1987-VIL-492-AP-DT

Equivalent Citation: [1988] 171 ITR 269, 66 CTR 143, 34 TAXMANN 411

ANDHRA PRADESH HIGH COURT

Date: 26.08.1987

COMMISSIONER OF INCOME-TAX

Vs

FRIENDS ENTERPRISES

BENCH

Judge(s)  : B. P. JEEVAN REDDY., Y. V. ANJANEYULU

JUDGMENT

The judgment of the court was delivered by

B. P. JEEVAN REDDY J.-Two questions are referred for the opinion of this court under section 256(2) of the Income-tax Act, 1961. They are :

" (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the assessee did not constitute an association of persons or a body of individuals ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that only 1/5th share was to be assessed in the hands of each of the co-sharers ? "

A return was filed by M/s. Friends Enterprises, in the status of registered firm for the assessment year 1973-74, showing the income at Rs. 1,09,897 on the total winnings in the accounting year ending on March 3, 1973. An application for registration under section 184 of the Act was also filed. It was claimed that the partnership consists of five persons, namely, Sri M. A. K. Ansari, Sri T. Sriramulu (both Inspectors in the Central Excise Department), Sri N. Venkatanarayana Pantulu (father-in-law of Sri T. Sriramulu), Smt. Meherunnissa Begum, and Smt. Badrunnissa Begum (sisters of Sri Ansari). In the course of assessment proceedings, it was mentioned by the assessee that the parties have also entered into a joint venture agreement on September 15, 1972, in respect of the very same transactions. The joint venture agreement, however, was not filed before the Income-tax Officer, but was filed for the first time before the Appellate Assistant Commissioner in appeal. The Income-tax Officer refused to grant registration under section 185 mainly on the ground that betting and racing do not constitute business, profession or vocation. Accordingly, he assessed the entity as an association of persons and levied tax on that basis. He also levied interest under sections 139(8) and 217. No appeal was preferred against the order rejecting the application for registration, but an appeal was preferred against the order of assessment. The Appellate Assistant Commissioner held that the Income-tax Officer was in error in holding that there was an association of persons and making the assessment on that entity. According to him, the said five persons did not even constitute a body of individuals for earning the income in question. He held that 1/5th share of the income has to be assessed in the hands of each of the five individuals. Accordingly, he set aside the assessment made by the Income-tax Officer with a direction to assess the income in five equal shares in the hands of the said five persons. He further observed that the Income-tax Officer may consider the assessment of income of any other persons in the hands of Sri Ansari and Sri Sriramulu, if he can establish that they are their benamis. The Department preferred an appeal to the Income-tax. Appellate Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal posed the question: " did the aforesaid persons join in a common purpose or a common action thereby becoming an association of individuals ? ". The Tribunal was of the opinion that any and every combination of persons cannot be treated as an association of persons and that it is only when they associate themselves in an income-producing activity that they become an association of persons. Purporting to follow the decisions in Graham v. Green [1925] 9 TC 309 (KB) and Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad), the Tribunal held that betting and racing cannot be treated as income producing activity in the real sense of the expression. The Tribunal agreed with the Appellate Assistant Commissioner that the said five persons cannot also be assessed as a body of individuals. The Tribunal went further and held that by virtue of the said two deeds, the share in the net amount to each of the five persons came to them by reason of an overriding title, and hence the said amount should be taxed as the separate and individual income of the five persons in five equal shares. It confirmed the Appellate Assistant Commissioner's direction to examine the question of benamis.

Mr. M. Suryanarayana Murthy, learned standing counsel for the Revenue, contended that both the Tribunal and the Appellate Assistant Commissioner were in error in holding that the assessment made by the Income-tax Officer treating the assessee as an association of persons was wrong. According to him, the said five persons joined together and pooled their moneys and efforts with a view to earn income by engaging themselves in betting and gambling and that, therefore, the income derived from such a course of activity is not only income but taxable income under the Act. He submitted that there is no question of diversion of income by overriding title in this case and that the Tribunal was in error in upholding the said contention.

On the other hand, Sri A. Satyanarayana, learned counsel for the assessee, contended that, although the amount received was income, it was a " windfall income " and, therefore, not taxable. He contended that the activity of an association of persons must be an activity directed towards earning a regular income and that it cannot be, what he calls, " windfall-income-producing-activity ". He submitted that these persons had merely acquired a ticket, which is " property ", and it so happened that that particular ticket produced a certain income. There was no other activity except purchasing the ticket, according to learned counsel. He also submitted that the two documents bring about a diversion of income by overriding title and that, in any event, the income has to be taxed separately in the hands of the five individuals in five equal shares.

