DCIT, Guntur v. T Siva Nageswara Rao, Kolluru

ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 1 OF 29 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER S. NO CASE NO. A.Y PAN NO APPELLANTS RESPONDENTS 1 ITA NO. 319/V/08 2003-04 AAAA K 4938 N KOLLURU LIQUOR SYNDICATE KOLLURU ACIT CIRCLE- 1(1) GUNTUR 2 ITA NO. 313/V/ 08 2003-04 AFVP G 0202 Q KOLLURU LIQUOR SYNDICATE KOLLURU (REP. G.NARENDRA) ACIT CIRCLE- 1(1) GUNTUR 3 ITA NO. 289/V/08 2003-04 AAPHS 7719 K SAMMETA DURGA PRASAD KOLLURU ACIT CIRCLE-1(1) GUNTUR 4 ITA NO. 290/V/08 2003-04 AOAPK 4493 F KURRA KRISHNA MURTHY KOLLURU ACIT CIRCLE-1(1) GUNTUR 5 ITA NO. 291/V/08 2003-04 BGMPS 8360 C TALASILA SIVA NAGESWARA RAO KOLLURU ACIT CIRCLE-1(1) GUNTUR 6 ITA NO. 292/V/08 2003-04 BGMPS 8434B TALASILA SRINIVASA RAO KOLLURU ACIT CIRCLE-1(1) GUNTUR 7 ITA NO. 320/V/08 2003-04 ADSPV 8242 C VEMPATTI PULLA REDDY KOLLURU ACIT CIRCLE-1(1) GUNTUR 8 ITA NO. 370/V/09 2002-03 AACHK 7832 G KOLLURU LIQUOR SYNDICATE KOLLURU ITO WARD-1 TENALI 9 ITA NO. 345/V/09 2002-03 AFVPG 0202 Q KOLLURU LIQUOR SYNDICATE KOLLURU (REP.G.NARENDRA) ACIT CIRCLE-1(1) GUNTUR 10 ITA NO. 236/V/09 2003-04 AAPHS 7719 K DCIT CENTRAL CIRCLE- 1(1) GUNTUR S. DURGA PRASAD KOLLURU 11 ITA NO. 241/V/09 2003-04 AOAPK 4493 F DCIT CENTRAL CIRCLE- 1(1) GUNTUR KURRA KRISHNA MURTHY KOLLURU 12 ITA NO. 239/V/09 2003-04 BGMPS 8360 L DCIT CENTRAL CIRCLE- 1(1) GUNTUR T.SIVA NAGESWARA RAO KOLLURU 13 ITA NO. 240/V/09 2003-04 BGMPS 8434 B DCIT CENTRAL CIRCLE- 1(1) GUNTUR T. SRINIVASA RAO KOLLURU 14 ITA NO. 237/V/09 2003-04 AERPS 3053 A DCIT CIRCLE-1(1) GUNTUR S. MURALI KRISHNA PRASAD KOLLURU 15 ITA NO. 238/V/09 2003-04 AFRPS 3143 A DCIT CIRCLE-1(1) GUNTUR S. SIVARAMA KRISHNA PRASAD KOLLURU 16 ITA NO. 67/V/09 2003-04 AACHK 7832 G DCIT CIRCLE-1(1) GUNTUR K. SAMBASIVA RAO KOLLURU ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 2 OF 29 17 ITA NO. 378/V/09 2002-03 AACHK 7832 G DCIT CIRCLE-1(1) GUNTUR K. SAMBASIVA RAO KOLLURU 18 ITA NO. 379/V/09 2002-03 AETPG 5144 C DCIT CIRCLE-1() GUNTUR G. SRINIVASA RAO KOLLURU APPELLANT BY: S/SHRI P.GOPI KRISHNA C. SUBRAMANYA M MSR PRASAD K. THIRUMALA RAO S. PULLA RAO RESPONDENT BY: SHRI SUBRATA SARKAR AND SHRI G.S.S. GOPINATH DR ORDER PER BENCH: THE APPEALS LISTED IN SERIAL NO.1 TO 6 FILED AT T HE INSTANCE OF THE RESPECTIVE ASSESSEES ARE DIRECTED AGAINST THE ORDER PASSED BY THE LD CIT (A) GUNTUR IN THEIR RESPECTIVE HANDS AND THEY RELAT E TO THE ASSESSMENT YEAR 2003-04. THESE APPEALS WERE HEARD TOGETHER AND FUR THER ALL THE APPEALS EMANATE FROM THE SAME