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Smt. Jaswant Kaur Sehgal and ors. Vs. Commissioner of Income-tax and ors. - Court Judgment

LegalCrystal Citation
Subject;Direct Taxation;Constitution
CourtGuwahati High Court
Decided On
Case NumberW.A. Nos. 436, 440, 441 and 442 of 1997 in C.R. Nos. 3884, 3885, 3886 and 3887 of 1993
Judge
ActsIncome Tax Act, 1961 - Sections 147 and 148; Constitution of India - Articles 226
AppellantSmt. Jaswant Kaur Sehgal and ors.
RespondentCommissioner of Income-tax and ors.
Appellant AdvocateG.K. Joshi, R.K. Joshi and U. Chakrawarty, Advs.
Respondent AdvocateA.K. Saraf and N. Havelia, Advs.
DispositionPetition dismissed
Excerpt:
- - 3. briefly stated, the facts necessary to be taken note of for comprehending the competing arguments of the parties are that the appellants/writ petitioners are residents of thangal bazar, imphal, in the state of manipur and are existing assessees under the income-tax act, 1961 (hereafter referred to as 'the act'), enjoying income from house property, share of profit from their respective firms as well as from interest. 10. in their reply dated january 7, 1992, the appellants while questioning the notice to be illegal as well as defective contended that no entity like 'm/s. 511/gauhati of 1991 was dismissed being barred by limitation as well as on the merits by the learned tribunal vide its judgment and order dated march 3, 2000. it was, inter alia, held that the assessment had..... amitava roy, j.1. these appeals arise out of the common judgment and order dated may 12, 1997 (see , passed in the aforementioned civil rules. the factual setting for all the writ petitions is the same and as common questions of law based thereon had arisen for adjudication, the appeals were heard together and are disposed of by this common judgment and order.2. we have heard mr. g. k. joshi, senior advocate, assisted by mr. r. k. joshi and mrs. u. chakravarty, advocate, for the appellants/writ petitioners and dr. a. k. saraf, senior advocate, assisted by ms. n. agarwal, advocate, for the respondent/revenue.3. briefly stated, the facts necessary to be taken note of for comprehending the competing arguments of the parties are that the appellants/writ petitioners are residents of thangal.....
Judgment:

Amitava Roy, J.

1. These appeals arise out of the common judgment and order dated May 12, 1997 (see , passed in the aforementioned civil rules. The factual setting for all the writ petitions is the same and as common questions of law based thereon had arisen for adjudication, the appeals were heard together and are disposed of by this common judgment and order.

2. We have heard Mr. G. K. Joshi, senior advocate, assisted by Mr. R. K. Joshi and Mrs. U. Chakravarty, advocate, for the appellants/writ petitioners and Dr. A. K. Saraf, senior advocate, assisted by Ms. N. Agarwal, advocate, for the respondent/Revenue.

3. Briefly stated, the facts necessary to be taken note of for comprehending the competing arguments of the parties are that the appellants/writ petitioners are residents of Thangal Bazar, Imphal, in the State of Manipur and are existing assessees under the Income-tax Act, 1961 (hereafter referred to as 'the Act'), enjoying income from house property, share of profit from their respective firms as well as from interest. During the year 1983-84, relevant to the assessment year 1984-85, the appellants along with four other persons residing at 4, Achambit Show Road, Calcutta, in the State of West Bengal, jointly purchased a lottery ticket of Rs. 5 bearing No. B-716127 of the First Diamond Lottery conducted by the Directorate of State Lotteries, Government of Nagaland, which won the first prize of Rs. 1 crore in the draw held on October 31, 1983. The purchasers having equal shares in the ticket claimed their respective l/8th share from the amount of Rs. 90,000 after deduction of 10 per cent. commission. Their claims, according to the appellants were registered separately with the Government of Nagaland, which was accepted and payment of l/8th share was made to each purchaser separately by account payee bank draft after deducting income-tax at source under the provisions of the Act. Resultantly each purchaser received an amount of Rs. 7,53,750 after deduction of Rs. 3,71,250 by way of income-tax at source from the amount of Rs. 11,25,000 being the 1/8th share of the available prize money. The appellants claim that the Government of Nagaland, consequently, also issued certificate of deduction of income-tax at source certifying that a sum of Rs. 3,71,250 being the income-tax at 30 per cent. and surcharge at 3 per cent. had been deducted from Rs. 11,25,000 from each purchaser. That the tax deducted at source was credited to the corresponding income-tax head on January 28, 1984, was also certified and certificate to the said effect was issued to each of the purchasers separately.

4. The appellants maintained that they disclosed in their individual income-tax returns, the factum of receipt of prize money of Rs. 11,25,000 under the head 'Income from other sources' along with their other incomes from house property, income from their respective firms and income from interest. The amount of Rs. 7,53,750 (after deduction of income-tax at source) was according to them also credited in the books of account of their firms. They also claimed credit of such income-tax payment at source in their income-tax returns. In all, according to them, all material facts relating to winning of the prize money from the lottery were fully and truly disclosed by them in their returns and before the Assessing Officer in the course of the assessment proceedings.

