COMMISSIONER OF INCOME-TAX VS A. U. CHANDRASEKHARAN
1999 P T D 2782
[229 I T R 406]
[Madras High Court (India)]
Before. K. A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
A. U. CHANDRASEKHARAN and others
Tax Case No. 177 of 1982 (Reference No.91 of 1982), decided on 23/09/1996.
Income-tax---
----Assessment---Status---Association of persons---Condition precedent-- Joint venture with object of earning income---Several persons entering into written agreement for purchase of lottery tickets from contributions-- Winnings to be equally distributed---Prize money assessable in status of association of persons---Indian Income Tax Act, 1961, S.2(24).
The ten respondents were all employees in the sales department of a company. They organised a joint venture, under which they agreed to jointly purchase lottery tickets for the total amount contributed by the members, of the group. The ticket numbers were to be typed with a written agreement signed by all members of the group and the proceeds of winning tickets would be equally divided among the members. The total number of members of the group was to be ten, although one or two members might be excluded and new members admitted from time to time. The respondents entered into an agreement on February 17, 1977, under which they agreed to jointly purchase lottery tickets of the Tamil Nadu Government for which the prize was declared on February 28, 1977. They secured a prize of rupees one lakh for one of the tickets, thus, purchased. The ten persons authorised the first respondent to collect the prize amount through the Punjab National Bank. The 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 Income-tax Officer was of the view that the ten persons should be assessed in the status .of association of persons, and brought the receipt to tax accordingly. The Appellate Assistant Commissioner held that the joint purchase of the lottery tickets was not an investment for definite expected gains, that it did not amount to any business, that there was no management involved in getting the prize money and that, therefore, the prize money could not be assessed to tax in the hands of the assessees as an association of persons, but should be assessed individually in the hands of the ten persons The Tribunal confirmed this. On a reference:
Held, that the ten persons by entering into an agreement had created a joint venture for purchasing the lottery ticket and the object of purchasing the lottery ticket was to win a prize. The ten persons together had appointed one person for purchasing the ticket and maintaining the same till any one of the tickets won 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 was only up to the purchase of the tickets and, thereafter, the winning was according to their luck was-not correct. The purchase of the lottery ticket was for earning income. The two conditions for assessing the income under the status of an association of persons (a) that there must be a joint venture and (b) that the object of the joint venture must be to earn income, had been satisfied. The assessees were, therefore, assessable in the status of association of persons.
CIT v. Friends Enterprises (1988) 171 ITR 269 (AP) fol.
CIT v. O. K. Arumugham Chettiar (1997) 224 ITR 391 (Mad.) distinguished.
CIT v. Indira Balkrishna (1960) 39 ITR 546 (SC); Deccan Wine and General Stores v. CIT (1977) 106 ITR 111 (SC); G. Murugesan & Bros. v. CIT (1973) 88 ITR 432 (SC) and Rama Devi Agarwalla v. CIT (1979) 117 ITR 256 (Cal.) ref.
S. V. Subramanian for the Commissioner.
Miss Maya, J. Nichani for the Assessee.
JUDGMENT
K. A. THANIKKACHALAM, J,---In compliance with the order of this Court, dated March 9, 1981, the Tribunal referred the following question, for the opinion of this Court, under section 256(2) . of the Income Tax 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?"
Sri A. U. Chandrasekharan and others are the employees of India Cements Limited, Sankari, Salem District. They entered into an agreement on February 17, 1977, as per which they agreed to join the purchase lottery tickets of the Tamil Nadu Government for which the prize was declared on February 28, 1977. They secured a prize of rupees one lakh for one of the tickets, thus, purchased, viz., Ticket No.647180. The abovesaid ten persons authorised Sri Chandrasekharan 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 Income-tax Officer was of the view that the ten persons should be assessed in the status of an "association of persons". Notice under section 139(2) was issued on October 24, 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 Income-tax Officer, all the elements of an "association of persons" were present in this case. Therefore, the Income-tax Officer brought to tax the above receipt from the lottery after giving the statutory deductions.
Aggrieved, the assessees went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner 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 assessees as an "association of persons", 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 CIT v. Indira Balkrishna (1960) 39 ITR 546, G. Murugesan & Bros. v: CIT (1973) 88 ITR 432 and Deccan Wine and General Stores v. CIT (1977) 106 ITR 111, confirmed the view taken by the Appellate Assistant Commissioner and dismissed the appeal filed by the Department.
Before us, 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 the definite understanding of dividing the winnings from the lottery. According to 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 association of persons existing in the present case. Learned senior standing counsel submitted that the decisions in CIT v. Indira Balkrishna (1960) 39 ITR 546 (SC) and G. Murugesan & Bros. v. CIT (1973) 88 ITR 432 (SC) were rendered under the Indian Income-tax Act, 1922. Further, it was submitted that in those cases there 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, learned senior standing counsel appearing for the Department relied upon the decision of the Andhra Pradesh High Court in CIT v. Friends Enterprises (1988) 171 ITR 269. According to learned senior standing counsel, this decision would apply on all fours to the facts arising in this case. 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 tickets and it could not be extended further. According to 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, 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 an association of persons, but in the status of individuals.