ASSESSMENT ORDER. HENCE WE F IND IT CONVENIENT TO DISPOSE THEM OFF BY THIS COMMON ORDER. THE ASSESS EE M/S KOLLURU LIQUOR SYNDICATE (ITA NO.319/VIZAG/2008) WAS ASSESSED IN T HE STATUS OF ASSOCIATION OF PERSONS (AOP) AND ALL OTHER FIVE A SSESSEES WERE CONSIDERED AS THE MEMBERS OF THE AOP EITHER DIRECTLY OR INDIRE CTLY. 2. THE EFFECTIVE GROUNDS RAISED BY M/S KOLLURU LIQUOR SYNDICATE (STATUS: ASSOCIATION OF PERSONS) READ AS UNDER: I) COMPLETING THE ASSESSMENT IN THE NAME OF KOLLURU LIQUOR SYNDICATES IS INCORRECT AND THE ASSESSMENT OUGHT TO HAVE BEEN MADE IN THE NAME OF THE LIQUOR LICENSE-HOLDER. II) WITHOUT THE PREJUDICE TO THE ABOVE CLAIM THE AS SESSMENT OUGHT TO HAVE BEEN COMPLETED AT LEAST IN THE NAME OF THE COR RECT A.O.P. WHICH IDENTIFIED IN THE ASSESSMENT ORDER. III) WITHOUT PREJUDICE TO THE ABOVE GROUNDS THE ASS ESSING OFFICER OUGHT TO HAVE ALLOWED THE EXPENDITURE LIKE MAMULS ESPECIA LLY IN VIEW OF ALLOWABILITY OF ILLEGAL EXPENSES IN ILLEGAL BUSINES S. ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 3 OF 29 IV) THE ASSESSING OFFICER HAS CONSIDERED ONLY PART OF THE SEIZED MATERIAL AND OUGHT TO HAVE CONSIDERED TOTAL SET OF FINANCIAL STATEMENT FOR DETERMINING THE PROFIT FOR THE RELEVANT YEAR. 2.1 ALL OTHER FIVE ASSESSEES ARE CHALLENGING TH E DECISION OF THE AO IN INCLUDING THEM AS ONE OF THE MEMBERS OF THE ASSOCIA TION OF PERSONS. 3. THE FACTS OF THE CASE ARE STATED IN BRIEF. THE E XCISE DEPARTMENT OF THE ANDHRA PRADESH GOVERNMENT GRANTS LICENSE THROU GH LOTTERY SYSTEM TO CARRY OUT LIQUOR BUSINESS IN A DESIGNATED AREA. IN T HE YEAR RELEVANT TO THE ASSESSMENT YEAR 2003-04 FOLLOWING 5 PERSONS WERE R UNNING LIQUOR SHOPS IN THE KOLLURU AREA UNDER THE AUTHORITY OF THE LICENSE GRANTED TO THEM: LICENSE HOLDER NAME OF THE SHOP I) SRI KAMMELA SAMBASIVA RAO M/S SRI SAI WINES II) SRI MYNENI RAGHAVA RAO M/S RAGHAVENDRA WINES III) SRI GAJULA SRINIVASA RAO M/S KANAKADURGA WINES IV) SRI V. PULLAREDDY M/S PULLAREDDY WINES V) SRI G. NARENDRA M/S SAI DURGA WINES. ALL THE ABOVE MENTIONED INDIVIDUALS WERE FILING THE RETURNS OF INCOME IN THEIR INDIVIDUAL STATUS DECLARING INCOME FROM THEI R RESPECTIVE LIQUOR SHOP. THE DEPARTMENT CARRIED OUT A SURVEY OPERATION U/S 1 33A OF THE ACT ON 15- 11-2002 IN A BUILDING WHERE BOOKS OF ACCOUNTS OF TH E LIQUOR BUSINESS WERE KEPT. DURING THE COURSE OF SURVEY IT CAME TO LIGHT THAT A COMMON SET OF BOOKS OF ACCOUNTS I.E. DAY BOOK & LEDGER WERE MAINT AINED FOR ALL THE 5 SHOPS AND COMMON MONTHLY PROFIT & LOSS A/C AND COMM ON MONTHLY BALANCE SHEET WERE ALSO PREPARED. THE MONTHLY