THE COMMISSIONER OF INCOME TAX V. SRI K S SATHYANARAYANA

ITA/626/2007

AI Insights

The case involves multiple appeals by the Revenue against the decisions of the Income Tax Appellate Tribunal, which had re-assessed the income of three assessees involved in a real estate project as an Association of Persons (AOP). The Tribunal's decision was based on the finding that the assessees had jointly contributed capital, developed the project, and shared profits, despite the absence of a formal partnership deed. The Revenue contended that the income should be assessed individually based on the proportions of profit sharing and individual contributions. The High Court upheld the Tribunal's decision, agreeing that the income should be assessed as AOP.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 738576 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-03-2014
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX V/S INDIRA BALKRISHNA, ITO v/s Ch.ATCHAIAH, LATE SMT.K.BHOOMIAMMA (BY LRS.) AND ANOTHER V/S COMMISSIONER OF INCOME TAX
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K S RAO; A SHANKAR; N NAGARAJU
• Assessee Lawyers: K V ARAVIND
• Keywords: Association of Persons; Block assessment; Income Tax; Real estate business; Undisclosed income
• Section: 143(2); 158BC; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 4TH DAY OF MARCH 2014 PRESENT THE HON'BLE MR.JUSTICE DILIP B.BHOSALE AND THE HON'BLE MR.JUSTICE B.MANOHAR ITA NO.626/2007, ITA NO.624/2007 & ITA NO.682/2007ITA NO.684/2007 ITA NO.626/2007 BETWEEN: 1. The Commissioner of Income Tax, Central Circle, C.R Building, Queens Road, Bangalore. 2. The Assistant Commissioner of Income-Tax, Central Circle – 1(4), C.R Building, Queens Road, Bangalore. …Appellants (By Sri.K.V.Aravind, Advocate) AND: Sri.K.S.Sathyanarayana, No.2, 80 Ft Road, Girinagar II Phase, Bangalore. …. Respondent (By Sri.K.S.Hanumantha Rao, Advocate) 2 This ITA is filed under Sec.260-A of Income Tax Act 1961, arising out of order dated 16-03-2007 passed in ITA(SS)A.No.51/Bang/2005, for the Assessment Year 1.4.1990 to 29.12.2000, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT Bangalore in IT(SS)A.No.51/2005 dated 16/03/2007 confirm the orders of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, Central Circle-1(4), Bangalore in the interest of justice and equity. ITA NO.624/2007 BETWEEN: 1. The Commissioner of Income Tax, Central Circle, C.R Building, Queens Road, Bangalore. 2. The Assistant Commissioner of Income-Tax, Central Circle – 1(4), C.R Building Queens Road, Bangalore. …Appellants (By Sri.K.V.Aravind, Advocate) AND: Sri.K.S.Sathyanarayana, No.2, 80 Ft Road, Girinagar II Phase, Bangalore. …. Respondent (By Sri.K.S.Hanumantha Rao, Advocate) 3 This ITA is filed under Sec.260-A of Income Tax Act 1961, arising out of Order dated 16-03-2007 passed in IT(SS)A.No.52/Bang/2005, for the Assessment Year 01/04/1990 to 29/12/2000, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT, Bangalore in IT(SS)A.No.52/Bang/2005, dated 16/03/2007 confirm the orders of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, Central Circle-1(4), Bangalore in the interest of justice and equity. ITA NO.682/2007 BETWEEN: 1. The Commissioner of Income Tax, Central Circle, C.R Building, Queens Road, Bangalore. 2. The Assistant Commissioner of Income-Tax, Central Circle – 1(4), C.R Building Queens Road, Bangalore. …Appellants (By Sri.K.V.Aravind, Advocate) AND: Sri.N.Venkatesh, No.41, I Main Road, 8th Cross, Girinagar, Bangalore. …. Respondent (By Sri.A.Shankar & Sri.M.Lava, Advocates) 4 This ITA is filed under Sec.260-A of Income Tax Act 1961, arising out of Order dated 29-03-2007 passed in IT(SS)A.No.9/Bang/2006, for the Block Assessment Period 01/04/1990 to 29/12/2000, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA.No.9/Bang/2006, dated 29/03/2007 confirm the orders of the Assistant Commissioner of Income Tax Officer, Central Circle - 1(4) Bangalore in the interest of justice and equity. ITA NO.684/2007 BETWEEN: 1. The Commissioner of Income Tax, Central Circle, C.R Building, Queens Road, Bangalore. 2. The Assistant Commissioner of Income-Tax, Circle – 1(4), C.R Building, Queens Road, Bangalore. …Appellants (By Sri.K.V.Aravind, Advocate) AND: Mr.N.A.Nagaraja Shetty, No.38/10, New Timber Yard Layout, Mysore Road, Bangalore. …. Respondent (By Sri.N.Nagaraju, Advocate for M/s.Ennar Associates for Respondent) 5 This ITA is filed under Sec.260-A of Income Tax Act 1961, arising out of Order dated 20-04-2007 passed in IT(SS)A.No.53 & 54/Bang/2005, for the Block Assessment Period 01/04/1990 to 29/12/2000, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. allow the appeal and set aside the order passed by the ITAT, Bangalore in IT(SS)A.No.53 & 54/Bang/2005 dated 20/04/2007 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, Central Circle-1(4), Bangalore in the interest of justice and equity. These Appeals coming on for Hearing this day, B.MANOHAR J., delivered the following: J U D G M E N T The Revenue has preferred these appeals under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) challenging the orders dated 16-3-2007, 29- 3-2007 and 20-04-2007 passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’ for short) Bangalore Bench-B in IT(SS)A No.51/Bang/2005 & IT(SS) A No.9/Bang/2006 and 6 IT(SS)A 53/Bang/2005 whereby the Appellate Tribunal allowed the appeals filed by the respondents-assessees while dismissing the appeals filed by the Revenue and set aside the order passed by the Assessing Authority. 