5. By an order of assessment dated March 31, 1987, under Section 143(3) of the Act, the Assessing Officer in each case completed the assessment of income of the appellants/assessees in the course of which income from the lottery was assessed as a protective measure though they had shown the same as their own income in their returns.

6. The appellants-assessees being dissatisfied with the assessment of income from lottery by way of protective measure, preferred appeals before the Commissioner of Income-tax (Appeals), Guwahati (hereafter referred to as 'the CIT (Appeals)'), wherein it was contended, inter alia, that such income was liable to be assessed by way of substantive measure in their hands. The appeals were registered as Appeal No. 245/Guwahati of 1987-88, 228/Gawa-hati of 1987-88, 232/Guwahati of 1987-88, 230/Guwahati of 1987-88. Their contention was negatived and the appeals were dismissed by the Commissioner of Income-tax (Appeals) by judgment and order dated September 15, 1987.

7. The appellants took the issue in appeal before the Income-tax Appellate Tribunal, Guwahati Bench, Guwahati (hereafter referred to as 'the Tribunal'). In the appeals which were registered as I. T. A. No. 618/Gauhati, 620/Gauhati, 621/Gauhati and 622/Gauhati of 1987, the Tribunal by its common judgment and order dated January 18, 1990, set aside the order of the Commissioner of Income-tax (Appeals) with a direction for fresh disposal of the matter after obtaining necessary facts and materials on record and upon hearing the parties.

8. Following the remand, the Commissioner of Income-tax (Appeals) enquired of the assessing authority as to whether any substantive assessment had been made with regard to the lottery prize of Rs. 90,000 to which the assessing authority replied in the negative. The Commissioner of Income-tax (Appeals) thereafter upon hearing both the parties and on a consideration of all materials on record by the common judgment and order dated March 27, 1991 held that the protective assessment made by the Assessing Officer was to be construed as substantive assessment. The appeals were thus allowed.

9. It was on a lapse of seven months thereafter that notices being No. M-658/ 985-92 dated November 14, 1991, under Section 148 of the Act addressed to M/s. Mahendra Singh Sehgal and seven others mentioning, inter alia, the names and addresses of all the eight prize winners of the lottery were served on the appellants. The notice was issued by respondent No. 1, Assistant Commissioner of Income-tax, Circle-1, Imphal, requiring 'M/s. Mahendra Singh Sehgal and seven others' to file return of income for the assessment year 1984-85 within 30 days from the date of service of notice without amongst others indicating the status of the aforementioned entity.

10. In their reply dated January 7, 1992, the appellants while questioning the notice to be illegal as well as defective contended that no entity like 'M/s. Mahendra Singh Sehgal and seven others' was in existence and requested the authority concerned to withdraw the notice and close the proceeding. They, however, requested respondent No. 1 to disclose the reasons for initiating the said proceeding and the income, which the authority believed had escaped assessment.

11. More than a year thereafter, another notice dated November 5, 1993, again addressed to M/s. Mahendra Singh Sehgal and seven others, under Section 142(1) of the Act was issued by respondent No. 1 for the assessment year 1984-85 requiring the addressee to file the return of income and produce books of account.

12. In the meantime, respondent No. 1 had filed an appeal against the common judgment and order dated March 27, 1991, passed by the Commissioner of Income-tax (Appeals) in the appeal filed by Sardar Harvinder Singh Sehgal (appellants in W. A. No. 442 of 1997). The appeal which was registered I. T. A. No. 511/Gauhati of 1991 was dismissed being barred by limitation as well as on the merits by the learned Tribunal vide its judgment and order dated March 3, 2000. It was, inter alia, held that the assessment had already been made on substantive basis and so the Commissioner of Income-tax (Appeals) was right in setting aside the order of the Assessing Officer assessing the income from the lottery on protective basis.

13. The appellants being aggrieved by the notice dated November 14, 1991, and the insistence on the part of the Revenue to pursue the proceeding on that basis, in spite of the above factual background, therefore, approached this court with the aforementioned civil rules assailing the said notice. This court by its order dated December 23, 1993, passed in the writ petitions, while issuing rule, stayed the operation of the notice. By the impugned judgment and order, however, the writ petitions have been dismissed by imposing a cost of Rs. 10,000 on each of the appellants.

