SHRI SHANTILAL JAIN,,MUMBAI vs. THE INCOME TAX OFFICER, WARD-2,, BHUJ

आयकर अपील�य अ�धकरण, राजकोट �यायपीठ, राजकोट । IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT �ी राजपाल यादव, �या�यक सद�य एवं �ी वसीम अहमद, लेखा सद�य के सम�। BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No.1063/Rjt/2009 (�नधा�रण वष� / Assessment Year : 2002-03) बनाम/ Shri Shantilal Jain, I.T.O, 41, Usha, Ward-2, Vs. 161, S.V.Road, Bhuj. Vile Parle(West) Mumbai. �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAEPJ8434B (अपीलाथ� /Appellant) (��यथ� / Respondent) .. अपीलाथ� ओर से / Appellant by : Shri Vimal Desai, A.R ��यथ� क� ओर से/Respondent by : Shri Anil Kumar, Sr. D.R सुनवाई क� तार�ख / Date of Hearing 19/09/2019 घोषणा क� तार�ख /Date of Pronouncement 10/12/2019 आदेश / O R D E R PER WASEEM AHMED ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)- II, Rajkot [Ld. CIT(A) in short] dated 02/09/2009, arising in the matter of assessment order passed under s. 143(3) r.w.s 147 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") dated 29/12/2006 relevant to Assessment Years (A.Y.) 2002-03.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 2 - The assessee has raised the following grounds of appeal:

ITA No.1063/RJT/2009 A.Y. 2002-03 - 3 - 5. Shri Suresh Bhatia, Plot No.234, Sector-4, Near OSLO, Gandhidham. 6. Shri Prakash Poonia, 59/596, Gujarat Housing Board, Gandhidham 7. Shri Vipulgar Narangar Gusai, 5, Jigar Niwas, Mahavir Nagar, Bhuj. 8. Shri Champaklal Thakkar, 13, Surdhara Circle, Thaltej, Ahmedabad. 9. Shri Nopaji Lakhmaji Charitable Trust, Mumbai, 41, Usha, 161, SC Road, Ville Parle, (West), Mumbai. 10. Shivam Development Trust, I 1, Saptmesh Complex, Pareshwar Chowk, Bhuj, Kutchch.

Now coming to the facts of the case:

4.1 The interconnected issue raised by the assessee relates to the reopening of the assessment u/s 147 of the Act, assessment on the AOP and consideration of the members of the AOP

ITA No.1063/RJT/2009 A.Y. 2002-03 - 4 - 4.2 The facts in brief are that the assessee in the present case is an AOP and found to be engaged in the activity of importing the goods and distributing the same among the earthquake victims in Gujarat.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 5 - Aggrieved assessee preferred an appeal to the Ld. CIT (A).

7.1 The assessee also claimed that there was no AOP involved in the activity of importing the goods and diverting the same to the open market as alleged by the AO in his assessment order. As such the parties involved in importing the goods and diverting the same in the open market, should only be subject to the proceedings under the Act.

7.2 The assessee further claimed that the goods imported are the rag clothes having no commercial value. Therefore, the AO without applying his mind has treated the value of such rag clothes determined by the custom department as undisclosed income of the assessee.

7.3 The assessee also claimed that the matter is pending before the CESTAT as of now and therefore there cannot be any addition on account of the impugned alleged activity of diverting the goods in the open market.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 6 - 8.1 The value of such goods which were diverted in the open market has been computed by the custom department and the assessee has paid the duty on such value of the goods. Accordingly, the Ld. CIT (A) has held that the AO has rightly determined the value of such goods as undisclosed income of the assessee.

8.2 The matter before the CESTAT is pending in relation to the penalty levied on the import of the goods which were diverted in the open market in violation of the notification issued under the Act. This fact can also be verified from the order of the penalty issued by the CESTAT dated 25th August, 2009. As such, there was no dispute pending before the CESTAT for the quantum addition made by the AO based on the DRI/customs department. In view of the above, the Ld. CIT (A) confirmed the order of the AO.

Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us.

Background: 1. The appellant is an individual. 2. One trust namely Shivam Development Trust, Bhuj imported duty free goods as earthquake relief material for the victims of earthquake in Kutch. 3. The DRI, Delhi conducted inquiries and investigation on various persons who were involved in importing, clearing and transportation of goods from Kandla to other destinations. The inquiries and investigations were carried out by the DRI on the ground that duty free imported relief material was diverted in to the open market. 4. The inquiries were made against 2 trusts & 8 individual (incl. trustee of the 2 trusts). The appellant was one of the persons on whom the inquiries were made by the DRI. The AO considered 8 persons including the appellant as AOP and alleged that the AOP is involved in such scandal.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 7 - 5. On the basis of the inquiries and investigations carried out by DRI, the AO issued notice u/s. 148 was inter alia issued to the appellant requiring him to file the return of income. 6. The appellant did not file the return of income in response to said notice u/s. 148.