PROFIT & LOS S A/C AND BALANCE SHEET WERE AVAILABLE RIGHT FROM THE ASSESSMENT YEAR 1999- 2000 ONWARDS AND UP TO THE DATE OF SURVEY. HOWEVER WITH REGARD TO THE COMMON SET OF BOOKS OF ACCOUNTS ONLY THE BOOKS PERTAINING TO THE ASSESSME NT YEAR 2002-03 AND PART PERIOD RELATING TO THE ASSESSMENT YEAR 2003-04 WERE FOUND. IN ADDITION TO THE ABOVE IT ALSO CAME TO LIGHT THAT T HESE SHOPS WERE OPERATING CERTAIN COMMON BANK ACCOUNTS; WHEREIN THE SALE PROC EEDS OF EACH SHOP WERE SAID TO HAVE BEEN DEPOSITED AND DEMAND DRAFTS WERE TAKEN FOR ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 4 OF 29 PURCHASE OF LIQUOR FOR ALL THESE 5 SHOPS. BASED ON THESE EVIDENCES THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT ALL T HESE 5 SHOPS HAVE FORMED AN UNOFFICIAL SYNDICATE WITH TWIN OBJECTIVE OF AVOI DING UNHEALTHY COMPETITION BETWEEN THEMSELVES AND TO MAXIMIZE THEIR PROFITS. ACCORDING TO THE RECORD SRI V.PULLA REDDY JOINED THE SYNDICATE ONLY IN THE MONTH OF MAY AND OTHER FOUR PERSONS WERE THE MEMBERS OF THE SYNDICATE SINC E 1.4.2002. BY PLACING RELIANCE ON THE DECISION OF THE SUPREME COURT IN TH E CASE OF CIT VS. INDIRA BALAKRISHNA (1960) 39 ITR 546 (SC) THE ASSESSING O FFICER CAME TO THE CONCLUSION THAT THE ABOVE SAID UNOFFICIAL SYNDICATE SQUARELY FALLS UNDER THE SCOPE OF THE DEFINITION OF ASSOCIATION OF PERSONS . THE AO ASSIGNED THE NAME KOLLURU LIQUOR SYNDICATE TO THIS UNOFFICIAL SYNDICATE AND THE ASSESSMENT WAS FRAMED IN THE SAME NAME. 3.1 BASED UPON THE SEIZED RECORD THE AO ALSO N OTICED THAT SUCH A SYNDICATE EXISTED IN THE EARLIER YEARS ALSO THOUGH THE CONSTITUENT MEMBERS CHANGED EVERY YEAR DEPENDING UPON THE PERSON TO WHO M LICENSE WAS GRANTED. THE LIST OF LICENSE HOLDERS FOR THE EARLI ER YEARS WAS ALSO PREPARED BY THE AO AND THE SAME IS EXTRACTED BELOW: ASSESSMENT YEAR LICENSED MEMBER SHOPS PERSONS TREATED AS MEMBERS OF AOP 1999-2000 M/S RAGHAVENDRA WINES SRI MYNENI RAGHAVA RAO M/S KANAKADURGA WINES SRI GAJULA SRINIVASA RAO M/S KAVERI WINES M/S KAVERI WINES (FIRM) M/S NAGARAJA WINES SRI RAVULA VENKATA SATYANARAYAN A 2000-01 M/S RAGHAVENDRA WINES SRI MYNENI RAGHAVA RA O M/S KANAKADURGA WINES SRI GAJULA SRINIVASA RAO M/S KAVERI WINES M/S KAVERI WINES (FIRM) M/S NAGARAJA WINES SRI RAVULA VENKATA SATYANARAYAN A 2001-02 M/S RAGHAVENDRA WINES SRI MYNENI RAGHAVA RA O M/S KANAKADURGA WINES SRI GAJULA SRINIVASA RAO M/S SRI SAI WINES SRI KAMMELA SAMBASIVA RAO ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 5 OF 29 2002-03 M/S RAGHAVENDRA WINES SRI MYNENI RAGHAVA RA O M/S KANAKADURGA WINES