Commissioner of Income Tax v. R. Sethu and Others — 1997 DIGILAW 1475 (MAD)

Judgment :- N. V. BALASUBRAMANIAN, J. At the instance of the Revenue, the Tribunal has stated a case and referred the following question of law arising out of its order ITA No. 435/Mds/1986, dated 12th October, 1977, under s. 256(1) of the IT Act, 1961 (hereinafter referred to as the 'Act') : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the winnings from the lottery by Shri R. Sethu and others were not assessable in the status of AOP or BOI and that 4 separate assessments must be made on the 4 individuals separately as co-owners in respect of their share ?" 2. The brief facts leading to the tax case reference are as under : One R. Sethu, is an assessee. The assessee with his father M. Ramalingam Pillai, his brother-in-law S. Narayanan and his mother-in-law Smt. Seethalakshmi purchased four lottery tickets sold by the Directorate of Small Savings and State Lotteries, Government of Rajasthan, Jaipur. The said four persons entered into an agreement on 30th January, 1982, to share the prize money received by them equally. The ticket purchased bearing No. A-272661 won the first prize of Rs. 10 lakhs at the draw conducted on 29th March, 1982, by the Director of Small Savings and State Lotteries, Government of Rajasthan, and the prize money was disbursed to the assessee and three others by cheque dated 17th September, 1982, issued by the Government of Rajasthan. The ITO "for the reasons stated by him in the order passed for the asst. yr. 1982-83, was of the view that the assessee's father, brother-in-law and mother-in-law were benamis of the assessee and the entire lottery income of Rs. 10 lakhs should also be assessed as a protective measure in the hands of the assessee for the asst. yr. 1983-84 on the ground that the amount was received in September, 1982 which is the previous year relevant for the asst. yr. 1983-84. He also made a protective assessment on R. Sethu and others in the status of BOI on the same date for the same asst. yr. 1983-84. The assessee preferred two separate appeals objecting to the assessment on the ground that there was no BOI as the share of the four co-owners were known and for determined and there could not be any assessment on the BOI. yr. 1983-84. The assessee preferred two separate appeals objecting to the assessment on the ground that there was no BOI as the share of the four co-owners were known and for determined and there could not be any assessment on the BOI. He also contested that the other three persons cannot be regarded as benamis and the entire sum of Rs. 10 lakhs cannot be included in the income of the assessee. The CIT(A) heard both the appeals together and after perusing the records, he came to the conclusion that each co-owner signed an affidavit before the Commissioner of Oaths of this Court affirming that each had a 25 per cent share in the prize money and the Director of Rajasthan State Lotteries deducted 20 per cent out of the prize amount of Rs. 10 lakhs and the balance of Rs. 8 lakhs was paid to each co-owner at the rate of Rs. 2, 00, 000 each. The CIT(A), therefore, held that since the cheques were received by the co-owners the prize winner acquired the income only when the Director of State Lotteries issued the cheques and not before that date and, therefore, he came to the conclusion that the correct assessment year in which the assessment should not be made was 1983-84. He also upheld that contention of the assessee that there was no scope for making an assessment as a BOI as there was no skill or industry in making the income and there was only a wagering contract and in this view, directed the ITO to adopt the total income of the BOI consisting of assessee and others as 'nil' for the asst. yr. 1983-84 and allowed the appeal. He also held that the other persons cannot be regarded as benamis and allowed the appeal preferred by the assessee. He also held that the assessee should be assessed only to an extent of rupees two lakhs instead of rupees ten lakhs. 3. The Revenue preferred appeals against both the orders of the CIT(A) before the Tribunal. The Tribunal upheld the orders of the CIT(A). He also held that the assessee should be assessed only to an extent of rupees two lakhs instead of rupees ten lakhs. 3. The Revenue preferred appeals against both the orders of the CIT(A) before the Tribunal. The Tribunal upheld the orders of the CIT(A). The Tribunal held that the alleged co-sharers cannot be regarded as an AOP and in the absence of any material produced by the Revenue to rebut the evidence produced by the assessee that the co-owners were benamis of the assessee, there was no justification to reject the contention of the assessee that the assessee was entitled to one-fourth share in the prize money and he was liable to be assessed only to the extent of Rs. 2, 00, 000. The Tribunal considered the other appeal regarding the status of the assessee to be adopted. The Tribunal, following its earlier order in the case of ITO vs. P. Sadasivam & Ors. 1985 11 ITD 700 (Mad) came to the conclusion that the status of BOI cannot be adopted and dismissed the appeals preferred by the Revenue. 