SURU BHASKAR RAO V. COMMNR.OF INCOME TAX

ITA/16/2005

AI Insights

The case involves a series of appeals by Sri Suru Bhaskar Rao against the orders of the Income Tax Appellate Tribunal (ITAT), which affirmed the decisions of the lower tax authorities. The disputes centered on the income declarations of M/s. Parbati Engineering Works, initially owned by the appellant's daughter, K. Sandhyarani, and later claimed to be under the appellant's control. The tax authorities had clubbed the income from this entity with the appellant's income, leading to the appeals. The main legal issues revolved around the interpretation of income clubbing under Section 64 of the Income Tax Act and the procedural fairness in the reassessment process under sections 143(1)(a), 144, 147, and 148 of the Act.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 763931 (HC-CUTTACK)
• Appeal Type: Others
• Pronouncement Date: 31-03-2016
• Assessment Year: misc
• Other Referred Cases: Mathai Mathai v. Joseph Mary @ Marykkutty Joseph & ors.
• Laws Referred To: Income Tax Act, 1961, Indian Contract Act, 1872
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: S K ACHARYA
• Assessee Lawyers: S RAY; S DEY; A MALLICK
• Keywords: Assessment; Benami property; Clubbing of Income; Income Tax; Natural Justice; Reassessment
• Section: 147; 148; 144; 64; 11; 143(1)(a); 260-A; 64(1-A)

Judgement Text

" THE HIGH COURT OF ORISSA : CUTTACK INCOME TAX APPEAL NOS. 16, 17, 18, 19, 20 AND 21 OF 2005 In the matter of appeals under Section 260-A of the Income Tax Act. -------------- In all the Appeals Sri Suru Bhaskar Rao …… Appellant -Versus- Commissioner of Income Tax, Orissa, Bhubaneswar and another …… Respondents For Appellant : M/s. S. Ray, S. Dey & A. Mallick For Respondents : Mr. S.K. Acharya, Senior Standing Counsel, Income Tax Department --------------- P R E S E N T : THE HON’BLE MR. JUSTICE INDRAJIT MAHANTY & THE HON’BLE DR. JUSTICE D.P. CHOUDHURY ------------------------------------------------------------------------ Date of hearing- 15.03.2016 : Date of judgment: 31.03.2016 ----------------------------------------------------------------------------------------------- Dr. D.P. Choudhury, J. The captioned Appeals arise out of a common order dated 23.6.2004 passed by the learned Income Tax Appellate tribunal, Cuttack Bench, Cuttack (hereinafter called “ITAT”) in I.T.A. 2 Nos. 277 to 280/CTK/2002 for the assessment years 1994-95 to 1997-98 and another common order dated 2.7.2004 in ITA Nos. 56 and 57 of 2004 for the assessment years 1992-93 and 1993-94. As common questions of law involved in all the Appeals, they are disposed of by this common order. FACTS 2. The factual matrix leading to the case of the appellant is that the appellant is the proprietor of a fabrication Unit in the name and style of Jeypore Small Scale Industries at Jeypore being an assessee under the status of individual. The appellant filed return in the name of his daughter K. Sandhyarani under section 143(1)(a) of the Income Tax Act, 1961 (hereinafter called “the Act”) for the years 1992-93 to 1997-98 declaring the income for the respective years. It is stated that Smt. K. Sadhyarani, who happens to be the daughter of the appellant was deriving income from M/s. Parbati Engineering Works till her marriage in 1994. After marriage she could not give personal attention and executed power of attorney in favour of the appellant to run the business. It is stated that Smt. K. Sandhayarani got proprietorship of M/s. Parbati Engineering Works from her mother Smt. S. Parbati having purchased same from her mother on payment of Rs.10,000/- and executed a promissory note of Rs.60,000/- as security in favour of her mother. It is averred that M/s. Parbati Engineering Works is a separate small scale unit under the Director of Industries and has got licence under the Sales Tax department. It is alleged inter alia that the Assessing Officer without affording reasonable opportunity of being heard reopened the assessment under sections 144/147 of the Act by issuing notice under section 148 of the Act to the appellant. The Assessing Officer 3 passed ex parte reassessment order for the assessment years 1994- 1998 without serving statutory notice on the appellant. In the order the Assessing Officer for no good reason clubbed the income of M/s. Parbati Engineering Works along with the fabrication unit of the appellant and demand was made for Rs.5,09,494/- for 1995-96, Rs.6,42,146/- for 1994-95, Rs.12,18,714/- for 1997-98, Rs.2,37,422/- for 1992-93, Rs.1,93,550/- for 1993-94 and Rs.3,65,512/- for 1996-97. Against these orders the appellant filed appeals before the Commissioner of Income Tax (Appeals) who without examining any materials on record illegally observed that the income declared by Smt. K. Sadhyarani belongs to the appellant without understanding law thereof. Against that order the appellant preferred appeals before the ITAT, Cuttack Bench, Cuttack challenging the orders passed by the Commissioner of Income Tax. The appellant did not appear before the ITAT on the date of hearing. Thereafter without affording any further opportunity to the appellant the ITAT disposed of the cases against the appellant by affirming the orders passed by the authorities below. Then against the orders of the ITAT the present appeals have been filed by the appellant challenging same raising various contentions. SUBMISIONS 3. Learned counsel for the appellant submitted that the order of the ITAT are illegal and arbitrary for violation of natural justice for being not followed the principles of audi alterm partem. The ITAT has also committed error by confirming the order of the First Appellate Authority in observing that the income of the