2. Since the common question of law and facts are involved in these appeals and all the three assessees are involved in the same project and also the question of law is common, the authorities below have passed different orders. Hence all the appeals are clubbed together and disposed off by this common order. 3. The facts of the case leading to the filing of these appeals are as follows: A search was conducted simultaneously on 25-12-2000 in the separate residential premises of the respondents-assessees, Sri.K.S.Sathyanarayan, N.Venkatesh and N.A.Nagaraja Setty. During the course of search, several incriminating materials were found and seized in respect of involvement of the assessees in real estate business and development of 4 acres of land at 7 Sy.No.10 of Pattanagere village and also money transaction. The statement of parties were also recorded and notice under Section 158BC of the Act was issued on 19-04-2001 to these assessees calling upon them to file returns of undisclosed income for the block period from 1- 4-1990 to 29-12-2000. In response to the said notice, K.S.Sathyanarayana filed return of income on 16-05-2001 declaring undisclosed income of Rs.9,23,680/-, Sri.Nagaraja Setty filed return of income on 29-06-2001 declaring undisclosed income of Rs.8,99,830/- and Sri.N.Venkatesh filed the returns on 12-3-2002 declaring NIL income. The search resulted in seizure of documents that evidenced the involvement of assessees in the real estate business i.e. development of 4 acres of land bearing Sy.No.10 situated at Pattanagere village forming sites and selling the same. The records clearly disclose that the land bearing Sy.No.10 of Pattanagere village was originally owned by one Sri.M.Manchaiah. He agreed to sell the land in favour of one Sri.K.Bagegowda for a sum of Rs.32,00,000/- as per the agreement dated 30-09-1995 8 and received an advance amount of Rs.5,00,000/-. In pursuance of the said agreement, Bagegowda took possession of 4 acres of land and undertook developmental activities in the said land. Thereafter, he had entered into an agreement with K.S.Sathyanarayana and D.Raghu to sell the 4 acres of land for a sum of Rs.13,75,000/- per acre. Thereafter, all the three respondents-assessees joined together and contributed capital for the development of the said land and formed sites. The original owner of the land Sri.Manchaiah after receipt of the full sale consideration, executed Power of Attorney in favour of the assesses to sell the sites to the prospective buyers. The seized materials and statement of the persons involved in the project clearly disclose that they have contributed their part of the capital for the purpose of completion of the project to share the profit. Though there was no specific joint venture agreement, the statement of accounts, details of the capital contribution, drawing of the amount from the Banks, details of booking of sites and statement of profit allocation etc., clearly show that all the 9 three assessees joined together, executed the project and shared the profit. The income earned in the real estate business was not disclosed. In the absence of partnership deed, the taxing entity cannot be a firm. Since all the three assessees have participated in the business venture and earned profit in the business, they had to be assessed in accordance with law. Accordingly, a notice under Section 143(2) of the Act was issued and the assessees filed objections to the said notice. The Assessing Authority after considering the matter, concluded that the said three persons have come together and executed the project by contributing the capital in the ratio of 65:20:15 and had a clear understanding to share the profit in the same ratio. Further observed that the said three persons have also drawn money from the profit at different stages in the same ratio and there is no material to suggest allocation of the profit in any other ratio. The Assessing Officer further held that there was no specific joint venture agreement among these three persons, and in the absence of a partnership deed, all the three partners had 10 participated in the business venture and earned profit. The profit of the whole project had to be computed based upon the materials available and assessed in their individual hands for the respective block period and also a sum of Rs.3,23,680/- paid to K.S.Sathyanarayana towards 5% commission of the Pattanagere project as per the assessment order dated 31-12-2002. 4. The assessees being aggrieved by the assessment order passed by the Assessing Authority preferred appeals before the Commissioner of Income Tax (Appeals)-IV, Bangalore (hereinafter referred to as ‘the First Appellate Authority’) contending that the order passed by the Assessing Authority is contrary to law. The profit earned by the assessees should have been assessed in the status of an ‘Association of Person’ (for short ‘the AOP’) even though no document has been produced. The undisclosed income/profit relating to the project of Pattanagere village required to be assessed to tax in the hands of the said AOP comprising of three assessees who had joined together to 11 execute the Pattanagere project. The position of law has been clearly laid down by the Hon’ble Supreme Court in various judgments that even though there is no partnership deed or partnership deed is an unregistered document, if all the parties have jointly developed the project by investing capital, the Assessing Officer is bound to assess as AOP. The individual assessment of the income is contrary to law. Further, some