The definition of the expression " income " in clause (24) of section 2 of the Act has been amended by the Finance Act, 1972, with effect from April 1, 1972. Sub-clause (ix) has been added to the definition. After this amendment, the expression " income " includes " any winnings from lotteries, crossword puzzles, races including horse races, card games an other games of any sort or from gambling or betting of any form or nature whatsoever". Such income is treated as "income from other sources ", by section 56(2)(ib). According to it, the income referred to in sub-clause (ix) of clause (24) of section 2 of the Act shall be chargeable to income-tax under the head " Income from other sources ".

Though a copy of the deed of partnership is not made available to us, a copy of the joint venture agreement dated September 15, 1972, has been placed before us by learned counsel for the assessee. The following averments in the deed are relevant :

" Whereas the parties hereto have mutually agreed upon to enter into a joint adventure regarding the placing of bettings, investing in jackpot and treble and tanala events in the horse racing season of 1972 at Hyderabad; ...... Now this indenture witnesseth as follows:.

(1) The parties hereto shall initially contribute the following sums for the purpose of enterprise of the joint adventure :

Rs.

Party of the first part 200

Party of the second part 200

Party of the third part 200

Party of the fourth part 200

Party of the fifth part 200

----------------

1,000

----------------

If any further sums are desired to be invested in addition to the initial contribution made, the parties hereto shall contribute further sums in equal proportions.

(2) The monies contributed to the joint adventure shall be invested in the placing of bettings, investing in jackpot, treble and tanala events in the horse racing season of 1972 at Hyderabad.

(3) In the event of any dividends being realised on the said investment, the same shall be collected by the party of the first part in his name and he shall distribute the proceeds to the parties hereto in the following proportions ....... ;

In pursuance of the said agreement, Sri M. A. K. Ansari, the first party in the said document, purchased Ticket No. 231J 057699, which won the jackpot on September 24, 1972. A cheque for Rs. 1,30,917 was issued in his name. It was claimed before the Income-tax Officer that 10 jackpot tickets were purchased for Rs. 50 contributed by the first party (Sri M. A. K. Ansari) and the fourth party (Sri T. Sriramulu), and that both of them actually attended the races and purchased the tickets for all the events. It was submitted that the cheque for Rs. 1,30,917 was deposited in the personal bank account of Sri Ansari and after realisation, individual cheques were issued in the names of the other four parties for Rs. 26,183.40 each. As stated above, a return was filed in the status of a registered firm for the assessment year 1973-74, showing the income at Rs. 1,09,897 on the total winnings for the relevant accounting year minus charges on bettings and expenses that were incurred in the race course.

The first question that arises is, whether the said five persons constituted an association of persons or body of individuals ? The expression "association of persons " is not defined in the Act. In Elias (B. N.), In re [1935] 3 ITR 408 (Cal), Derbyshire C.J. referred to the Oxford Dictionary, where the meaning of the word " associate " is given as " to join in common purpose, or to join in an action ". In Indira Balkrishna's case [1960] 39 ITR 546, the Supreme Court referred to the decisions of the Indian courts and held (p. 551):

"Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains ...... It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of section 3 ; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not. "

In Deccan wine and General Stores v. CIT [1977] 106 ITR 111, Bench of this court dealt with the meaning of the said expression and, after referring to the aforesaid decision of the Supreme Court and decisions of other courts, observed (p. 117):

"It is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association ; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression " association of persons " flows from the meaning of the word 'association'."

If we examine the facts of this case in the light of the above tests and principles, it would be clear beyond any doubt that the five persons came together and entered into a joint venture with a view to invest moneys and engage themselves in betting and gambling and thus earn income. The joint venture agreement clearly says that they had entered into a joint venture regarding the placing of bettings, investing in jackpot and treble and tanala events in the horse-racing season of 1972 at Hyderabad. Each of them contributed Rs. 200 initially and agreed to supply further amounts required in equal proportions. The moneys so contributed were to be invested in placing of bettings and in jackpot, treble and tanala events. It was also provided that if any " dividends " are realised from the said investment, the same shall be divided between them in five equal shares. We can presume that the earlier partnership agreement also must have been in the same terms. Indeed, it was " partnership " agreement, which expression is not without some significance in the circumstances. In such a situation, it cannot but be said that these persons came together and engaged themselves in an organised/ regular course of activity for earning income. It is immaterial that the activity is betting and gambling. We are unable to appreciate the opinion of the Tribunal that betting and racing do not produce income in the real sense of the word and that they cannot be viewed as a source of producing income. As pointed out hereinbefore, the definition of " income", inclusive no doubt in section 2(24), clearly includes winnings from races, including horse races, and from all sorts of gambling or betting activities of any form or nature whatsoever. It cannot also be said that these five persons Were indulging in the said activity merely for pleasure. It was a regular course of activity and an organised course of activity. Indeed, they have entered into a partnership agreement in that behalf and also executed a joint venture agreement later. It cannot be said that they were doing it as a matter of pleasure or habit. They had come together with a common design to produce income. Thus, all the tests enunciated in the decisions mentioned above are satisfied. The Income-tax Officer was, therefore, right in making the assessment in the status of an association of persons.

