COMMISSIONER OF INCOME TAX Vs. FRIENDS ENTERPRISES

JUDGEMENT

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

(2.) A return was filed by M/s. Friends Enterprises, 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 in the accounting year ending on 3/03/1973. 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 (sister of Sri Ansari). In the course of assessment proceedings, it was mentioned by the assessee that the parties have also entered into entered into a joint venture agreement on 15/09/1972, 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 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 there by 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-tax introducing 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 give equal shares. It confirmed the Appellate Assistant Commissioners direction to examine the question of benamis.

(3.) 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 working. 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 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.