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Commissioner Of Income-Tax v. Khalid Mehdi And Others
Comprehensive Summary of the Opinion (P.A. Choudary, J.)
Factual and Procedural Background
The disputes arise from assessments relating to income derived from the Skyline Theatre, a cinema building constructed by Rafiq Mehdi Khan and his four minor sons (Arif, Khalid, Toufiq and A.N. Nisar Mehdi Khan). The theatre building (with projector, furniture and fittings) was later leased out. Separate lease amounts were received for the building (Rs. 4,000) and for the projector, furniture and fittings (Rs. 4,500). The father and four sons filed returns as individuals, treating the building income under the head "Property" and the hire of machinery/furniture under "Other sources." The Income-tax Officer accepted those returns for the assessment years 1971-72, 1972-73 and 1973-74; some assessments became final.
The Commissioner invoked his powers under section 263 of the Income-tax Act to set aside certain assessments (against Arif and Khalid) and directed fresh assessments to be made in the status of an "Association of persons" (AOP), treating the entire income (both building and machinery/fittings) as arising to that AOP. Arif and Khalid appealed to the Income-tax Appellate Tribunal (the Tribunal). The Tribunal held there was an AOP within clause (31) of section 2 of the Income-tax Act and, relying on Atchaiah (Ch.) v. ITO, concluded that because the father's assessments had been finalised in his individual status the Revenue could not assess him later as a member of an AOP; accordingly, it treated the Commissioner’s directions to assess as an AOP as invalid in those respects. The Tribunal also accepted the assessees' contention that the building rent should be assessed under "Property" while rent of projector/fittings should be assessed under "Other sources."
The Revenue referred questions to this Court (R.C. No. 75 of 1979 and R.C. No. 163 of 1979). The Court considered (a) whether the Tribunal was justified in holding that rent of the building should be assessed under "Income from property" and (b) whether the Tribunal was justified in holding that the Commissioner's directions to assess in the status of an AOP were invalid and that rent should be ascribed to members individually with machinery hire to "Other sources."
Legal Issues Presented
- "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the rent of the building should be assessed under the head 'Income from property'?" (Referred in R.C. No. 75 of 1979.)
- "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the directions given by the Commissioner to make the assessment in the status of an 'Association of persons' are invalid?" (First question referred in R.C. No. 163 of 1979.)
- "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rent of the building should be assessed under the head 'Property' in the hands of the individual co-owners and the rent from furniture and projector, etc., under the head 'Other sources' in the assessment of the association of persons?" (Second question referred in R.C. No. 163 of 1979.)
Arguments of the Parties
Assessees' Arguments (Arif and Khalid Mehdi Khan)
- The order of the Commissioner directing assessment in the status of an Association of Persons is wrong because there is no such association in existence for the relevant period.
- The rent of the building should be assessed under the head "Income from property" in the hands of the co-owners as individuals.
- The rent from the projector, furniture and fittings should be assessed under the head "Income from other sources."
- They relied upon the Tribunal's acceptance of their classification and on the finality of prior individual assessments (as filed and accepted by the Income-tax Officer).
Revenue's Arguments (as advanced before this Court)
- Sri Suryanarayana Murthy, for the Revenue, contended that the Tribunal's view that once an assessment against an individual member has become final the Revenue cannot assess that person later as a member of an AOP is not correct and requires reconsideration.
- The Revenue urged that the Division Bench decision in Atchaiah (Ch.) v. ITO (1979) ought to be reconsidered; that decision had held that an Income-tax Officer's initial option to assess individuals (rather than the AOP) is final and irrevocable.