SRI GAJULA SRINIVASA RAO M/S SRI SAI WINES SRI KAMMELA SAMBASIVA RAO M/S SAI DURGA WINES SRI GHANTA NARENDRA 3.2 ACCORDINGLY THE AO PROPOSED A SINGLE ASSESSM ENT FOR ALL THE SHOPS IN THE STATUS OF ASSOCIATION OF PERSONS (AOP) WITH THE NAME KOLLURU LIQUOR SYNDICATE FOR DIFFERENT ASSESSMENT YEARS. SINCE T HE COMPOSITION OF MEMBERS CHANGED EVERY YEAR EACH YEARS SYNDICATE W AS TREATED AS SEPARATE AOP AND ACCORDINGLY DIFFERENT PA NUMBERS W ERE ALLOTTED FOR EACH AOP EVEN THOUGH SAME NAME WAS USED IN EACH OF THE A SSESSMENT YEAR. FOR EXAMPLE FOR THE ASSESSMENT YEAR 2002-03 THE P .A. NUMBER ALLOTTED IS (GIR K-604) AACHK 7832 G AND FOR ASSESSMENT YEAR 200 3-04 (GIR NO. K- 638) P.A.NO. AAAAK4938N WAS ALLOTTED. 3.3 DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT CAME TO THE NOTICE OF THE AO THAT APART FROM THE LICENSE HOLDERS STAT ED ABOVE SOME OTHER PERSONS HAVE ALSO ACTIVELY PARTICIPATED IN THE RUNN ING OF LIQUOR SHOPS IN THE FOLLOWING FORMS: A) BANK ACCOUNTS HAVE BEEN OPENED IN JOINT NAMES CONSI STING OF THE LICENSE HOLDERS AND OTHER PERSONS. B) CASH DISCOUNTS RECEIVED FROM THE MANUFACTURERS OF L IQUOR BRANDS HAVE BEEN DEPOSITED IN BANK ACCOUNT BELONGING TO OT HERS. C) ACCORDING TO THE EXCISE RULES THE LICENSE HOLDERS ARE ALLOWED TO OPEN BELT SHOPS IN SMALL HAMLETS. HOWEVER THE BEL T SHOP AGREEMENT HAS BEEN ENTERED BY THE PERSONS WHO ARE N OT LICENSE HOLDERS. D) ON EXAMINATION OF CERTAIN LICENSE HOLDERS ON OATH THE EXISTENCE OF SUB-PARTNERSHIP WAS CONFIRMED. E) THE EXPENDITURE AND WITHDRAWAL VOUCHERS HAVE BEEN S IGNED BY SOME PERSONS WHO ARE NOT LICENSE HOLDERS. BASED ON THE INFORMATION AND MATERIAL CITED ABOVE THE AO ALSO DETERMINED THE PERSONS WHO WERE PARTNERS OF EACH SHOP. THUS T HE GROUP CONSISTING OF LICENSE HOLDERS WAS TREATED AS LARGER AOP AND THE G ROUP CONSISTING OF PARTNERS OF EACH SHOP WAS TREATED AS SMALLER AOP. IF THERE IS NO EVIDENCE ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 6 OF 29 OF ANY PARTNERSHIP THE CONCERNED LICENSED HOLDER W AS TREATED AS INDIVIDUAL. THUS FOR THE ASSESSMENT YEAR 2003-04 THE AO HAS ID ENTIFIED ONE LARGER AOP WHICH CONSISTED OF THREE SMALLER AOPS AND TWO INDIVIDUAL LICENSE HOLDERS. FOR THE ASSESSMENT YEAR 2003-04 THE AO DIVIDED THE INCOME DETERMINED BY HIM EQUALLY BETWEEN THE MEMBERS OF TH E LARGER AOP. THE SHARE OF EACH MEMBER OF LARGER AOP WAS FURTHER DIVI DED EQUALLY BETWEEN THE MEMBERS OF EACH SMALLER AOP. SINCE THE RECORD REVEALED THAT SHRI PULLA REDDY OF M/S PULLA REDDY WINES JOINED THE AOP ONLY IN THE MONTH OF MAY THE AO HAS MADE