14. The Revenue's pleaded case is that eight persons, including the appellants by jointly purchasing the lottery ticket for earning the prize money through a joint venture had formed an association of persons and they having become joint owners of the winning ticket and the prize money, their income from lottery is liable to be assessed as that of such association of persons. It asserted that the joint owners being eight in number, they had to be described as M/s. Mahendra Singh Sehgal and seven others with all names mentioned separately in the impugned notice. The Revenue contended that the purpose of the notice issued under Section 148 of the Act was for the assessment of the escaped income of the association of persons formed with the said eight persons. According to it, the Assessing Officer duly recorded the reasons for the initiation of proceedings under Section 147(a) or 147(b) of the Act which met the approval of the Commissioner of Income-tax, Deputy Commissioner of Income-tax.

15. Emphatically assailing the impugned judgment and order, Mr. Joshi has argued that there being no material, whatsoever, to suggest that there was any volition among the co-owners of the lottery ticket to form an association of persons (for short hereafter referred to as 'the AOP'), and in the absence of any management on their part to produce any income therefrom, the purchasers of the lottery ticket could not, in any view of the matter, be said to have formed an association of persons as winning an income from the lottery was a mere chance. He maintained that the fact that the co-owners had decided to claim individual shares of the prize money and that the payment thereof had been made by the Government following deduction of the commission and income-tax at source, clearly suggest that the owners of the winning lottery ticket did not at any point of time form an association of persons. Alternatively learned senior counsel urged that assuming that the joint purchasers at the time of purchasing the lottery ticket had formed an association of persons, on their withdrawal therefrom after the ticket had won the prize for which they collected their prize money individually, the association of persons had ceased to exist and thus their income could not be assessed as that of the association of persons. Apart from the fact that no such association of persons had ever existed, Mr. Joshi argued that there being no act of management or activity on the part of the co-owners in generating the income from the lottery ticket, they did not form the association of persons and that the impugned notice apart from being in contravention of Sections 147 and 148 of the Act is even otherwise misconceived and void ab initio.

16. Mr. Joshi next argued that the protective assessment of income from lottery having become a substantive assessment in the hands of the appellants by virtue of the common judgment and order dated March 27, 1997, passed by the Commissioner of Income-tax (Appeals) and the judgment and order dated March 3, 2000, passed by the Tribunal in Appeal No. 511 (Gauhati) of 1991, the same had become final in the hands of the appellants/assessee and thus could not be reassessed in the hands of a new entity as the same would then be hit by the bar of double taxation. He also pleaded the bar of limitation under Section 154(7) of the Act prescribed for rectification of mistakes in the assessment (assessment being made on March 31, 1987). According to him, therefore, the assessment having become final, no rectification, or reassessment thereof, on the ground of escaped assessment under Section 154/147/148, respectively, was permissible in law.

17. Learned senior counsel next turned to the notice and urged that the same was on the face of the records, in contravention of Section 147(a) and (b) and on that ground alone is liable to be declared illegal, null and void. According to him, each of the appellants/assessees having filed his/her return of income on May 15, 1984, under Section 139 declaring their income from the lottery and they having fully and truly disclosed all material facts necessary for assessment of such income, there was no reason for the Assessing Officer to believe that the income from lottery had escaped assessment by reason of omission or failure on the part of the appellants to make a return under Section 139 of the Act. The Assessing Officer at that stage could have assessed the income as a substantive measure either in the hands of the appellants or any other entity, to which according to him the income belonged. The assessment of the income in the hands of the appellants having eventually been accepted as substantive assessment following the judgment and order dated March 27, 1991, and March 3, 2000, of the Commissioner of Income-tax (Appeals) and the Tribunal, respectively, there was no further scope to contend that the income from lottery had escaped assessment. The Assessing Officer, having completed the assessment of income from the lottery in the hands of the appellants on a consideration of all the available materials, it was not permissible to reopen the assessment on the purported ground of escaped assessment in the absence of any new information or material to that effect, Mr. Joshi contended. There being no such information or material at the disposal of the Income-tax Officer, the condition precedent for exercise of power under Section 147 was conspicuously absent and as by the impugned notice the reassessment of the same income was sought to be made afresh in the hands of a new entity, the same in the attending factual background was ex facie illegal and without jurisdiction and is liable to be adjudged as such.

18. Mounting his attack on the notice, learned senior counsel contended further that no reason for the notice having been recorded before the same was issued to the appellants, the impugned action was in patent violation of Section 148(2) of the Act rendering the impugned notice, per se, null and void. According to him, the notice is also vague and unintelligible, as the same does not disclose the status of the assessee or the particulars of the income sought to be assessed or reassessed. Drawing the attention of the court to the definition of the word 'assessee' as provided in Section 2(31) of the Act, Mr. Joshi has emphatically argued that in the absence of the above particulars, the notice is non est in law. According to him, learned single judge went wrong in overlooking these vital defects in the notice by resorting to Section 292B of the Act. He asserted that as substantial questions of law had been raised in the writ proceedings, the learned single judge ought not to have saddled the appellants with costs on the ground that the writ petitions had been filed on frivolous pleas.