Other Arguments Raised at the Bar (not attributed to a specific party in the opinion)
- It was argued (the opinion records) that so-called "protective assessments" do not acquire finality and therefore can be varied later. The Court noted, however, that no statutory provision was shown to support this contention.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Atchaiah (Ch.) v. ITO, [1979] 116 ITR 675 (AP) | Held that where the Income-tax Officer first assesses members individually (including income that accrued to them as members of an AOP), the option exercised is final and irrevocable; it is not open to Revenue thereafter to assess them as members of the AOP. | The Tribunal relied on this case to rule that the Commissioner's directions to assess as an AOP were invalid. The Court acknowledged the rule but observed that the wider question of its correctness need not be resolved here because, on the facts, assessments had become final; accordingly the Court answered the first referred question in favour of the assessee, applying the effect of finality reflected in Atchaiah. |
| Sultan Brothers P. Ltd. v. CIT, [1964] 51 ITR 353 (SC) | Established the principle that where the letting of machinery, plant or furniture and buildings is inseparable (so that the letting of buildings is inseparable from the letting of machinery), such income may be chargeable under the residuary head "Income from other sources" (Section 56) if not chargeable under "Profits and gains of business or profession". | The Court relied on this Supreme Court decision to conclude that the letting of the cinema projector and the letting of the building were inseparable and therefore the income from both should be treated as "Income from other sources" under Section 56. The Court held against the Tribunal's contrary view. |
| Lalji Haridas v. Income Tax Officer & Anothers, [1961] 43 ITR 387 (SC) | Authority (as referenced in the opinion) supporting the proposition that a protective assessment may be treated as a final determination for certain purposes. | The Court invoked this decision to support its conclusion that "protective assessments" (as labelled) lacked any statutory basis for being non-final and therefore, in law, ought to be treated as final determinations, barring interference on ordinary grounds applicable to assessments. |
| CIT v. Blue Mountain Engineering Corporation, [1978] 112 ITR 839 (Mad) | High Courts (including this Madras decision) have endorsed the Atchaiah rule that an initial option by the Income-tax Officer to assess individuals is final. | Listed by the Court as one of several authorities that follow the Atchaiah view; cited in the context of a division of judicial opinion (the Court noted the cleavage but did not resolve it). |
| CIT v. R. Dhandayutham, [1978] 113 ITR 602 (Mad) | Another High Court decision aligned with the Atchaiah principle (option to assess individuals is final). | Referred by the Court among authorities that adopt the Atchaiah position; used to demonstrate supporting High Court authority for that view. |
| CIT v. Ratan (C.) & Co. and S.N. Agarwalla, [1981] 128 ITR 39 (Cal) | High Court authority supporting the view that an initial option by the Income-tax Officer to assess individuals is conclusive. | Identified by the Court as one of several supportive High Court decisions illustrating the cleavage of opinion on this issue. |
| Universal Commercial Company v. Commissioner of Income-Tax, Madras, [1981] 130 ITR 775 (Mad) | Another Madras High Court decision in the group supporting the Atchaiah approach. | Noted by the Court among authorities endorsing the Atchaiah principle. |
| Commissioner of Income-Tax, A.P. v. Hyderabad Deccan Liquor Syndicate, [1974] 95 ITR 130 (AP) | High Court authority consistent with the Atchaiah position. | Listed by the Court as part of supporting jurisprudence for the view that initial individual assessment is final. |
| Ravinder Narain v. ITO, [1974] 96 ITR 612 (Delhi) | Delhi High Court decision adopting the view that an initial assessment of individuals is final and precludes later AOP assessment. | Referred to by the Court as one of the decisions in support of the Atchaiah doctrine. |
| CIT v. Pure Nichitpur Colliery Co., [1975] 101 ITR 79 (Pat) | Patna High Court decision aligned with the Atchaiah approach. | Included by the Court among authorities supporting the finality principle for initial individual assessments. |
| Ramanlal Madanlal v. CIT, [1979] 116 ITR 657 (Cal) | Calcutta High Court decision supporting the Atchaiah view. | Noted as one of the cases that take the same position as Atchaiah. |
| M.K. Dar v. CIT, [1982] 138 ITR 801 (All) | Allahabad High Court decision taking a contrary view (i.e., not following the Atchaiah rule). | Referenced by the Court as part of the line of cases adopting a different approach; the Court observed the cleavage but did not decide the larger question. |
| Rodamal Lalchand v. CIT, [1977] 109 ITR 7 (P&H) | Punjab & Haryana High Court decision expressing a contrary view to Atchaiah. | Identified by the Court as one of the contrary authorities illustrating the division of opinion. |
| Mahendra Kumar Agarwalla v. ITO, [1976] 103 ITR 688 (Patna) | Patna High Court decision also taking a view contrary to Atchaiah. | Noted by the Court among those High Court decisions that disagree with the Atchaiah principle; the Court did not resolve the conflict. |
Court's Reasoning and Analysis
The Court addressed two main lines of legal analysis: (A) classification of the income (building rent and machinery/fittings hire) under the heads of income in the Income-tax Act; and (B) whether the Commissioner could direct reassessment of taxpayers in the status of an AOP after individual assessments had become final.
A. Classification of income — building rent and hire of projector/fittings
- The Court began by referencing the statutory scheme: Section 14 classifies income into six heads (including "income from house property" and "income from other sources"), and Section 56 contains the residuary head "Income from other sources" and specific provisions concerning lettings.
- The Court observed that letting of machinery, plant or furniture separately from buildings can in some cases be chargeable as "Profits and gains of business or profession," but in the facts of this case the machinery (cinema projector) and fittings were leased only for the purpose of operating the cinema and could not be used without the building.