SUITABLE ADJUSTMENT WHILE DIVI DING THE PROFIT OF THE LARGER AOP BETWEEN ITS MEMBERS SO THAT SHRI PULLA R EDDY WAS ALLOCATED PROFIT OF ELEVEN MONTHS ONLY. 3.4 THE DETAILS OF SMALLER AOP AS DETERMINED BY TH E AO FOR THE ASSESSMENT YEAR 2003-04 ARE GIVEN BELOW:- LICENSE HOLDER NAME OF THE SHOP MEMBERS OF SMALLER AOP I) SRI KAMMELA SAMBASIVA RAO M/S SRI SAI WINES 1. KAMMELA SAMBASIVA RAO 2. VEMURI RAMA MOHAN RAO (SINCE DECEASED). SMT. VEMURU BALATRIPURA SUNDARI TREATED AS LEGAL REPRESENTATIVE. II) SRI GAJULA SRINIVASA RAO M/S KANAKADURG A WINES 1. GAJULA SRINIVASA RAO 2. SUNKARA SATYANARAYANA 3. SAMMETA MURALIKRISHNA PRASAD 4. S.SIVA RAMA KRISHNA PRASAD III) SRI G. NARENDRA M/S SAI DURGA WINES 1. G. NARENDRA 2. KURRA KRISHNA MURTHY 3. SAMMETA DURGA PRASAD 4. TALASILA SIVA NAGESWARA RAO 5. TALASILA SRINIVASA RAO . THE REMAINING TWO LICENSE HOLDERS VIZ. SHRI MYNENI RAGHAVA RAO OF M/S RAGAVENDRA WINES AND SHRI V.PULLA REDDY OF M/S PULL A REDDY WINES WERE TREATED AS INDIVIDUAL MEMBERS. 3.5 A VOLUNTARY RETURN OF INCOME WAS FILED IN TH E NAME OF KOLLURU LIQUOR SYNDICATE IN THE STATUS OF AOP ON 24.3.2004; WHER E IN INCOME PERTAINING TO ONLY FOUR SHOPS WERE ADMITTED. THE INCOME OF TH E SHOP NAMED M/S SAI ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 7 OF 29 DURGA WINES WHICH IS LICENSED TO GHANTA NARENDRA WA S NOT INCLUDED IN THE RETURN OF INCOME. FURTHER THE RETURN OF INCOME WAS FOUND TO BE SIGNED ONLY BY THREE MEMBERS. IN VIEW OF THE ABOVE SHORT COMIN GS THE AO HELD THAT RETURN OF INCOME IS AN INVALID RETURN AND DID NOT T AKE COGNIZANCE THEREOF. ACCORDINGLY THE AO ISSUED A NOTICE U/S 148 ON 30.1. 2006 TO THE SYNDICATE CONSISTING OF FIVE LICENSE HOLDERS REQUIRING THEM T O FURNISH A RETURN OF INCOME. SINCE SOME MORE PERSONS WERE IDENTIFIED A S THE MEMBERS OF THE SYNDICATE UPON MAKING FURTHER PROBE THE AO DROPPE D THE PROCEEDINGS INITIATED ON 30.1.2006. 3.6 SUBSEQUENTLY THE AO ISSUED ANOTHER NOTICE U /S 148 ON 6.3.2006 TO THE SYNDICATE BY REGARDING THE GROUP CONSISTING OF FIVE LICENSE HOLDERS AS LARGER AOP OUT OF WHICH THREE SHOPS WERE TREATED A S THREE SMALLER AOPS AND THE REMAINING TWO SHOPS WERE CONSIDERED AS PROP RIETARY CONCERNS. IN RESPONSE TO THE ABOVE SAID NOTICE SRI MYNENI RAGHA VA RAO SRI KAMMELA SAMBASIVA RAO AND SRI GAJULA SRINIVASA RAO FILED LE TTERS DATED 10.3.2006 REQUESTING THE AO TO TREAT THE RETURN ALREADY FILED ON 24.3.2004 AS THE RETURN FILED IN RESPONSE TO THE SAID NOTICE. SINCE THE ORIGINAL RETURN FILED ON 24.3.2004 WAS TREATED BY THE AO AS AN INVALID RETUR N THE AO DID