Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee did not constitute an AOP or a BOI.

Counsel Appeared

M. Suryanarayana Murthy, for the Revenue : Y. Ratnakar, for the Assessee

B.P. JEEVAN REDDY, J.:

The Tribunal, Hyderabad, has referred the following two questions to this Court under s. 256(1) of the IT Act, 1961 (for short “the Act”): “(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee did not constitute an AOP or a BOI. (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that individual assessments are to be made in the hands of each of the co-sharers on the amounts received by them on the ground that there was a diversion of income by overriding title ?” Indeed, the facts of this case are identical with the facts in CIT vs. Friends Enterprises (1987) 66 CTR (AP) 143 : (1988) 171 ITR 269 (AP). The Tribunal disposed of the appeal following the principle of this decision in the said case. On reference, however, this Court did not agree with the reasoning and conclusion of the Tribunal, and answered two identical questions against the assessee and in favour of the Revenue. That decision should conclude the questions in this case. But, Mr. Y. Ratnakar, learned counsel for the assessee, raised a contention which was not raised or considered by the Court in CIT vs. Friends Enterprises (supra). The contention is that before making the assessment in the status of an AOP, a notice under s. 139(2) of the Act ought to have been issued calling upon the assessee to submit a return in that status. Since that has not been done, it is argued, the assessment made is illegal. Though this question has not been specifically referred to the by the Tribunal for our opinion, the Tribunal was of the opinion, when the assessee asked for referring the same, that the said question is implicit in the two questions referred by it and that it is open to the assessee to argue the said question before this Court. Though learned standing counsel for the Revenue contends that the assessee could not have asked for referring a question in a reference application filed by the Revenue and that the Tribunal was not competent to make the said observation, we prefer not to go into that aspect. We would rather deal with the contention urged on merits. Five persons, namely, (1) D. Seshagiri Rao, (2) K. Gopalkrishna Murthy, (3) D. Rangaseshu, (4) Smt. A Bharathi, and (5) Ramesh Kumar, executed an agreement of partnership on 27th Oct., 1975, describing themselves as partners. The document recites they have formed into a partnership on and w.e.f. 1st Aug., 1975, to bet on horses in races conducted at Hyderabad and other places in India. The deed provided that betting could be done in the name of any of the partners and that the profits or losses accruing from the said activity shall be made out and distributed among the partners in equal measure. For the asst. yr. 1976-77, an application in Form No. 11 was filed for registration of the said firm under the Act on 27th Oct., 1975. On 30th July, 1976, a return of income was filed in the status of a registered firm showing an income of Rs. 1,88,380. Subsequently, on 20th March, 1979, a letter was filed by the assessee stating that since the filing of the return, it has been advised that there could be no business of betting of horses and, therefore, it must be construed that the return filed by it earlier without proper appreciation of the provisions of law, was filed inadvertently, and must be ignored. The assessee contended that the income derived by it cannot be assessed either in the status of a firm or even in the status of an AOP. It was also contended that, in any event, the five individuals can be assessed only to the extent of the amount received by each of them separately, for which purpose they had also submitted separate returns of income. In short, the submission was that the return filed earlier should be ignored and the separate returns filed by the five individuals should be taken into consideration and acted upon. A revised return was also filed on this occasion, showing “nil” income, but showing the status as a registered firm.

By his order dt. 1st Feb., 1980, the ITO held that placing bets on horses in the race course cannot be considered as carrying on a trade or business, and since the existence of a business is a sine qua non for a valid partnership, there was no valid partnership in this case. Accordingly, he refused registration and stated further that the assessee’s status should be determined as that of an AOP. On 19th Aug., 1980, he made the order of assessment. In this order, he referred to his earlier order dt. 1st Feb., 1980. He overruled the objection of the assessee that no assessment can be made upon it in the status of an AOP. The assessee filed an appeal contending, inter alia, that since there was no income producing activity carried on by the five individuals, they would not constitute an association of persons, and hence no assessment could have been made in that status. The CIT(A), however, did not agree with the said submission and dismissed the appeal, whereupon the matter was carried in further appeal to the Tribunal. Before the Tribunal a specific contention—described by the Tribunal as an alternative contention—was raised to the effect that where a return was filed in the status of a firm, no assessment could be made in the status of an association of persons without issuing a notice under s. 139(2) or s. 148, as the case may be. On this question, the Tribunal held that, on the facts of the case, the assessment cannot be said to have become illegal merely because no fresh notice under s. 139(2) was issued, inasmuch as, all the affected persons were already before the authority. It held that no principle of natural justice nor any provision of law is violated on account of non-issuance of such notice. The Tribunal, however, held in favour of the assessee on other questions, with the result that the ultimate decision went in favour of the assessee. Thereupon, the Revenue applied for and obtained reference of the two questions aforementioned.

The only question we have to consider now is whether the assessment made on the assessee in the status of an AOP is illegal and invalid for the reason that, before doing so, no notice under s. 139(2) was issued to the assessee. It must be remembered that the return was filed in the status of a firm along with an application for registration of the firm. In its letter dt. 20th March, 1979, however, the assessee contended that the return filed by it must be ignored because it was filed under a misconception of law and that it could not be assessed either in the status of a firm or in the status of an AOP. The ITO passed orders on 1st Feb., 1980, refusing registration under s. 185. No appeal was preferred against the said order and that has become final. Thereafter, he made an assessment order on 19th Aug., 1980, ascribing the status of an AOP to the assessee. No notice was, however, issued by him either under s. 139(2) or s. 148 calling upon the assessee to file a return in the status of an AOP.

