J. N. SHARMA, J. :
All the writ petitions raise common questions of law and are based on the same factual matrix and as such as agreed to are taken up for hearing together and this judgment shall cover all of them.
2. The four petitioners, residents of Imphal and carrying on business at Imphal and belonging to the same family, along with the four others, residents of Calcutta, claimed to have purchased a lottery ticket worth Rs. 5 of the Government of Nagaland. It is claimed that they were the joint purchasers of the ticket and were entitled to the prize money equally. The draw was held on 31st October, 1983, and the ticket won the first prize of rupees one crore. The four other persons are : (i) Md. Ayub, (ii) Md. Anwar, (iii) Md. Elyas and (iv) Md. Abhas, all of 4, Achambit Show Road, Calcutta-22.
Claim was made for the share of each and accordingly it was paid by deducting tax at the source from individual claims and the necessary certificate of deduction was given in 1984.
The four petitioners filed IT returns wherein this income was shown as winnings from lottery. But the AO treated it as a 'protective measure' only. The petitioners claim that they are ignorant of what has happened to the other four persons in Calcutta.
Appeals were filed before the CIT(A) challenging the aforesaid order. The contention with regard to the lottery money was dismissed. This is the order dt. 15th September, 1987, and annexure-III to the writ applications.
Appeals were filed before the Tribunal, Gauhati Bench. On 18th January, 1990, the Tribunal set aside the order dt. 15th September, 1987, and sent back the matters for fresh disposal after bringing the basic facts and other materials on record. This is annexure-IV to the writ petitions.
On remand by order dt. 27th March, 1991, the CIT(A) held the protective assessments made in the four cases to be substantive assessments and allowed the appeals. This is annexure-IV to the writ applications.
Thereafter on 14th November, 1991, a notice under s. 148 of the IT Act (hereinafter called the 'Act') was issued to Mahender Singh Sehgal and seven others in the C/o of the persons mentioned in the notice. That notice in its entirety is quoted below to appreciate the rival contentions put forward by the parties :
'Whereas I have reason to believe that ...... your/the income of ...... income ...... chargeable to tax for the asst. yr. 1984-85 has escaped assessment within the meaning of s. 147 of the IT Act, 1961.
I, therefore, propose to assess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income ...... in respect of which you are assessable for the said assessment year.
This notice is being issued after obtaining the necessary satisfaction of the Dy. CIT, Silchar Range, Silchar'.
It is the legality and validity of this notice which is challenged in the writ applications. A prayer is made to quash/cancel this notice. On 23rd December, 1993, rule was issued and stay was granted. The admitted position is this notice was received by the four petitioners. We are not concerned with the other four persons as the petitioners feign ignorance about them.
3. Heard Shri J. P. Bhattacharjee, the learned advocate for the petitioners, and Dr. A. K. Saraf, the learned advocate for the Revenue. Affidavit-in-opposition has been filed and record has been produced. A large number of decisions have been cited at the Bar. But I have considered below only the cases which are relevant for disposal of the matter.
Broadly two submissions have been made on behalf of the petitioners -
(a) Notice is a condition precedent for initiation of proceedings for reassessment.
(b) The impugned notice under s. 148 of the IT Act is invalid in the eye of law for reasons as elaborated by learned counsel at the time of hearing.
Regarding the first contention, Dr. Saraf fairly submits that it is the correct proposition of law, but he contends in the case in hand, notice was issued, it is a valid notice and there is no infirmity in the notice. The notice as admitted was duly served. This being the position, there is no necessity to consider the first contention and it is decided in favour of the petitioners.
4. Before we proceed further let us have a look at McDowell & Co. Ltd. vs . CTO : 154ITR148(SC) . It is a decision of five judges. There, in the judgment by Misra J. (as he then was) for the four judges in paragraphs 45 and 46, it has been laid down as follows :
'Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
On this aspect, one of us, Chinnappa Reddy J., has proposed a separate and detailed opinion with which we agree'.
Chinnappa Reddy J., in his concurring judgment, in paragraphs 17 and 18, after considering a large volume of authorities has laid down the law as follows :
'We think that time has come for us to depart from the Westminster (1936) AC 1 principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is the large hidden loss to the community (as pointed out by Master Wheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers, and accountants on the one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the artful dodgers. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, Taxes are what we pay for civilised society. I like to pay taxes. With them I buy civilisation. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster (1936) AC 1 and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels Ltd., In re (1977) 47 Comp Cas 597 (Guj) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation as was done in W. T. Ramsay Ltd. vs. IRC (1982) AC 300 (HL), IRC vs. Burmah Oil Co. Ltd. (1982) STC 30, and Furniss vs. Dawson (1984) 1 All ER 530 (HL), to expose the devices for what they really are and to refuse to give judicial benediction'.