However, learned counsel appearing for the assessee submitted that in view of the decisions 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 a joint venture for the purpose of earning income. The winning of a prize depends upon luck, and, therefore, it cannot be said that any income is earned from the winning of the lottery ticket. According to 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 association of persons in the present case. Learned counsel also submitted that the decision of the Andhra Pradesh High Court in CIT v. Friends Enterprises (1988) 171 ITR 269 would not be applicable to the facts of this case. According to learned counsel, the joint venture would stop with the purchase of the tickets and thereafter the ticket-holders are depending upon their luck in the matter of winning the prize. Hence, even if there is any association of persons, that is not for earning income.
We have heard learned senior standing counsel appearing for the Department and learned counsel appearing for the assessee. We have already set out the facts in detail. The point for consideration is whether there is any association of persons according to the facts arising in the present case.
Ten persons joined together and under a letter, dated October 18, 1977, each of the members has categorically stated as under:
"(1) The joint venture was organised by Mr. A. U. Chandrasekharan in November, 1976, anti 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.
(2) We are doing the same sort of joint venture every month and the total members will also be ten. But any one or 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 association of persons in the present case. According to them, they joined together only for the purpose of purchasing the tickets and winning the prize depends upon their luck. This submission made by learned counsel for the assessee cannot be accepted. The joint venture would not stop with the purchase of the tickets, 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, when any one of the tickets purchased by them wins a prize, then the point would arise, whether the winnings from the lottery could be assessed either in the status of an association of persons 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 tickets was for earning income.
The definition of the expression "income" in clause (24) of section 2 of the Act has been amended by the Finance Act, 1972, with effect from April 1, 1972. Sub-clause (ix) has been added to the definition. After this amendment, the expression "income" includes any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. Such income is treated as "income" from other sources by section 56(2)(ib). According to it, the income referred to in sub-clause (ix) of clause (24) of section 2 of the Act shall be chargeable to income-tax under the head "Income from other sources".
In CIT v. Indira Balkrishna (1960) 39 ITR 546, the Supreme Court, while considering the meaning of the words "association of persons" pointed out that the word "associate" means to join in 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.
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 an "association of persons".
According to the facts arising in G. Murugesan & Bros. v. CIT (1973) 88 ITR 432 (SC), S executed a settlement deed in March, 1955, conveying to his four grandsons, M, K, R and V, the appellants, a life interest in a 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 S's 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 "association of persons". On a reference, the High Court held that in view of section 9(3) of the Indian Income-tax Act, 1922, the appellants had to be assessed only as individuals in relation to the income from house property, but that they were to be assessed in the status of an "association of persons" in relation to dividends. On appeal, the Supreme Court held that the appellants could not be assessed in the status of-an "association of persons" 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 assess the income derived from the dividends by the shareholders under the status of "association of persons".
Learned counsel appearing for the assessee placed reliance upon the decision of the Calcutta High Court in Rama Devi Agarwalla v. CIT (1979) 117 ITR 256 in order to contend that in the present case also there is no evidence of 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 association of persons and the income derived from the joint venture should be assessed in the status of "association of persons". On these facts, a question arose whether the Tribunal was justified in law in holding that the assessment made in the status of an "association of persons" 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 an "association of persons" within the meaning of section 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 "association of persons" in the abovesaid case. However, learned senior standing counsel appearing for the Department, heavily relied upon the decision of the Andhra Pradesh High Court in CIT v. Friends Enterprises (1988) 171 ITR 269. According to the facts arising in this case, the five persons had come together and engaged themselves in an organised course of activity to earn income from betting, and, therefore, according to the Department they were assessable in the status of an "association of persons". On these facts, a question arose whether the said five persons constituted an association of persons or body of individuals. While answering this question, the Andhra Pradesh High Court held as under (page 274):
"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 bets, investing in jackpot and treble and tanala events in the horse-racing season 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 bets 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 divided 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 section 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 Income-tax Officer was, therefore, right in making the assessment in the status of an association of persons."
Thus, a plain appreciation of the facts arising in this case would go to show that ten persons by entering into an agreement created a 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 shares. Therefore, to say that the joint venture is only up to 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 tickets is for earning an income. The two conditions for assessing the income under the status of an association of persons 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 assessees 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 v. CIT (1979) 117 ITR 256, would not come to the aid of the assessee, since there was no joint venture in purchasing the land by the 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 CIT v. Friends Enterprises (1988) 171 ITR 269, 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 T.C: No.49 of 1983, on June 5, 1995 in CIT v. O. K. Arumugham Chettiar (1997) 224 ITR 391. 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 percent of the lottery winning if the ticket gets a prize. Fortunately, the ticket got a prize of Rs.17,85,000. A question arose whether the prize earned by the ticket is to be assessed in the status of "association of persons". This Court held that the lottery winning cannot be assessed in the status of "association of persons" because the agreement was reached between the two persons after the ticket was purchase. 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 winnings cannot be assessed in the status of an "association of persons". On facts, this decision is also distinguished. 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 winnings from the lottery should not be assessed under the head "association of persons". 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 'association of persons'?"
In view of the foregoing discussion, we answer the question referred to us in the affirmative and in favour of the Department. No costs.
M.B.A./3053/FC Reference answered