Commissioner of Income Tax vs A. Gattupalli

B.P. Jeevan Reddy, J.—The following question has been referred to us u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in holding that the department was not correct in assessing the income derived from the business carried on in the name of A. Gattupalli in the status of ''body of individuals''?

One Shri Gattupalli was carrying on tobacco business. He exported tobacco to foreign countries, in consideration whereof some import entitlements were granted to him. Shri Gattupalli died on 31-8-1971. He left behind a will under which he bequeathed all his movable and immovable properties to his wife and four minor sons to be enjoyed by them equally. Till his death he was being assessed in the status of an individual. Soon after his death, i.e., in the next month, a deed of partition was executed whereunder the widow divided all the movable and immovable properties left by her deceased-husband into five shares, between herself and her four minor sons. The partition deed is dated 15-9-1971. One of the items shown in the partition deed as having been divided between the five parties thereto, is:

Quota rights of imports etc.

Smt. G. Chellamma, the widow of the deceased Shri Gattupalli, filed a return of income wherein she disclosed only one-fifth of the income received from the sale of import entitlements. (In this case, we are concerned with three assessment years, i.e., 1973-74, 1974-75 and 1975-76). The ITO was of the view that the income received from the sale of import entitlements should be assessed in the hands of ''body of individuals'' consisting of Smt. Chellamma and her four sons. In this view of the matter, he issued a notice u/s 148 of the Act to the said BOI calling upon them to file a return. They filed a ''nil'' return. The ITO, however, completed the assessment treating the entire income as the business income of the BOI carrying on business under the name and style of A. Gattupalli. The ITO was of the opinion that there was a common intention in the mother and four sons to exploit the quota rights to carry on the business of A. Gattupalli. According to him, inasmuch as all these persons had joined together with a common purpose of earning income, they should be assessed as BOI. This view of his was affirmed by the AAC in appeal.

On further appeal, however, the Tribunal took a different view. The Tribunal was of the view that import quota rights were only one of the properties left behind by Shri A. Gattupalli, and that this property along with other properties left by the deceased was partitioned between the mother and four sons under a deed of partition. It also held that no business was carried on as such by the said BOI. The Tribunal referred to the fact that the Government rejected the request of Mrs. Gattupalli for issuance of separate entitlements in the name of herself and her four sons, but held that the said rejection by the Government has no relevance on the question of status. It held that, inasmuch as the deed of partition clearly stated that each of the co-owners was entitled to a one-fifth share in the quota rights left behind by the deceased, the income arising by exploitation of such rights cannot be taxed in the hands of BOI, but should be taxed, if at all, as the individual income of the five individuals. The Tribunal was also of the opinion that there was diversion by superior or overriding title, namely, the deed of partition which specified and separated the share of each of the five heirs of the deceased. The correctness of the said view is questioned in this reference.

It is evident from the facts stated above that Shri A. Gattupalli left behind his wife and four minor sons. There is no evidence or material before us to show that after the death of Shri A. Gattupalli, his wife and four minor sons carried on the business which was hitherto carried on by the deceased. The business of the deceased was tobacco business, including export of tobacco. His business was not merely selling import entitlements. Import entitlements accrued only in the course of carrying on of tobacco export business. It is also not shown that any income was earned by any of these five individuals from tobacco business. The only income is one arising from the sale of import entitlements. In the circumstances, it must be held that this is only a case of the five heirs of the deceased disposing of the assets inherited by them, which they had also partitioned after the death of the deceased. Just like other assets, they inherited these entitlements as well. Indubitably, these import entitlements also constitute property. They sold these entitlements and derived some income. This by itself cannot be called carrying on of business. Unless they carry on business together, they cannot be assessed as a BOI. We are unable to agree with the learned standing counsel for the revenue that merely because they sold these import entitlements which they inherited from the deceased, and divided the income arising therefrom, they must be deemed or must be held to have carried on the business. We find it difficult to agree that mere sale of these entitlements constitutes business, or constituted the business of the alleged BOI. Once we hold that no business was carried on by the wife and four minor sons of the deceased, it follows that they cannot be taxed as a BOI, even applying the test enunciated by this Court in Deccan Wine and General Stores Vs. Commissioner of Income Tax, . In such a case, it is unnecessary to go into the question whether there was diversion by superior or overriding title.

For the above reasons, we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. No costs.