Kanchanlal Maganlal Kapadia vs ITO

D.A. Mehta, J.—This petition is filed by one Shri Kanchanlal Maganlal Kapadia and 14 others challenging the action of the respondent in issuing notice u/s 148 of the Income Tax Act, 1961 (the ''Act'') in the name and style of Shri Kanchanlal Maganlal Kapadia & 14 others members (AOP) for assessment year 1986-87.

The facts which are not in dispute are that all the 15 persons jointly purchased lottery tickets, each having an equal share therein i.e., 1/15th each. Out of many tickets so purchased by the 15 individuals, one lottery ticket turned out to be a winning ticket bearing No. JM 2606390 for a sum of Rs. 25,00,000. In the return of income filed by Shri Kanchanlal Maganlal (Individual) under the head "Income from other sources" income from winning of lottery at 1/15th share to the tune of Rs. 1,66,667 was shown and statutory deduction therefrom was claimed. The assessing officer vide notice dt. (sic) 142(1) of the Act along with letter of the same date called for following particulars:

In connection with your assessment proceedings, following particulars are required:

(i) Along with your return of income, you have filed xerox copy of tax deduction certificate issued by Pay and Accounts Office of Government of Maharashtra. The original certificate is required to be filed.

(ii) It is your claim that you have only 1/15th interest in prize winning lottery. You are requested to give names of other 14 persons who as per your claim have shared prize with you with their interest. Their complete address and permanent account number should also be given, if they are assessed to tax.

(iii) Any other evidence which you desire to furnish in support of your claim that you have only 1/15th interest in the prize winning of lottery.

The assessee individual replied on 8-8-1988 and enclosed the following evidence in support of the claim that only 1/15 was assessable in hands of the individual:

Evidence in support of the claim that the assessee has only 1/15th share of interest in the prize amount is:

(i) The lottery ticket was purchased by all the persons jointly and by the natural guardian of minor co-sharers. A copy of the agreement is enclosed herewith.

(ii) The prize ticket was discharged by all the co-sharers for submitting to the Government of Maharashtra for claiming prize amount. Photocopy of the discharged ticket is enclosed herewith.

(iii) The receipt from the Finance department, Bombay, acknowledging the receipt of the prize ticket states that it has been received from Kanchanlal M. Kapadia and others.

(iv) The prize amount was deposited in Savings Account No. K-2348 with State bank of India on 17-2-1986, from where it was disbursed to all the co-shares equally on 18-2-1988.

The assessee individual also placed reliance on the Apex Court decision in case of G. Murugesan and Brothers Vs. Commissioner of Income Tax , Madras, by addressing the assessing officer in following terms:

As per the decision of Hon''ble Supreme Court in the case of G. Murugesan & Bros. v. CIT (supra), such a case where lottery tickets are purchased jointly does not constitute an AOP, since the essential ingredients of an AOP are not present. Photocopy of the gist of the said judgment is enclosed herewith.

On 13-9-1988, assessment was framed u/s 143(3) of the Act by the assessing officer and in case of one of the individual assessees the assessing officer observed as under:

In addition to the above evidence showing that 15 persons had collectively purchased the lottery ticket and prize winning was to be shared by all of them equally, the assessee has given written submission vide his letter dated 8-8-1988 discussing the various judicial decisions showing that all the 15 persons who purchased the ticket collectively are liable to be assessed on their share of prize winning in individual capacity. Considering the submission made by the assessee and evidence produced by him, the prize winning from lottery as declared by the assessee is assessed accordingly.

Thereafter, on 1-3-1996, the impugned notice u/s 148 of the Act has been issued.

The learned advocate for the petitioner has principally assailed the said action of the respondent by pointing out that the impugned notice has been issued beyond a period of four years from the end of the relevant assessment year and hence, unless and until the revenue is in a position to show that there was any failure on part of the assessee to make a return, or that there was any failure on part of the assessee to respond to a notice u/s 142(1) or Section 148 of the Act, or disclose fully or truly all material facts necessary for the assessment, the impugned notice be struck down as being without jurisdiction. Referring to the aforesaid facts recorded hereinbefore it was submitted that all the 15 individuals had duly shown 1/15th share each and as could be seen from the case of individual Shri Kanchanlal Maganlal, after thorough inquiry, and application of mind, the assessing officer had assessed 1/15th share of the prize winning money in hands of the individual. That in fact the petitioner had, in response to notice u/s 142(1) of the Act, invited attention to the correct legal position by adverting to the decision of the Apex Court in case of G. Murugesan & Bros, (supra) and, therefore, even in law, the stand taken by the assessee individuals was justified and there was no entity like Shri Kanchanlal Maganlal Kapadia & 14 others (AOP). That if the assessing officer was of the opinion, after considering the evidence placed on record and the submissions made by the individual assessees, that an AOP was liable as an entity to file a return of income, it was open to the assessing officer to issue a notice u/s 139(2) of the Act calling upon such an AOP to file a return of income. That the impugned notice was without jurisdiction as the same was based merely on a change of opinion.