19. In support of his contention, Mr. Joshi has placed reliance on a host of decisions in Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) ; ITO v. Lakhmani Mewal Das : [1976]103ITR437(SC) ; Maharaj Kumar Kamal Singh v. CIT : [1959]35ITR1(SC) ; Indian and Eastern Newspaper Society v. CIT : [1979]119ITR996(SC) ; Y. Narayana Chetty v. ITO : [1959]35ITR388(SC) ; CIT v. Kurban Hussain Ibrahimji Mithiborwala : [1971]82ITR821(SC) ; Tansukhrai Bodulal v. ITO ; CIT v. Indira Balkrishna : [1960]39ITR546(SC) ; G. Murugesan and Brothers v. CIT : [1973]88ITR432(SC) and CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory : [1966]60ITR95(SC) .

20. Dr. Saraf, on the other hand, has contended that the appellants along with four others having jointly purchased the lottery ticket had thus made investment for earning an income from a joint business venture and thus formed an association of persons for which the income from the lottery earned by them was liable to be assessed in the hands of the said association. He argued that the appellants/assessees along with others having admittedly purchased the lottery ticket jointly, receipt of individual shares of the prize amount would not by itself imply that the association of persons had ceased to exist and therefore the income therein is liable to be assessed in its hands. According to him, in the present factual premises, the association of persons was the right person to be assessed and the impugned exercise being not one of reassessment of an income but an assessment of the income of the association of persons the plea of double taxation was wholly misconceived. He maintained that even if an assessment is complete in the hands of the individuals comprising the association of persons the income can again be assessed in the hands of the association following which adjustment, if any, of tax payable by the association can always be made taking into account the tax already paid by the individual members. According to him, the duty to assess the right person is a solemn obligation of the authorities under the Act and in the facts and circumstances of the case, the impugned notice is legal and valid in all respects having been issued to achieve the said object.

21. Dr. Saraf argued, that the assessment of the income in the hands of the association of persons, in the facts of the present case does not amount to reassessment thereof, vis-a-vis, the association of persons and as the impugned notice does not involve opening of the assessment of the appellants, the contentions based on Section 147/148 of the Act are not relevant at all. Learned senior counsel referred to the reply of the appellants to the impugned notice and contended that it is apparent from the stand taken that they were aware that the association of persons named was sought to be assessed and therefore, the plea with regard to the vagueness of the notice is simply an afterthought. According to him, Section 147 being only a machinery provision and not a charging provision, minor omissions in the notice would not render it invalid. He dismissed the contention based on the failure on the part of the Assessing Officer to convey the reasons for invoking Section 147 of the Act asserting that no such requirement was prescribed either in Section 148 or in Section 139(2) thereof. He also questioned the maintainability of the writ petition contending the same to be pre-mature as no returns in response to the impugned notice had been submitted. Dr. Saraf, placed reliance on ITO v. Bachu Lal Kapoor : [1966]60ITR74(SC) ; N. V. Shanmugham and Co. v. CIT : [1971]81ITR310(SC) ; CIT v. A. U. Chandrasekharan : [1998]229ITR406(Mad) ; CIT v. George : [2000]241ITR536(Mad) ; Hyderabad Allwyn Metal Works Ltd. v. ITO : [1962]46ITR988(AP) ; CIT v. Sun Engineering Works Pvt. Ltd. : [1992]198ITR297(SC) ; S. Narayanappa v. CIT : [1967]63ITR219(SC) ; Ambalal Jivabhai Patel v. ITO : [1964]54ITR308(Guj) ; GKN Drivershafts (India) Ltd. v. ITO [2003] 259 ITR 19 .

22. Two broad issues fall for adjudication, namely, (1) Whether the appellants and four others by jointly purchasing the winning lottery ticket had formed an association of persons and the lottery prize won is an income liable to be assessed in the hands of such association (2) Whether the impugned notice is invalid and non est in law for being in contravention of Sections 147 and 148 of the Act ?

Issue No. 1

23. Before we proceed to answer the questions so posed, it is worthwhile to recall the admitted facts. The appellants and four others had jointly purchased a lottery ticket, which won the first prize of Rs. 1 crore. The purchasers claimed individual shares of the available prize money from the Government, which was paid to them after deducting the income-tax at source. The certificate of such deduction was also issued to the purchasers. The tax was credited to the corresponding income-tax head as well and a certificate to the said effect was also issued. The appellants in their individual income-tax returns disclosed their income from the lottery. The Assessing Officer duly assessed the said income. Though initially the assessment was by way of protective measure, the same was treated to be a substantive assessment in terms of the judgment and order dated March 27, 1991, passed by the Commissioner of Income-tax (Appeals) in appeals filed by the appellants. The position was confirmed by the judgment and order dated March 3, 2000, passed by the Tribunal in I. T. A. No. 511/Gauhati of 1991 preferred by the Revenue against the judgment and order dated March 27, 1991. It was thereafter, that the impugned notice dated November 14, 1991, was issued. The stand of the Revenue in essence is that the appellants and others by purchasing the lottery ticket jointly had formed an association of persons and though assessment of their income from lottery had been made as individual assessees, it was permissible to assess the joint income as one in the hands of the said association of persons, which in the facts and circumstances of the case was the right person to be assessed.

