1992-VIL-164-ITAT-AHM

Equivalent Citation: ITD 043, 680, TTJ 045, 690,

Income Tax Appellate Tribunal AHMEDABAD

Date: 08.10.1992

INCOME-TAX OFFICER.

Vs

HC. SHAH.

BENCH

Member(s)  : K. R. DIXIT., B. M. KOTHARI.

JUDGMENT

Per K.R. Dixit, Judicial Member--This group of appeals raises one common question whether each one of the assessee is a Body of Individuals (BOI) or an Association of Persons (AOP). The Income-tax Officer had regarded them as an AOP while the Dy. Commissioner (Appeals) has regarded them as a BOI. That is why the Revenue is in appeal. The material facts in each one of them are identical and what is stated for one would apply for all the others. However, during the course of the hearing certain facts have emerged which though applicable to each one case separately have also to be considered.

2. Briefly, the assessee H.C. Shah and others was the recipient of a gift of a certain sum on 8-1-1981 from one Bipinchandra Mafatlal, the karta of Bipinchandra Mafatlal (HUF). A declaration to that effect was made on 21st June, 1981. It is also the beneficiary of a trust called Manilal Trust by deed of settlement executed on 12-1-1981. It filed a return declaring an income from 6.7% share as a beneficiary in Manilal Trust as also certain interest income. The ITO taxed both at the maximum marginal rate holding the assessee as an AOP as stated above. He has made observations regarding the time gap of five months between the date of gift and the execution of the declaration thereof and stated that there must be some pressing reason for that. He has also observed the scoring out of the old date on that document and substitution of the latter date. He has made observations regarding the validity of the gift. He has then considered the Supreme Court decision in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 and ultimately observed that (i) the making of the gift alone could not result in an income, (ii) the assessees by agreeing to the terms of the gift had given their consent to the common design of generating income by the use of the gift and (iii) the individual shares of the donees in the corpus or income were not specified and was left to be determined by the donees which could be done only by joint action and common understanding. According to him, the gift was not to a BOI but to the individuals who were identified as members of BOI. He has made the assessment " protectively without prejudice to the action that may be taken in the trust's case or in the case of the members of the alleged BOI ".

3. According to the Dy. Commissioner the ITO could not have changed the status of the assessee from the one which was filed in the return and if he wanted to do so he should have given notice under section 148 relying on the Bombay High Court decision in the case of CIT v. Associated Cement & Steel Agencies [1984] 147 ITR 776. He has observed that the ITO wanted to distinguish the receipt of income from earning of income but if the decision in the case of Indira Balkrishna was applied no AOP would come into existence. He has followed the decision of the Tribunal, Ahmedabad Bench in the case of S.C. Shah v. ITO (sic) which has followed the decision of the Gujarat High Court in the case of CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 and held the assessee to be a BOI.

4. The learned Departmental Representative explained the facts which according to him were relevant and submitted that this was part of a whole scheme to divide the income of the trust and to reduce the tax liability. He first of all pointed out the long time gap between the date of declaration of gift and the actual date of execution of that document as wen as the erasure of the earlier date of its execution and substitution by a later one thus trying to show the scheme to avoid tax. He then submitted that the Tribunal in the aforesaid decision in the case of S.C. Shah had not considered the Supreme Court decision in the case of N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 and submitted that although a miscellaneous application was moved pointing out this error the Tribunal incorporated in the order a paragraph to the effect that the Revenue had relied upon the Supreme Court decision in the case of G. Murugesan & Bros. v. CIT [1973] 88 ITR 432. He also submitted that at the time of the Tribunal's earlier decision in the case of S.C. Shah the facts which appear now showing whole scheme for evading tax were not before it and that therefore, that decision should not be followed. He submitted that the Gujarat High Court judgment in the case of Harivadan Tribhovandas showed that it did not have sufficient facts before it. He relied on the following decisions :---

1. Indira Balkrishna

2. CIT v. Buldana District Main Cloth Importers Group [1961] 42 ITR 172 (SC).

3. N.V. Shanmugham & Co.'s case.

He submitted that if the Gujarat High Court decision in the case of Harivadan Tribhovandas was so interpreted that if individuals happen to come together and do business then it is a BOI the Supreme Court decision in the case of N.V. Shanmugham & Co. would be contradicted. Therefore, according to him, this was not the ratio of the Gujarat High Court decision. This was shown by its agreement with the observation of the Andhra Pradesh High Court quoted at page 504. Lastly, he submitted that this was a fit case for applying the Supreme Court decision in the case of Mc Dowell & Co. Ltd. v. CTO [1985] 154 ITR 148 and for that purpose relied on the following decisions of the Tribunal :---