NOT ACCEPT TO THE SAID REQUEST OF THE ASSESSEE. IN THE MEAN T IME MANY PERSONS WHO WERE IDENTIFIED AS THE MEMBERS OF THE AOP (EITHER L ARGER AOP OR SMALLER AOP) FILED REPLIES CLAIMING THAT THEY HAD NO ROLE O R INTEREST IN THE BUSINESSES OF LIQUOR SHOPS. ULTIMATELY NO OTHER RE TURN OF INCOME WAS FILED IN RESPONSE TO THE NOTICE ISSUED U/S 148 EXCEPT THE LETTER STATED ABOVE. HENCE THE AO PROCEEDED TO COMPLETE THE ASSESSMENT U /S 144 OF THE ACT. 3.7 SINCE THE COMMON SET OF BOOKS WAS AVAILABLE UP TO AUGUST 2002 THE AO EXTRAPOLATED THE PURCHASE SALES AND EXPENDI TURE FIGURES THAT WERE FOUND RECORDED IN THE BOOKS TO THE FULL YEAR. THE ASSESSEE HAD FILED A PROFIT AND LOSS ACCOUNT ALONG WITH ITS RETURN OF INCOME FI LED ON 24.3.2004. THE AO COMPARED THE PROJECTED FIGURES WITH THE FIGURES THAT WERE AVAILABLE IN THE SAID PROFIT AND LOSS ACCOUNT AND ON SOME BASIS REDRAFTED THE PROFIT AND ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 8 OF 29 LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. ACC ORDINGLY THE AO DETERMINED THE NET PROFIT FOR THE YEAR AT RS.49.70 LAKHS. IN THE COMMON SET OF BOOKS CERTAIN CASH CREDITS WERE FOUND AND S INCE THE ASSESSEE COULD NOT PROVE CERTAIN CASH CREDITS TO THE SATISFACTION OF THE AO A SUM OF RS.23.80 LAKHS WAS ADDED U/S 68 OF THE ACT. THUS T HE AO DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.73.50 LAKHS AND DISTRIBUTED THE SAME BETWEEN THE MEMBERS OF THE LARGER AOP AND FURTHER T HE SHARE INCOME OF EACH MEMBER OF LARGER AOP WAS DISTRIBUTED AMONG THE MEMBERS OF THE SMALLER AOP OF EACH SHOP. THE ASSESSMENT ORDER IS DATED 29.3.2006. 3.8 AS PER THE RECORD OF THE APPEALS HEARD BY U S WE NOTICE THAT VERY SAME ASSESSMENT ORDER DATED 29.3.2006 WAS CHALLENGE D BEFORE THE LD CIT(A) BY VARIOUS PERSONS STATED BELOW BY FILING SE PARATE APPEAL. A. KOLLURU LIQUOR SYNDICATE (P.A.NO.AAAAK4938N) LARGER AOP. B.KOLLURU LIQUOR SYNDICATE (P.A.NO.AFVPG0202G) RE P. BY G.NARENDRA C. SAMMETTA DURGA PRASAD - (MEMBER OF SAI DURGA WINES- SMALLER AOP) D. KURRA KRISHNAMURTHY - ( ) E. TALASILA. SIVA NAGESWARA RAO ( ) F. TALASILA SRINIVASA RAO ( ) SINCE THE LD CIT(A) CONFIRMED THE ORDER OF THE ASSE SSING OFFICER AND DISMISSED THE APPEALS FILED BY THESE PERSONS THEY HAVE FILED SEPARATE APPEALS BEFORE US. THE BRIEF FACTS RELATED TO THE APPEALS FILED BY THE PERSONS LISTED IN SERIAL NO. (B) TO (F) ARE DISCUSS ED HEREUNDER. 