Despite that assessee had formed various AOP syndicates for carrying out the business for a definite share of profit, the share of the assessee in the profit of these syndicates and also, the undisclosed income of the syndicates cannot be added to the income of the member assessee.
In a recent judgment, Hon’ble Supreme Court have dismissed the SLP of the Revenue challenging the deletion of addition of undisclosed income of Association of Persons (Syndicates) in the hands of the member assessee.
ABCAUS Case Law Citation:
4730 (2025) (09) abcaus.in SC
In the instant case, appeals had been filed at the instance of the Revenue and cross appeals had been filed by the assessee against the Common Order of the Commissioner of Income Tax (Appeals) for the block assessment year.
The Revenue had challenged the order passed by the CIT(A) in deleting the addition made by the AO on account of undisclosed income and unexplained investments arising out of the common assessment order u/s. 153A r.w.s. 143(3) of the Income Tax Act, 1961 (the Act).
The assessee was an individual mainly deriving income from carrying out the business of sales of liquor. During the course of the search and seizure action u/s 132 of the Act carried out in the premises of the assessee’s group, various incriminating documents were seized from which it was revealed that to operate liquor trading business, the assessee had formed syndicates/cartels/group in different districts as self-organizing group formed to transact specific business, to pursue or promote a shared interest.
As per the AO, from the seized documents it was evident that the assessee was one of the key members of multiple syndicates. The AO further taking support from dictionary clarified that such syndicates were formed by individuals or organizations to promote common interest of profit.
According to the AO, the existence of syndicates was beyond doubts as the same was accepted by the various members of the group in their statements given during the search/post search investigation. Further, according to the AO, the term ‘syndicate’ was taken from the seized material in which they have used this term to explain their modus operandi.
The AO made a clear and unequivocal finding that various investigations strengthened the contention that there existed a syndicate and various assessees are part of such syndicates. The AO also found that incriminating documents seized during the course of the search also contained some bank transactions which were carried out by the assessee from his bank accounts. The AO further made reference of various incriminating data which inter alia include, tally accounts, balance sheet, profit and loss account etc. of various syndicates in which the assessee was found to be one of the members.
The assessment was completed by the Assessing Officer (AO) by making several additions on account of share of assessee in undisclosed income of some syndicates, share in inadmissible expenses incurred by such syndicates, undisclosed capital invested by the assessee in various syndicates, undisclosed expenditure on purchase of jewellery, undisclosed investment in immovable properties, unexplained expenditure on son’s marriage, unaccounted cash payment on the basis of diaries, unexplained cash found in the locker of family members etc.
Aggrieved assessee preferred appeals for all the assessment years under consideration before CIT(A). The CIT(A), vide his common Order gave substantial relief and also confirmed certain additions.
The CIT(A) held that although, the assessee had undisputedly formed various syndicates/groups with various persons for carrying out the business of liquour, for a definite share of profit, but, in any case, the share of the assessee in the profit of these syndicates and also in the inadmissible expenses incurred by such syndicates cannot be added to the income of the assessee in view of the specific provisions of section 86 of the Income-Tax Act, 1961 r.w.s. 67A of the Act.
The CIT(A) held that the status of these syndicates is that of Assosciation of Persons (AOP) or Body of Individuals (BOI) which are included in the definition of the expression ‘Person’ as ascribed to in section 2(31) of the Act. According to the CIT(A), such syndicates were separate taxable legal entity and separately charged to tax u/s. 4 of the Act at the maximum marginal rate (MMR).
The CIT(A) futher held that income derived by various syndicates, in which the assessee was one of the members, was required to be assessed in the hands of such syndicates only and the direct assessment in the hands of the assessee could not have been made in respect of such income derived by the syndicates.
The CIT(A) also held that even the question of admissibility or inadmissibility of any expenditure could have been raised only while making the assessment in cases of such syndicates. The CIT(A) further held that the assessee could have, at the best, been assessed in respect of his share in taxable income of such syndicates but for the provisions of section 86 of the Act, which provides that Income Tax shall not be payable by the assessee in respect of his share in the income of the Association of Persons or Body of Individuals.
The CIT(A) relying upon the decisions of the Hon’ble Supreme Court deleted the entire additions made by the AO in the assessee’s income, for various assessment years, on the grounds of assessee’s share in profit of various syndicates and as also, share in the inadmissible expenses incurred by such syndicates.
Before the Tribunal the Revenue contended that ample of documentary evidences and tally data were found during the course of the search and from such material, it was evident that the assessee had carried out unaccounted business of liquor by forming syndicates and groups with other persons. It was further contended that many of the syndicates could not be subjected to tax and therefore, for collecting the due tax for the ex-chequer, the tax should be collected from its members and assessee is one of the members.