1. B. D. Fibre Enterprises v. IAC [1986] 19 ITD 427 (Bom.)

2. 78 CTR (Trib.) Ahd. (sic)

3. ITO v. Samir Builders [1987] 23 ITD 570 (Ahd.)

4. Atman Trust v. LAC [1989] 31 ITD 315 (Ahd.)

5. Neo Trust.

5. The learned counsel for the assessee, on the other hand, first of all

submitted that the Tribunal decision in the case of S.C. Shah fully covered the present controversy and that it should be followed since according to him, the Tribunal has mentioned the decision of the Supreme Court in the case of N. V. Shanmugham & Co. and so it must be said that it was considered relying upon inter alia the following quotation from the well-known treatise of Salmond on Jurisprudence :----

" The mere fact that (as is contended) the earlier court misconstrued a statute or against a rule of construction, is no ground for impugning the authority of the precedent. A precedent on the construction of a statute is as much binding as any other, and the fact that it was mistaken in its reasoning does not destroy its binding force." (at page 151)

" One of the chief reasons for the doctrine of precedent is that a matter that has once been fully argued and decided should not be allowed to be reopened." (at page 155)

" A precedent is not destroyed merely because it was badly argued, inadequately considered and fallaciously reasoned." (at page 156)

He also submitted that the Gujarat High Court decision in the case of Harivadan Tribhovandas was binding on this Tribunal. Regarding merits he submitted that the question was whether the entity claimed to be BOI is a result of the volition of the members thereof. The learned Departmental Representative had pointed out by means of a chart that there were persons who were common as members in the various assessee. BOIs and that even the donees in some cases and vice versa and had thus tried to establish that, this was part of a design to avoid tax by dividing the income. In this connection, he argued that the case of each individual assessee was to be judged separately and the fact that there were common members or donors and donees between all the assessees was irrelevant. In other words, the facts of the other cases before us were irrelevant for each of the appeals before us. The learned counsel for the assessee submitted that what the learned D.R. had argued came to this that it was the larger entity comprised of all the individuals in the entities which was the recipient of the income and liable for the tax as such. That according to him, however, was not the issue before us. The issue was whether each individual assessee was an AOP or a BOI. He said that at the most what could be said was that there was an agreement to reduce the tax liability but what was necessary to prove was that there was an agreement to earn the income. He submitted that the question whether there was an attempt to divide the income and reduce that liability was very much before the Tribunal because in the revisional order of the Commissioner over which the Tribunal was hearing the appeal it was stated as follows :

" It is also unbelievable that the petty sum of Rs. 1000 will earn the first year itself an income of Rs. 24,60,000 (for a part of the year) in as much as it is a part of the design to fragment the income. This is to avoid payment of tax." [Emphasis supplied].

He also submitted that in the miscellaneous application the grievance was that the citation of N.V. Shanmugham's case had not been included in para 9 of the Tribunal's decision and not that it had not been considered. According to him, since the Tribunal had incorporated the citation of the decision in G. Murugesan's case which had considered the decision in N.V. Shanugham's case the error was corrected. He relied upon the decision of the Tribunal in 38 ITD 138 to submit that the earlier Tilbunal decision should not be departed from and also pointed out that if a departure was made then in one case the assessee would be a BOI and in another it would be an AOP although the facts in both the cases were the same and again in the case of the same assessee for one year it would be a BOI and in another an AOP. Referring to the Tribunal's decision dated 31-1-1992 in the case of Bhaveshwar and others on which the learned D.R. has relied he submitted that in that case the assessee-appellants were unrepresented. He relied upon the decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479 and submitted that since the true effect of the documents, i.e., the declaration of gift and the trust deeds was clear there was no scope for considerations of tax avoidance. Finally, he stated that harsh facts should not make bad law and that suspicion cannot take the place of proof relying upon the Supreme Court decision in the case of Union of India v. Playworld Electronics (P.) Ltd. [19901]184 ITR 308.

6. The learned D.R. in rejoinder reiterated his earlier arguments and also pointed out the various resolutions passed by the assessee which showed that the members thereof had decided and agreed to deposit the sum received as gift with M/s. Hasmukh Shah Enterprise at the rate of 12% per annum and thus tried to show that the assessees had taken a step to earn an income which established their status as AOPs.

