Income-tax---

----Assessment---Status---Association of persons---Person earning Rs.2 per day purchasing lottery ticket for Rs.2---Obtaining 50 paise from another person to buy meal against promise to part with 25 per cent. of prize money---Two persons not an association of persons---Indian Income Tax Act' 1961, S.2(31).

The first respondent, who worked in a cycle shop on daily wages of Rs.2 purchased a lottery ticket for Rs.2. He agreed to share 25 per cent. of the prize money with the second respondent as he was in need of 50 paise for the next meal. The agreement was reduced into writing. The ticket earned a prize of Rs.17,85,000. The Income-tax Officer assessed the respondents as an association of persons. The Tribunal set aside the assessment holding that the mere agreement to share the prize money for a consideration being a single activity for the purposes of sharing a chance prize would not constitute an association of persons. On a reference:

Held, that there was no agreement between the two respondents prior to the purchase of the lottery ticket to form an entity for the purpose of producing income by purchasing the lottery ticket. The contract was between the first respondent and the second respondent. The first respondent obtained 50 paise from the second respondent and agreed to pay 25 per cent. of the prize money if the ticket in his hand won a prize. Therefore, there was no consensus ad idem between these two persons to purchase the ticket for the purpose of reducing the income. The second respondent could claim no right over the ticket. Hence, the ingredients for considering both of them as forming an association of persons were lacking. There was no association of persons between the two respondents and hence they could not be assessed in the status of association of persons.

CIT v. Friends Enterprises (1988) 171 ITR 269 (AP) distinguished.

CIT v. Har Parshad (1989) 178 ITR 591 (P & H); CIT v. Indira Balkrishna (1960) 39 ITR 546 (SC); CIT v. Laxmidas Devidas (1937) 5 ITR 584 (Bom.); CIT v. Saraswati Bai (Smt.) (1982) 137 ITR 656 (P & H); CIT v. Shiv Sagar Estates (AOP) (1993) 2.01 ITR 953 (Bom.); Dwarkanath Harishchandra Pitale, In re (1937) 5 ITR 716 (Bom.); Elias (B.N.), In re (1935) 3 ITR 408 (Cal.) and (G.) Murugesan & Bros. v. CIT (1973) 88 ITR 432 (SC) ref.

C.V. Rajan for the Commissioner.

K. Vaitheeswaran for Subbaraya Aiyar, Padmanabhan and Ramamani for the Assessees.

JUDGMENT

THANIKKACHALAM, J.---At .the instance of the Department, the. Tribunal referred the following question for the opinion of this Court under section 256(1) of the Income Tax Act; 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the lottery winnings of Rs.17,85,000 (net) should not be assessed in the hands of the members as one unit in the status of 'association of persons' but should be assessed individually in the hands of the members on their respective shares?" -

One Sri Arumugham Chettiar is said to be a daily wage earner of Rs.3 per day in a cycle shop. He purchased a lottery ticket for Rs.2 and agreed to share 25 per cent. of the prize with one Sri O.K. Ramaswamy Chettiar as he was in need of 50 paise for his next meal. This agreement was reduced to writing. The ticket earned a prize of Rs.17,85,000. Both these persons offered the respective shares for tax purposes. The Income-tax Officer was of the view that the entire assessment should be made as a single assessment on an association of persons. Accordingly the assessment was made in the status of association of persons. On appeal the Appellate Assistant Commissioner found that they came together through an accidental union and there was no conscious and stable relationship expected of an association. Accordingly, the Appellate Assistant Commissioner set aside the assessment made in the status of association of persons. As against this order, the Department filed an appeal before the Appellate Tribunal. The Tribunal dismissed the Departmental appeal holding that the mere agreement to share the prize money for a consideration being a single activity for the purposes of sharing a chance prize would hardly constitute an association of persons. The Tribunal pointed out that the scheme of Act is to tax individuals and not to club the incomes of different persons except under conditions prescribed under section 64 of the Act. According to the Tribunal in order that an association or body of individual is assessed there should be such a separate entity in existence. These two persons had not combined for other purposes and at other times nor did they have any other common relationship. There was, therefore, no basis for treating both of them together as a common assessable entity. It was also found that the case for aggregation or otherwise did not depend upon the validity or otherwise of the agreement. Accordingly, the Tribunal confirmed -the order passed by the Appellate Assistant Commissioner.

Learned senior standing counsel for the Department submitted that the agreement between these two individuals would go to show that there was an association of persons for the purpose of producing income. By entering into the abovesaid agreement both the individuals agreed to have a share in the ticket as well as in the income produced by the ticket. According to learned senior standing counsel even one activity of joining into a common action for the purpose of producing income would be sufficient to form an association of persons. Learned standing counsel further pointed out that the contention put forward by the assessee that the winning of the lottery has not produced any income to the joint venture of association of persons is untenable because winnings from lottery are now only made taxable as income. In order to support these contentions, learned standing counsel for the Department relied upon various decisions about which we will consider at a later stage.