5. This matter must be looked at from another angle. The rule of construction does not permit the taxpayer to take the benefit of an illegality. An interpretation must be avoided which will lead to evasion taking shelter under the umbrella of the right to avoid tax by proper planning. An attempt to prevent fraud by a taxpayer should not be ordinarily quashed by the Court as it is not the function/business of the Court to protect fraud and fraudulent transactions. It cannot be accepted as gospel truth that all is fair in love, war, also tax evasion. This as a principle cannot be acclaimed in the field of love and tax evasion. I leave the war from any comments. The machinery provisions in a taxing Act and the provisions enacted to suppress tax evasion are to be construed liberally to effectuate their object. Secs. 147 and 148 of the Act are machinery provisions and must receive a construction which will effectuate the purpose of the Act. Any and every omission should not be frowned upon and must not be utilised as a tool to quash the notice.
6. The story of a lottery ticket worth Rs. 5 being purchased by eight persons jointly being residents of two different places and there being no relationship between the four persons at Imphal and the other four in Calcutta is hard to digest and no reasonable person can accept the genuineness of such a claim. Be that as it may, for the decision of this case, we are not so much concerned with it.
7. Dr. Saraf, learned counsel, argues that the writ applications are to be thrown out on the ground of existence of adequate alternative remedy. He submits that the Act provides adequate, alternative, efficacious remedy and without resorting to them the petitioners cannot seek remedy in the writ forum. On the other hand, the learned advocate for the petitioners submits that when the action is without jurisdiction, the petitioners need not wait or pursue the long-drawn dilatory remedies. For this case, I am not deciding it as I have heard the matter at length and so I shall decide it on the merits.
8. The first ground urged by Shri Bhattacharjee is that in the case in hand the assessment was made on 31st March, 1987, and a notice was issued on 14th November, 1991, it is beyond four years and s. 151(2) of the IT Act requires that no notice shall be issued under s. 148 after the expiry of four years from the end of the relevant assessment year (in the case in hand it is 1984-85) unless the CIT is satisfied on the reasons recorded by the ITO that it is a fit case for the issue of such notice. Shri Bhattacharjee submits that the impugned notice itself will show that it was issued with the satisfaction of the Dy. CIT and not the CIT. There is no specific challenge on this score in the writ applications, so the Revenue did not have the opportunity to meet this point in their affidavit-in-opposition. The matter was argued only at the time of hearing. But on scrutiny it is found that this point has no merit. Under s. 116(d) of the Act, the Dy. CIT is an IT authority (the Act as it stood at the relevant time). Under s. 119(2)(a) the Board may also issue directions with regard to assessment, etc., by way of relaxation of any of the provisions of the sections mentioned therein. Sec. 148 is specifically mentioned there. Further, s. 151 itself has undergone a change w.e.f. 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and it is quoted below :
'151. (1) In a case where an assessment under sub-s. (3) of s. 143 or s. 147 has been made for the relevant assessment year, no notice shall be issued under s. 148 by an AO, who is below the rank of Asstt. CIT, unless the Dy. CIT is satisfied on the reasons recorded by such AO that it is a fit case for the issue of such notice :
Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief CIT or CIT is satisfied, on the reasons recorded by the AO aforesaid, that it is a fit case for the issue of such notice.
(2) In a case other than a case falling under sub-s. (1), no notice shall be issued under s. 148 by an AO, who is below the rank of Dy. CIT, after the expiry of four years from the end of the relevant assessment year, unless the Dy. CIT is satisfied, on the reasons recorded by such AO, that it is a fit case for the issue of such notice'.
This is not a case where an assessment of persons sought to be made now, has been made earlier under s. 143(3) or s. 147. The Revenue now wants these persons to be taxed as 'association of persons'. So the case is covered by sub-s. (2) and not sub-s. (1) of s. 151 and as such the sanction given by the Dy. CIT is valid.