4. The Revenue has challenged the order of the Tribunal insofar as it relates to the question of status of the association to be adopted. It is fairly stated by the learned counsel for the Revenue Mr. C. V. Rajan, that the other order of the Tribunal holding that the other persons, cannot be regarded as benamis and the assessee should be assessed only to the extent of 2 lakhs rupees has become final and it is only against the other order of the Tribunal regarding the status of the assessee to be adopted, the Revenue had filed a reference application and the Tribunal had referred to the question of law set out supra. 5. Mr. C. V. Rajan, learned counsel for the Revenue submitted that the order of the Tribunal holding that the ITO was not correct in adopting the status of BOI is plainly erroneous in point of law as the Tribunal has overlooked the important fact that all these four persons came together for the purpose of winning in the lottery and the object of the association was to earn income. He further submitted that the decision of this Court in CIT vs. A. U. Chandrasekaran & Ors. 1997 (141) CTR(Mad) 177 would squarely apply to the facts of this case. 6. Mr. He further submitted that the decision of this Court in CIT vs. A. U. Chandrasekaran & Ors. 1997 (141) CTR(Mad) 177 would squarely apply to the facts of this case. 6. Mr. R. Janakiraman, learned counsel for the assessee, on the other hand, submitted that the entire reference has become academic as the Revenue has failed to challenge the other independent order of the Tribunal holding that the assessee was entitled to one-fourth share in the prize money and he was liable to be assessed only to a sum of Rs. 2, 00, 000. He therefore, submitted that under the provisions of the IT Act, the other order of the Tribunal has become final, the reference filed as against the order of the Tribunal regarding the status of the assessee has become academic and, therefore, the question of law referred to us should be returned without answering the question. 7. We have carefully considered the submissions of the learned counsel for the parties. We have set out the facts in detail. The fact remains that the assessee along with three others joined together and purchased a lottery ticket with the object of earning income. There was a joint venture and the object of the joint venture was to earn income and since both the conditions are satisfied, we are of the view that the status to be adopted for such association can only be the BOI. In a similar factual situation, this Court in CIT vs. A. U. Chandrasekharan & Ors. (supra) held as under : Thus a plain appreciation of facts arising in this case would go to show that ten persons by entering into an agreement created joint venture for purchasing the lottery tickets and the object of purchasing the lottery tickets was to win a prize. The ten persons together appointed one person for purchasing the tickets and maintaining the same till any one of the tickets of the tickets wins a prize. After a ticket won the prize, the money from the Government was collected through a bank and credited in the name of each of the individuals according to their share. The ten persons together appointed one person for purchasing the tickets and maintaining the same till any one of the tickets of the tickets wins a prize. After a ticket won the prize, the money from the Government was collected through a bank and credited in the name of each of the individuals according to their share. Therefore, to say that the joint venture in only up to the purchase of the tickets and thereafter the winning is according to their luck cannot be an argument for acceptance, inasmuch as under the later amendment winning of the lottery was also considered to be an income taxable under the head 'other sources'. Therefore, purchase of the lottery ticket is for earning an income. The two conditions for assessing the income under the status of AOP are : (1) there must be a joint venture, and (2) that the object of the joint venture is to earn income. Both the conditions are satisfied in the present case." Since we find that both the conditions, namely, that there was an association of people coming together for the joint venture, and the object of the association was to earn income are present in the instant case, the Tribunal was not correct in holding that the status of BOI cannot be adopted as BOI on the facts of the case. 8. What remains to be considered is the contention of Mr. Janakiraman that the entire reference has become academic. We are of the view that this contention is not acceptable. There were two assessments made by the ITO, one against the individual holding that the entire sum of Rs. 10, 00, 000 should be assessed in the hands of the assessee in his individual assessment, and another in the status of BOI. The Tribunal has rendered its finding with reference to the taxability of sum of Rs. 10 lakhs in the hands of the assessee as an individual and in that context, the Tribunal held that the other three persons cannot be regarded as benamidars of the assessee and the assessee would be assessable only at a sum of Rs. 2 lakhs. The Tribunal has rendered its finding with reference to the taxability of sum of Rs. 10 lakhs in the hands of the assessee as an individual and in that context, the Tribunal held that the other three persons cannot be regarded as benamidars of the assessee and the assessee would be assessable only at a sum of Rs. 2 lakhs. The above finding of the Tribunal, in our view, should be taken as only declaring the right of the assessee to receive a part of the amount won in the lottery and it