24. It would be convenient to survey the law before adverting to the facts. The apex court in G. Murugesan and Brothers : [1973]88ITR432(SC) , while defining 'association of persons' held that such an association can be formed only when two or more individuals voluntarily join together for a certain purpose and that volition on the part of the members of the association is an essential ingredient. It was ruled that it was always open to the persons to withdraw from it and no particular form need be followed for such withdrawal. In that case, the appellants for the assessment years 1957-58 and 1958-59 had submitted their returns in the status of association of persons but claimed to be assessed as individuals and for the years 1959-60 to 1962-63 stating that they were no more in union as an association of persons. As the appellants claimed that they had been realising their dividends from the shares involved as individuals, a stand, which had remained unrebutted, the apex court upheld their contention.

25. The expression 'association of persons' came to be dealt with by the apex court in CIT v. Indira Balkrishna : [1960]39ITR546(SC) as well. It held, referring to earlier decisions that 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 procure income, profits or gains. It, however, held that there was no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an association of persons and it would depend on the particular facts and circumstances of each case as to whether such a conclusion can be drawn.

26. In N. V. Shamugham and Co. v. CIT : [1971]81ITR310(SC) , three receivers had been appointed by the court to conduct the business of a firm subject to the condition that the profit, if any, would be treated as an asset of the firm to be divided between the partners as set out in the partnership deed. The question that arose was whether the profit could be assessed in the hands of the receivers in the status of an association of persons. The apex court held that as the business was carried on by the receivers on behalf of the partners with their consent and that they acted on their behalf who were the owners of the business, the profits were earned on their behalf and that existence of a specific or definite interest in the profits did not make the earnings any less by an association of persons.

27. The Madras High Court in CIT v. George : [2000]241ITR536(Mad) , reiterated its view expressed in CIT v. A. U. Chandrasekharan : [1998]229ITR406(Mad) , that when several persons enter into a written agreement for purchasing of lottery tickets from contributions, the winnings have to be equally distributed and the prize money is assessable in the status of association of persons as the two conditions, namely, (a) a joint venture, and (b) object to earn income, were satisfied.

28. The word 'association' as defined in the Black's Law Dictionary is :

'Association : The act of a number of persons in uniting together for some special purpose or business. It is a term of vague meaning used to indicate a collection or organisation of persons who have joined together for a certain or common object. Also, the persons so joining ; the state of being associated.'

'Associate' in the same dictionary signifies confederacy or union for a particular purpose, good or ill.

29. An association of persons, therefore, essentially pre-supposes a union of the members thereof for a common purpose. There has to be a community of interest. For the purpose of the Act such a combination must be one, the object of which is to secure income, profit or gain. Not only therefore, the persons concerned join in a common purpose or action they are required to put in joint and concerted efforts to generate income, profit or gain in the enterprise undertaken. Jointness in effort and endeavour is one of the essential traits, which distinguish an association of persons from an individual. Income from lottery is taxable but when such income is liable to be taxed as one in the hands of an association of persons, the requirement of a binding, common purpose or action with the object of producing income, profits and gains is indispensable. The apex court in CIT v. Indira Balkrishna : [1960]39ITR546(SC) , while recounting the above essentials of an association of persons had added a rider observing that there is no formula of universal application as to what facts and of what nature are necessary to conclude in favour of the existence of an association of persons. According to it, it would depend on the particular facts and circumstance of each case. In the case in hand, admittedly, there is no written agreement amongst the purchasers to form an association of persons to purchase the lottery ticket for winning a prize. No tangible evidence is available to establish any such intention. It was a solitary instance where it is not unlikely that the purchasers had casually joined together to purchase a lottery ticket. Their conduct after the results also is significant. Thus, only because the lottery ticket was purchased jointly and the same had won a prize, to a draw decisive conclusion founded thereon that the purchasers had formed an association of persons would be wholly inferential. In our view therefore, it would be too sweeping a conclusion to make that only because some persons have joined together in purchasing one lottery ticket, which eventually had won a prize, they had thereby formed an association of persons.

30. The transaction involved would also matter. In a lottery, income, if any, by winning, is by chance and is not contingent on the skill or enterprise of the winner. Keeping in view the primary and essential ingredients of an association of persons outlined by the apex court in the decisions referred to above, it appears to us that for an income to be assessed in the hands of an association of persons, it must be derived from a process in which the association of persons has some control facilitating contribution of its members for earning the income, profit or gain for which it is formed. Mere purchase of a lottery ticket jointly falls short of the considerations which ought to weigh in concluding that the purchasers had formed an association of persons.