9. It us urged by Shri Bhattacharjee that non-disclosure of the reasons recorded and non-communication of the same will invalidate the initiation of the proceedings. Under s. 148(2), the AO is bound to record his reasons in every case before issuing notice under sub-s. (1) of s. 148, and it is on the basis of the reasons recorded that the prior sanction of the higher authority must be obtained under s. 151. In the reasons to be recorded, the authority should at least state the basic facts which according to him constitute the concealment. If the reasons are mechanically recorded or are extraneous to the statutory conditions for taking action or are factually incorrect or misguiding, the notice and all the subsequent action would be vitiated. But the question is whether such reasons are to be communicated to the assessee Whether the reasons are to be disclosed at the time of filing the affidavit-in-opposition Dr. Saraf joins issue with the learned advocate for the petitioners that there is no such statutory requirement; he of course submits that the reasons must be disclosed to the Court and that he has done by producing the record. In support of the rival contention, the following cases are cited at the Bar :
S. Narayanappa vs . CIT : 63ITR219(SC) That was a case under the Indian IT Act, 1922. The Supreme Court pointed out as follows :
'But the legal position is that if there are in fact some reasonable grounds for the ITO to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the ITO to issue the notice under s. 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the ITO to act is not a justiciable issue. It is of course open for the assessee to contend that the ITO did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression reason to believe in s. 34 of the IT Act does not mean a purely subjective satisfaction on the part of the ITO. The belief must be held in good faith : it cannot be merely a pretence. To put it differently, it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the ITO in starting proceedings under s. 34 of the Act is open to challenge in a Court of law [see Calcutta Discount Co. Ltd. vs . ITO : 41ITR191(SC) .
It was also contended for the appellant that the ITO should have communicated to him the reasons which led him to initiate the proceedings under s. 34 of the Act. It was stated that a request to this effect was made by the appellant to the ITO, but the ITO declined to disclose the reasons. In our opinion, the argument of the appellant on this point is misconceived. The proceedings for assessment or reassessment under s. 34(1)(a) of the IT Act start with the issue of a notice and it is only after the service of the notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceeding for recording the reasons of the ITO and for obtaining the sanction of the CIT are administrative in character and are not quasi-judicial. The scheme of s. 34 of the Act is that, if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under sub-s. (2) of s. 22. But before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under s. 34 and obtain the sanction of the CIT who must be satisfied that the action under s. 34 was justified. There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the CIT to accord sanction to proceed under s. 34 must also be communicated to the assessee. In Presidency Talkies Ltd. vs . First Addl. ITO : 25ITR447(Mad) the Madras High Court has expressed a similar view and we consider that view is correct. We accordingly reject the argument of the appellant on this aspect of the case'.
Jatindra Nath Sarmah vs . ITO . This is a decision of a Division Bench of our High Court wherein, relying on an earlier decision of the apex Court, this Court pointed out that it is not the necessity of law to state the reason in the notice nor is there any necessity to disclose and/or communicate it to the assessee. The learned advocate for the petitioners contended that non-disclosure will cause prejudice to the assessee as in such a case he cannot avail of the opportunity to challenge the validity of the reasons or their non-existence. As the sufficiency or adequacy of the reasons even cannot be scrutinised by the Court, this does not cause prejudice; further at the time of hearing when reasons are disclosed by production of the record, the assessee always can avail of the opportunity to address the Court on the limited ground available to him, that they have been mechanically recorded, extraneous or are factually incorrect or misguiding. When the reasons were shown to the learned advocate for the petitioner he failed to make any such submissions not to speak of substantiating the basis on which the Court can scrutinise the reasons. I have perused the reasons and I am satisfied that there are valid reasons to initiate the proceeding.
10. This matter can be considered also on the basis of the decision in STO vs . Uttareswari Rice Mills : 89ITR6(SC) , wherein the Supreme Court endorsed the previous decision of the Privy Council and earlier decisions of the Supreme Court. The Supreme Court pointed out as follows :
'The Judicial Committee, while dealing with the language of s. 34, observed :
Sec. 34 is unhappily and even ungrammatically phrased. It is expressed impersonally, and it fails to state by whom and by what procedure it is to be established that income, profits or gains have escaped assessment or have been assessed at too low a rate. There is fortunately no dispute that the person who must make that decision is the ITO, for, apart from the assessee, no one else is in a position to say whether income has been assessed or at what rate it has been assessed. The omission to prescribe expressly what the nature of the decision should be and by what procedure it must be reached is all the more surprising because in other sections of the Act the legislature has been careful to define what is necessary in these respects. This circumstance was founded on by learned counsel for the respondents, who pointed out that where some fact had to be established merely prima facie to the satisfaction of the ITO in the bona fide exercise of his discretion, this was expressed by such phraseology as 'when it appears to the ITO' or 'if the ITO has reasons to believe'. On the other hand, when the statute requires that the ITO shall make a decision, which is final so far as he is concerned, upon a matter of fact, the usual expression is 'if he is satisfied'.
