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Commissioner of Income-tax Vs. Smt. Saraswati Bai and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 86 of 1976
Judge
Reported in(1981)23CTR(P& H)330; [1982]137ITR656(P& H)
ActsIncome Tax Act, 1961 - Sections 148
AppellantCommissioner of Income-tax
RespondentSmt. Saraswati Bai and ors.
Appellant Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Respondent Advocate Bhagirath Dass and; B.K. Gupta, Advs.
Excerpt:
.....hands as 'association of persons' as well. there is no good reason to reject this version as the ladies purchased residential flats at malabar hills some time after the sale of the land in question. and besides that, it was further contended that the finding was not confined to the documents alone but to all other attending circumstances like the time factor, the taxable event and the conduct of the parties. such like transactions of purchase and sale were not repeated. this contention is well-founded and must prevail. it is also well settled that the issuance of a notice under section 148 of the act cannot be regarded as a mere procedural requirement and if the notice so issued is invalid for any reason, the entire proceedings taken by the ito would become void for want of..........gains but on protective basis observing that the transaction appeared to be an adventure in the nature of trade carried on by an association of persons. so far as shrimati saraswati bai was concerned, the ito held it to be business income in her hands. on march 1, 1969, a single notice under section 148 of the i.t. act, 1961, was issued to the aforesaid three ladies. in response to this notice, these ladies filed a return showing their income at rupees nil contending that they did not constitute an association of persons and that the notice issued to them under section 148 of the act was invalid. they further submitted that they did not carry on any business and as such the sum of rs. 66,000 was not liable to be assessed in their hands as business income. they went on to explain that.....
Judgment:

M.M. Punchhi, J.

1. The Income-tax Appellate Tribunal, Amritsar Bench, Amritsar, has referred to us four questions of law. The facts giving rise thereto, as stated, are these :

Sarvshrimati Saraswati Bai, Maina Bai and Pushpa Bai purchasedtwo adjacent pieces of land along with existing structure measuring about3,085 square yards situated at Kandivali, Bombay, from one V.P. Shahafor Rs. 1,25,000 on December 5, 1963. They sold this property to one ShriM.K. Mehra, Chief Secretary of Shimita Co-operative Society, forRs. 2,10,000, on February 24, 1964. This resulted in a profit of Rs. 66,000to the aforesaid ladies. For the assessment year 1964-65, the three ladies individually filed their returns showing Rs. 22,000, respectively, as capital gains accrued to them individually. The ITO assessed Sarvshrimati Maina Bai and Pushpa Bai individually and treated the said sum of Rs. 22,000 each as capital gains but on protective basis observing that the transaction appeared to be an adventure in the nature of trade carried on by an association of persons. So far as Shrimati Saraswati Bai was concerned, the ITO held it to be business income in her hands. On March 1, 1969, a single notice under Section 148 of the I.T. Act, 1961, was issued to the aforesaid three ladies. In response to this notice, these ladies filed a return showing their income at rupees nil contending that they did not constitute an association of persons and that the notice issued to them under Section 148 of the Act was invalid. They further submitted that they did not carry on any business and as such the sum of Rs. 66,000 was not liable to be assessed in their hands as business income. They went on to explain that they had purchased the land in question for constructing a residential house but on finding out that the locality was not good, they changed their mind and sold the property. According to them, therefore, the transaction in question was not an adventure in the nature of trade. They pointed out that their individual assessments had been concluded in their individual capacities and as such the ITO could not assess the same amount in their hands as 'association of persons' as well. The ITO, rejecting their pleas, held that the ladies constituted an AOP and that the transaction in question was an adventure in the nature of trade and thus the profit of Rs. 66,000 was assessable in the hands of the assessee-AOP as its business income. The AAC upheld the order of the ITO but on second appeal to the Tribunal, the order was reversed. On the findings recorded by the Tribunal, the following are the questions of law referred to us:

'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Sarvshrimati Saraswati Bai, Maina Bai and Pushpa Bai did not constitute an AOP and that the transaction in question was not an adventure in the nature of trade ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the notice under Section 148 served upon the appellants was not valid in the eye of law ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, after having assessed Smt. Saraswathi Bai, Smt. Maina Bai and Smt. Pushpa Bai in their individual capacities, the Income-tax Officer could not legally assess the so-called AOP of the appellants in respect of the same profit ?

