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income-tax Officer Vs. Babulal Tulsiram Burud - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Reported in(1985)13ITD70(Pune.)
Appellantincome-tax Officer
RespondentBabulal Tulsiram Burud
.....the act and assessing what the members called short-term capital gains, cannot be said to have in fact exercised such option of assessing the members direct. in this respect, the aac has erred in holding that in fact the option has been exercised by the ito.4. referring to case law on the subject, shri walvekar submitted that the reliance of the aac in the case of cit v. jr. dhandayutham [1978] 113 itr 602 (mad.) is not correct. there is also contrary view expressed in a number of judgments, in particular as follows: rodamal lalchand v. cit [1977] 109 itr 7 (punj. & har.), mahendra kumar agrawalla v. ito [1976] 103 itr 688 (pat.), punjab cloth stores v. cit [1980] 121 itr 604 (delhi), sudsons construction co. v. addl. cit [1983] 140 itr 634 (delhi). shri walvekar specially referred.....
1. These appeals are filed by the revenue against the order of the AAC, dated 15-7-1983, annulling the assessment of the AOP of Shri B.T.Burud.

2. The departmental representative invited our attention to the basic facts. The ITO who had jurisdiction over persons who are not hitherto assessed, got information that four persons, namely, Shri B.T. Burud, S.B. Burud, B.T. Bohra and R.B. Bohra, had entered into an agreement for purchase of certain lands admeasuring 5 acres and 12 gunthas near Nasik on 1-7-1971. For acquiring these lands, the above parties had invested Rs. 70,000. Later on, these lands were divided into plots with certain changes and were ultimately sold realising profits which, according to the assessee, were Rs. 21,790 for 1974-75 and Rs. 22,900 for 1975-76. With this information, the ITO issued notices under Section 148 of the Income-tax Act, 1961 ('the Act'), to the AOP on 28-9-1977. Notices were served on 5-10-1977 and in response, the AOP filed nil returns. The returns were duly processed and resulted in assessment dated 31-3-1982. The objections taken before the ITO are summarised in para 3 of the ITO's order and the ITO's reply is contained in paras 4 to 6 of the order. The first contention was that the assessee had no intention of doing business in land and the second contention was that the AOP cannot be assessed since some members were already assessed on a capital gains derived as above. Consequently, the notice under Section 148 is void.

3. The departmental representative then explained how the objections of the assessee had no force. The ITO has examined duly the location of the land, the factum of investment, application to town planning authorities and asked the Collector, Nasik, to give his finding that the entire idea was conceived as adventure in the nature of trade. The departmental representative further explained that there is no question of any exercise of any option because no such option was exercised by the ITO. If by chance some other ITO completed a member's assessments then this does not amount to exercise of an option to assess the members direct. Exercise of option involves knowledge about the existence of such option. It has to be exercised, if at all, only after examining the various pros and cons of such option. The ITO, passing orders under Section 143(1) of the Act and assessing what the members called short-term capital gains, cannot be said to have in fact exercised such option of assessing the members direct. In this respect, the AAC has erred in holding that in fact the option has been exercised by the ITO.4. Referring to case law on the subject, Shri Walvekar submitted that the reliance of the AAC in the case of CIT v. JR. Dhandayutham [1978] 113 ITR 602 (Mad.) is not correct. There is also contrary view expressed in a number of judgments, in particular as follows: Rodamal Lalchand v. CIT [1977] 109 ITR 7 (Punj. & Har.), Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688 (Pat.), Punjab Cloth Stores v. CIT [1980] 121 ITR 604 (Delhi), Sudsons Construction Co. v. Addl. CIT [1983] 140 ITR 634 (Delhi). Shri Walvekar specially referred to the case of Jain Bros. v. Union of India [1970] 77 ITR 107 (SC). Shri Walvekar admitted that the Bombay High Court judgment in CIT v. V.H.Sheth [1984] 148 ITR 169 has actually referred to the Board's circular and held that once a member is assessed, the AOP cannot again be assessed. He, however, explained that in this judgment the fact that the option was actually exercised, was never in dispute. Shri Walvekar admitted that there were certain Board's instructions referred to in the above judgment, as also in Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 (Guj.). Shri Walvekar, however, submitted that the Board's circulars have possibly been withdrawn. Accordingly, it was submitted that the AAC erred in annulling the assessments in the manner done by him.

5. In reply, Shri Gadgil invited our attention to pages 1 and 2 of his paper book and showed how all the facts were disclosed by the members.

Shri Burud had appeared before the ITO and given detailed statement along with the return. He was actually assessed on short-term capital gains of Rs. 6,170 and Rs. 5,433, respectively, attributable to the sale of the impugned lands of AOP. As seen from the order sheet, although assessment is marked under Section 143(1), actually the assessment was framed under Section 143(3) after proper application of mind. For 1975-76, there were no capital gains assessed as the assessee had claimed relief under Section 54D of the Act and this claim was accepted under Section 143(1). For 1976-77, though not quite relevant, the ITO has in fact made the assessment on members. Regarding Shri Bohra, Shri Gadgil pointed out that the assessments were made under Section 143(1) on 23-10-1975 for each of the years in question.

