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Commissioner of Income-tax Vs. Khalid Mehdi and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 75 and 163 of 1979
Judge
Reported in(1986)57CTR(AP)110; [1987]165ITR685(AP)
ActsIncome Tax Act, 1961 - Sections 2(31)
AppellantCommissioner of Income-tax
RespondentKhalid Mehdi and ors.
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateY. Ratnakar, Adv.
Excerpt:
.....powers under section 263 and set aside assessment - directed income tax officer to make fresh assessment in status of an 'association of person' - assessment made against father and sons had become final - revenue contended that assessment was made in status of 'individual' but labelled as 'protective assessment' which subsequently can be varied - assessment made by officer cannot be contingent and it must be final and definite - no statutory provision enacted for levying 'protective assessment' - held, assessment made against assessee cannot be reopened and accordingly question of assessing assessee in status of an 'association of persons' cannot arise. - cantonments act[c.a. no. 41/2006]. section 346 & cantonment fund (servants rules, 1937, rules 13, 14 & 15: [h.l. gokhale, ag...........of this court at the instance of the revenue. in this case, there are three respondents : khalid mehdi khan, toufiq mehdi khan and a. n. nisar mehdi khan. 2. in r. c. no. 163 of 1979, the following questions have been referred for the opinion of this court, at the instance of the revenue : '1. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the directions given by the commissioner to make the assessment in the status of an 'association of persons' are invalid 2. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the rent of the building should be assessed under the head 'property' in hands of the individual co-owners and the rent from furniture and projector, etc., under the head.....
Judgment:

P.A. Choudary, J.

1. In R.C. No. 75 of 1979, the following question :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the rent of the building should be assessed under the head 'Income from property ?'

has been referred for the opinion of this court at the instance of the Revenue. In this case, there are three respondents : Khalid Mehdi Khan, Toufiq Mehdi Khan and A. N. Nisar Mehdi Khan.

2. In R. C. No. 163 of 1979, the following questions have been referred for the opinion of this court, at the instance of the Revenue :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the directions given by the Commissioner to make the assessment in the status of an 'Association of persons' are invalid

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rent of the building should be assessed under the head 'Property' in hands of the individual co-owners and the rent from furniture and projector, etc., under the head 'Other sources' in the assessment of the association of person ?'

3. The dispute centres round a well-known cinema theatre in the City called 'Skyline Theatre' which is owned by five persons, viz., Rafiq Mehdi Khan, Arif Mehdi Khan, Khalid Mehdi Khan, Toufiq Mehdi Khan and A. N. Nisar Mehdi Khan.

4. Rafiq Mehdi Khan along with his four minor sons constructed a building equipped with a cinema projector, furniture, fittings, etc., so as to make it a regular cinema theatre, viz., 'Skyline Theatre'.

5. The building was some time later leased out and an amount of Rs. 4,000 was charged as lease rent for the building and another amount of Rs. 4,500 was charged as rent for the projector, furniture, fittings, etc. On the income so derived, the father and four sons voluntarily submitted returns of income showing the income of the building under the head 'Property' and the income derived on account of hiring of furniture, etc., under the head 'Other sources'. These returns were made by the five persons as individuals on the basis of their co-ownership of the theatre. The returns so filed by the five persons were accepted by the Income-tax Officer. We are concerned, in this case, with the assessment years 1971-72, 1972-73 and 1973-74. The father's assessment for the years 1971-72 and 1972-73 was completed by the Income-tax Officer in the status of an individual. Similarly, assessment of Khalid Mehdi Khan was completed by the Income-tax Officer for the year 1973-74 in the status of an individual. The Income-tax Officer accepted the contention of the assessees that the building income is property income and the income derived from the projector, etc., is income from 'Other sources'. The assessment made by the Income-tax Officer on the father Rafiq Mehdi Khan for the years 1971-72 and 1972-73 had become final. However, the Commissioner of Income-tax invoking his powers under section 263 of the Income-tax Act, set aside the assessment made against Arif Mehdi Khan and Khalid Mehdi Khan, and directed the Income-tax Officer to make a fresh assessment in the status of an association of persons consisting of the father and four sons. The Commissioner's direction was to treat the entire income derived on account of lease of the building and hire charges received for furniture, fittings, etc., in the status of an association of persons. Aggrieved by that order, Arif Mehdi Khan and Khalid Mehdi Khan preferred appeals to the Income-tax Appellate Tribunal. They contended that the order of the Commissioner is wrong, in that it directed the entire income to be treated as income arising out of 'other sources'. They also contended that there is no association of persons existing and, as such, assessment on such a non-existing identity could not have been directed to be made by the Commissioner.