It was further observed :
The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat.
In view of the criticism levelled against the wording of s. 34 of the Indian IT Act, the above section was amended by Amendment Act of 1939. Despite the amendment made in s. 34 of the Indian IT Act, the Orissa legislature, it would appear, has used phraseology in s. 12(8) of the Act similar to that of s. 34 of the Indian IT Act, 1922, as it existed before the said amendment.
The above decision of the Judicial Committee is also an authority for the proposition that it is not necessary to initiate to the assessee the nature of the alleged escapement in the notice which is issued to him under s. 34 (as it then existed) of the Indian IT Act, 1922.
In the case of K. S. Rashid & Son vs . ITO : 52ITR355(SC) , this Court expressed the view that the assessee was not entitled to a copy of the reasons which were recorded by the ITO when he issued the notice under s. 34 of the Indian IT Act, 1922. In the later case of S. Narayanappa vs . CIT : 63ITR219(SC) an argument was advanced that the ITO should have indicated to the assessee the reasons which led him to initiate the proceedings under s. 34 of the Act ...
It was also mentioned that the details of the material which led to the initiation of proceedings under s. 12(8) of the Act had been recorded in the relevant case file. The said file, it would appear from the affidavit of Shri Mohanty, was kept available for reference by the High Court at the time of hearing. No reference, it would seem, was however made to that file because the High Court did not feel the necessity of doing so'.
Further, income is said to have escaped under s. 147 when it has not been charged in the hands of the assessee in the assessment year. It is immaterial that the income was charged or included in some other assessment (see CIT vs. Ved Nath Singh (1940) 8 ITR 222, or that the failure to charge the income was entirely due to oversight or inadvertence on the part of the IT authorities [see Harischandra vs. Suraj 40 ITR 309], as the income consists of dividend deemed to be distributed by fiction of laws [see Sardar Baldev Singh vs . CIT : 40ITR605(SC) . The concept of income escaping assessment is wide enough to cover a claim of different varieties. Where income was assessed in the hands of a wrong person, proceedings may be subsequently taken under s. 147 to assess the person properly chargeable in respect of the Income-tax [Manji Dana vs . CIT : 60ITR582(SC) ITO vs . Bachu Lal : 60ITR74(SC) .
11. The Court can examine the reasons only in a limited way. If any authority is required for this proposition one can have a look at the following decision of the apex Court ITO vs . Lakhmani Mewal Das : 103ITR437(SC) wherein the Supreme Court at pages 445 and 446 pointed out as follows :
'Once there exist reasonable grounds for the ITO to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the Court to investigate. The sufficiency of the grounds which induce the ITO to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the ITO did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression reason to believe does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the ITO in starting proceedings in respect of income escaping assessment is open to challenge in a Court of law (see observations of this Court in the cases of Calcutta Discount Co. Ltd. vs . ITO : 41ITR191(SC) and S. Narayanappa vs . CIT : 63ITR219(SC) while dealing with the corresponding provisions of the Indian IT Act, 1922'.
12. The next attack on the validity of this notice are :
(i) That the notice is vague, as it cannot be ascertained who is the assessee.
(ii) In what capacity the notice was served ?
(iii) Does not indicate particular item or business or activity regarding which fresh assessment is sought to be made.
(iv) There is no AOP in existence in the eye of law.
13. Regarding notice under s. 148, no standard form is prescribed; all that the section requires is that notice must be served with particulars as may be prescribed. In Jawala Prasad Chobey vs . CIT : 3ITR295(Cal) a Division Bench of the Calcutta High Court considered this aspect of the matter construing s. 34 of the Indian IT Act, 1922, and the question which arose before the Court was as follows :
'(i) Whether, having regard to the fact that s. 34 of the Act requires particulars to be stated in the notice and that the notice is the basis of the proceedings under the said section, the ITO was competent in law to go behind the particulars as specified in the notice under s. 34 in the present case ?'
The question was answered as follows :
'It is admitted that notice under s. 34 is not to be in any prescribed or any statutory form. Therefore, so long as it brings to the attention of the person to whom it is served the matters required to be answered or dealt with or the things required to be furnished it is sufficient'.