of the assessees disputed their contribution and also contended that they have taken back their contribution with very small portion of income. Further, N.Venkatesh contended that except commission he has not received any money from the said project. The assessment of income is contrary to law. The First Appellate Authority after considering the matter in detail and taking into consideration various judgments of the Hon’ble Supreme Court and other High Courts held that the order passed by the Assessing Authority assessing the income in individual capacity is contrary to law. Since all the three persons joined together and developed the project, the Assessing Authority ought to have assessed 12 the said Pattanagere project as AOP and accordingly, partly allowed the appeal and set aside the order passed by the Assessing Authority insofar as assessing the income in individual capacity and also upheld the order to the effect that profit sharing ratio of persons is 65:20:15, however rejected some other claims of the assessees, by its order dated 29-07-2005. The assessees being aggrieved by the order passed by the First Appellate Authority, preferred appeals before the Income Tax Appellate Tribunal, Bangalore challenging the profit sharing ratio and rejection of other claims. The Revenue also preferred an appeal challenging the order passed by the First Appellate Authority insofar as setting aside the order passed by the Assessing Authority on various grounds regarding deduction of net profit of Rs.3,23,680/- given as 5% commission to the assessee-K.S.Sathyanarayana. 5. The Appellate Tribunal after re-examining the matter in detail on the basis of the records available held that the order passed by the Assessing Authority is contrary to law. 13 All the three persons joined together; contributed their capital; completed the Pattanagere Project and sold 93 sites jointly. Even though there is no partnership deed or Association of Persons, the Assessing Authority ought to have assessed their income as AOP and assessment made in individual capacity is contrary to law and directed the Assessing Authority to re-assess the income as AOP and pass necessary orders. Upholding the order passed by the First Appellate Authority, the Tribunal dismissed the appeal filed by the Revenue, by its orders dated 16-3-2007, 29-3-2007 and 20-04-2007. Being aggrieved by the orders passed by the Tribunal, the Revenue has preferred these appeals. 6. These appeals are admitted for considering the following substantial questions of law: i) Whether the Appellate Authorities were correct in holding that the income earned from Pattanagere project should be assessed in the status of AOP consisting of the assessee, Sri.N.A.Nagaraja Shetty and Sri.N.Venkatesh and not in the hands of the individual assessee as held by the Assessing Officer? 14 ii) Whether the Appellate Authorities were correct in not taking into consideration that there was no joint venture to carry on the AOP, no joint Bank account and in their statements and assessment proceedings there was no evidence regarding jointness of project by claiming a joint venture, co-operation of business activity etc., and consequently recorded a perverse finding? iii) Whether the Tribunal having set aside the computation of percentage among the members of the AOP and the number of persons who constitute the AOP for reconstruction, failed to take into consideration that no return of income was filed in the status of AOP and in response to notice under Section 158BC of the Act, assessee had filed return of income in his individual status declaring undisclosed income? iv) Whether the Tribunal was correct in holding that a sum of Rs.3,23,680/- representing assessee’s commission of 5% received from Pattanagere project cannot be assessed in the hands of the assessee individual but should be assessed in the status of AOP consisting of the assessee, Sri.N.A.Nagaraja Shetty and Sri.N.Venkatesh? v) Whether the Tribunal was correct in holding that no surcharge can be levied against the assessee in respect of the search conducted on 29.12.2000 by ignoring the provisions of the Finance Act? 15 7. Sri.K.V.Aravind, learned advocate appearing for the Revenue contended that the order passed by the First Appellate Authority as well as the Tribunal is contrary to law. During the course of search many incriminating documents had been seized in respect of Pattanagere Project in the land bearing Sy.No.10 measuring 4 acres of land and selling of the sites. Though the assessees contended that all the three had contributed capital for completion of the Pattanagere project, no document has been produced, not even a copy of the agreement is produced in this regard. In spite of specific direction, the Partnership Deed was not made available. In the absence of the same, taking into consideration the various documents found during the search, the Assessing Authority assessed the income in the proportion of 65:20:15. There is no infirmity or irregularity in the assessment order passed by the Assessing Authority. Admittedly, the owner of the land had given power of attorney in the name of N.Venkatesh. The Bank account operated for the purpose of project stands in the name of 16 N.Venkatesh. Admittedly, the profit earned in the said project was divided by three persons according to their percentage. Hence, the income earned has to be assessed in the individual capacity. In the absence of Partnership Deed, the taxing entity cannot be treated as a Firm. All the three persons have participated in the business venture and earned profit. In support of his contention, he relied upon the judgments reported in (1960) 39 ITR 546(SC) in the case of COMMISSIONER OF INCOME TAX V/S INDIRA BALKRISHNA and sought for allowing the appeals. 