Re: Assessment made in the status of AOP: 1. The learned A.O. considered 8 persons named in the show cause notice issued by the DRI as AOP and completed the assessment in the status of AOP comprising of 8 persons. 2. The learned A.O. has completed the assessment without bringing anything on record to establish that all these 8 persons constituted an AOP. 3. "Association of person" as used in section 2(31) 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. 4. It may kindly be appreciated that an AOP comes into existence when two or more persons join hands for a common purpose or for a common action, the object of which is to produce income, profits or gains. An AOP can be formed only when two or more individuals voluntarily combine together for a certain purpose. 5. It may further be appreciated that an AOP does not mean any and every combination of persons. Unless combined in a joint enterprise voluntarily to produce income, there could be no AOP. 6. The learned A.O. has failed to appreciate that for constituting AOP, the persons against whom investigations were carried out by the DRI ought to have entered into an agreement to earn the income and then share that income. 7. In this case nothing has been brought on record to establish all the 8 persons assessed in the status of AOP had mutually agreed to import the material under the guise of relief to earthquake affected people in Kutch and then divert it in the open market to earn and share the income amongst them.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 8 - statements recorded by the DRI as reproduced in the show cause notice issued by the DRI (Ref. Para 9 to 16 on page 3 to 5 of the said show cause notice). 9. When mutual agreement to carry out an activity for earning & sharing income amongst 8 persons named in the assessment order is not present, assessment in the status of AOP is bad in law. 10. It is most respectfully submitted that what is to be seen is the conduct at the time of carrying out an activity. In the cause under consideration, there was no coming together of the 8 persons to engage in any activity jointly. Merely because all these 8 persons were investigated by DRI that by itself would not be sufficient to hold that there was an AOP. 11. The learned AO has summarily made assessment in the status of AOP comprising all the 8 persons against whom inquiry and investigations were carried out by the DRI as AOP without bringing in anything on record to establish the existence of an AOP. 12. Therefore, the assessment made in the status of AOP is void ab initio. Reliance is placed on the following decisions: • G. Murugesan & Bros. Vs. CIT [88 ITR 432 (SC)] - Copy enclosed • Wajrachand G. Jain & Ors. Vs. ACIT [76 TTJ 101 (Pune)] - Copy enclosed Re: Considering appellant as member of AOP : 1. The appellant was the director of M/s Kandla clearing Agency Pvt. Ltd. Which function as a CHA. He is not connected, directly of indirectly, with Shivam Development Trust, the trust whose letter were used for importing and clearing the goods being used clothes. 2. Merely because the appellant was engaged in the clearance of goods in the normal course of business, he can not be considered as member of AOP. 3. The mere fact of issuance of show cause notice and liability for penalty under section 112 of the Customs Act, 1962 can not be a ground to hold the appellant i as member of alleged AOP. 4. Therefore, the appellant cannot be treated as a member of alleged AOP. I Re: Assessing total income of AOP at Rs. 15,26,052/-: 1. The learned AO has assessed total income of AOP at Rs. 15,26,052/- (for 22 bales which could not be located and seized by the DRI) on the basis of valuation done by the DRI. In para 2.3 (pg. no. 16 & 17) of the assessment order which pertains to determination of income, the AO contended that 22 bales out of 93 bales imported by Shivam Development Trust and Nopaji Lakhmaji Charitable Trust which could not be found by DRI were sold in the open market. It is not clear from the assessment order as to how many bales belonged to which trust. The DRI has estimated market value of 71 bales confiscated at Rs. 49.25 lacs and accordingly estimated market value of 22 bales that could not be located and confiscated at Rs. 15.26 lacs. The same is considered as income of the alleged AOP. It may kindly be noted that the goods imported were old and used clothing which were to be given as donation to earthquake victims. This factor does not seem to have been considered while estimation of market value by the DRI.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 9 -

It may also kindly be noted that in the show cause notice issued by the DRI, no basis whatever for estimation market value of goods confiscated as well as that could not be confiscated has been given. The learned AO has blindly adopted the valuation done by the DRI without application of mind. The matter is not yet finalized and at present pending with CESTAT. Further, it is also gathered from the reply of Shivam Development trust (reproduced on page 2 to 4 of the assessment order) that the income was first taxed in the hands of the trust. That assessment was set aside by the Rajkot ITAT. It is necessary to examine what stand was taken in the de novo assessment of the trust and why the A.O. changed his mind to tax the income in the hands of alleged AOP. The same are not clear from the assessment order.