cannot conclude the question of the status of the assessee in which the assessment should be made. Further, even if the assessment is to be made on the BOI, the members constituting the BOI would be separately assessable and in their assessment the question may arise how much they would be liable to be taxed with reference to their share in the BOI. Therefore, it cannot be said that the Tribunal has finally determined that the said amount should be assessed only in the hands of the individuals and not in the hands of BOI. The Tribunal had no occasion to consider the question of status to be adopted with reference to the receipt of the sum of Rs. 8 lakhs by the assessee and three others. The question was precisely considered in ITA. No. 435/Mds/1986 and in appeal, the Tribunal held that the status of BOI cannot be adopted. Therefore, we are of the view that since the question of the status was irrelevant to the other appeal preferred by the assessee in his individual assessment, it cannot be said that the finding rendered in the other appeal would render the entire reference as academic. Though the Revenue has accepted the other order of the Tribunal rendered in the individual assessment of the assessee, that would not bar the Revenue to question the order of the Tribunal regarding the determination of the status to be adopted with reference to the receipt of the money by these four persons. The Tribunal held that the status of BOI cannot be adopted and we have already held that the order of the Tribunal is erroneous in law and we have come to the conclusion that the proper status to be adopted is the BOI, as was done by the ITO though in a protective manner. The Tribunal held that the status of BOI cannot be adopted and we have already held that the order of the Tribunal is erroneous in law and we have come to the conclusion that the proper status to be adopted is the BOI, as was done by the ITO though in a protective manner. The acceptance of the order of the Tribunal in the individual assessment of the assessee, in effect, would mean that the other order made in a protective manner in the status of AOP becomes operative (sic-inoperative) as there cannot be two assessments with reference to the same assessee. The effect of order holding that three other persons were not benamidars of the assessee and the assessee was liable to be taxed only for a sum of Rs. 2 lakhs is that the share of the assessee in the winning was determined and nothing more can be read into the order, and therefore, it cannot be said that that would not conclude the status of the assessee to be adopted. It is well known that under s. 66 r/w s. 86 of the Act, as it stood then, the share of the member of BOI is 'disprove' the explanation of the assessee even if the same can be treated as prima facie 'not proved'. Keeping in mind the basic concept of the Evidence Act, the assessee should invariably take the following steps in such proceedings :(i) The assessee on receipt of penalty notice should submit a detailed reply and if the show cause notice is vague he must insist for the alleged itemized default from the Assessing Officer. (ii) If by any inadvertent mistake such reply could not be filed, it can be offered before the appellate authority and as held by Madras High Court in S. K. Sanjan Chettiar & Sons the Tribunal has to accept an explanation offered for the first time before it though no explanation was offered before Income-tax Officer or first appellate authority. Even when the explanation is rejected and not taken on record by the first appellate authority it should be placed on record for consideration before the Tribunal, a appeal is nothing but 'rehearing' of original proceedings. Even when the explanation is rejected and not taken on record by the first appellate authority it should be placed on record for consideration before the Tribunal, a appeal is nothing but 'rehearing' of original proceedings. (iii) That though the decision of Gujarat High Court rendered in CIT vs. Drapco Electric Corporation lays down that the explanation being merely rule of evidence it was competent for the authority which imposes penalty to invoke its aid although the Income-tax Officer may not have resorted at it at the stage when he made reference to the authority. With respect, this approach does not seem to be correct. It is most essential for the assessee to know whether the Assessing Officer proposed to proceed only against the substantive penal provision of law or intends to invoke any of the 3 Explanations. This is for obvious reason that it is for the assessee to rebut the prima facie presumption statutorily raised against him if and when any of the Explanation is invoked. It is, therefore, essential that at the very first stage, any of the said Explanation is invoked and full opportunity shall be given to the assessee to meet with the case of the Revenue.(iv) Apart from the raising legal contention it would always be advisable to plead on facts of the case 'bona fide belief' and 'reasonable cause' for committal of default, if any. Irrespective of cluster of statutory presumptions against the assessee in the realm of penalty, the law laid down by Supreme Court in the case of Anwar Ali and Hindustan Steel Ltd. (supra) holds the field along with other supporting judgments referred above on various aspects concerning right of the assessee and host of defense available to him.