The Tribunal observed that as per the provisions of section 86, of the Act, the entire share of an assessee in income of the Association of Persons or Body of Individuals, as computed in the manner provided in section 67A shall not be chargeable to income-tax.
The Tribunal opined that in the present case, the clause (a) of the first proviso to section 86 would apply, inasmuch, the syndicates are chargeable to tax at the maximum marginal rate and consequently, the share of any member in the syndicates as computed in the manner provided in section 67A shall not be included in the total income of the member i.e. the assessee in the present case.
The Tribunal further noted that as per the findings given by the AO himself, the share of the assessee as a member of the syndicates (AOPs) was determinate and therefore, the assessee’s case would not fall under the provisions of sub-section (1) to section 167B of the Act. On the other hand, the case of the assessee would fall under the provisions of sub-section (2) to section 167B of the Act. In such a situation, the entire income of the syndicates, of which the assessee was found to be a member, would be chargeable to maximum marginal rate in accordance with clause (i) of subsection (2) to section 167B of the Act in the hands of such syndicates only. The Tribunal further noted that the income of the syndicates were, undisputedly, chargeable to tax under section 167B of the Act and therefore, such proviso would also not apply in the instant case.
The Tribunal opined that in the light of the legal position, income of all the syndicates, as determined by the AO, could be assessed in the hands of the respective syndicates only as these syndicates, being AOPs are classified as separate persons and tax entity u/s. 2(31) of the Act, but, in any circumstance, any share of profit from such syndicates cannot be added as income chargeable to tax in the hands of any of its members.
The Tribunal further stated that even if for any reason the Revenue failed to make any assessment in the hands of the syndicates, then also the income, which is otherwise chargeable to tax in a different tax entity i.e. the syndicate, cannot be added to the income of the assessee. We find that unlike under section 3 of the Income-Tax Act, 1922, in the present Income Tax Act, 1961 there is no such discretion or option available to an assessing officer as regard to taxing of any income earned by an AOP either in the hands of AOP or its members. Now, the assessing officer, subject to the provisions contained in ss. 67A, 86 and 167B is statutorily bound to make the assessment only in the hands of AOP and no addition, on the count of share of profit of a member in the AOP, can be made in the hands of such member.
In view of the above findings, the Tribunal dismissed the grounds raised by the Revenue.
Not satisfied with the dismissal of appeal by the ITAT, the Revenue challenged it before the Hon’ble High Court urging that the order passed by the ITAT was perverse and not in accordance with law inasmuch as ITAT had committed an error in deleting the additions made by the Assessing Officer on the grounds of assesses share in profit derived by various syndicates maintaining that share of profit is taxable in the hands of syndicate and not in the hands of the assessee as per the existing provisions of the Income Tax Act, 1961.
The Revenue also raised the question whether, such syndicate did not have any PAN and that they were not filing statutory tax returns, fully establishing mens rea on the part of the assessee and taxing share of profits of such colourable devices (syndicates) in the hands of the assessee in all practicality is in the spirit of the ‘Doctrine of lifting of corporate veil’ in larger public interest?
The Hon’ble High Court observed that the findings given by the CIT(A) and reproduced by the ITAT remained uncontroverted by the Revenue, even in respect of some of the syndicates, separate assessments had already been framed by the various assessing officers u/s. 144/153C r.w.s. 153A of the Act and while making assessments in the hands of such syndicates, the amount of undisclosed income earned by these syndicates, had already been determined.
The Hon’ble High Court further observed that it is a well settled legal position that as per clause (a) of proviso to section 86 of the Act r.w.s 67A of the Act, if the assessee is a member in AOP/BOI and income earned from such AOP/BOI have been offered to tax, then, the share received by the assessee from such AOP/BOI after payment of due taxes cannot be taxed again in the hands of the recipient assessee.
The Hon’ble High Court found that the CIT(A) as well as the ITAT referred to the legal position rendered by the Hon’ble Supreme Court and took the view that the income derived by various syndicates in which the assessee was found one of the members, was required to be assessed in the hands of such syndicates only and a direct assessment in the hands of the assessee could not have been made in respect of such income derived by the syndicates.
The Hon’ble High Court held that there was no merit in the appeals and dismissed them in limine.
Not satisfied, the Revenue challenged the judgment of the Hon’ble High Court before the Hon’ble Supreme Court by way of filing a Special Leave Petition (SLP).
However, the Hon’ble Apex Court held that the income of the Association of Persons (Syndicates) cannot be clubbed with the assessees and In the High Court had not erred in passing the order.
Accordingly, the SLP was dismissed.
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