COMMISSIONER OF INCOME TAX vs A. U. CHANDRASEKHARAN and Others

THANIKKACHALAM, J. :

In compliance with the order of this Court dt. 9th March, 1981, the Tribunal referred the following question, for the opinion of this Court, under s.

256(2) of the IT Act, 1961 :

Whether, on the facts and in the circumstances of the case, the prize money of Rs. 1,00,000 could be assessed in the hands of the members as

one unit in the status of Association of persons or individually in the hands of the members ?

Shri A. U. Chandrasekaran and others are the employees of India Cements Ltd, Sankari, Salem District. They entered into on agreement on

17th February, 1977 as per which they agreed to jointly purchase lottery tickets of the Tamil Nadu Government for which the prize was declared

on 28th February, 1977. They secured a prize of rupees One lakh for one of the tickets thus purchased, viz., ticket No. S. 647180. The

abovesaid ten persons authorised Shri Chandrasekaran to collect the prize amount through the Punjab National Bank. The said Bank, after

realising the prize amount, credited the net amount thus drawn, i.e., Rs. 67,000 (Rs. 1,00,000 minus Rs. 33,000 deducted by the Director of

Raffles) to the respective Bank accounts of the ten persons. Each one of the ten persons thus got a sum of Rs. 6,700. The ITO was of the view

that the ten persons should be assessed in the status of Association of Persons (AOP). Notice under s. 139(2) was issued on 24th October, 1977.

A nil return was filed. However, in Part III of the return, it was mentioned that the sum of Rs. 1,00,000 was obtained as the first prize jointly by the

ten persons and that the same was exempt. Later, it was pointed out that the sum of Rs. 1,00,000 was divided among them and individual returns

were filed admitting their shares of the prize money. According to the ITO, all the elements of AOP were present in this case. Therefore, the ITO

brought to tax the above receipt from the lottery after giving the statutory deductions.

Aggrieved, the assessee went in appeal before the AAC. The AAC held that the joint purchase of the lottery tickets was not an investment for

definite expected gains, that the same does not amount to any business, that there was no management involved in getting the prize money and that,

therefore, the prize money cannot be assessed to tax in the hands of the assessee as AOP but should be assessed individually in the hands of the

ten persons. In that view of the matter, he cancelled the assessment. Aggrieved, the Department filed a second appeal before the Tribunal. The

Tribunal, following the decisions of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, ; G. Murugesan and

Brothers Vs. Commissioner of Income Tax , Madras, and Deccan Wine and General Stores Vs. Commissioner of Income Tax, confirmed the

view taken by the AAC and dismissed the appeal filed by the Department.

Before us, the learned senior standing counsel appearing for the Department submitted that as per the written agreement entered into between

ten persons, there is a joint venture through which lottery tickets were purchased with definite understanding of dividing the winning from the

lottery. According to the learned senior standing counsel, the assessees were doing the same venture from 1976 onwards. Therefore, by way of

regular activity, the assessee had a common volition in joining together to earn income. Hence, there is an AOP existing in the present case. The

learned senior standing counsel submitted that the decisions in Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, and G.

Murugesan and Brothers Vs. Commissioner of Income Tax , Madras, were rendered under Indian IT Act, 1922. Further, it was submitted that in

those cases where was no joint venture by the assessees themselves. Hence, it was submitted that the abovesaid Supreme Court cases would not

be applicable to the facts arising in the present case. However, the learned senior standing counsel appearing for the Department relied upon the

decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Friends Enterprises, According to the learned senior standing

counsel, this decision would apply on all fours to the facts arising in this case. The learned senior standing counsel further pointed out that the

Tribunal was not correct in stating that the joint venture ends with the purchasing of the ticket and it could not be extended further. According to

the learned senior standing counsel, the joint venture is for the purpose of earning income and does not stop with the purchase of the tickets. For

these reasons, the learned senior standing counsel appearing for the Department, submitted that the Tribunal was not correct in holding that the

assessee should be assessed not in the status of AOP but in the status of individuals.

However, the learned counsel appearing for the assessee submitted that in view of the decision of the Supreme Court cited supra, there is no

joint venture. Lottery tickets were purchased with the fond hope of getting a prize from the winning ticket. This would not amount to joint venture

for the purpose of earning income. Winning of a prize depends upon the luck, and, therefore, it cannot be said that any income is earned from the

winning of the lottery ticket. According to the learned counsel even though there is a written agreement, but by an oral understanding the ten

persons agreed to purchase the tickets for the purpose of dividing the income if any ticket wins the prize. Inasmuch as there is an understanding to

divide the income individually, it cannot be said that there is any element of AOP in the present case. The learned counsel also submitted that the

decision of the Andhra Pradesh High Court reported in Commissioner of Income Tax Vs. Friends Enterprises, would not be applicable to the facts

of this case. According to the learned counsel, the joint venture would stop with the purchase of the ticket and thereafter the ticket-holders are

depending upon their luck in the matter of winning the prize. Hence, even if there is any AOP, that is not for earning income.