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the profit of Rs. 66,000 in question was not assessable in the hands of the so-called assessee-AOP as 'business income'?

2. We would deal with them one after the other.

3. On the twin question whether the three ladies constituted an AOP and whether the transaction in question was an adventure in the nature of trade, the Tribunal held as follows:

'7. The first and the most important question for consideration is whether Smt. Saraswati Bai, Smt. Maina Bai and Smt. Pushpa Bai constituted an AOP and whether they embarked upon an adventure in the nature of trade. An 'association of persons' means an association in which two or more persons join in a common purpose or common action with the object of producing income, profits or gains. Now, in the present case, there is not an iota of documentary or oral evidence on record to prove that Smt. Saraswati Bai, Smt. Maina Bai and Smt. Pushpa Bai jointly carried on business in the sale and purchase of land either before the transaction in question or thereafter. It cannot, therefore, be said that they had constituted an 'association of persons' with the common object of producing income, profits or gains. The only transaction in which they joined together is the transaction under consideration. The case of the appellants has throughout been that they purchased the land in question with the intention of constructing a house for their residence, but, later on, they abandoned the idea and sold the land as they did not find the locality suitable for their residence. There is no good reason to reject this version as the ladies purchased residential flats at Malabar Hills some time after the sale of the land in question. Even if we presume, in view of the circumstances referred to by the Appellate Assistant Commissioner, that the intention of the appellants to purchase the land was to make profit out of the same, this being a solitary transaction, it cannot be said that the same was necessarily an adventure in the nature of trade. In this connection, we may refer to the commentary at pp.114 and 115 of the Law and Practice of Income-tax by Kanga and Palkhivala. As stated therein, 'a transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale'. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced value motivated the enhancement. In Leeming's case [1930] 15 TC 333, a syndicate of four persons acquired two assets with a view to their resale at a profit. They resold the two estates to a company at a profit. The Commissioners found that the acquisition was made with the sole object of turning itover at a profit and that the syndicate at no time had any intention of holding it as an investment. Rowlatt J. remanded the case to the Commissioners for a finding as to whether there was or was not a concern in the nature of trade. The Commissioners found that the transaction in question was not a concern in the nature of trade. The House of Lords held that it was an isolated capital transaction, and the profit was not liable to tax. Lord Buckmaster said 'an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value. If it does so rise, its realisation does not become its income'. In IRC v. Reinhold [1953] 34 TC 389 (C. Sess) the assessee purchased four houses and after two years sold them at a profit. It was an isolated transaction outside the assessee's ordinary line of business, but he admitted that he had bought the property with a view to resale and had instructed his agents to sell whenever a suitable opportunity arose. The Court of Session held that the intention to resell did not per se establish that the transaction was an adventure in the nature of trade and the Commissioners were justified in treating the profit as a capital accretion. As observed at p. 115 of The law and Practice of Income-tax by Kanga & Palkhivala, a man may purchase land, shares and securities as a capital investment producing revenue or may purchase an article with a view to using it and, coupled with the intention to invest or use, there may be the intention of reselling at a profit when the market is favourable. The purchase would none the less be on capital account and not in the nature of trade. In the illustration given at p. 113 of the said commentary, the assessee, a prosperous businessman, with a view to building a residential house for himself and constructing a workshop agreed to purchase a plot of land from an insurance society which had undertaken a land development scheme and also paid a part of the purchase price. The purchase was to be completed later since the land was under acquisition by the Government. After a year, the assessee changed his mind and assigned to a third party at a profit his rights under the agreement with the society.

The Supreme Court held that in the absence of any evidence to support the inference that the isolated transaction constituted an adventure in the nature of trade, it should be regarded as on capital account Saroj Kumar Mazumdar v. CIT : [1959]37ITR242(SC) .

8. In view of the above discussion, we hold that there is no evidence to hold that the appellants constituted an AOP and carried on the business of sale and purchase of land in that capacity. We are also of the opinion that, in the circumstances attending the case, the transaction in question, being an isolated transaction, was not an adventure in the nature of tradeand as such the profit of Rs. 66,000 is not assessable in the hands of the so-called AOP as 'business income'.'

