. was Rs. 45,000 a month. The said branch incurred various types of expenses for earning the said income and in respect of the business of the said branch, which was treated by M/s. Sancheti Enterprises as a separate source of income, it adopted the financial year as the previous year.

4) Ashoke Sancheti retired from Sancheti Enterprises with effect from December 31, 1981 and thus, the Assessee became the sole proprietor from January 1, 1982 and from that day, M/s. Sancheti Enterprises became the sole proprietary concern of the Assessee with previous year as the calendar year and that of the Branch business as the financial year.

5) M/s. Sancheti Enterprises, whose previous year ended on December 31, 1981, was separately assessed in the status of 'Association of Persons' for the Assessment year 1982-83. In the said Assessment year, M/s. Sancheti Enterprises did not include the income of its Branch office business, the previous year of which, it alleged, ended on March 31, 1982, which is subsequent to the close of the previous year of M/s. Sancheti Enterprises, i.e. December 31, 1981. However, the Assessee in its return for the year 1983-84, disclosed the income from M/s. Sancheti Enterprises for the calendar year ended December 31, 1982 and the same included the income from the Branch office business for the financial year ended March 31, 1982.

6) Similarly, the income in respect of the Branch office business for the financial year ended on March 31, 1983 was included in the income of M/s. Sancheti Enterprises for the calendar year ended December 31, 1983 and was reflected in the return of the Assessee for the Assessment year 1984-85.

7) The cases of both the Assessee and M/s. Sancheti Enterprises arising out of the assessment year 1982-83 ultimately went before the Commissioner of Income Tax (Appeal). The appeal filed by Sancheti Enterprises being No. 169/III/CIT(A)-X/86-87 was disposed of on September 23, 1988. In that appeal, the question was whether the said 'Association of Persons' was liable to be assessed in the Assessment year 1982-83 for which its previous year was the calendar year ended December 31, 1982 in respect of the income arising out of its Branch office business, the account of which was closed on March 31, 1982. The Assessing officer of M/s. Sancheti Enterprises included in the assessment, the remuneration received from M/s. Contemporary Tea Co. Ltd. at the rate of Rs. 45,000/- a month from April 1, 1981 to December 31, 1981 amounting to Rs. 4,05,000/-.

8) The appeal was allowed by the Commissioner of Income Tax (Appeal) by deleting the said amount with the following observations as recorded in paragraph 5 of the order which is quoted below:

I have carefully considered the facts of the case and the submissions made in this regard. The records of this case and that of M/s. Pradeep Trust have also been examined. It is seen that the assessee had started a new department called Sancheti Enterprises (Service Department) for attending to the work of M/s. C.T.C Ltd. from 1-4-81. The accounts of the new department were closed for the first time on 31-3-82 and since the accounting year of the assessee for assessment year 1982-83 was 31-12-81, the result of the Service Department was not included in the accounts for this assessment. Moreover, the business of the Service Department was taken over by one of the partners M/s. Pradeep Trust on and from 1-1-82 i.e. before the close of the accounts of the Service Department for the first time on 31-3-82. The result of the Service Department which has been taken over by M/s. Pradeep Trust has been disclosed in the return of M/s. Pradeep Trust in the assessment for 1983-84. This was done as per return filed on 17-8-83 before the search in the case of M/s. C.T.C. Ltd. on 22-11-83. The appellant's contention that an assessee is permitted to have two separate accounting years for separate departments and branches is supported by the decisions of the Supreme Court and the Allahabad High Court relied upon by the appellant. It is seen that M/s. Pradeep Trust, which has taken over the service department has accounted for the entire receipts from M/s. C.T.C Ltd., in its assessments for the assessment years 1983-84 and 1984-85. The return of income in this regard was filed by M/s. Pradeep Trust before the search in the case of M/s. C.T.C Ltd. Therefore, the ITO.s decision that the claim is nothing but a fabrication after the search operation to hide the fact of non-discloser of the income cannot be supported. On these facts, I find that since the entire receipts for services rendered to M/s. C.T.C Ltd. has been accounted for in the returns of M/s. Pradeep Trust, there is no justification for including any part of the same as income in the hands of the assessee and doing so amounts to double taxation for the same income. The addition of Rs. 4,05,000/- is, therefore, found to be not justified and is accordingly deleted.9) None of the parties preferred any appeal against such order and thus, the said order attained finality. However, the Assessing officer by taking aid of Section 147 of the Act, reopened the Assessment for the Assessment year 1982-83 and included the Rs. 5,40,000/- received from the Branch office business from April 1, 1981 to March 31, 1982. It appears from the Assessment order dated March 31, 1995 that although the Assessing officer accepted the position that the Branch business was a separate source of income, was of the view that the same was assessable for the Assessment year 1982-83 because, according to him, the income or loss from different sources of the relevant previous year in relation to a particular assessment year should be taken into consideration for the assessment of the same year.