6. Disagreeing with the contention of the assessees, the Income-tax Appellate Tribunal held, as a fact, that there was an association of persons within the meaning of clause (31) of section 2 of the Income-tax Act, consisting of the father and four sons. But, in view of the fact that the assessment against the father had been made as an individual and that has become final for the assessment years 1971-72 and 1972-73, it would not be open to the Revenue now to assess the father and four sons as an 'Association of persons'. The Appellate Tribunal had relied upon Atchaiah (Ch.) v. ITO : [1979]116ITR675(AP) . In effect, the Appellate Tribunal ruled that the directions given by the Commissioner to assess the assessee in the status of an association of persons are not valid. The first question which has been referred to us in R. C. No. 163 of 1979 and which has been set out by us above, arises in those circumstances.

7. Before the Appellate Tribunal, the contention of the assessee that the rent of the building should be assessed under the head 'Property' and the rent from projector, furniture, fittings, etc., should be assessed under the head 'Other sources' was accepted. Out of that finding of the Appellate Tribunal, the second question in R. C. No. 163 of 1979 which we have set out above, has been referred to us.

8. Now, taking these two referred cases together and considering the only question in R. C. No. 75 of 1979 and the second question in R. C. No. 163 of 1979, we are of the opinion that the Tribunal erred in holding that a portion of the income that is attributable to the building is to be ascribed to the sources of property income while the income derived from leasing out the cinema projector and other fittings is to be ascribed to the heading of 'Income from other sources'. Section 14 of the Income-tax Act classifies all income for the purpose of charging of income-tax in the computation of total income into six heads, namely, salaries, interest on securities, income from house property, profits and gains of business or profession, capital gains and income from other sources. There would have been no problem in ascribing the income derived out of the lease of a building to the head of income 'Profits and gains of business or profession.' But, in this case, the building was constructed as a cinema theatre in which cinema projector and other machinery and fittings have been located. Now, this machinery and other fittings have been separately let out and this income from the lease of the machinery cannot clearly fall under the heading of 'Business income'. It can only be ascribed to the residuary head of income called 'Income from other sources' falling under section 56 of the Income-tax Act. Section 56, clause (2), sub-clause (iii), says that 'where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'Profits and gains of business or profession' should be charged under the head 'Income from other sources'. There can be no doubt that the leasing of the machinery in this case can only be for the purpose of using that machinery as a cinema projector. If so, the machinery leased out cannot be used without the building. Thus, the letting of the building becomes inseparable from the letting of the machinery. Accordingly, the income from the machinery as well as the income from the lease of the building should be treated as 'income from other sources' falling under section 56 of the Act. The contrary view taken by the Tribunal runs counter to the judgment of the Supreme Court reported in Sultan Brothers P. Ltd. v. CIT : [1964]51ITR353(SC) . We accordingly answer the only question in R.C. No. 75 of 1979 and the second question in R.C. No. 163 of 1979 against the assessee and in favour of the Revenue holding that the lease income both on the machinery and on the building should be treated as falling under the head 'Other sources' under section 56 of the Income-tax Act and that the assessee should be assessed in their individual status.