major daughter of the appellant also belongs to the income of the appellant. He further submitted that the impugned order suffers 4 from illegality by not considering the income of the daughter of the appellant as separate income of the daughter of the appellant. The ITAT has also erred in law by considering the property of the daughter of the appellant as Benami property of the appellant. The impugned order also suffers from illegality by doubting about the promissory note executed by the daughter of the appellant as she was minor by then. 4. It is submitted by learned counsel for the appellant that the ITAT has failed to appreciate the facts of the case by not affording reasonable opportunity of being heard to the appellant. The ITAT has also failed to appreciate that the Assessing Officer without following the statutory provisions of the Act has reopened the case under section 148 of the Income Tax Act. He further submitted that section 64 of the Act provides that income of an individual will also include the income of spouse, minor daughter etc. under certain circumstances as has been provided therein and the impugned order passed by the Tribunal has not taken into consideration properly about applicability of such statutory provision. Section 64 (1-A) of the Act provides that income accruing to a minor child shall be included in the total income of the individual in particular situation, otherwise clubbing is not legally permissible. But in the present case the authorities below without considering such provision of law, clubbed the income of the daughter of the appellant, who is major at the time of assessment with the income of the appellant. It is submitted by learned counsel for the appellant that the order passed by the ITAT being dehors to the provisions of law should be set aside. Learned counsel for the appellant raises the following questions of law for determination: 5 (i) Whether in the facts and circumstances of the case, the ITAT Cuttack Bench, Cuttack is legally correct in sustaining the reasons of the Forums below and legally justified in clubbing the income of Smt. K. Sadhyarani in the hands of her father, the present appellant and whether such a conclusion does not run contrary to law laid down in (190 ITR 336)? (ii) Whether in the facts and circumstances of the case, the clubbing of income of Smt. K. Sandhyarani at the hands of her father, the present appellant is not contrary to the provision contained U/s. 64 of the Income Tax Act, 1961 and therefore legally unsustainable in the particular circumstances of the case? (iii) Whether in the facts and circumstances of the case, failure on the part of the ITAT, Cuttack Bench, Cuttack to decide on each of the grounds of appeal taken by the appellant does not vitiate the proceedings and render the order non-est in law? (iv) Whether in the facts and circumstances of the case, the appeal decided ex parte without ext ending reasonable opportunity of being heard to the appellant, should not be held as arbitrary and highly prejudicial, and should not be struck down as being in gross violation of rules of natural justice? 5. Learned Senior Standing Counsel for the revenue submitted that the impugned orders suffered from no illegality and they are based on facts of the case. According to him, the daughter of the appellant has been examined by the assessing Officer and in her statement she categorically stated that M/s. Parbati Engineering Works is owned by her father although purchased in her name, in view of such submission there is no wrong in clubbing the income of 6 M/s. Parbati Engineering Works, which is under the control of the assessee, with the income of the appellant. He further submitted that rightly the authorities below have appreciated the fact that the daughter of the appellant being minor has acquired the property of M/s. Parbati Engineering Works as Benami property of the appellant inasmuch as minor has no capacity to contract under the Contract Act and she had no income to acquire the property. He further submitted that the story of execution of promissory note by the daughter of the appellant towards the balance purchase cost of M/s. Parbati Engineering Works is a void document as she was minor by then. So he supported the impugned orders and submitted to dismiss the appeals. POINT FOR CONSIDERATION. 6. The points for consideration in these appeals as formulated by the Court is “Whether in the facts & circumstances of the case, it is legal and justified to club the income of a daughter at the hands of her father and whether it is contrary to the provisions of Section 64 of the Income Tax Act, 1961?” DISCUSSIONS. 7. It is an admitted fact that the appellant is an assessee under individual capacity. It is also an admitted fact that Smt. K. Parbati is the wife of the appellant and Smt. K. Sandhyarani is the daughter born out of their wedlock. It is also the admitted fact that the appellant being assessee has derived his income in his fabrication unit in the name of Jeypore Small Scale Industries. 7 8. It is the claim of the appellant that M/s. Parbati Engineering Works belonged to his wife and subsequently it has been transferred by his wife to his daughter K. Sandhyarani. With regard to the manner of purchase of such unit it is revealed from the orders of assessment that daughter paid Rs.10,000/- and a promissory note of Rs.60,000/- in favour of her mother as consideration. It is revealed from the orders passed by the authorities below including the Assessing Officer at the time of such transaction K. Sandhyarani was minor. If she was minor it is difficult to understand how she earned money to pay the same to her mother. Moreover, when she was minor how she has got capacity to execute promissory note in favour of her mother. Section 11 of the Indian Contract Act reads follows:- “11. Who are competent to contract.—Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject. —Every person is competent to contract who is of the age of majority according to the law to which he is subject,1 and who is of sound mind and is not disqualified from contracting by any law to which he is subject.\" 9. From the aforesaid provision it is clear that no minor is competent to enter into contract. To acquire competence to enter into a contract K. Sandhyarani should have been age of majority as required under section 11 of the Indian Contract Act. In the case of Mathai Mathai v. Joseph Mary @ Marykkutty Joseph & ors., reported in (2015) 5 SCC 622, where Their Lordships observed at paragraphs-9 and 10 as follows:- 8 “9. The first point is required to be answered against the appellant for the following reasons:- It is an undisputed fact that Exh. A1 is the mortgage deed executed by the uncle of the appellant and the first respondent in favour of the deceased mother of the appellant as collateral security towards the dowry amount. At the time of execution and registration of the document, it is an undisputed fact that the age of the mortgagee, the deceased mother of the appellant was 15 years as mentioned in the mortgage deed itself. Therefore, she had not attained the majority under the Indian Majority Act, 1875. To acquire the competency to enter into a contract with the uncle of both the appellant and the first respondent the parties should have been of age of majority as required under Section 11 of the Indian Contract Act, 1872. The aforesaid aspect fell for interpretation before the Privy Council in the case of Mohori Bibee v. Dharmodas Ghose[1], wherein the Privy Council after interpretations of relevant provisions of Section 11 of the Indian Contract Act, 1872, has held that the contracting parties should be competent to contract as per the above provision and the minor’s contract was held to be void as he cannot be the mortgagor, the relevant paragraphs referred to in the aforesaid decision are extracted hereunder :- “Looking at these sections their Lordships are satisfied that the Act makes it essential that all contracting parties should be “competent to contract,” and expressly provides that a person, who by reason of infancy is incompetent to contract, cannot make a contract within the meaning of the Act” In the later part of the same paragraph, it is stated, “The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot arise in the case of an infant. Their 9 Lordships are therefore of opinion that in the present case there is not any such voidable contract as is dealt with in section 64.” Thus, it was held that a minor cannot be a contracting party, as a minor is not competent to contract as per Section 11 of the Indian Contract Act. At this juncture, it is also necessary to extract Sections 2 and 11 of the Indian Contract Act, 1872 which read as under:- “2.Interpretation-clause. In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context :- (a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal; (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise; (c) The person making the proposal is called the “promisor” and the person accepting the proposal is called the “promisee”; (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise; (e) Every promise and every set of promises, forming the consideration for each other, is an agreement; (f) Promises, which form the consideration or part of the consideration for each other, are called reciprocal promises; (g) An agreement not enforceable by law is said to be void; (h) An agreement enforceable by law is a contract; 10 (i) An agreement which is enforceable by law at the option of one or more of the parties- thereto, but not at the option of the other or others, is a voidable contract; (j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. 11. Who are competent to contract- Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.” This important factual and legal aspect has been conveniently ignored by the authorities including the High Court while adverting to Exh.A1, the mortgage deed. A strong reliance was placed upon it by both the Land Tribunal and the Appellate Authority in allowing the claim application of the appellant holding that he is a deemed tenant under Section 4A of the K.L.R. Act without noticing the aforesaid relevant factual aspect of the matter. Therefore, we have to hold that the mortgage deed-Ex. A1 executed by the uncle of the appellant and the first respondent, in favour of the deceased mother of the appellant, is not a valid mortgage deed in respect of the property covered in the said document for the reason that the deceased mother at the time of execution and registration of the document was a minor, aged 15 years, and she was not represented by her natural guardian to constitute the document as valid as she has not attained majority according to law. Many courts have held that a minor can be a mortgagee as it is transfer of property in the interest of the minor. We feel that this is an erroneous application of the law keeping in mind the decision of the Privy Council in Mohori Bibee’s case (supra). 