31. In the case in hand, there is no evidence that the appellants and four others had voluntarily joined together to purchase the lottery ticket with the objective of earning an income as an association of persons. Logically, keeping in view, the nature of the venture, there was no scope for them to control/monitor, the process of lottery to earn any income. In other words, after the purchase of the lottery ticket they had no control over the transaction and the income from the winning ticket was per chance.

32. Further they made their intentions clear immediately after the result and demanded payment of their individual shares which was accepted and payments were made by deducting the income-tax at source from their respective shares of prize money. The deductions were credited to the related head and certificates to the above effect were also issued to them. There is no material to indicate either that thereafter they continued to remain joint in dealing with the prize money. Taking into account, the above facts in their entirety, we cannot persuade ourselves to hold that the appellants and four others in purchasing the lottery ticket had formed an association of persons and the prize money was its income.

33. Admittedly, the appellants had submitted individual returns for the assessment year 1984-85 in which they had disclosed the receipt of their shares of the prize money under the head 'Income from other sources'. The Assessing Officer had made the assessment on March 31, 1987. The appellants as individual assessees had also claimed credit on account of the deduction of the income-tax at source. The assessment of their individual income from the lottery though initially was on protective basis was eventually construed as substantive assessment in view of the judgment and order dated March 17, 1991, passed by the Commissioner of Income-tax (Appeals) and the order dated March 3, 2000, passed by the Tribunal in I. T. A. No. 511/Gauhati of 1991. No further appeal being preferred by the Revenue, the substantive assessment of the individual income of the appellants had become final and binding on the parties. The Revenue has not controverted the assertion of me appellants that full and true particulars of their income had been disclosed in the assessment proceedings and that the assessment had been completed on the basis thereof. It is not the stand of the Revenue that the assessment of the appellants was a case of escaped assessment. There is no material to conclude that the purchasers even after the receipt of their shares of the prize had continued as an association of persons thereafter or that the move to receive their shares of the prize money was only to camouflage the income to avoid assessment thereof as that of the association of persons.

34. Though Dr. Saraf may be right in contending that it is the solemn duty of the taxing authorities to assess the right person and that assessment of income in the hands of individuals may not be a bar for an assessment of the same income in the hands of a different entity, such an exercise can be permitted only in accordance with the procedure prescribed by the Act. There has to be cogent and convincing materials for such an exercise sufficient to generate the satisfaction or belief that the earlier assessment had been made in the hands of a wrong person(s). It would not depend on the mere wish or fancy of the assessing authority.

35. In CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory : [1966]60ITR95(SC) , the apex court, with reference to the option available to an Income-tax Officer under Section 3 of the Indian Income-tax Act, 1922, held that it was not open to the Assessing Officer to assess one income twice, once in the hands of the individuals and again in the hands of an unregistered firm. There the Income-tax Officer had earlier assessed the partners on individual basis and subsequently sought to assess them in the status of an unregistered firm.

36. In ITO v. Bachu Lal Kapoor : [1966]60ITR74(SC) , a notice under Section 34 of the Indian Income-tax Act, 1922, issued to the karta of a Hindu undivided family was sought to be resisted, inter alia, on the ground that the income for a particular assessment year had already been assessed in the hands of the members and could not be assessed as that of the family which had ceased to exist. The stand of the Revenue was that the members of the family were living together and the business was run by the karta of the Hindu undivided family. The apex court held that if the existence of the joint family was kept back from the knowledge of the Income-tax Officer, it was a clear case of the family's income escaping assessment and that the Income-tax Officer had the jurisdiction to initiate the proceeding under Section 34 of the Act. It further held that after the assessment proceedings, appropriate adjustments would have to be made if necessary in respect of the tax realised by the Revenue on that part of the income of the family assessed in the hands of the individuals and doing so would not amount to reopening of the earlier orders of assessment but would signify determination of the correct figure of tax payable by the Hindu undivided family. The basic premises in which the decision proceeds is distinguishable from the present facts, inasmuch as, it is not the case of the Revenue that the existence of the association of persons comprised of the appellants and four others was withheld from it resulting in a case of escaped assessment.

37. The decision in ITO v. Ch. Atchaiah : [1996]218ITR239(SC) , was relied upon to underline the principle that assessment of the members of an association of persons individually is no bar for assessment of the association of persons. Though keeping in view, the difference in the scheme of the Act and the Indian Income-tax Act, 1922, on the aspect of option, there can be no dispute on the legal principle enunciated, having held that the appellants and four others had not formed the association of persons, this decision is of no avail to the Revenue.

38. Though on principle, there may not be any bar for assessing the income once assessed in the hands of the individuals, again as of the association of persons, the facts of the present case demonstrate that at all relevant times, full and true materials were available with the Assessing Officer to effect a correct assessment under the Act. The assessment on protective basis of the income of the appellants as individuals was in terms of the judgment and order of the Commissioner of Income-tax (Appeals) and the Tribunal, construed as substantive assessment. In that view of the matter, in the above conspectus of facts and the authorities relied upon by the parties, we are of the opinion that the income of the joint purchasers of the winning lottery ticket cannot be assessed again in the status of association of persons said to be comprised of them.