- Relying on Section 56(2)(iii) (as quoted in the opinion) and the Supreme Court decision in Sultan Brothers P. Ltd. v. CIT, the Court held that where letting of buildings and machinery is inseparable, the income from such letting (if not chargeable under "Profits and gains of business or profession") must be charged under "Income from other sources."
- Applying that principle to the Skyline Theatre, the Court concluded that the letting of the projector/fittings was inseparable from the letting of the building; therefore the income from both should be treated under the residuary head "Income from other sources" (Section 56) and not, as the Tribunal had held, with part under "Property" and part under "Other sources."
B. Validity of Commissioner's directions to assess as an Association of Persons
- The Tribunal had found there was an Association of Persons consisting of the father and four sons (clause (31), section 2), but ruled (relying on Atchaiah) that because the father's assessments for 1971-72 and 1972-73 had become final in his individual status it was not open to Revenue to assess him as a member of an AOP for those years.
- The Revenue urged reconsideration of the Atchaiah principle; the Court observed the division of High Court authority on this legal question but held that it did not need to resolve the wider issue because, on the facts before it, individual assessments had in fact become final.
- Regarding assessments labelled "protective," the Court considered the contention that such assessments do not acquire finality. The Court found no statutory provision supporting that proposition. Invoking the provisions of the Income-tax Act and the supporting authority of Lalji Haridas v. ITO, the Court concluded that absent statutory authority a so-called protective assessment must be treated as a final assessment (capable of variation only on ordinary grounds applicable to assessments).
- Because the father's assessments for 1971-72 and 1972-73 were final, Khalid's 1973-74 assessment as an individual had become final, and the other individual assessments for 1973-74 (although labelled "protective") were to be treated as final, it was not possible in the present facts to reopen assessments or to convert those individuals' assessments into an assessment of an AOP. Consequently the Commissioner's directions under section 263 directing reassessment as an AOP could not be effective as against all the relevant persons.
Holding and Implications
Holding:
- The lease income both on the machinery and on the building should be treated as falling under the head "Income from other sources" under section 56 of the Income-tax Act.
- The assessees are to be assessed in their individual status; the directions given by the Commissioner to make the assessment in the status of an "association of persons" are not valid (in the circumstances of this case).
- The first question in R.C. No. 163 of 1979 (on the validity of the Commissioner's directions to assess as an AOP) was answered in favour of the assessee and against the Revenue. The other referred questions (including the classification issue) were answered against the assessee and in favour of the Revenue insofar as income classification was concerned (i.e., both building and machinery hire under "Other sources").
Implications and consequences:
- Direct effect on the parties: The Court ordered that for the assessment years in question the lease income from both the building and the projector/fittings is chargeable as "Income from other sources" (Section 56), and the assessees should be assessed in their individual capacities rather than as an AOP.
- Limit on broader precedent: The Court noted a cleavage of judicial opinion on whether an initial option to assess individuals precludes later assessment of an AOP (the Atchaiah line of authority versus contrary High Court decisions). The Court expressly declined to resolve this broader conflict of law because the specific factual posture (finality of individual assessments) made that wider question unnecessary to decide in this case. Therefore no new, broader precedent resolving that cleavage was laid down by this opinion.
- Costs: The Court ordered "No costs."
This summary is based exclusively on the content of the provided opinion and does not add or infer facts beyond those stated in the opinion.
P.A Choudary, J.:— In R.C No. 75 of 1979, the following question: “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the rent of the building should be assessed under, the head ‘Income from property’?”
2. Has been referred for the opinion of this court at the instance of the Revenue. In this case, there are three respondents: Khalid Mehdi Khan, Toufiq Mehdi Khan and A.N Nisar Mehdi Khan. In R.C No. 163 of 1979, the following questions have been referred for the opinion of this court, at the instance of the Revenue:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the directions given by the Commissioner to make the assessment in the status of an ‘Association of persons’ are invalid?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rent of the building should be assessed under the head ‘Property’ in the hands of the individual coowners and the rent from furniture and projector, etc., under the head ‘Other sources’ in the assessment of the association of persons?”
3. The dispute centres round a well-known cinema theatre in the City called ‘Skyline Theatre’ which is owned by five persons, viz., Rafiq Mehdi Khan, Arif Mehdi Khan, Khalid Mehdi Khan, Toufiq Mehdi Khan and A.N Nisar Mehdi Khan.