There is no provision either in the Act or the Rules providing that where the ITO proposes to make the assessment in a status different form the one in which return is filed, a notice or a fresh notice, as the case may be, under s. 139(2) should be issued. This obligation, according to the learned counsel for the assessee, arises from the very fact that the ITO seeks to change the status of the assessee which may have adverse consequences to it. Reliance is placed upon the decision of the Bombay High Court in CIT vs. Associated Cement & Steel Agencies (1984) 147 ITR 776 (Bom) : TC10R.521 and also upon the decision of Allahabad High Court in CWT vs. J.K. Srivastava & Sons (1983) 34 CTR (All) 319 : (1983) 142 ITR 183 (All). Reliance is also sought to be placed upon certain observations of a Full Bench of this Court in Pannabai vs. CIT (1985) 47 CTR (AP) 91 (FB) : (1985) 153 ITR 608 (AP)(FB) : TC10R.508.

The decision of the Bombay High Court in CIT vs. Associated Cement & Steel Agencies (supra) does, indeed, support the assessee’s contention. In that case too, a return was filed in the status of a firm along with an application for registration. Registration was refused and assessment was made in the status of AOP. This was held to be impermissible on the following reasoning: “That a ‘firm’ and an ‘AOP’ are two different ‘persons’ and, indeed, independent units of assessment, cannot be disputed, considering the whole scheme of the IT Act, 1961.

The mode of their taxing and process of recovery of liability are also different. Thus, even if the identity of the members of the alleged firm and the AOP is established, there cannot be a valid assessment altering the status declared in the return. Mandatory requirement of issuing of a notice under s. 143(2) before making assessment under s. 143(3) cannot be lost sight of; in this case, notice was given to the firm in relation to the return filed as a firm, and no notice to the AOP was issued. Therefore, even if it is correct to make assessment in certain status, such assessment cannot be made in relation to proceedings in an incorrect status. This in, our view, is the root of the controversy…”. Indeed, the learned judges say at later stage that this question was academic in the facts of the case before them; yet, they did express an opinion and that is relied upon before us. With great respect, we are unable to agree with the said reasoning. In the case before us, the assessee having filed a return in the status of a firm and having applied for registration, took a specific stand through a subsequent letter that it cannot be assessed either as a firm or as an AOP, and that its income is not liable to tax at all. The ITO did not agree with any of these submissions. He held that the income of the assessee is eligible to tax and that it is liable to be assessed in the status of an AOP. Before doing so, issuance of a fresh notice either under s. 139(2) or s. 143(2) is really unnecessary. Indeed, we are unable to see the relevance of a notice under s. 143(2) in such a situation. As we said earlier, there is neither a provision of law requiring the ITO to issue such notice, nor can such a notice be inferred from the principles of natural justice. We are, therefore, unable to agree with the view of the Bombay High Court.

The decision in CWT vs. J.K. Srivastava & Sons (supra) was rendered under the WT Act. A return of wealth was filed by the assessee in the status of an AOP. The WTO rejected the contention of the assessee that no wealth-tax was chargeable on an AOP and assessed in the status of an individual on the ground that the word “individual”, occurring in s. 3 of the Act, includes an AOP. This was affirmed by the first appellate authority. The Tribunal, however, held that an AOP is different from an individual and that a voluntary return filed in the status of an AOP could not have been treated as a return in the status of an individual, and since no notice was issued to the assessee in the status of an individual to file a return under s. 14(2), the WTO had no jurisdiction to make an assessment in the status of an individual and, accordingly, cancelled the assessment. This view was affirmed by the High Court on reference. The decision in this case too is based upon the reasoning that an AOP is an entity different from an individual and, therefore, the return filed by one cannot be made the basis for making an assessment on the other without issuing a notice under s. 14(2) of the WT Act. For the reasons given by us while discussing the ratio of the Bombay judgment, we are unable to agree with the reasoning of this decision. It should be remembered that in the case before us, all the affected persons were already before the ITO. It is not a case where, by changing the status, some persons or individuals who were not before the ITO would have been affected. Not only all the affected persons were there before the ITO, but they had also specifically raised the contention that no assessment could be made upon them either in the status of an AOP or in the status of a firm.

Lastly, reliance is placed upon certain observations made in the Full Bench judgment of this Court in Pannabai vs. CIT (supra). After referring to the decisions of the Allahabad and Bombay High Courts in J.K. Srivastava & Sons’ case (supra) and Associated Cement & Steel Agencies’ case (supra) and a contrary decision of the Punjab and Haryana High Court in Mangat Ram Hazari Mal vs. CIT (1968) 67 ITR 788 (P&H) the Full Bench did not express itself in favour of either view. In the case before the Full Bench, however, the facts were totally different. There, an individual had filed a return stating that only one-seventh of the share income received by her is assessable in her hands and not the entire share income. The ITO did not agree and made an assessment in the status of a BOI consisting of the said person and her minor children. He brought the entire share income to tax. Before doing so, the affected persons, i.e., the minor children, were not put on notice. It was, therefore, held that the assessment so made is invalid.

Reference may be made lastly to the decision of the Punjab and Haryana High Court in Mangat Ram Hazari Mal vs. CIT (supra). In this case, a return was filed by a firm. Registration was refused and an assessment was made treating it as an unregistered firm. On appeal, the Tribunal took the view that the assessee was not a firm at all and assessed it in the status of an association of persons. This was contended to be bad; but the High Court held, on reference, that the Tribunal did have the power to uphold an order changing the status of an assessee and that there was no illegality or infirmity in that.

For the above reasons, we answer both questions referred to us in the negative, i.e., in favour of the Revenue and against the assessee. No costs.

Learned counsel for the assessee makes an oral request for grant of a certificate under s. 261 of the IT Act. We do not, however, think that this is a fit case to be certified under s. 261 of the IT Act. Oral request is accordingly rejected.

[Citation :182 ITR 24]