Issue No. 2 :

39. The impugned notice had been issued under Section 148 of the Act. It is addressed to M/s. Mahendra Singh Sehgal and seven others and the appellants as well as four other purchasers have been shown to be under the care of the said entity. A reading thereof indicates that the income of the addressee chargeable to tax for the assessment year 1984-85 had escaped assessment within the meaning of Section 147 of the Act. Therefore, assessment of the income of the addressee for the said assessment year was proposed to be made and the return was required to be filed in connection therewith. Compared to the form of such notice to which we were referred in the course of the arguments by Dr. Joshi, we find that the impugned notice is substantially similar. However, the notice does not indicate the status of the addressee and the details of the income for the concerned assessment year which had escaped assessment. The notice though not wholly unintelligible cannot be said to be clear and informative so as to enable the assessee to respond thereto fully and effectively. The purpose of the notice being to acquaint the assessee with the requirements thereof without any ambiguity or uncertainty, in our view, the impugned notice lacks in material particulars compelling the addressee to act on inferences and suppositions to its prejudice.

40. Leaving it at that we now turn to a more important aspect. The impugned notice clearly indicates that thereby a proceeding had been initiated under Section 147/148 of the Act for making an assessment of the income of the addressee which the Revenue believes is an association of persons for the escaped assessment of its income for the assessment year 1984-85. As much has been argued on the scope of Section 147/148, it would be essential to set out the said provisions of the Act for ready reference.

'147. Income escaping assessment.--If (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year).

148. Issue of notice where income has escaped assessment.--(1) Before making the assessment, reassessment or recomputation under Section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 139 ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.

(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.'

41. Under Section 139(2) referred to in Section 148, if in the Income-tax Officer's opinion, a person is assessable under the Act, the Income-tax Officer may, before the end of the relevant assessment year, issue a notice to him and serve the same upon him requiring him to furnish within 30 days from the date of service of the notice, a return of his income or income of such other person in the prescribed manner setting forth such other particulars as may be prescribed.

42. A bare reading of Section 147 discloses that it deals with assessment of income escaping assessment. Under Clause (a) thereof to initiate the proceeding, the Income-tax Officer must have reason to believe that by reason of the omission or failure on the part of the assessee to make a return under Section 139 for any assessment year or to disclose fully and truly all material facts necessary for such assessment, income chargeable to tax has escaped assessment. Under Clause (b), the Income-tax Officer must have reason to believe in consequence of information in his possession that notwithstanding the absence of any omission or failure as contemplated in Clause (a), income chargeable to tax has escaped assessment for any assessment year. The assessment or reassessment of the income, etc., as comprehended in Section 147 has to be made subject to the provisions of Sections 148 to 153.

43. Section 148 mandates that before making the assessment, reassessment, etc., under Section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Section 139(2). Section 148(2) requires that the Income-tax Officer should record his reasons before issuing a notice under the said section.

44. From the language used in the above provisions of the Act which is plain and unmistakable, it is more than apparent that a proceeding under Section 147 and/or 148 cannot be initiated unless the Income-tax Officer has reason to believe that because of the eventualities enumerated in Clause (a) and/or (b) income chargeable to tax has escaped assessment and the reasons in support of such belief have to be recorded by him before issuing notice under Section 148. The above requirements are mandatory in nature and any departure therefrom would be at the pain of invalidation of the proceeding.

45. The edict of Section 139(2) also makes it incumbent on the Income-tax Officer to issue a notice to the assessee in the prescribed form requiring him to furnish a return of his income and other particulars as may be prescribed. This in our view makes it incumbent to ensure that the notice is clear and unequivocal so as to enable the assessee to furnish all relevant particulars with regard to the income sought to be assessed.

46. The apex court in Calcutta Discount Co. Ltd. : [1961]41ITR191(SC) had an occasion to interpret the expression 'reason to believe' used in Section 34(1)(a) of the 1922 Act (pari materia with Section 147(a) of the Act). It held thus (p. 210) :

'The expression 'reason to believe' postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer ; the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief ; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information.'

47. In Maharaj Kumar Kamal Singh : [1959]35ITR1(SC) , which was a case under Section 34(1)(b) of the Act, it was held that the Assessing Officer must have information coming to his notice subsequent to the original assessment and that such information must lead to a bona fide belief that the income chargeable to tax had escaped assessment.

48. That the reason for reopening an assessment must be in good faith and that mere change of opinion cannot be a ground therefor was underlined by the apex court in ITO v. Lakhmani Mewal Das : [1976]103ITR437(SC) . The apex court in Indian and Eastern Newspaper Society : [1979]119ITR996(SC) , held that an error in assessment discovered on a reconsideration of the same material does not confer jurisdiction on the Assessing Officer to effect reassessment.