On behalf of the respondent Ms. M.M. Bhatt, learned standing Counsel, contended that as per reasons recorded there was an obligation in law on the AOP to file a return of income and as no such return of income had been filed income had escaped assessment. Therefore, the respondent was within his right to issue the impugned notice even beyond the period of four years. It was further submitted that the AOP was under a legal obligation to file a return of income as an AOP and mere filing of returns by 15 individuals would not absolve the petitioner AOP.

The proviso u/s 147 of the Act envisages three different contingencies, upon fulfilment of any one or more of them, an assessing officer would derive jurisdiction to initiate reassessment proceedings beyond a period of four years from the end of the relevant assessment year. Either there has to be a failure on part of the assessee to file a return of income u/s 139 of the Act, or there has to be a failure to respond to a notice u/s 142(1)/148 of the Act, or to disclose fully or truly all material facts necessary for the assessment of the assessment year in question. The reasons recorded as per extract appearing in the affidavit-in-reply by the respondent read as under:

The above AOP has won the prize of lottery of Maharashtra State bearing No. JM 2606390 in which draw was held on 15-11-1985 and prize amounting to Rs. 25 lakhs is paid by concerned authority as per their regulation in the record. The AOP has neither filed any return of income nor declared it for taxation. Hence, I have reason to believe that there is escaped assessment within the meaning of Section 147 of the Income Tax Act, 1961. I, therefore, propose to issue notice u/s 148 of the Income Tax Act, 1961.

Thus, it is apparent that the only reason for issuance of notice u/s 148 of the Act is failure on part of the AOP to file a return of income and offering prize winning money for taxation. In the affidavit-in-reply certain extract from the Supreme Court decision in case of G. Murugesan & Bros, (supra) has been reproduced and the learned standing Counsel also emphasized the said part of the Apex Court decision to contend that there was an AOP which had come into existence and was thus duty-bound to file a return of income declaring the entire prize winning money in hands of that one entity.

The only question that the court is therefore required to address is whether, in the first instance, it could be said with certainty that an AOP existed on the day when the prize was declared on the draw of lottery; and whether there was any obligation on such an entity to file a return of income. The factum of Shri Kanchanlal Maganlal Kapadia and 14 other persons having entered into an agreement dated 7-11-1985 was already available on record. It is also available on record that the said 15 Individuals had collectively purchased number of tickets of Maharashtra State Lottery, out of which one turned out to be a prize winning ticket. All 15 persons have discharged the said lottery ticket by appending their signatures on the reverse side of the lottery ticket. The receipt issued by the authority of Maharashtra State Lottery categorically indicates that the claim of prize winning ticket was made by 15 individual persons. Hence, it is apparent that 15 persons, in their individual capacity, had acted in unison and evidence thereof was available before the assessing officer at the time of original assessment. The assessing officer had applied his mind to the said aspect of the matter when along with notice u/s 142(1) of the Act by a separate letter of even date details of all the 15 persons were called for along with evidence in support of the claim that individual Shri Kanchanlal Maganlal haft only 1/15th interest in the prize winning lottery ticket.

In case of G. Mumgesan & Bros, (supra) the Apex Court has stated asunder:

For forming an ''AOP'', the members of the association must join together for the purposes of producing an income. An ''AOP'' can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, volition on the part of the members of the association is an essential ingredient. It is true that even a minor can join an ''AOP'' if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two or more shareholders function as an ''AOP'' from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an ''AOP''.

Applying the aforesaid ratio to the facts available on record it becomes apparent that for the purposes of purchasing a lottery ticket and collecting the winning prize, in the event of being successful, the act does not involve any management which would permit drawing of an inference that two or more lottery ticket-holders function as an AOP. The Apex Court was concerned with a fact situation where dividends were received by joint shareholders.

In the circumstances, it is not possible to accept the stand of the respondent-authority that there was any obligation on an entity by the name of Shri Kanchanlal Maganlal Kapadia & 14 others members (AOP) to tender a return of income under the provisions of the Act. In absence of any obligation in law it is not possible to state that there was any failure or omission on part of the petitioner to file a return of income. Once there was no failure on part of the petitioner to be treated as an assessee under the provisions of the Act the impugned notice u/s 148 of the Act which was admittedly issued beyond a period of four years from the end of assessment year 1986-87 could not have been issued. Accordingly, notice u/s 148 of the Act dated 1-3-1996, issued by the respondent-authority is hereby quashed.

The petition is allowed accordingly. Rule made absolute. There shall be no order as to costs.