10) In appeal before the Commissioner of Income Tax (Appeal), the grievance of the Assessee was twofold. First, according to the Assessee, there was no justification of the invoking the jurisdiction under Section 147. Secondly, the addition of the said amount was illegal.

11) The Commissioner of Income Tax (Appeals), by his order dated March 7, 1996 followed the earlier order September 23, 1988 and allowed the appeal by deleting the additional amount of Rs. 5,40,000/-. The first point taken by the Assessee, regarding the justification of invoking Section 147 of the Act was, however, not decided by the Commissioner of Income Tax (Appeals).

12) Against the said order, the Revenue preferred an appeal before the Tribunal while the Assessee preferred a cross-objection on the question of assuming the jurisdiction under Section 147 of the Act.

13) So far as the reassessment order dated March 31, 1995 for the Assessment year 1983-84 are concerned, the Assessing officer included the remuneration received from M/s. Contemporary Tea Co. Ltd. at the rate of Rs. 45,000/- a month for six months from April 1, 1982 to September 30, 1982 amounting to Rs. 2, 70,000/-. On Appeal, the Commissioner of Income Tax (Appeals) deleted the amount.

14) The Revenue preferred a separate Appeal before the Tribunal in respect of the Assessment year 1983-84.

15) The Tribunal by the orders impugned in these appeals has allowed the appeals of the Revenue by upholding the order of reassessment.

6. Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, at the very outset, contended that the learned tribunal erred in law in holding that the Appellant had only one source of income viz. M/s. Sancheti Enterprises. Mr. Khaitan points out that M/s. Sancheti Enterprises, in respect of Branch business, which was regarded as separate source of income, had a separate previous year i.e. financial year and the order passed by the tribunal that the assessee had only one source of income is contrary to the assessment order dated March 31, 1995 where the Assessing officer accepted that the Branch business was a separate source of income.

7. According to Mr. Khaitan, under the provisions of Section 3 of the Act prior to its amendment with effect from April 1, 1989, it was permissible for the assessee to have different previous year in respect of separate source of income as provided in Sub-section (3) thereof and for that reason, the Commissioner of Income Tax (Appeals) by his order dated September 23, 1988 by following the decision of the Supreme Court in the case of CIT v. Lady Kanchanbai reported in : (1970) 77 ITR 123 (SC) upheld the adoption of different previous years for different sources of income and the Department having accepted such position by not preferring any appeal against the order dated September 23, 1988, it was not open to it to contend in a different way.

8. Mr. Khaitan further contends that the remuneration given by M/s. Contemporary Tea Co. Ltd. cannot be treated as salary and there cannot be any determination on monthly basis because the real income can be ascertained only after taking into consideration the expenditure made by the Assessee in earning that remuneration and that can be quantified only after the close of the accounting year.

9. Mr. Khaitan further criticized the order passed by the Tribunal for placing reliance upon Section 3(1)(f) of the Act, which applies only to a case where the Assessee was a partner of a partnership firm. Mr. Khaitan points out that admittedly M/s. Sancheti Enterprises was 'Association of Persons' till December 31, 1981 after which it became a proprietary concern of the Assessee. Mr. Khaitan by relying upon the provisions contained in Sub-clause (iv) and (v) of Section 2(31) of the Act submits that the Partnership and the Association of Persons are distinct and different taxable entities.

10. Mr. Khaitan lastly contends that the learned Tribunal ought to have also considered the cross-objection as to whether sufficient ground has been made out for invoking Section 147 of the Act in the facts of the present case.