49. It was held by the apex court in Y. Narayana Chetty : [1959]35ITR388(SC) , that a notice under Section 34 of the 1922 Act was not a mere procedural requirement and the service of the prescribed notice on the assessee is a condition precedent to the validity of any such reassessment. The view was reiterated by a Full Bench of this court in Tansukhrai Bodulal , and by the apex court in CIT v. Kurban Hussain Ibrahimji Mithiborwala : [1971]82ITR821(SC) .

50. Disclosure in the notice under Section 34 of the 1922 Act of particulars of escaped assessment was held to be not necessary by the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works : [1962]46ITR988(AP) relied upon by learned senior counsel for the Revenue. While reiterating its view in Calcutta Discount Co. : [1961]41ITR191(SC) , the apex court in S. Narayanappa : [1967]63ITR219(SC) , however, held that reasons for initiation of the proceedings under Section 34 need not be communicated. It was held in CIT v. Sun Engineering Works Pvt. Ltd. : [1992]198ITR297(SC) , that Section 147 of the Act being only a machinery provision an interpretation to make it workable has to be adopted.

51. The preponderant judicial opinion as can be gleaned from the authorities cited at the bar is that the Income-tax Officer for the purpose of initiating a proceeding under Section 147/148 must have reason to believe that the income sought to be assessed had escaped assessment and the reasons therefor have to be recorded. The reasons have to be cogent, convincing and existing and should not be unreal or imaginary. The belief has to be bona fide and not a pretence. The notice under Section 147/148 has to be in compliance with the requirements prescribed thereby to be valid which is an essential pre-condition for the validity of the proceeding. It is on a compliance with the above requirements that an Income-tax Officer assumes jurisdiction to initiate a proceeding under Section 147/148.

52. We have examined the records placed before us by learned counsel for the Revenue. It appears therefrom that the Assessing Officer had proceeded on the basis that the appellants and four others had comprised an association of persons and had in that capacity claimed to have received the prize in the lottery and as neither the association of persons had submitted its return nor the department had issued any notice under Section 139(2)/148, the income which was chargeable in the hands of the association of persons had escaped assessment for the assessment year 1984-85. The proposal for initiating action under Section 147/148 was approved by the higher authorities without recording any reasons, whatsoever.

53. A bare reading of the orders to the above effect discloses that neither the Assessing Officer nor the approving authority had any material to come to the conclusion that the purchasers of the lottery ticket in fact had formed an association of persons and had claimed to have received the prize in the said capacity. Not only are the records bereft of any evidence in support of such a supposition, on the contrary, the appellants in their returns had disclosed their individual income from the lottery and the same was assessed in the said capacity. At no point of time earlier during the proceeding? relating to such assessment did the Revenue take the stand that the purchasers had formed an association of persons. In view of the state of the materials in the official records, we are, therefore, constrained to hold that there is no material worth the name to entertain any reason to believe that the income from the lottery was that of the association of persons and that it had escaped assessment necessitating initiation of a proceeding under Section 147/148. No reason as required under Section 148(2) of the Act, in support of the impugned action is also available on record. The decision to initiate a proceeding under Section 147/148 of the Act and the impugned notice therefore cannot be sustained on the touchstone of the mandates of the said provisions of the Act. According to us, the impugned decision is vitiated by non-application of mind. It being the categorical stand of the Revenue that the proceeding under Section 147/148 had to be initiated as the income of the association of persons from the lottery has escaped assessment, the submission of Dr. Saraf that the requirements of the said provisions of the Act are not attracted in the instant case cannot be accepted. The impugned notice as a consequence is also vitiated by non-compliance of the prescriptions of Section 147/148 of the Act and does not only suffer from a mere irregularity which can be cured by resorting to Section 292B of the Act.

54. The decision of the apex court in GKN Driveshafts (India) Ltd. [2003] 259 ITR 19, does not lay down a general principle of law that an assessee, aggrieved by a notice under Section 148 of the Act can under no circumstance before submitting a return as required question the same in a writ proceeding. Having regard to the attending facts and circumstances, the plea of the Revenue that the writ petitions are pre-mature does not commend for acceptance.

55. The upshot of the above discussion, therefore, is that the purchasers of the lottery ticket did not form an association of persons and the income from lottery was not liable to be assessed in the hands of such an association. The initiation of the proceeding under Section 147/148 as well as the impugned notice is thus illegal, null and void as the same are in contravention of the mandatory provisions of the Act.

56. We have examined the impugned judgment and order and with all respect cannot record our agreement therewith in view of the findings scripted hereinabove. In the result the appeals are allowed. The impugned judgment and order is set aside. The impugned notice dated November 14, 1991, is hereby quashed. However, there would be no order as to costs.


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