4. It would seem that ex jade the first question raised and the twin answer given by the Tribunal was patently a question of fact. However, the revenue on the strength of the law laid down by the Supreme Court in G. Venkataswami Naidu & Co. v. CIT 0065/1958 : [1959]35ITR594(SC) , ventured to raise the contention that the finding recorded by the Tribunal was a mixed question of law and fact and thus could properly be raised on a reference under Section 256(1) of the Act. Side by side it was contended that the Tribunal had treated the transaction in question to be an isolated one ignoring the question altogether that there were two transactions, one of purchase and the other of sale of the properties involved. On that score, it was contended that the entire conspectus of things had to be looked into ; all the more when the purchase deed and the sale deed were part of the statement of the case and they being documents of title requiring interpretation. It was further contended that the vendors had purchased the properties in a block, sold the same in a block without defining their shares and thus the question raised by the Tribunal being in sum and substance relating to the construction of the two documents, was thus a question of law. And besides that, it was further contended that the finding was not confined to the documents alone but to all other attending circumstances like the time factor, the taxable event and the conduct of the parties. On the other limb of the question it was contended that the transaction, despite being single, was none the less a plunge made in the waters of trade and was nothing but in the nature of trade.

5. In G. Venkataswami Naidu's case 0065/1958 : [1959]35ITR594(SC) , their Lordships of the Supreme Court, after considering the entire case law on the subject, held as follows (p. 610):

'In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction, and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to the facts before us.'

6. and then again (p. 610):

'We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumstances.'

7. In our advisory jurisdiction under Section 256 of the Act, we are not a court of appeal. The finding of the Tribunal is clear and positive. It is held that there is no evidence to hold that the appellants constituted anAOP and carried on the business of sale and purchase of land in that capacity. It is also held in their view that the attending circumstances of the case make them hold that the transaction in question being an isolated transaction was not an adventure in the nature of trade. Merely because in the agreement for purchase, liberty has been given to the purchasers to get conveyance in their name or in the name of their nominees or co-operative societies and the vendor was bound to execute the deed of sale to such named persons on the direction of the purchasers, is by itself not indicative of any element of trade or business. The taxable event was the sale of the property alone and none other. Such like transactions of purchase and sale were not repeated. Further, the mere fact that the property was purchased by the purchaser as Chief Secretary of Shimita Co-operative Society is also not indicative of the property having been purchased by the vendor with the sole object of selling it to the co-operative society and in the nature of a plunge in the realm of trade. The further additional factor which weighed with the Tribunal was that the ladies in fact purchased residential plots at Malabar Hills some time after the sale of the land in question. So, the finding of the Tribunal is not resting solely on the construction of the documents so as to raise a question of law but also on attending circumstances and inferences drawn therefrom. These being pristinely questions of fact on both counts, that is, that the appellants did not constitute an AOP and on the other hand the transaction was not an adventure in the nature of trade, we find that question No. 1 referred to us being a question of fact does not have to be answered by us. And on the view we have taken, the question of answering question No. 3 does not arise. The answer to question No. 4 is dependent on the answer to questions Nos. 1 and 3 and since the occasion has not arisen, question No. 4 need not be answered as it does not arise.

8. We would have refrained answering question No. 2 in the same strain. However, it is the legality of the notice served upon the assessee which is in question and we propose to answer it in this way. We have to see whether the assessee could be called that person to whom notice under Section 148 of the Act had been issued. 'Person' has been defined as thus :

'2. (31) 'Person' includes-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.'

9. Clause (vii) is the key to discern its meaning. It is plain that, leaving apart the individual, other categories of persons are artificial juridical persons. An individual is a person, but if he is a member of an association or a body of individuals, whether incorporated or not, it is the association which is the person and not he. Here, a single notice was addressed to the three ladies care of M/s. Daulat Ram Ram Chand Brothers, Katra Ahluwalia, Amritsar. It was not addressed to the so-called association of persons. Concededly, the expression 'association of persons' was not used in the notice addressed to the three ladies figuring in the present case. Concededly, the ladies had individually been assessed for the sum of Rs. 22,000, each falling in their hands as individuals. It is not that their assessments were to be reopened but a new assessee, that is, the AOP, was being awakened by a notice under Section 148 of the Act as, according to the ITO, he had reason to believe that the income had escaped assessment.