11. Mr. Bhowmik, the learned Counsel appearing on behalf of the Revenue has opposed the aforesaid contentions of Mr. Khaitan and has supported the order passed by the Tribunal. Mr. Bhowmik contends that the Assessee had only one source of income i.e. the share of profit of M/s. Sancheti Enterprises and had no option of having a different previous year than that of M/s. Sancheti Enterprises and thus, the amount of Rs. 5,40,000/- received as remuneration from Consolidated Tea Co. Ltd. should be held to be relevant for the Assessment year 1982-83.

12. Mr. Bhowmik further contends that the notice was issued under Section 148 of the Act after obtaining approval of recorded reason by the Commissioner of Income Tax, WB-IV/Cal as the said income escaped the notice of the Assessment officer for non-discloser in the relevant return. Mr. Bhowmik submits that after search and seizer, it was found that Sancheti Enterprises Service Department which was a wing of M/s. Sancheti Enterprises had income of Rs. 5,40,000/- and the Assessee had shown that income in the next year only for avoiding penalty.

13. Mr. Bhowmik further contends that although the Assessee is assessed as 'Association of Persons', yet, there is no material difference between a partner and an 'Association of Persons', both being engaged in business for sharing profit of business on agreement, particularly when the Assessee had the only source of income from M/s. Sancheti Enterprises. Mr. Bhowmik, therefore, prays for answering the framed issues against the Assessee.

14. Therefore, the first question that arises for determination in these appeals is whether in the facts and circumstances of the case the Tribunal was right in law in holding that Section 3(1)(f) of the Income Tax Act is applicable on the 'Association of Persons' born from the joint-venture agreement instead of right section i.e. Section 3(1)(b) of the Income Tax Act 1961.

15. In order to appreciate the said question, it will be appropriate to refer to the provisions contained in Section 3 of the Act as it stood at the relevant point of time and those are quoted below:

'Previous year' defined.

(1) For the purposes of this Act, 'previous year' means-(a) the financial year immediately preceding the assessment year; or

(b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date; or

(c) in the case of any person or business or class of persons or business not falling within Clause (a) or Clause (b), such period as may be determined by the Board or by any authority authorised by the Board in this behalf; or

(d) in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession; and-

(i) ending with the said financial year, or

(ii) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, ending on that date, or

(iii) ending with the period, if any, determined under Clause (c), as the case may be; or

(e) in the case of a business or profession newly set up in the twelve months immediately preceding the said financial year-

(i) if the accounts of the assessee have been made up to a date within the said financial year and the said financial year and the period from the date of the setting up of the business or profession to such date does not exceed twelve months, then, at the option of the assessee, such period, or

(ii) if any period has been determined under Clause (c), then the period beginning with the date of the setting up of the business or profession and ending with the period, as the case may be; or

(f) where the assessee is a partner in a firm and the firm has been assessed as such, then, in respect of the assessee's share in the income of the firm, the period determined as the previous year for the assessment of the income of the firm; or

(g) in respect of profits and gains from life insurance business, the year immediately preceding the assessment year for which annual accounts are required to be prepared under the Insurance Act, 1938 (4 of 1938), or under that Act read with Section 43 of the Life Insurance Corporation Act, 1956 (31 of 1956).

(2) Where an assessee has newly set up a business or profession in the said financial year and his accounts are made up to a date in the assessment year in respect of a period not exceeding twelve months from the date of such setting up, then, notwithstanding anything contained in Sub-clause (iii) of Clause (d) of Sub-section (1), the assessee shall, in respect of that business or profession, at his option, be deemed to have no previous year for the said assessment year under that clause and such option shall, in relation to the immediately succeeding assessment year, have effect as an option exercised under Sub-clause (I) of Clause (e) of Sub-section (1).

(3) Subject to the other provisions of this section, an assessee may have different previous years in respect of separate sources of his income.

(4) Where in respect of a particular source of income or in respect of a business or profession newly set up, an assessee has once exercised the option under Clause (b) or Sub-clause (ii) of Clause (d) or Sub-clause (i) of Clause (e) of Sub-section (1) or has once been assessed, the, he shall not, in respect of that source, or, as the case may be, business or profession, be entitled to vary the meaning of the expression 'previous year' as then applicable to him, except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose.

16. In case of separate sources of income, an assessee may have two separate previous year as held by the Apex Court in the case of The Commissioner of Income-tax, M.P. v. Lady Kanchanbai reported in : AIR 1970 SC 691. In that case it was held that it is possible for an Assessee to have a different 'previous year' for each 'separate source of income, profits and gains', however, the word 'Source' means not a legal concept but which a practical man would regard as a real source of income.