11.1 Now before us, from the preceding discussion, multiple issues arise for our adjudication as described below: i. Whether there was escaped of income u/s 147 of the Act in the given facts and circumstances. ii. Whether there exist AOP involving the import of goods and diverting the same in the open market. iii. Whether all the 8 persons discussed above are the members of AOP. iv. Whether the value determined by the custom department for claiming the import duty is undisclosed income of the assessee.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 10 - 11.2 Regarding the question No. 1, we note that the AO had the information from the DRI wherein it was alleged that the group of 8 persons was involved in the defrauding the custom duty. Accordingly, an amount of Rs. 10,00,000/- was paid to the custom department to compensate the loss of duty by Shantilal Jain one of the member of AOP. Thus, the AO based on such information, acquired the satisfaction that there is the escapement of income by such group of persons and treated all of them as the AOP. Accordingly notice was issued by the AO u/s 148 of the Act. Admittedly, the goods were imported which were cleared without the payment of the import duty in contravention to the notification bearing number 7/2001. Accordingly one of the parties out of such group has paid the import duty amounting to ₹10 lakhs only. Thus in our considered view the information received from the DRI was sufficient enough for the AO to acquire the satisfaction that the income has escaped assessment.

11.3 The AO in the income tax assessment proceedings has to form a prima-facie opinion that the income has escaped assessment based on the tangible documentary evidence. As such the AO is not under the obligation to reach to the conclusion that there is actually escapement of income. Thus we are of the view that the AO has derived his satisfaction based on the tangible materials received from the DRI.

11.4 We also note that, the reopening u/s 147 of the Act was initiated within the period of 4 years from the end of the assessment year in which notice u/s 148 was issued. Thus in such case, we are of the view that the prima – facie opinion was based on the tangible material which is sufficient to initiate the proceedings u/s 147 of the Act. In view of the above, we uphold the initiation of the proceedings u/s 147 of the Act. Accordingly, we do not find any reason to interfere in the finding of the Ld. CIT (A).

ITA No.1063/RJT/2009 A.Y. 2002-03 - 11 - 12. The next question arises whether there exist any AOP as alleged by the authorities below. In this regard, we note that the group of persons carrying out any activity for the common objects and for the profit, then such group shall be regarded as Association of persons. We further note that to decide the existence of AOP the following legal characteristics are required to be adhered:

a) The word ‘associate’ indicates to join in for common purpose or to join in for common action, (b) The term ‘association of persons’ must be construed in its plain and ordinary meaning. They are not ejusdem generis with the word immediately preceding, namely, firm. (c) Since the words occur in an Act imposing tax on income, profits or gains, the association must be one which produces income, profits or gains, (d) It is not necessary that there should be any mutual right or obligation among the members of an association enforceable in a Court of law, (e) The members of the association must voluntarily combine together for a certain purpose; volition on the part of the members of the association is an essential ingredient; (f) There must be a deliberate common design to produce income, to form an AOP

12.1 We further find support and guidance from the judgment of Hon’ble Supreme Court in the case of G. Murugesan & Brothers v/s CIT reported in 88 ITR 432 wherein it was held as under; “For forming an 'association of persons', the members of the association must join together for the purpose of producing an income. An 'association of persons' 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

ITA No.1063/RJT/2009 A.Y. 2002-03 - 12 - that even a minor can join an 'association of persons' 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 'association of persons' 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 'association of persons'.”

12.2 From the above, it is clear that it is not necessary that there should be anything in writing for referring any group of persons as the AOP. What is required is that there should be common object and profit motive of the persons involved.

ITA No.1063/RJT/2009 A.Y. 2002-03 - 13 - the custom department. Thus it is presumed that the market value of such goods was the value determined by the custom department. Accordingly, it is inferred that the assessee must have sold the impugned goods in the open market as the same was not seized by the custom department. The AO also noted that that the income from sale of goods was not disclosed in the income tax return.

14.1 Moreover, the onus lies on the assessee to justify based on the documentary evidence that it has sold the goods at a value less than the value determined by the custom department. But the assessee failed to discharge its onus. Furthermore, the AO has taken the value based on the valuation determined by the custom department which was not challenged by the assessee. Accordingly, we are of the view that the impugned value cannot be disputed by the assessee in the income tax proceedings.

15.1 However, there is no dispute to the fact that the assessee against such value of the goods of Rs. 15,26,050.00 has incurred a cost of ₹10 lakhs by way of paying the custom duty, interest etc which has direct nexus with the impugned income. Accordingly we hold that the assessee is entitled for the relief/benefit of such expenses against the impugned undisclosed income

ITA No.1063/RJT/2009 A.Y. 2002-03 - 14 - determined by the authorities below. Accordingly, we sustain the addition of Rs. 5,26,052.00 ( 15,26,052- 10,00,000.00) as income of the assessee. Hence, the ground of appeal of the assessee is partly allowed.

This Order pronounced in Open Court on 10/12/2019

-Sd- -Sd- (राजपाल यादव) (वसीम अहमद) �या�यक सद�य लेखा सद�य (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Dated 10 /12/2019 manish