4. Rafiq Mehdi Khan along with his four minor sons constructed a building equipped with a cinema projector, furniture, fittings, etc., so as to make it a regular cinema theare, viz., Skyline Theatre
5. The building was some time later leased out and an amount of Rs. 4,000 was charged as lease rent for the building and another amount of Rs. 4,500 was charged as rent for the projector, furniture, fittings, etc. On the income so derived, the father and four sons voluntarily submitted returns of income showing the income of the building under the head “Property” and the income derived on account of hiring of furniture, etc., under the head “Other sources”. These returns were made by the five persons as individuals on the basis of their co-ownership of the theatre. The returns so filed by the five persons were accepted by the Income-tax Officer. We are concerned, in this case, with the assessment years 1971-72, 1972-73 and 1973-74. The father's assessment for the years 1971-72 and 1972-73 was completed by the Income-tax Officer in the status of an individual. Similarly, assessment of Khalid Mehdi Khan was completed by the Income-tax Officer for the year 1973-74 in the status of an individual. The Income-tax Officer accepted the contention of the assessees that the building income is property income and the income derived from the projector, etc., is income from “Other sources”. The assessment made by the Income-tax Officer on the father Rafiq Mehdi Khan for the years 1971-72 and 1972-73 had become final. However, the Commissioner of Income-tax, invoking his powers under section 263 of the Income-tax Act, set aside the assessment made against Arif Mehdi Khan and Khalid Mehdi Khan, and directed the Income-tax Officer to make a fresh assessment in the status of an association of persons consisting of the father and four sons. The Commissioner's direction was to treat the entire income derived on account of lease of the building and hire charges received for furniture, fittings, etc., in the status of an association of persons. Aggrieved by that order, Arif Mehdi Khan and Khalid Mehdi Khan preferred appeals to the Income-tax Appellate Tribunal. They contended that the order of the Commissioner is wrong, in that it directed the entire income to be treated as income arising out of other sources They also contended that there is no association of persons existing and, as such, assessment on such a nonexisting identity could not have been directed to be made by the Commissioner.
6. Disagreeing with the contention of the assessees, the Income-tax Appellate Tribunal held, as a fact, that there was an association of persons within the meaning of clause (31) of section 2 of the Income-tax Act, consisting of the father and four sons. But, in view of the fact that the assessment against the father had been made as an individual and that has become final for the assessment years 1971-72 and 1972-73, it would not be open to the Revenue now to assess the father and four sons as an “Association of persons”. The Appellate Tribunal had relied upon Atchaiah (Ch.) v. ITO, [1979] 116 ITR 675 (AP). In effect, the Appellate Tribunal ruled that the directions given by the Commissioner to assess the assessees in the status of an association of persons are not valid. The first question which has been referred to us in R.C No. 163 of 1979 and which has been set out by us above, arises in those circumstances.
7. Before the Appellate Tribunal, the contention of the assessees that the rent of the building should be assessed under the head “Property” and the rent from projector, furniture, fittings, etc., should be assessed under the head “Other sources” was accepted. Out of that finding of the Appellate Tribunal, the second question in R.C No. 163 of 1979 which we have set out above, has been referred to us.
8. Now, taking these two referred cases together and considering the only question in R.C No. 75 of 1979 and the second question in R.C No. 163 of 1979, we are of the opinion that the Tribunal erred in holding that a portion of the income that is attributable to the building is to be ascribed to the sources of property income while the income derived from leasing out the cinema projector and other fittings is to be ascribed to the heading of “Income from other sources Section 14 of the Income-tax Act classifies all income for the purpose of charging of income-tax in the computation of total income into six heads, namely, salaries, interest on securities, income from house property, profits and gains of business or profession, capital gains and income from other sources. There would have been no problem in ascribing the income derived out of the lease of a building to the head of income “Profits and gains of business or profession.” But, in this case, the building was constructed as a cinema theatre in which cinema projector and other machinery and fittings have been located. Now, this machinery and other fittings have been separately let out and this income from the lease of the machinery cannot clearly fall under the heading of “Business income It can only be ascribed to the residuary head of income called “Income from other sources” falling under section 56 of the Income-tax Act. Section 56, clause (2), sub-clause (iii), says that “where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession” should be charged under the head “Income from other sources”. There can be no doubt that the leasing of the machinery in this case can only be for the purpose of using that machinery as a cinema projector. If so, the machinery leased out cannot be used without the building. Thus, the letting of the building becomes inseparable from the letting of the machinery. Accordingly, the income from the machinery as well as the income from the lease of the building should be treated as “income from other sources” falling under section 56 of the Act. The contrary view taken by the Tribunal runs counter to the judgment of the Supreme Court reported in Sultan Brothers P. Ltd. v. CIT, [1964] 51 ITR 353. We accordingly answer the only question in R.C No. 75 of 1979 and the second question in R.C No. 163 of 1979 against the assessee and in favour of the Revenue holding that the lease income both on the machinery and on the building should be treated as falling under the head “Other sources” under section 56 of the Income-tax Act and that the assessees should be assessed in their individual status.