We have heard the learned senior standing counsel appearing for the Department and the learned counsel appearing for the assessee. We have

already set out the facts in detail. The point for consideration is whether there is any AOP according to the facts arising in the present case.

Ten persons joined together and under a letter, dt. 18th October, 1977, each of the members has categorically stated as under :

The joint venture was organized by Mr. A. U. Chandrasekaran in November, 1976 and purchased tickets every month. We have got an oral

agreement to the effect that Raffle tickets have to be purchased for the total amount contributed by the members of this group and the ticket

numbers will be typed with a written agreement signed by all the members of this group stating that the proceeds of the winning tickets will be

equally divided amongst the members.

We are doing the same sort of joint venture every month and the total members will also be 10. But any one or (sic-every month) two members

will be excluded and in their place new members will be admitted so as to try our luck in succeeding attempt. All the members in our group are

working in the Sales Department of the Indian Cements Ltd., Sankari West and no outsiders will be admitted in our group"".

It is the case of the assessee that there is no permanency in the formation of the members, because, every month two out of the ten persons would

be removed and another two new members would be added in their place. But it remains to be seen that at least to the extent of eight persons they

remain constantly. It is the case of the assessee that there is no element of AOP in the present case. According to them, they jointed together only

for the purpose of purchasing the ticket and winning the prize depends upon their luck. This submission made by the learned counsel for the

assessee cannot be accepted. The joint venture would not stop with the purchase of the ticket, but it would extend till the winning of the prize for

the tickets which they have purchased. If there is no winning of the prize by any of the tickets, then the matter ends there. But any one of the tickets

purchased by them wins a prize, then the point would arise, whether the winning of the lottery could be assessed either in the status of AOP or in

the status of individuals, who joined the venture.

Even according to the assessee, as per their written agreement, they are entering into a joint venture for the purpose of purchasing the tickets.

The object of purchasing the ticket was for earning income.

The definition of the expression income in cl. (24) of s. 2 of the Act has been amended by the Finance Act, 1972, w.e.f. 1st April, 1972. Sub-

cl. (ix) has been added to the definition. After this amendment, the expression income includes any winnings from lotteries, cross-word puzzles,

races, including horse races, card games and other games of any sort or from gambling or betting or any form or nature whatsoever. Such income

is treated as income from other sources by s. 56(2)(iv). According to it, the income referred to in sub-cl. (ix) of cl. (24) of s. 2 of the Act shall be

chargeable to Income Tax under the head income from other sources.

In CIT vs. Indira Balkrishna (supra) the Supreme Court, while considering the meaning of the word AOP pointed out ""that the word associate

means to join in common purpose or to join in an action. Therefore, AOP as used in s. 3 of the IT Act means an association in which two or more

persons join in a common purpose or common action, and as the words occur in section, which imposes a tax on income, the association must be

one, the object of which is to produce income, profits or gains.

According to the facts arising in the abovesaid decision the co-widows of a Hindu, governed by the Mitakshara law, inherited his estate, which

consisted of immovable properties, shares, money lying in deposit and a share in a registered firm. These co-widows succeeded as co-heirs to the

estate of their deceased husband and took as joint tenants with rights of survivorship and equal beneficial enjoyment; they were entitled as between

themselves to an equal share of the income. This would go to show that the co-widows themselves did not form together as a joint venture in the

matter of inheriting the estate from their husband. In the absence of a joint venture to produce income, the Supreme Court held that they cannot be

assessed as on AOP.

According to the facts arising in G. Murugesan & Bros. vs. CIT (supra) S executed a settlement deed in March, 1955, conveying to his four

grandsons M, K, R & V, the appellants, a life interest in house property, with remainder to their children. He also purchased certain shares in joint

stock companies in the name of M and Brothers, the applications for transfer being signed by their mother as their guardian in 1959 and thereafter

by M for himself and on behalf of his brothers. M became a major in March, 1955 and V, the youngest in December, 1962. The income from the

house property and the dividends from the shares were credited to an account headed M and Brothers in the books of Ss firm, and at the end of

each year, the balance in the account of M and Brothers was transferred in equal proportions to the separate and individual accounts of M.K.R.

and V, in the books of the firm. The Department assessed the appellants in the status of an AOP. On a reference, the High Court held that in view

of s. 9(3) of the Indian IT Act, 1922, the appellants had to be assessed only as individuals in relation to the income from house property, but they

were to be assessed in the status of an AOP in relation to dividends. On appeal, the Supreme Court held that the appellants could not be assessed

in the status of an AOP in regard to the realisation of dividends since if the members of an association chose to realise their dividends as

individuals, there was an end of the association and the appellants assertion that they realised the dividends in their individual capacity remained

unrebutted and none of the facts could be said to be inconsistent with their claim. Thus, it can be seen in the abovesaid decision also there is no

joint venture by the brothers, who inherited the shares from their ancestors. When there is no intention to form a joint venture, it is not possible to

assessee the income derived from the dividends by the share-holders under the status of AOP.