17. In the case before us, M/s. Sancheti Enterprises entered into agreement with Contemporary Tea Co. Ltd, for giving consultancy service on April 1, 1981 which was a different source of income and the remuneration payable to M/s. Sancheti Enterprise was Rs. 45,000/- a month for which a branch was opened in Siliguri. For the purpose of earning the said amount, M/s. Sancheti Enterprises was required to incur some expenditure. With effect from January 1, 1982, with the retirement of Ashoke Sancheti, the Assessee became the sole proprietor of M/s. Sancheti Enterprises. Therefore, what was the actual income received from such new source could not be ascertained until the arrival of the last day of the accounting year of such new source of business and for that reason, such income was shown in the next Assessment year of the Sancheti Enterprises. Thus, it was not possible to assess the actual income from the said new source until March 31, 1982. It is now settled law that an income-tax liability becomes crystallized on the last day of the previous year and thus, the income from such source was crystallized on March 31, 1982.

18. It appears from the order dated September 23, 1988 passed by the Commissioner of Income Tax (Appeals) in the Appeal of M/s. Sancheti Enterprises that the above view was taken and such order has attained finality and thus, the Revenue Authority is precluded from contending that the said branch business was not a separate source of income of the Assessee.

19. It appears from the order impugned that the Tribunal relied upon Section 3(1)(f) of the Act which is applicable to a case where the assessee was a partnership firm and such firm was assessed as such. In the case before us, until December 31, 1981, M/s. Sancheti Enterprise was an 'Association of Persons' and thereafter, it became a proprietary concern of the Assessee. Section 3(1)(f) of the Act is not at all applicable to a case where the Assessee is a member of the 'Association of Persons'. At the relevant period, in case of income of 'Association of Persons', it was only such Association, which was to be assessed, and there was no question of taxation on share of income of the Association in the hand of any member of the Association. On the other hand, in the case of Registered Partnership Firm, not only the Firm pays tax on the income of the firm but also a partner thereof pays tax on his share of income from the Firm. Thus, the Tribunal erred in law in applying the provisions of Section 3(1)(f) of the Act to the case of an Assessee who was a member of 'Association of Persons'.

20. The two decisions relied upon by Mr. Bhowmik, viz. CIT v. Mckenzies Ltd. : (1980) 121 ITR 458 (Bom) and CIT v. Greenham Estate P. Ltd. : (2006) 285 ITR 345 (Mad), referred to situations where the Assessee was a partner of the firm which has no application to the Assessee in the present cases.

21. We, thus, answer the first point in negative.

22. As regards the second point, we find substance in the contention of Mr. Khaitan that the Tribunal having reversed the decision of the Commissioner of Income Tax (Appeals) on merit, before doing so, it had the duty to enter into the question whether the invocation of Section 147 of the Act was justified in the facts of the present case. Although it has not decided that issue, we propose to decide the same.

23. In the case before us, the reason of reopening the assessment was that the amount received from Contemporary Tea Co. Ltd. was suppressed by the Assessee and during the search and seizer of the said Company, the same came to the notice of the Assessing officer. It appears from the materials on records that the Assessee in its return for the year 1983-84 disclosed the added amount as its income and such return was submitted on August 17, 1983 whereas the search and seizer of Contemporary Tea Co. Ltd. was made on November 21, 1983. Therefore, it was wrong to allege that the suppression was detected at the time of search and seizer. Moreover, it appears that in the appeal against the original assessment order filed by M/s. Sancheti Enterprise, the selfsame question was answered against the Revenue by the Commissioner of Income Tax (Appeals) vide its order dated September 23, 1988 in favour of the M/s. Sancheti Enterprises and the said order has not been appealed against. Thus, there was no justification of reopening the Assessment by taking aid of Section 147 of the Act.

24. We, therefore, answer the second question in negative and hold that there was no justification of reopening the assessment by taking aid of Section 147 of the Act in the facts of the present case.

25. In view of our findings above, the answer to the only question formulated in ITA No. 16 of 2002 should be in negative.

26. Both the appeals, thus, are allowed by setting aside the order of the Tribunal below and restoring the orders passed by the Commissioner of Income Tax (Appeals).

27. In the facts and circumstances, there will be, however, no order as to costs.

Prasenjit Mandal, J.

28. I agree