10. As per the Indian Contract Act, 1872 it is clearly stated that for an agreement to become a contract, the parties must be competent to contract, wherein age of 11 majority is a condition for competency. A deed of mortgage is a contract and we cannot hold that a mortgage in the name of a minor is valid, simply because it is in the interests of the minor unless she is represented by her natural guardian or guardian appointed by the court. The law cannot be read differently for a minor who is a mortgagor and a minor who is a mortgagee as there are rights and liabilities in respect of the immovable property would flow out of such a contract on both of them. Therefore, this Court has to hold that the mortgage deed-Ex.A1 is void ab initio in law and the appellant cannot claim any rights under it. Accordingly, the first part of first point is answered against the appellant.” 10. With due respect it appears from the aforesaid decision that the Hon’ble Apex Court has also followed the Privy Council in the case of Mohori Bibee v. Dharmodas Ghose, reported in (1903) ILR 30 Calc. 539 (P.C.). Thus, it is clear from the authorities as stated above that any contract by the minor is void and thus he is not competent to execute any promissory note which is also agreement between her and her mother. Apart from this, such view has been taken consistently taken by the authorities below. Since we are in seisin of the Second Appeal and the authorities below have consistently found fact that K. Sandhyarani was a minor while executed the promissory note to succeed to M/s. Parbati Engineering Works of her mother and there being no objection to such findings by the appellant, we are constrained to observe that such document is void one. Apart from this, question arises in mind as to her capacity to earn money and pay Rs.10,000/- for purchasing of M/s. Parbati Engineering Works from her mother. On the other hand, it is clear from the orders of the authorities below 12 that K. Sandhyarani has admitted before the Assessing Officer that the entire document of promissory note and other documents were only prepared at the instance of her father who is the appellant and she had no any knowledge of purchase of the property. 11. It is also available from the documents filed that K. Sandhyarani has executed one power of attorney in favour of the appellant to look after the affairs of M/s. Parbati Engineering Works and take all necessary steps to file the Income Tax return etc. It is revealed from orders of the Assessing Officer that while K. Sandhyaani was examined, she admitted that she has no knowledge about M/s. Parbati Engineering Works and such property belongs to her fat her. She has also admitted before the Assessing Officer that all documents are created b y appellant. So taking into consideration of all these documents and statement of K. Sandhdyarani, we are of the considered view that M/s. Parbati Engineering Works is not owned by K. Sandhyarani. Moreover, neither the appellant takes the plea nor document is proved to show that such property is owned by his wife K. Parbati. On the other hand, we are of the considered view that M/s. Parbati Engineering Works is a Benami property of the appellant. 12. Section 64 of the Income Tax Act reads in the following manner:- 64. Income of individual to include income of spouse, minor child, etc.- (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly— (i) [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.] (ii) to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such 13 individual has a substantial interest: Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience ; xx xx xx 64 (1A) In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in section 80U : Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any— (a) manual work done by him; or (b) activity involving application of his skill, talent or specialised knowledge and experience. Explanation.—For the purposes of this sub-section, the income of the minor child shall be included,— (a) where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater ; or (b) where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do. 13. From the aforesaid provisions it is made clear that Section 64 of the Act purportedly directs for computing income of individual where income of wife be included. Section 64A of the Act 14 also enshrines about clubbing of income of minor child with income of father under individual category if it is not derived from his (minor) manual work or activity concerning minor’s skill, talent and likewise. So even if for argument shake it is considered that this property of M/s. Parbati Engineering Works belongs to his wife or minor daughter, income of such property will be clubbed with the income derived from M/s. Jeypore Small Scale Industries of the appellant. 14. In view of the analysis made above, we are of the view that M/s.Parbati Engineering Works belongs to appellant and income of such fabrication unit is income of the appellant. So, we are of the considered view that income of M/s. Parbati Engineering Works should be clubbed with the income of the appellant. Thus, we do not find any infirmity with the impugned orders of the ITAT. CONCLUSION. 15. Now adverting to points for consideration as formulated, we are of considered view that facts and circumstances of the case as discussed above do not purportedly show income derived from M/s. Parbati Engineering Works is of K. Sandhyarani or K. Parbati but it is income of appellant. So, the appellant being assesee is liable to pay Income Tax on the income derived from M/s. Parbati Engineering Works and question of income of his daughter at the hand of appellant does not arise. Moreover, other questions whether provisions of Section 64 of the Act is contrary to above findings now becomes academic. 15 In toto we are of the considered view that orders of the ITAT in all these appeals being affirmed by us need no interference. As such the Appeals being devoid of merit stand dismissed. ..………………………… Dr. D.P. Choudhury, J. I. Mahanty, J. I agree. ..………………………… I. Mahanty, J. ORISSA HIGH COURT : CUTTACK The 31st March, 2016/DNP "