Mr. Satyanarayana, learned counsel for the assessee, contended that the object of these persons coming together was not to earn income but only to purchase tickets which is property in their hands and that one of such tickets incidentally produced income. His submission is that there was no activity other than purchasing of tickets. He likens the present case to a case where some persons come together and purchase a property and subsequently finding that a better offer is available, sell it away. He says, in such a case, the resultant surplus is not taxable income. We are unable to appreciate this argument. The joint venture agreement itself dispels the argument that the object of these persons coming together was to purchase tickets. The object was not to purchase tickets but to earn income by investing the moneys jointly contributed by them in bettings, in jackpots and other horse racing events, and to share the income arising therefrom. The Tribunal was not right in holding that betting and racing cannot be viewed as sources for producing income or that they do not produce income in the real sense of the word. Once the definition of " income " has been amended by inserting subclause (ix), such income is clearly taxable as " income from other sources under section 56 of the Act.

Learned counsel for the assessee placed strong reliance upon the decision of the Madras High Court in Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660. It was held there that while winnings arising from bettings in horse races is " income ", it is not taxable income as it was of a casual and non-recurring nature, and was within the scope of the exemption granted by section 4(3)(vii) of the Indian Income-tax Act, 1922. This decision was rendered under the 1922 Act. The expression " income " was defined in clause (6C) of section 2 of the Act, and it did not contain a sub-clause corresponding to sub-clause (ix) in section 2(24) of the 1961 Act. Moreover, section 4(3)(vii) of the said Act declared " any receipts... not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature " shall not be included in the total income of the person receiving them. Once the definition of "income" was amended in the 1961 Act and the said income was expressly made chargeable to tax as " income from other sources " under section 56(2)(ib), the principle of the said decision ceases to apply. More important, section 10(3) of the 1961 Act (corresponding to section 4(3)(vii) of the 1922 Act) is entirely different. Section 10(3), as applicable during the relevant year, reads as follows :

" 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-...

(3) any receipts which are of a casual and non-recurring nature, not being winnings from lotteries, to the extent such receipts do not exceed one thousand rupees in the aggregate. "

According to this provision, any receipts, though of a casual and non-recurring nature, exceeding Rs. 1,000 in aggregate, are liable to be included in the total income of the previous year. We, therefore, do not think that the principle of the Madras decision has any application herein.

Mr. A. Satyanarayana also relied upon the decision of this court in Shaik Ibrahim v. CIT [1968] 69 ITR 117, which related to income arising from betting on New York cotton rates. This was also a decision rendered under the 1922 Act and for the reasons which we have given with respect to the Madras decision, the principle of this decision also does not apply herein.

Mr. Satyanarayana then cited the decision of the Calcutta High Court in Rama Devi Agarwalla v. CIT [1979] 117 ITR 256. There, five persons together purchased a property and sold the same for profit within about eight months. The said income was sought to be taxed in their hands, treating them as an association of persons. It was held that it cannot be done. It was pointed out that according to the findings of the Tribunal, all the five ladies bad drawn out their separate funds to purchase the property, that they had distinct shares in the ownership of the property, and that there was no specific finding recorded by the Tribunal that the five ladies had intended to embark upon a joint enterprise, nor was there a finding that there was an arrangement or agreement, or any common aim or purpose or volition of the persons concerned to engage themselves in any adventure, or a course of activity to earn income. It is unnecessary to pursue this line of cases, because each case depends upon its particular facts. No generalisation is possible. The question is one of inferring the intention of the parties from given facts. No general principle of law can be evolved in such cases.

For the above reasons, we are of the opinion that the Tribunal and the Appellate Assistant Commissioner were in error in holding that the assessee did not constitute an association of persons and cannot be taxed as such. The first question accordingly has to be answered in the negative, i.e., in favour of the Revenue and against the assessee.

Once we answer the first question against the assessee, the second question does not really arise for consideration. There is no question of diversion of income by superior title on account of the partnership deed or the joint venture agreement. The finding that the assessment has to be made upon the assessee treating it as an association of persons puts an end to this controversy. Even otherwise, we see no room for applying the said theory in the circumstances of this case. It is an agreement in the nature of a partnership whether it is called a partnership deed or a joint venture agreement.

For the above reasons, the second question also is answered in the negative, i.e., in favour of the Revenue and against the assessee.

 

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