7. To our mind there are three principal issues for our consideration. They are (a) whether for the sake of consistency we should pass an order similar to the Tribunal's order in the case of H. C. Shah (b) what is the difference between a BOI and an AOP the criterion for determining it, and (c) what is the result of applying that criterion to the facts of this case.

8. The first issue at once gives rise to the question of precedent or judicial comity. How far the facts before the Tribunal in H.C. Shah's case are the same as those before us here, whether there are any facts different from those facts or in addition to those facts? In that case also the facts were materially the same as those in each individual case here looked at separately and in isolation. There was a gift to a certain group of three individuals and that group was a beneficiary in Manilal Trust and that is the trust in which some of the present assessee groups are beneficiaries. As stated above that trust is doing construction business. The terms of the gift were the same as in the present case giving discretion to the donees by majority to divide the gifted property and the accumulation of any accretion thereto. The Tribunal has applied the second test laid down by the Gujarat High Court in the case of Harivadan Tribhovandas i.e., " a conglomeration of individuals who happened to have come together but carry on some activity with a view to earn income or profits or gains". According to the Tribunal, since the donees had not come together on their own volition but happened to have come together by reason of the gift, they were a Body of Individuals. Looked at in isolation the facts of each appeal here are similar to those in the above case of H.C.Shah. However, when an the appeals were heard together, we have found certain important facts which make a material difference. In order to bring out that difference the following facts are mentioned.

9. Some of the assessees here are beneficiaries in Manilal Trust and some in Chinubhai Trust. So far as Manilal Trust is concerned, the following chart shows the name of the settlor, the trustees and the beneficiaries :---

Manilal Trust - Settlor Hasmukh Chinubhai (HUF) Trustees: Vijay Natwarlal Shah, Hasmukh Chinubhai Shah and Bipin Mafatlal Shah.

Beneficiaries Members of the BOI

1. BOI U. C. Shah& Others Upendra Chinubhai Shah

Jyotsna Bipinchandra Shah

Mehul Natwarlal Shah

2. BOI Hasmukh C. Shah Hasmukh C. Shah

Vijay Bipin Shah

Natwarlal Trikamlal Shah

3. BOI Natwarlal Trikamlal Shah Natwarlal Trikamlal Shah

Upendra Chinubhai

Jyotsna Bipin Shah

4. BOI Bipinchandra Mafatlal Bipinchandra Mafatlal Shah

Shah Smruti Hasmukhlal

Natwarlal Trikamlal Shah

5. BOI Shantaben Chinubhai Shantaben

Shah Bipinchandra Mafatlal Shah

Mehul Natwarlal Shah

6. Vijay Natwarlal Shah Vijay Natwarlal Shah

Shantaben Chinubhai Shah

Jyotsnaben Bipinchandra Shah

7. Mehul Natwarlal Shah Mehul Natwarlal Shah

Hasmukh Chinubhai Shah

Jyotsnaben Bipinchandra Shah

8. Pushpaben Natwarlal Shah Pushpaben N. Shah

Upendra C. Shah

Bipinchandra Mafatlal Shah

9. Smruti Hasmukh Shah Smruti Hasmukh Shah

Vijay Bipinchandra Shah

Vijay Natwarlal Shah

10. Vijay Bipinchandra Shah Vijay Bipinchandra Shah

Upendra C. Shah

Pushpa Natwarlal Shah

11. Vijay Trust Trustee Jyotsnaben Bipinchandra

Shah

12. Jyotsnaben Trust " Bipinchandra Mafatlal Shah

13. Bipinchandra " " Vijay Natwarlal Shah

14. Pushpaben " " Natwarlal Trikamal Shah

15. Vijaykamal " " Hasmukh C. Shah

Similarly, a chart is also given below for Chinubhai Trust :---

Chinubhai Trust -- Settlor Bipinchandra Mafatlal Shah (HUF)