The Court can assume jurisdiction only when the notice on the face of it is illegal. The Court must not adopt a hypertechnical approach to quash a notice because it does not conform to all the niceties expected by an assessee in such a notice. The Court is to adopt the broad and pragmatic view in construing such a notice in order to find out whether in substance and effect it is in conformity with or according to the intent and purpose of the Act. An inconsequential technicality must not be allowed to defeat justice.
14. Shri Bhattacharjee draws attention to ss. 2(7) and 2(31) of the Act. Sec. 2(7) is the definition of 'assessee', s. 2(31) is the inclusive definition of 'person'. The learned advocate relying on s. 4 of the Act submits that tax can be charged only on a person. He also draws attention to ss. 139, 142 which refer to a person and to ss. 147, 148 and 151, which refer to an assessee. His submission in short is that the notice on the face of it must disclose that it is being served on a person/assessee as understood in legal parlance. He submits that the impugned notice quoted above does not conform to this requirement and as such is invalid. A perusal of the record produced by the authority will show that the notice is being served on an 'association of persons' (hereinafter called 'AOP') and the notice was addressed to Mahender Singh Sehgal and seven others. It cannot be deemed to be a notice to individual persons, what is sought to be assessed is an AOP. The petitioners also well understood this notice to be an AOP as will be evident from paras 8, 9 and 10 of the writ applications. They are quoted below :
'8. That your petitioner categorically states and submits that no person or entity in the aforesaid name does exist. Such a person or entity was never constituted or formed for the purpose of carrying on any business or adventure jointly in order to earn any income or profit. It may be mentioned that joint purchasing of a single lottery ticket only once does not bring into existence any entity like AOP or BOI liable to tax as an entity within the meaning of the word person under the IT Act, 1961.
9. That your petitioner submits that for forming an AOP the members of the association must join together for the purpose of producing an income. An AOP can be formed only when two or more than two persons voluntarily combine together for a certain purpose. Mere purchase of a lottery ticket once jointly by a few persons does not by itself go to show that these persons acted as an AOP liable to tax under the provisions of the IT Act, 1961.
10. That your petitioner submits that the joint purchasers of the lottery ticket in the instant case did not join in common purpose with the object of producing any income, profits or gains and they had not undertaken jointly any act of business or business adventure which has helped to produce any income. Your petitioner submits that the joint purchasers of a lottery ticket do not constitute or form an AOP or any other entity so as to become liable to tax under the provisions of the IT Act, 1961'.
Further, from annexure-VII letter dt. 7th January, 1992, Harvinder Singh Sehgal stated there is no entity as Mahender Singh Sehgal and seven others. It was further stated in this letter that the authority has no reason to believe that there was an organisation as alleged at the above address or it has any income which has escaped assessment. So the contention of the learned advocate for the petitioner on this count fails. The law is that the notice does not require to indicate the business or income which has escaped assessment. But from the pleadings it appears that even the petitioners are well aware of this aspect and they knew that it was the prize money of the lottery which was the bone of contention, and it was this money which was sought to be assessed as income of an AOP.
15. The last argument of Shri Bhattacharjee that in the instant case even admitting everything, there is no AOP, it is non-existent in the eye of law and as such the notice deserves to be quashed. Shri Bhattacharjee cited a number of decisions in support of this argument/contention, but it is not necessary to consider all the cases, as they have merely reiterated the same position of law as enunciated by the Supreme Court. To clinch this contention, I shall rely on the following decisions :
(1.) B. N. Elias In re : 3ITR408(Cal) That is a decision of the Division Bench of the Calcutta High Court. This decision was later on approved by the Supreme Court. The Court pointed out as follows :
'Those words association of individuals have to be construed in their plain, ordinary meaning. There is no difficulty about the word individuals'. Associate means, according to the Oxford Dictionary, to join in common purpose, or to join in an action. Did these individuals join in a common purpose, or common action, thereby becoming an association of individuals In my view, they did. In the first place, they joined together in the purchase of this property on 9th January, 1920. In the second place, they have remained joint as owners of this property from the date of the purchase down to the present time. Thirdly, they have joined together, as the power of attorney show, for the purpose of holding this property and of using it for the purpose of earning income to the best advantage of them all. Under these circumstances, it seems to me that looking at the position and construing the words of the Act in their ordinary common meaning, the four persons named are an association of individuals. In arriving at the conclusion, I am fortified by the words of Lord Justice Cotton in the case of Smith vs. Anderson (1880) 15 Ch. 247, at page 282. There, the learned Lord Justice is discussing the meaning of the word association as used in s. 4 of the Companies Act, of 1862. The word occurs along with the words company or partnership. Cotton L.J., says at page 282 : I do not think it very material to consider how far the word association differs from company or partnership, but I think we may say that if association is intended to denote something different from a company or partnership, it must be judged by its two companions between which it stands, and it must denote something where the associates are in the nature of partners. It seems to me (not that I think it material) that it might have been intended to hit the case which we have frequently seen, of a number of persons or a number of firms joining themselves together for the purpose of carrying on a particular adventure in order to make gain by it. Then he goes on to describe instances of that ...