9. Then remains the first question in R.C No. 163 of 1979, which is really the subject-matter of debate at the bar. It is argued for the Revenue by Sri Suryanarayana Murthy that the view which has been taken by the Tribunal that once an assessment made against the father in his individual status has become final, it is not open to the Revenue to assess the same person in the status of an “Association of persons” is not correct. Sri Suryanarayana Murthy argued that the judgment of a Division Bench of this court, consisting of Kuppuswami J. and Madhava Rao J., in Atchaiah (Ch.) v. ITO, [1979] 116 ITR 675 requires reconsideration. In that case, the Division Bench ruled that where the Income-tax Officer opts first to assess the member or members of the “associations of persons” in the status of individuals on the total income accrued to them including the income that accrued to them as members of the “association of persons”, it is not open to the Revenue to assess those individuals as members of the “association of persons”. The learned Judges laid down that the option exercised by the Income-tax Officer should be treated as final and irrevocable. This is the view which has been taken by various other High Courts also in:
10. CIT v. Blue Mountain Engineering Corporation, [1978] 112 ITR 839 (Mad), CIT v. R. Dhandayutham, [1978] 113 ITR 602 (Mad), CIT v. Ratan (C.) & Co. and S.N Agarwalla, [1981] 128 ITR 39 (Cal), Universal Commercial Company v. Commissioner Of Income-Tax, Madras, [1981] 130 ITR 775 (Mad), Commissioner Of Income-Tax, A.P v. Hyderabad Deccan Liquor Syndicate, [1974] 95 ITR 130 (AP), Ravinder Narain v. ITO, [1974] 96 ITR 612 (Delhi), CIT v. Pure Nichitpur Colliery Co., [1975] 101 ITR 79 (Pat) and Ramanlal Madanlal v. CIT, [1979] 116 ITR 657 (Cal). A contrary view has been taken by the Allahabad High Court in M.K Dar v. CIT, [1982] 138 ITR 801, the Punjab and Haryana High Court in Rodamal Lalchand v. CIT, [1977] 109 ITR 7 and the Patna High Court in Mahendra Kumar Agarwalla v. ITO, [1976] 103 ITR 688. This question which has been thus raised in this case and which has been marked by the cleavage of opinion which we have noted above, is not necessary to be resolved in this case. In the facts and circumstances of this case, the assessments of these various persons in the status of an “association of persons” is not possible to be made. The father's assessment for the years 1971-72 and 1972-73 had become final and that assessment was made against the father in his individual status. The assessments made against Khalid Mehdi Khan for the assessment year 1973-74 as an individual has also become final. The assessments against the other three assessees was made in the status of individuals for the assessment year 1973-74, but labelled as protective assessments. It was argued that a protective assessment is an assessment which acquires no finality and which can be varied later on. But in support of this argument, no statutory provision has been shown to us. The provisions of the Income-tax Act would only permit the levying of assessment within the period of limitation. The assessment so made by the Income-tax Officer cannot be contingent. It must be final and definite. In the absence of any statutory provision authorising the Income-tax Officer to make the so-called protective assessment, we are compelled to hold that in law a protective assessment is a final determination of the tax payable by the assessee and is incapable of being varied, except on the grounds which are available for interfering with ordinary assessments. The arguments of late Nambiar advanced in Lalji Haridas v. Income Tax Officer & Anothers, [1961] 43 ITR 387 (SC), lend support to this view. In view of that, the assessments made against the other assessees for the assessment year 1973-74 should also be taken to have become final. The result is that the assessments made against the father in his individual status for 1971-72 and 1972-73 have become final, the assessment made against Khalid Mehdi Khan for the assessment year 1973-74 in the status of an individual has become final and the assessment against the other assessees made in their individual status for ‘the assessment year 1973-74 also has become final. In those circumstances, the directions which have been issued by the Commissioner of Income-tax under section 263 of the Income-tax Act, directing the reopening of the assessments made against Sri Arif Mehdi Khan and Khalid Mehdi Khan alone cannot be effective against the other three assessees. The result is that the assessments made against the other three assessees cannot be reopened and accordingly the question of assessing the assessees in their status as an “association of persons” cannot arise. For this reason, we hold that the directions given by the Commissioner to make the assessment in the status of an “association of persons” are not valid. The first question in R.C No. 163 of 1979 is accordingly answered in favour of the assessee and against the Revenue.
11. The questions are answered accordingly. No costs.
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