8. On the other hand Sri.Shankar, learned counsel appearing for the respondents-assessees argued in support of the order passed by the Tribunal and contended that after remanding the matter from the Tribunal, the Assessing Authority re-assessed the income as AOP. The said order was challenged before the First Appellate Authority and the same was quashed by the Appellate Authority. The Revenue has not taken up the matter in 17 appeal. Hence, all these appeals filed by the Revenue have become infructuous and sought for dismissal of the same. On merits, he submitted that the records clearly disclose that all the three persons have come together and executed the project by contributing their capital. In the absence of the Partnership Deed, the Assessing Authority has to assess their income as AOP and not in individual capacity. Section 2(31) of the Act provides that a person includes individual, company and a firm. Hence sought for dismissal of the appeals. 9. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and other relevant records. 10. The materials seized during the search and the statement of persons involved in the project clearly disclose that three persons i.e. assessees in these three appeals joined together, contributing their part of the capital for the purpose of executing and completing the Pattanagere project and to share the profit. Though there 18 is no specific joint venture agreement in a document form, the statement of accounts, capital contribution, drawing of amount from the bank, pass book, clearly disclose that all the three persons were involved in the development of project. The Association of Persons means, an association in which, two or more persons joined for a common purpose or common action. The members of an Association must join together for the purpose of producing income. As the Association of Person can be formed only when two or more individuals voluntarily combine together for certain purpose, the liability to tax depend upon the earning of profit by a Unit and not upon the ultimate division of the profit. Section 2(31) of the Act defines “person” which reads as under: Sec. 2(31) (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. 19 [Explanation .- For the purpose of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;] The reading of the above provision makes it very clear that the word “person” defined under Section 2(31) of the Act includes an individual, and a Hindu undivided family. It also includes association of person or body of individual whether incorporated or not. The Act has recognized an Association of Person as a Taxable Unit. When several individuals are found to have joined together for the purpose of making profit, the group of individuals may be conveniently described as a body of individuals. Association of person whether incorporated or not has been brought within the net of taxation with a clear intention to hit combination of individual or other person who are engaged together in some joint enterprises. The combination may or may not be incorporated. A profit yielding joint venture has to be taxed as a single Unit. The 20 Supreme Court in various judgments examined the above said issues, more particularly in (1996)218 ITR 239 (SC) in the case of ITO v/s Ch.ATCHAIAH. Further this Court in a judgment reported in (1992) 194 ITR 723 (Kar) in the case of LATE SMT.K.BHOOMIAMMA (BY LRS.) AND ANOTHER V/S COMMISSIONER OF INCOME TAX has taken a view that the income of association of persons has to be assessed in the hands of association relying upon the various judgments of the Supreme Court. In the instant case, the records seized by the Authority clearly disclose that all the three persons have developed Pattanagere Project and sold 93 sites on the basis of power of attorney issued by the erstwhile owner of the land and full consideration has been paid to the owner of the land. Even though the Association of Persons or Partnership is not reduced into writing or registered before the competent authority, it has to be assessed as a Unit and not in individual capacity. The Appellate Authority as well as the Tribunal considered the matter in detail and passed the order. 21 11. That apart, in pursuance of the order passed by the Tribunal, the Assessing Authority reassessed the income generated by the assessees as Association of Person. The said order was confirmed by the First Appellate Authority and it has become final. Hence it is not proper to reopen the matter at this stage. The inclusion of 5% of net profit amounting to Rs.3,23,650/- for the service rendered by K.S.Sathyanarayana to the project has to be treated as income from the Association of Persons. The service rendered is not deductible as an expenditure and surcharge is also not leviable. There is no infirmity in the order passed by the Tribunal. The Supreme Court judgment relied upon by K.V.Aravind is not applicable to the facts of the present case since the said judgment was rendered prior to the amendment of Income Tax Act, 1961. Hence, all the substantial questions of law are answered against the Revenue and in favour of the assessees. Hence all these appeals are liable to be 22 dismissed. Accordingly, we pass the following: ORDER All the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE mpk/-* "