Mr. Banerjee invited us to take upon ourselves the difficult but not indeed impossible task of laying down a general definition of the expression association of individuals. In my opinion that is not desirable from any point of view whatever. Each case must be decided upon its own peculiar facts and circumstances. When we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers to use an archaic expression, then I think no difficulty whatever arises in the way of saying that in this particular case these four persons did constitute an association of individuals within the meaning of both s. 3 and s. 55 of the Indian IT Act, 1922'.
(2) N. V. Shanmugham & Co. vs. CIT : 81ITR310(SC) There, the Supreme Court pointed out as follows :
'In CIT vs. Indira Balkrishna : 39ITR546(SC) this Court accepted the observations of Sir Harold Derbyshire C.J., In re B. N. Elias : 3ITR408(Cal) that the word associate means to join in common purpose or to join in an action. Therefore, association of persons as used in s. 3 of the Act means an association 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 produce income, profits or gains'.
The question which arose was whether profits earned in the business should be considered as profits earned by an AOP or whether they should be considered as having been earned by individuals. The Supreme Court held that it was earned by an AOP.
(3) CIT vs. Indira Balkrishna : 39ITR546(SC) The Supreme Court pointed out as follows :
'It is enough for our purpose to refer to three decisions : In re B. N. Elias : 3ITR408(Cal) CIT vs. Laxmidas Devidas : 5ITR584(Bom) and In re Dwarakanath Harischandra Pitale : 5ITR716(Bom) In In re B. N. Elias (supra), 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 AOP 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 produce income, profits or gains. This was the view expressed by Beaumont C.J., in CIT vs. Laxmidas Devidas (supra) and also in In re Dwarakanath Harischandra Pitale (supra). In In re B. N. Elias (supra), Costello J., put the test in more forceful language. He said : It may well be that the intention of the legislature was to hit combinations 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 ...
We think that the aforesaid decisions correctly lay down the crucial test for determining what is an AOP within the meaning of s. 3 of the IT Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is 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 AOP within the meaning of s. 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.
Learned counsel for the appellant has suggested that having regard to ss. 3 and 4 of the Indian IT Act, the real test is the existence of a common source of income in which two or more persons are interested as owner or otherwise and it is immaterial whether their shares are specific and definite or whether there is any scheme of management or not. He has submitted that if the persons so interested come to an arrangement, express or tacit, by which they divide the income at a point of time before it emanates from the source, then the association ceases; otherwise it continues to be an association. We have indicated above what is the crucial test in determining an AOP within the meaning of s. 3, and we are of the view that the tests suggested by learned counsel for the appellant are neither conclusive nor determinative of the question before us'.
16. So what can be gathered from the decisions cited above is as follows :
There is no cut and dry formula to decide what is an AOP. Each case must be decided on the particular facts and background of that case. Prior to 1922, the phrase used in the 1922 Act was association of individuals but it was changed to AOP by the amending Act of that year. If the word person has a wider connotation than individuals, the amendment was made to remove any doubt as to the assessability as a unit. The words AOP are not used in any technical sense but must be construed in their plain ordinary meaning. To constitute common action and common venture it is not necessary that there should be continuous business or continuous existence.
Even AOP may come into existence for a single venture. When an income results from a joint venture or joint act, the assessment can be made in the status of AOP. In order to constitute an AOP, they must join in a common purpose or common action and the object of the association must be to produce income.
In the case in hand, 8 persons joined together in purchasing a lottery ticket worth Rs. 5 and it earned income of Rs. 1 crore (one crore). The lottery ticket was purchased by the eight persons joining together out of their own volition, they had a common purpose in view, that is the expectation of prize money and the object was to produce income. So definitely these 8 persons must be held to be an AOP in the eye of law.