On the other hand learned counsel appearing for the assessee while supporting the order passed by the Tribunal submitted that there is no association of persons as alleged by the Department between the said two individuals in the present case. The holder of the ticket never agreed to share the right in the ticket. What was agreed by the holder of the ticket was to part with 25 per cent. of the prize money if the ticket wins a prize. Therefore, the second person has no right in the ticket and there is no. common intention between the two persons for entering into a venture for producing the income. For these reasons, it was submitted that there is no association of persons as stated by the Department. Learned counsel further contended that in the present case apart from the abovesaid single contract there is no other activity of joining into common action in between the abovesaid two individuals. Again it was submitted that winning of a lottery cannot be equated to produce the income. Learned counsel appearing for the assessee also relied upon certain decision in order to support his contentions.

We have heard the rival submissions. The fact remains that one Arumugham Chettiar who was working in a cycle shop on daily wages of Rs.2 purchased a lottery ticket for Rs.2. He agreed to share 25 per cent. of the prize money with one O.K. Ramaswamy Chittiar as he was in need of 50 paise for the next meal. The agreement was reduced into writing. The ticket earned a prize of Rs.17,85,000. According to the Department, both the individuals formed an association of persons for producing this lottery winning income. Hence, the winning of the lottery is to be assessed in the status of association of persons. In the case of G. Murugesan & Brothers v. CIT (1973) 88 ITR 432, the Supreme Court has held as under (page 436):

"The expression 'association of person' is not a term of art. That expression has come up for consideration before this Court in more than one case. In CIT v. Indira Balkrishna (1960) 39 ITR 546, this Court, after referring to the various Judgments, observed, thus:

'It is enough for our purpose to refer to three decisions: In re B.N. Elias (1935) 3 ITR 408 (Cal.); CIT v. Laxmidas Devidas (1937) 5 ITR 584 (Bom.) and In re Dwarkanath Harishchandra Pitale (1937) 5 ITR 716 (Bom.). In re B.N. Elias (1935) 3 ITR 408 (Cal.), Derbyshire, C.J. rightly pointed out that the word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or join in an action". Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income profits or gains. This was the view expressed by Beaumont, C.J. in CIT v. Laxmidas Devidas (1937) 5 ITR 584 (Bom.) at page 589 and also in In re Dwarkanath Harishchandra Pitale (1937) 5 ITR 716 (Bom.). In in re B.N. Elias (1935) 3 ITR 408 (Cal.), Costello, J. put the test in-more forceful language. He said: ' It .may well be that the intention of the Legislature was to hit a combination of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships ....When we find ....that there is a combination of persons formed for the promotion of a joint enterprise ....then I think no difficulty arises whatever in the way of saying that ....these persons did constitute an association ...."

We think that the aforesaid decisions correctly lay down the crucial test for determining what is an "association of persons" within the meaning of section 3 of the Income Tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not'.

So also the Supreme Court had another occasion to consider the meaning of the word "association of persons" in the case of CIT v. Indira Balkrishna (1960) 39 ITR 546, wherein it was held that "the word ' associate' means to 'join in a common purpose, or to join in an action'. Therefore, association of persons' as used in section 3 of the Income Tax Act, means an association in which two or more persons join in a common purpose or common- action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains".

A similar question came up for consideration before the Punjab and Haryana High Courts in the case of CIT v. Smt. Saraswati Bai (1982) 137 ITR 656. According to the facts arising in this case a piece of land was purchased by three ladies jointly and subsequently resold. Profit on the sale of land was included in the individual returns of the ladies as capital gains and assessed as such. Subsequently, the Income-tax Officer issued a notice of reassessment on the ground that the assessees constituted an association of persons and the transaction amounted to an adventure in the nature of trade. While considering these facts, the Punjab and Haryana High Courts held that "there was evidence on which the Tribunal had arrived at a positive finding on fact that the assessee did not constitute an association of persons and that transaction did not amount to an adventure in the nature of trade".

According to the facts arising in the abovesaid case, the ladies who purchased the land were having interest in the said land before they resold it. Therefore, they are considered to be co-owners and not an association of persons. Hence, this decision on the facts arising in that case would not be applicable for making any decision in the present case.