Amount Rs. I 000

Trustees

1. Shri Upendra C. Shah

2. Shri Vijay Bipinchandra Shah

3. Shri Natwarlal Trikamalal Shah

Beneficiaries

1. U.C. Shah and Others (Claimed to be BOI)

2. M.N. Shah and Others --do--

3. B. M. Shah and Others --do--

4. S.H. Shah and Others --do--

5. H.C. Shah and Others --do--

6. Hasmruti Trust

7. Shantaben Trust

8. Hetsal Trust

9. Mehul Trust

10. Natvarlal Trust

These charts clearly show that the real persons either as donors, trustees or members of the groups claimed to be BOI are common. By various permutations and combinations of the same real persons the groups claimed to be BOI have been created. The trustees in the beneficiary trusts are also to be found as beneficiaries in the said groups. The declaration of gift shows that all the gifts to these groups were made on 8th January, 1981. Manilal and Chinubhai Trust settlements were made four days later on 12th January, 1981 naming the above ten groups and five trusts as the beneficiaries. Resolutions were passed on the 8th January, 1981 by the above groups claimed to be BOIs stating inter alia that the amount received as gift " is being deposited with M/s. Hasmukh Shah Enterprise at the interest rate of 12% per annum ". The assessees have shown the interest thus earned in their return of income. The construction business of the trusts is being carried on in the name of Hasmukh Shah Enterprise. The donors have withdrawn money from Hasmukh Shah Enterprise and made the said gifts. The addresses of all the said groups where beneficiaries under the Manilal Trust are care of that trust and addresses of the assessees of those groups who are beneficiaries in Chinubhai Trust are care of that trust. Both the trusts have the same address, i.e., Chinubhai Centre, Ashram, Road, Ahmedabad. The above facts show that there is an agreement between the real persons who some times appear as donors, sometimes as trustees and some times as members of the said group claimed to be BOIs and some times as trustees of the five beneficiary trusts to divide the income from the construction business in such a manner as to pay less income-tax than is really due. These facts distinguish these appeals from the appeal in the case of H. C. Shah decided by the Tribunal earlier. The learned Counsel for the assessee has relied upon the well-known book on jurisprudence by Salmond, quotations from which are given above. However, towards the end of that Chapter on precedent, the learned author has stated as follows :

" The general rule is that a court is bound by the decisions of an courts higher than itself. A High Court judge cannot question a decision of the Court of Appeal, nor can the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that courts are bound only by decisions of higher courts and not by those of lower or equal rank. A High Court judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflicts of authority and to secure certainty and uniformity in the administration of justice."

10. It is clear from the above quotation that in deciding these appeals we are not bound by the earlier decision of the Tribunal and we may pass a similar order only as a matter ofjudicial comity. The above distinguishing facts enable and require us to take a different view. The learned counsel for the assessee pointed out from the revisional order of the Commissioner from which the Tribunal heard the earlier appeal that this was a part of the design to fragment the income and submitted that this consideration was before the Tribunal. That however, is not correct because the Commissioner has merely relied on the argument that a petty sum of Rs. 1000 had produced an income of Rs. 2460. The above facts that the members of the said group, the trustees of the Manilal Trust (Chinubhai Trust) and the donors were common were not before the Tribunal at that time.

11. The learned counsel placed strong reliance upon the Gujarat High Court decision in the case of Harivadan Tribhovandas. The test for a BOI which the High Court has adopted in that case was that it should be " a conglomeration of individuals who happened to have come together but who carry on some activity with a view to earn income or profits or gains ". However, in that very decision, the Hon'ble High Court has approved the following observations of the A.P. High Court in the case of Deccan Wine & General Stores v. CIT [1977] 106 ITR 111 (AP) at page 117 :

" We are of the view that the expression body of individuals should receive a wide interpretation, perhaps not wide enough to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities, but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design, and one or more of whose members produce or help to produce income for the benefit of all, We are content to leave it at that."

This means that a group will not cease to be a body of individuals because it earns an income. If some of the members produce or help to produce " income " for the benefit of all it will still be a body of individuals but if the members are actuated by common design then it will not be a body of individuals. In this connection, the decision of the Supreme Court in the case of N.V. Shanmugham is relevant. In that case three receivers were appointed in a suit for dissolution of a firm and taking accounts. The court had directed them to conduct the firm's business for winding up. The Supreme Court held that the business was carried on by the receivers on behalf of the erstwhile partners with their consent. The control and management was in the hands of the receivers and that control and management was a unified one. The receivers had joined in a common purpose and had acted jointly. When they did so they acted on behalf of the persons who were the owners of the business. The receivers did not and could not have represented the individual interest of the various owners of the business. The profits were earned on behalf of the persons who had a common interest created by the order of the court and were on that account an association of persons. This decision of the Supreme Court had not been considered in the Gujarat High Court judgment in Harivadan Tribovandas's case but it is not inconsistent with the Supreme Court decision. Therefore, the above second test laid down by the Gujarat High Court means that it is the existence of a common design to earn an income at any stage of being by the individuals in the group which is material. The learned Departmental Representative has quite rightly contended that if emphasis was placed merely on the lack of volition for earning the " income " at the time of coming into existence by the group then that meaning of the Gujarat High Court decision would run contrary to the aforesaid decision of the Supreme Court. The learned counsel for the assessee pointed out the Tribunal's decision in the case of J.C. Kutumb [IT Appeal No. 4422 (Ahd.) of 1989 dated 9-7-1992] but at the time of hearing of that appeal the aforesaid decision of the Supreme Court in the case of N.V. Shanmugham had not been pointed out and consequently the Tribunal has not considered it. The result is that if there is a common design between the members of a group to " earn an income " then that group will not be a BOI but it will be an AOP.