17. Before we leave this point let us have a look at the case in CIT vs. O. K. Arumugham Chettiar : 224ITR391(Mad) , cited by the learned advocate for the petitioners. The first respondent in that case worked in a cycle shop on daily wage of Rs. 2. He purchased a lottery ticket of Rs. 2. He agreed to share 25 per cent. of the prize money with the second respondent as he was in need of 50 p. for the next meal. The agreement was reduced into writing. The ticket earned a prize of about Rs. 18 lakhs. The ITO assessed the respondents as an AOP. The Tribunal set aside the assessment holding that the mere agreement to share the prize money for a consideration being a single activity for the purposes of a chance prize would not constitute an AOP. There was a reference before the Madras High Court. The Madras High Court laid down the law as follows :
'But according to the facts arising in the present case, there was no agreement between the said two individuals prior to the purchase of the lottery ticket to form an entity for the purpose of producing income by purchasing the lottery ticket. The facts arising in the present case would go to show that Arumugham Chettiar purchased the lottery ticket out of his own money. After the purchase of the ticket he required a second person, viz., O. K. Ramaswamy Chettiar, to part with a sum of 50 paise for the purpose of obtaining his next meal and promised to pay back 25 per cent. of the lottery winning if the ticket got a prize. Therefore, both these persons did not enter into a contract of prior to the purchase of the ticket for the purpose of entering into a venture to purchase the lottery ticket for producing the income. The contract is between Arumugham Chettiar and Ramaswamy Chettiar. Arumugham Chettiar obtained 50 paise from Ramaswamy Chettiar and agreed to pay 25 per cent. of the prize money if the ticket in his hand gets a prize. Therefore, there is no consensus ad idem between these two persons to purchase the ticket for the purpose of producing the income. This agreement would go to show that O. K. Ramaswamy Chettiar can look to Arumugham Chettiar to get 25 per cent. of the prize money if Arumugham Chettiars ticket successfully wins a prize. Therefore, Ramaswamy Chettiar can claim no right over the ticket. Hence, the ingredients for considering both of them forming an AOP are lacking in the present case'.
This case instead of helping the petitioner helps the Revenue. In the case in hand eight persons prior to purchase of the ticket, joined together, purchased the ticket for the purpose of producing income by purchasing a lottery ticket. There was consensus ad idem between them to purchase the ticket for the purpose of producing income. The other observation that if there is a single activity, that will not constitute an AOP was not accepted by the High Court. Even otherwise I hold that this observation of the Tribunal is not the correct proposition of law.
18. To bring to an end this judgment, it is necessary to take note of another submission of Dr. Saraf. He submits that in view of s. 292B of the Act, there is no necessity to look to the technicalities of notice as urged on behalf of the petitioners. Sec. 292B of the Act is quoted below :
'292B. No return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding, is in substance and effect in conformity with or according to the intent and purpose of this Act'.
This section was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st October, 1975. The section was inserted as a protective measure to prevent invalidation of the things mentioned therein, if the things are done in substance and effect in conformity with or according to the intent and purpose of the Act.
19. This matter can be scrutinised also on the basis of a recent decision of the apex Court in CIT vs. Jai Prakash Singh : 219ITR737(SC) , where the Supreme Court reversed the decision of this Court in Jai Prakash Singh vs. CIT and laid down the law as follows :
'The facts in this case are telling. They are : Rangalal Jajodia filed his IT return for the asst. yrs. 1942-43 and 1943-44 under the IT Act as well as under the EPT Act. Before the assessments were completed, he died (on 11th January, 1946). Rangalal had a son, Shankar Lal, by his pre-deceased wife. He married a second time and had children from the second wife, Aruna Devi. Rangalal executed a will totally disinheriting Shankar Lal and appointing Aruna Devi and another as executors of his will. The ITO, probably unaware of the will, gave notice to Shankar Lal, who objected that he is not the legal representative of the deceased and that the second wife (Aruna Devi) and the other executor are the proper persons to be notified. The ITO called for a copy of the will but it was not produced. The ITO thereupon completed the assessment describing the assessee as the estate of the late Sri Rangalal Jajodia by legal heirs and representatives, Sri Shankar Lal Jajodia, son of Rangalal Jajodia, Smt. Aruna Devi, wife of Rangalal Jajodia and her children. Appeals were preferred by the second wife, Aruna Devi, contending, inter alia, that the assessments having been made without notice to her or the other executors were illegal and invalid. This plea was rejected by the AAC and the Tribunal, who remitted the matters to the ITO to complete the assessments after notice to Aruna Devi. The High Court too rejected the said contention whereupon the matter was brought to this Court, which held that the absence of notice to Aruna Devi makes the assessment merely defective but not null and void. It is in this connection that the aforesaid observation was made. This Court sustained the direction given by the AAC to the ITO to make fresh assessment on Aruna Devi in accordance with the provisions of the Act. This decision, in our opinion, is sufficient to reject the assessees contention herein. If an assessment made with notice to Shankar Lal (who was not really the legal representative of the deceased Rangalal), and without serving notice upon the lawful legal representatives (Aruna Devi, the other executor or Aruna Devis children) that too, despite the objection of Shankar Lal that he is not the legal representative and that notice must be sent to Aruna Devi, etc., who are the legal representatives of the deceased Rangalal - is only defective and not null and void, it would be rather odd to contend that assessments made on the basis of the returns filed by one of the legal representatives (disclosing the total income received by the deceased) is null and void on the ground that notices were not sent to the other legal representatives. The principle that emerges from the above decision is that an omission to serve or any defect in the service of notices provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions (charging sections). Any such omission or defect may render the order made irregular - depending upon the nature of the provision not complied with but certainly not void or illegal'.