The learned counsel appearing for the assessee placed reliance upon the decision of the Calcutta High Court in Rama Devi Agarwalla and

Others Vs. Commissioner of Income Tax, in order to contend that in the present case also there is no evidence for management in the matter of

forming the joint venture and earning the income. According to the facts arising in the abovesaid case, five ladies together purchased a property

and the five ladies sold their shares in the property resulting in receipt of a surplus of Rs. 2,50,000. According to the Department, the five ladies

formed together a joint venture and purchased the property and sold it for the purpose of earning income. Therefore, there is an AOP and the

income derived from the joint venture should be assessed in the status of AOP. On these facts, a question arose whether the Tribunal was justified

in law in holding that the assessment made in the status of AOP and is in order. While answering this question, the Calcutta High Court held that

the five ladies had purchased the property as tenants-in-common and in equal shares as recorded in the deed itself, that in this view of the matter

there was no joint tenancy, that the purchasers were entitled to an interest in the property to the extent of their respective shares and that there was

no material for the Tribunal to find that the five ladies constituted on AOP within the meaning of s. 3 of the Act, 1922. Thus, in the absence of a

joint venture by the ladies, who purchased the property, it was held that there was no arrangement or agreement or any common aim or purpose

or volition of the persons concerned in the matter of purchasing the property and selling the same. It is under these circumstances it was held that

there is no AOP in the abovesaid case. However, the learned senior standing counsel appearing for the Department, heavily relied upon the

decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Friends Enterprises, . According to the facts arising in this case

five persons had come together and engaged themselves in an organised course or activity to earn income from betting, and, therefore, according

to the Department they were assessable in the status of an AOP. On these facts, a question arose whether the said five persons constituted an

AOP or BOI. While answering this question, the Andhra Pradesh High Court held as under :

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 section 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 dividend 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 a 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 s. 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 ITO was, therefore, right in making the assessment in the status of an AOP.

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 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 upto 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. Hence the Tribunal was not

correct in confirming the order passed by the first appellate authority, who directed to assess the income earned from lottery money in the status of

individuals. As already pointed out, the abovesaid two decisions of the Supreme Court would not come to the aid of the assessee in order to

support their case, because the facts are different in those decisions. So also the decision of the Calcutta High Court in Rama Devi Agarwalla and

Others Vs. Commissioner of Income Tax, also would not come to the aid of the assessee, since there was no joint venture in purchasing the land

by five ladies and selling the same. A plain reading of the facts arising in the present case would go to show that the decision of the Andhra Pradesh

High Court in Commissioner of Income Tax Vs. Friends Enterprises, would apply to the facts arising in this case on all fours.

A mention was made with regard to a decision rendered by this Court in TC No. 49 of 1983 on 5th June, 1995 - CIT vs. O. K. Arumugham

Chettiar & Anr. [since reported at (1997) 141 CTR (Mad) 47. This case also deals with lottery money. According to the facts arising in this case,

after the purchase of the ticket, O. K. Ramasami Chettiar Parted with a sum of 50 paise for the purpose of obtaining his next meal and promised to

pay back 25 per cent of the lottery winning if the ticket gets a prize. Fortunately, the ticket got a prize of Rs. 17,86,000. A question arose whether

the prize earned by the ticket is to be assessed in the status of AOP. This Court held that the lottery winning cannot be assessed in the status of

AOP because the agreement was reached between the two persons after the ticket was purchased. According to the agreement, one person

agreed to part with 25 per cent of the prize. Therefore, this Court held that there is no joint venture in earning the income from lottery. Accordingly,

it was held that the lottery winning cannot be assessed in the status of AOP. On facts, this decision is also distinguishable. Thus, considering the

facts arising in the present case, in the light of the judicial pronouncements, we hold that the Tribunal was not correct in coming to the conclusion

that the winning of the lottery should not be assessed under the head AOP. Inasmuch as the question referred by the Tribunal does not reflect the

issue arising in this case, we would like to reframe the question as under :

Whether, on the facts and in the circumstances of the case, the prize money of Rs. 1,00,000 could be assessed in the hands of the members as

one unit in the status of AOP"".

In view of the foregoing discussion, we answer the question referred to us in the affirmative and in favour of the Department. No costs.