6. Relying on case law, Shri Gadgil referred to the following: R.Dhandayutham's case (supra), Ch. Atchaiah v. ITO [1979] 116 ITR 675 (AP) and CIT v. C. Ratan & Co. and S.N. Agarwalla [1981] 128 ITR 39 (Cal.) as also the following judgments in favour of the assessee: CIT v. Pure Nichitpur Colliery Co. [1975] 101 ITR 79 (Pat.), CIT v. Blue Mountain Engg. Corpn. [1978] 112 ITR 839 (Mad.), Ramanlal Madanlal v.CIT [1979] 116 ITR 657 (Cal.), Laxmichand Hirjibhai's case (supra) and CIT v. Karkhana Zinda Tilismath [1980] 123 ITR 814 (AP).

While admitting that a contrary view has been taken in the following cases, viz., Mahendra Kumar Agrawalla's case (supra), Punjab Cloth Stores' case (supra), Jupiter Foundry & Machines (Knives) v. CIT [1977] 109 ITR 92 (Punj. & Har.) and Deccan Bharat Khandsari Sugar Factory v.CIT [1980] 123 ITR 802 (AP), Shri Gadgil laid more stress on the fact that in the case of V.H. Sheth (supra), the Bombay High Court has decided the issue and this decision would be binding on us.

7. Without prejudice, Shri Gadgil submitted that on merits, if the above preliminary objection is held against the assessee, the matter has to be sent back as the AAC has not examined on merits the various contentions regarding adventure in the nature of trade, etc.

8. In his rejoinder, Shri Walvekar pointed out that the case law relied upon Ch. Atchaiah's case (supra) has been overruled by a later judgment in Punjab Cloth Stores' case (supra).

9. On an examination of the various facts, we hold that in this case, in fact, no option of the type canvassed on behalf of the respondent has, in fact, been exercised. As pointed out by the departmental representative, exercise of an option involved assumption of existence of such option. The ITO has merely taxed short-term capital gain, which the assessee offered for assessment. He could not, by his unilateral action, have deprived the ITO having proper jurisdiction over the AOP of framing proper assessment. The Supreme Court in M.M. Ipoh v. CIT [1968] 67 ITR 106 observed as under: Under the Indian Income-tax Act, 1922, primarily the return of income would be made by an association of persons where the association has earned income and the Income-tax Officer would also call upon the association to submit a return of its income and would ordinarily proceed to assess tax on the return so made. But for diverse reasons, assessment of the income of the association may not be possible or it may be that such assessment may lead to evasion of tax. It would be open to the Income-tax Officer then to assess the individual members on the shares received by them. The duty of the Income-tax Officer is to administer the provisions of the Act in the interests of public revenue, and to prevent evasion or escapement of tax legitimately due to the State. Though an executive officer, engaged in the administration of the Act, the function of the Income-tax Officer is fundamentally quasi-judicial. The Income-tax Officer's discretion to bring to tax either the income of the association collectively or the shares of the members of the association separately is not final; it is subject to appeal to the Appellate Assistant Commissioner and to the Tribunal. Exercise of this power is from its very nature contemplated to be governed not by considerations arbitrary but judicial. The nature of the authority exercised by the Income-tax Officer in a proceeding to assess to tax income, and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, constitute adequate enunciation of principles and policy for the guidance of the Income-tax Officer in exercising his option....

It is also now settled law that the appellate authority has jurisdiction as well the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate direction to the authority against whose decision the appeal is preferred to dispose of the appeal or any part of the matter afresh unless forbidden from doing so by the statute--Kapurchand Shrimal v. CIT (1981) 131 ITR 451 (SC).

10. Applying the above principles, we find no material to hold that the ITO has in fact exercised the alleged option of assessing the members directly. All that has happened is that the ITO, having jurisdiction over members, has accepted the contention that certain short-term capital gains are assessable. From this, it cannot be said that the AOP did not exist or that it did not carry on any business. This finding could have been given, at all, only by the ITO. Even assuming for the sake of argument that the ITO has exercised any such option, it is the duty of the appeallate authorities, as mentioned above, to give a finding as to whether such an option if exercised, is correctly exercised. From the facts above, we hold that in fact no such option has been exercised. The AAC, therefore, fell into an error in annulling the assessments. In the case law, relied upon by Shri Gadgil, there was no dispute about the actual exercise of the option. Hence, that case law is not applicable to the facts of this case.

11. Accordingly, we hold in the interest of justice that the matter should be sent back to the AAC, who should examine the main question, viz., whether there was an AOP doing business.

12. The AAC should also examine the alternative contention regarding the existence of adventure in the nature of trade, etc., of AOP after hearing both the sides. Accordingly, the order of the AAC is set aside for fresh disposal on the lines given above.

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