Reliance was also placed upon the decision of the Punjab and Haryana High Courts in CIT v. Har Parshad (1989) 178 ITR 591. According to the facts arising in that case, N.T.H. and P. purchased two pieces of land in 1951. During the financial year ending March 31, 1960; and in the assessment year 1960-61 under consideration the land was sold by the aforesaid persons after dividing it into 12 plots. The Income-tax Officer started proceedings with a view to tax the income from the sale of the land and issued a notice under section 148 of the Income Tax Act, 1961, to the aforesaid four persons jointly treating their status as an association of persons. However, the Tribunal held that the assessment under section 143(3) was not valid as there was no service of notice and that no association of persons had been formed. On a reference, the High Court held that (headnote):

"There was no material to show that the four persons in question, while purchasing the land, formed themselves into an association with the object of producing income. It appeared to be a joint venture of owning property. The land was purchased in May, 1951,and it was sold after more than eight years. The mere fact that it was sold after dividing it into plots did not mean that at the time of its purchase, the purpose or object was to earn profits. No association of persons had been formed by the four persons in the impugned transaction of purchase and sale of land."

Therefore, on the facts, this decision would also render no assistance to the assessees to say that there is no association of persons in the present case. Reliance was also placed upon a decision of the Bombay High Court in the case of CIT v. Shiv Sagar Estates (AOP) (1993) 201 ITR 953. According to the facts arising in that case 65 persons of three prosperous families together purchased properties, from the legal heirs of the Maharaja of Gwalior to whom it belonged as per the registered document, dated November 4, 1963. Each of the families contributed equally to the consideration of Rs.65,00,000 paid for the transfer. The entire property was divided into eight plots. Since there was disagreement between the seller of the lands and the purchasers, the 65 co-owners became the direct lessors since the lands were let out to Kiran Constructions. The rent received by them was said to be assessed in the status of association of persons. The Bombay High Court held that since they are co-owners they cannot be assessed in the status of association of persons, since they are already having interest over the immovable property. Therefore, on the facts this decision would also be not helpful for the purpose of making a decision in the present case.

Learned senior standing counsel heavily relied upon a decision of the Andhra Pradesh High Court in CIT v. Friends Enterprises (1988) 171 ITR 269. According to the facts arising in that case a return was filed by the assessee in the status of registered firm for the assessment year 1973-74 showing an income of over Rs. l lakh on total winnings. It was claimed that a partnership had been formed consisting of five persons. The five persons had agreed to contribute equal sums of Rs.200 each. The amount would be invested in placing bets, investing in jackpots, etc., in the horse racing season. The Income-tax Officer assessed the entity as an association of persons but the Tribunal held that betting and racing could not be treated as an income-producing activity and the assessment in the status of an association of persons could not be sustained. On a reference, the Andhra Pradesh High Court held that "the income from betting was taxable as income from other sources under section 56. In the instant case, the five persons had come together and engaged themselves in an organised course of activity to earn income from betting. They were assessable in the status of an association of persons".

Thus, according to the facts arising in that case, even prior to entering into the venture five persons entered into an agreement to invest money for producing income. But according to the facts arising in the present case, there was no agreement between the said two individuals prior to the purchase of the lottery ticket to form an entity for the purpose of producing income by purchasing the lottery ticket. The facts arising in the present case would go to show that Arumugham Chettiar purchased the lottery ticket out of his own money. After the purchase of the ticket he required a second person, viz., O.K. Ramaswamy Chittiar, to part 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 got a prize. Therefore, both these persons did not enter into a contract prior to the purchase of the ticket for the purpose of entering into a venture to purchase the lottery ticket for producing the income. The contract is between Arumugham Chettiar and Ramaswamy Chettiar. Arumugham Chettiar obtained 50 paise from Ramaswamy Chettiar and agreed to pay 25 per cent. of the prize money if the ticket in his hand gets a prize. Therefore, there is no consensus ad idem between these two persons to purchase the ticket for the purpose of producing the income. This agreement would go to show that O.K. Ramaswamy Chettiar can look to Arumugham Chettiar to get 25 per cent. of the prize money if Arumugham Chettiar's ticket successfully wins a prize. Therefore, Ramaswamy Chettiar can claim no right over the ticket. Hence, the ingredients for considering both of them forming an association of persons are lacking in the present case Therefore. the decision cited by learned senior standing counsel for the Department, viz., CIT v. Friends Enterprises (1988) 171 ITR 269 (AP). would not be applicable to the facts of the case. Even though the income by way of lottery winnings is an income assessable under section 2(24)(ix) of the Income Tax Act, for all these reasons stated above, we hold that there is no infirmity in the order passed by the Tribunal in coming to the conclusion that there is no association of persons between Arumugham Chettiar and Ramaswamy Chettiar hence they cannot be assessed in the status of association of persons. Accordingly, we answer the question referred to us in the affirmative and against the Department. There will be no order as to costs. Counsel fee Rs.1,000 (one thousand only).

M.B.A./1429/FC Reference answered.