The point that was urged before the Court was that an assessment made on persons without notice to them is a clear case of violation of the principles of natural justice and hence the assessments are null and void, but the Court did not accept this contention.
20. This s. 292B came up for interpretation in the following decisions :
(i) In CIT vs. R. Girdhar : 145ITR246(KAR) There the Karnataka High Court pointed out that if an action in substance and effect is in conformity with and according to the intent and purpose of the Act, the defect or omission cannot invalidate the action.
(ii) In I. Devarajan vs. Tamil Nadu Farmers Service Co-operative Federation : 131ITR506(Mad) . That is a case from the Madras High Court. That was with regard to the warrant of search. The Court held as follows :
'Learned counsel then pointed out that Form No. 45 had not been properly filled up and that the exercise of power under s. 132 in the present case is invalid and illegal. What is pointed out is that in the whole body of the first page of Form No. 45, after the following words whereas information has been laid before me and on the consideration thereof I have reason to believe that ... a part of the form has been left intact while the rest has been scored. This, according to learned counsel, shows that the authorities did not apply their mind properly and that in a serious matter like this, where the right of property guaranteed under Arts. 19 and 31 is interfered with under the powers conferred by the statute, then the provision of the statue would have to be strictly complied with, and any defect in compliance will render the whole action invalid and illegal. We do not find that the omission to score the whole of first page after the words extracted already, was such as to mislead anyone or that the search in pursuance thereof can be characterised as an illegal exercise of the powers. At the most, there may be some irregularity in not scoring out that part of the form. But that does not in any way affect the exercise of the power by the authorities concerned. What is sought to be emphasised in the form is if summons were issued for production, then the required books or documents would not be produced, and that the assets represented by undisclosed income had not been or would not be disclosed. The fixed deposits, the savings bank account, etc., have been referred to in the authorisation. The authority has specified the assets, which required examination by a search. The form has been duly filled up. We are unable to find any infirmity in the authorisation as such. In addition, s. 292B provides that no proceeding taken in pursuance of any of the provisions of the Act shall be invalid by reason of any mistake or defect in the proceeding if it is in effect in conformity with or according to the intent or purpose of the Act. Thus, any defect in the form is cured by this provision, as the proceeding has been taken according to the intent or purpose of the Act. There is thus no substance in this contention also'.
21. In CIT vs. Smt. Phoolmati Devi : 144ITR954(All) . That is a case of the Allahabad High Court. The Court pointed out as follows :
'Relying upon s. 292B of the IT Act inserted by the Taxation Laws (Amendment) Act, of 1975, learned counsel submitted that the defect of non-service of notice was fairly a technical objection and as such the same should not come in the way of the validity of the acquisition. We are unable to agree. Sec. 292B may apply to a case where service has already been effected, but there is a technical mistake in the notice'.
I respectfully agree with the decision regarding interpretation of s. 292B of the Act and hold that the impugned notice is also valid in view of s. 292B of the Act, as it conformed to the substance of the Act and wanted to effectuate the purpose of the Act. Further, defects or omissions, if any, in the notice did not cause any prejudice to the petitioners and they are inconsequential in nature.
Accordingly, there is no merit in the writ applications, and all are dismissed with costs of Rs. 10,000 (ten thousand). The stay orders passed earlier shall stand vacated.