12. That brings us to the argument of the learned counsel for the assessee that at the most it could be said that there was an intention to reduce the tax liability by dividing the income but what was necessary for the Revenue to prove was that there was a common intention to " earn the income " in order to regard the assessees as AOPs. Thus, the learned counsel has emphasised the distinction between saving tax and earning the income and according to him it was the latter which was necessary for treating the assessees as AOPs. Now, this distinction, to our mind, is not real or material. If the legal position is considered in its correct perspective what is necessary is that the common intention should be to obtain some financial benefit. The expression ' income ' used in the above decided cases has to be understood in that sense. For this purpose, it would be useful to hark back on the observations in the case of B.N. Elias, In re [1935] 3 ITR 408 (Cal.) which have been quoted in the Gujarat High Court's judgment in the case of Harivadan Tribhovandas's case. Their Lordships have first pointed out the meaning of the word ' association ' i.e., " " to associate means according to the Oxford Dictionary, to join in a common purpose or to join in an action ". Thereafter, these words have been interpreted in the context of the Income-tax Act and that is how the requirement that the common purpose must be to " earn an income " has been brought in. The Hon'ble Gujarat High Court has also considered this common purpose in the light of the Income-tax Act, and that is how it has said that the common purpose must be to earn an income. The basic idea, therefore, is that the common purpose has to be understood in the light of the context viz., the Income-tax Act and not that it should necessarily be confined to the concept of income only. When we apply the same process of reasoning it is easy to see that the idea is that if a group is to be called ' Association of Persons ' it should be made up of persons who have a common intention to get some financial benefit. What makes a group coherent is the common intention. It is that which distinguishes it from a Body of Individuals.

When the next step is taken to consider that attribute or quality of a group in the light of the Income-tax Act it must be said that earning of income is not the only consideration. Since the purpose of the Income-tax Act is to levy and collect tax on income any purpose or activity to reduce the tax payable would be well within its scope. In the context of the Income-tax Act a common purpose of a group having a common purpose to save income-tax would, therefore, be included in the meaning of an AOP. The decisions which have been cited before us do not show that [if the common intention of a group was to save tax it would not have been regarded by the courts as an AOP].

13. According to the assessee's learned counsel, the Revenues contentions could only lead to the conclusion that there was a large group made up of the settlors of the trust of the two trusts, the group claimed to be BOI, the members thereof, the beneficiary trusts and the beneficiaries of those trusts but that was not the issue before us. Our answer to that argument is short and simple. The fact that there was an agreement between all the aforesaid persons does not derogate from the fact that there was an agreement between the members of assessee groups. On the contrary, the agreement of the larger group includes the agreement between the members of the smaller assessee groups inter-se. The learned counsel has contended that the evidence for that was very sketchy but far from that the evidence is very clear. The persons constituting the assessee groups the settlors of the two trusts, the trustees and the donors have gathered together with the above common purpose. Even if it is regarded that the common intention must be to earn the income then the resolutions of the assessees to invest donations and earn interest is sufficient to qualify them as AOPs. The real factual picture is that a number of real human persons have come together in one place and merely put their stamps and signatures on a number of documents with the sole purpose of tax evasion. Finally, these facts when looked at realistically without being burdened by legal forms of constitution of the said separate groups by separate donations show that persons have come together for a common purpose and have made a mockery of the law treating it as a mere toy with utter cynicism and contempt for it.

14. This case has been very keenly contested -- the assessee's counsel putting forward subtle arguments. The learned Departmental Representative has spared no effort and has presented the Revenue's case very well. We find that the weight of evidence and balance of reasoning is in favour of the Revenue.

15. We hold that all the assessees were rightly regarded as AOPs by the ITO. His orders are restored. All the appeals are allowed

 

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