10. The Tribunal, while dealing with the question, held as follows :

'9. The learned representative of the assessee has also challenged the validity of the notice dated 1-3-1969 under Section 148 of the Income-tax Act, 1961. He urges that this notice was not addressed to the so-called AOP of the appellants and that there is nothing in the notice to indicate that the same was intended to be addressed to the aforesaid AOP or that the appellants were sought to be assessed in the status of an AOP. It is, accordingly, pleaded by the learned representative of the assessee that this notice is invalid and as such the entire proceedings taken in pursuance thereof are illegal. This contention is well-founded and must prevail. The case is fully covered by the authority of the Delhi High Court in the case of Ravinder Narain v. ITO : [1974]96ITR612(Delhi) . The aforesaid case is on all fours with the present case. As in the case of Ravinder Narain, the expression 'association of persons' was not used in the notice addressed to the three appellants in the present case. The return was invited of 'your income' and the alternative column 'the income......in respect ofwhich you are assessable' was left blank. Obviously, therefore, it cannot be said that the notice under Section 148 was issued to the so-called AOP of the appellants and as such the appellants could not be assessed in the status of an AOP. In Y. Narayana Chetty v. ITO : [1959]35ITR388(SC) , the Supreme Court has held that the notice prescribed under Section 34 of the Indian Income-tax Act, 1922, similar to Section 147 of the Income-tax Act, 1961, for the purpose of initiating the reassessment proceedings is not a mere procedural requirement but the service of the prescribed notice on the assessee is a condition precedent to the validity of any reassessmentmade under that section and if no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void. Similar view has been taken by the Supreme Court in [1967] 65 ITR 507 (CIT v. K. Adinarayana Murthy). Thus, following the authority of the Delhi High Court in the aforesaid case, we hold that the notice under Section 148 of the Income-tax Act, 1961, was not validly issued to the so-called AOP of the appellants and, as such, the entire proceedings taken in pursuance thereof are vitiated.'

11. The counsel for the Revenue cited before us a decision of this court in Rodamal Dalchand v. CIT , to contend that it was within the right of the ITO to have proceeded against the assessee despite the fact that the members of the said AOP had individually been assessed. The case aforequoted was a case in which the partners had been assessed separately in respect of their share of the income from the partnership business but the assessing authority had proceeded against the firm as the taxable entity. Same was the view adopted by the Andhra Pradesh High Court in Deccan Bharat Khandsari Sugar Factory v. CIT : [1980]123ITR802(AP) . These authorities are of no avail to the Revenue, for that was, if at all, the domain of question No. 3, which we have left unanswered. There is a catena of precedents in Madhav Motor Stores v. CIT : [1978]115ITR887(Bom) , Bhagwan Devi Saraogi v. ITO : [1979]118ITR906(Cal) , Rama Devi Agarwalla v. CIT : [1979]117ITR256(Cal) and ITO v. Chandi Prasad Modi : [1979]119ITR340(Cal) , for the view that it is only on the issuance of a valid notice does the ITO acquire jurisdiction to proceed in the matter. Once it is held that there was no valid notice of reassessment, the entire reassessment proceedings would be without jurisdiction and would be void and illegal. It is also well settled that the issuance of a notice under Section 148 of the Act cannot be regarded as a mere procedural requirement and if the notice so issued is invalid for any reason, the entire proceedings taken by the ITO would become void for want of jurisdiction. It also stands settled that if such a notice is ambiguous or defective or otherwise invalid, the same cannot be cured by taking into account and/or looking into other documents whereby such defects can be rectified and/or omissions filled in.

12. Here the finding of the Tribunal is that if the crucial column of the notice was left blank, the mere fact that the notice was joint in nature and that the three ladies responded jointly in response thereto would be of no consequence and it would remain nevertheless a vague notice and defective in the eye of law. It is equally of no consequence that in response to the notice, the three ladies filed a return showing income at rupees nil, for, it was intimately wedded with the objection that the noticeissued to them was void and they were not an 'AOP' in whose bands the income was perhaps to be taxed. The AOP as an assessee having not been served, the Tribunal was right in law in holding that the notice under Section 148 of the Act served upon the ladies was not valid in the eye of law. Thus, question No. 2 has to be answered in the affirmative, that is against the Revenue and in favour of the assessee. But even if, by any stretch of imagination, we were to hold otherwise, that the service on the ladies was service on the AOP, it would still be dependent upon the finding whether the ladies in fact were an AOP. That being a finding of fact, it has been held against the Revenue. All the same we chose to answer the question and it has hereby been so done.

13. For the foregoing reasons, this reference is declined in view of the questions dealt with and answered by us in the manner aforeindicated. No costs.


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