9. Then remains the first question in R.C. No. 163 of 1979, which is really the subject-matter of debate at the bar. It is argued for the Revenue by Sri Suryanarayana Murthy that the view which has been taken by the Tribunal that once an assessment made against the father in his individual status has become final, it is not open to the Revenue to assess the same person in the status of an 'Association of persons' is not correct. Sri Suryanarayana Murthy argued that the judgment of a Division Bench of this court, consisting of Kuppuswami J. and Madhava Rao J., in Atchaiah (Ch.) v. ITO : [1979]116ITR675(AP) requires reconsideration. In that case, the Division Bench ruled that where the Income-tax Officer opts first to assess the member or Members of the 'associations of persons', in the status of individuals on the total income accrued to them including the income that accrued to them as mmembers of the 'association of persons', it is not open to the Revenue to assess those individuals as members of the 'association of persons'. The learned Judges laid down that the option exercised by the Income-tax Officer should be treated as final and irrevocable. This is the view which has been taken by various other High Courts also in :

CIT v. Blue Mountain Engineering Corporation : [1978]112ITR839(Mad) CIT v. R. Dhandayutham : [1978]113ITR602(Mad) CIT v. Ratan (C.) & Co. and S. N. Agarwalla : [1981]128ITR39(Cal) , Universal Commercial Co. v. CIT : [1981]130ITR775(Mad) , CIT v. Hyderabad Deccan Liquor Syndicate : [1974]95ITR130(AP) , Ravinder Narain v. ITO : [1974]96ITR612(Delhi) , CIT v. Pure Nichitpur Colliery Co. : [1975]101ITR79(Patna) and Ramanlal Madanlal v. CIT : [1979]116ITR657(Cal) . A country view has been taken by the Allahabad High Court in M. K. Dar v. CIT : [1982]138ITR801(All) the Punjab and Haryana High Court in Rodamal Lalchand v. CIT and the Patna High Court in Mahendra Kumar Agarwalla v. ITO : [1976]103ITR688(Patna) .

10. This question which has been thus raised in this case and which has been marked by the cleavage of opinion which we have noted above, is not necessary to be resolved in this case. In the facts and circumstances of this case, the assessments of these various persons in the status of an 'association of persons' is not possible to be made. The father's assessment for the years 1971-72 and 1972-73 had become final and that assessment was made against the father in his individual status. The assessments made against Khalid Mehdi Khan for the assessment year 1973-74 as an individual has also become final. The assessments against the other three assessee was made in the status of individuals for the assessment year 1973-74, but labelled as protective assessments. It was argued that a protective assessment is an assessment which acquires no finality and which can be varied later on. But in support of this argument, no statutory provision has been shown to us. The provisions of the Income-tax Act would only permit the levying of assessment within the period of limitation. The assessment so made by the Income-tax Officer cannot be contingent. It must be final and definite. In the absence of any statutory provision authorising the Income-tax Officer to make the so-called protective assessment, we are compelled to hold that in law a protective assessment is a final determination of the tax payable by the assessee and is incapable of being varied, except on the grounds which are available for interfering with ordinary assessments. The arguments of late Nambiar advanced in Lalji Haridas v. ITO : [1961]43ITR387(SC) , lend support to this view. In view of that, the assessments made against the other assessees for the assessment year 1973-74 should also be taken to have become final. The result is that the assessments made against the father in his individual status for 1971-72 and 1972-73 have become final, the assessment made against Khalid Mehdi Khan for the assessment year 1973-74 in the status of an individual has become final and the assessment against the other assessees made in their individual status for the assessment year 1973-74 also has become final. In those circumstances, the directions which have been issued by the Commissioner of Income-tax under section 263 of the Income-tax Act, directing the reopening of the assessments made against Sri Arif Mehdi Khan and Khalid Mehdi Khan alone cannot be effective against the other three assessees. The result is that the assessments made against the other three assessees cannot be reopened and accordingly the question of assessing the assessees in their status as an 'association of persons' cannot arise. For this reason, we hold that the directions given by the Commissioner to make the assessment in the status of an 'association of persons' are not valid. The first question in R. C. No. 163 of 1979 is accordingly answered in favour of the assessee and against the Revenue.

11. The questions are answered accordingly. No costs.


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