4. THE LICENSEE OF THE SHOP NAMED M/S SAI DURGA WINES SHRI GHANTA NARENDRA PLEADED BEFORE THE AO THAT HE DID NOT CAR RY ON THE BUSINESS AT ALL EVEN THOUGH THE RELEVANT LICENSE STANDS IN HIS NAME. HE CLAIMED THAT HE HAD LENT OUT THE LICENSE TO ANOTHER PERSON NAMED KURRA KRISHNA MURTHY. IN SUPPORT OF HIS CONTENTIONS HE FILED HIS OWN AFFI DAVIT AND ALSO AFFIDAVITS OBTAINED FROM TWO OTHER PERSONS. THE AO CONSIDERED THE AFFIDAVITS AND ALSO OTHER MATERIALS THAT WERE AVAILABLE WITH HIM; LEGAL POSITION WITH REGARD ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 9 OF 29 TO THE TRANSFER OF LICENSE AND FINALLY DID NOT ACCE PT THE PLEA OF GHANTA NARENDRA. HENCE HE WAS TREATED AS A MEMBER OF THE LARGER AOP AND ALSO OF THE SMALLER AOP OF THE SHOP NAMED M/S SAI DURGA WINES. HENCE SHRI GHANTA NARENDRA HAS ALSO CHALLENGED THE VERY SAME A SSESSMENT ORDER DATED 29.3.2006 BEFORE LD CIT(A) BUT COULD NOT SUC CEED. FOR CHALLENGING THE ORDER OF THE AO SHRI GHANTA NARENDRA HAS OBTAI NED ANOTHER PA NUMBER VIZ. AFVPG0202Q IN THE SAME NAME OF KOLLU RU LIQUOR SYNDICATE. AGAINST THE ORDER OF LD CIT(A) APPEAL HAS BEEN FI LED BEFORE THE ITAT AND THE SAME IS NUMBERED AS ITA 313/V/08. 4.1 SIMILARLY THE MEMBERS OF SMALLER AOP RELATED TO M/S SAI DURGA WINES VIZ. SAMMETTA DURGA PRASAD; KURRA KRISHNAMURTHY T ALASILA SIVA NAGESWARA RAO AND TALASILLA SRINIVASA RAO HAVE OBJE CTED TO THEIR INCLUSION IN THE SMALLER AOP. SINCE THEY COULD NOT WIN THEIR RESPECTIVE CASE BEFORE THE LD CIT(A) THEY HAVE ALSO FILED SEPARATE APPEAL BEFORE US IN THEIR RESPECTIVE NAMES AS DETAILED IN THE CAUSE TITLE SU PRA. 5. THE LICENSE HOLDER OF THE SHOP NAMED M/S PUL LA REDDY WINES SHRI VEMPATI PULLA REDDY ALSO DID NOT ACCEPT THE MEMBERS HIP OF THE LARGER AOP. HE PREFERRED APPEAL BEFORE LD CIT(A) AGAINST THE AS SESSMENT ORDER PASSED IN HIS HAND FOR THE ASSESSMENT YEAR 2003-04 WHICH WAS PARTLY ALLOWED. AGGRIEVED AGAINST THE ORDER OF LD CIT(A) THE ASSES SEE HAS PREFERRED APPEAL BEFORE THE ITAT CHALLENGING THE VARIOUS ADDITIONS M ADE IN HIS HANDS AND ALSO CHALLENGING HIS INCLUSION IN THE LARGER AOP. 6. WE WERE GIVEN TO UNDERSTAND BY THE COUNSEL T HAT CERTAIN OTHER PERSONS WHO WERE INCLUDED IN THE SMALLER AOP HAVE A LSO CHALLENGED THEIR INCLUSION AND THEIR APPEALS ARE PENDING BEFORE LD C IT(A). HOWEVER AS PER THE APPEALS HEARD BY US WE NOTICE THAT (A) SHRI GHANTA NRENDRA OF M/S SAI DURGA WINES HAS CLAIMED THAT HE DID NOT CARRY ON BUSINESS AT ALL THOUGH THE LICENSE STANDS IN HIS NAME. ACCORDINGLY HE HAS OBJECTED TO HIS INCLUSION AS A M EMBER OF LARGER AOP. ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 10 OF 29 HIS CLAIM IS THAT HE HAS LENT OUT THE LICENSE TO AN OTHER PERSON NAMED SHRI KURRA KRISHNAMURTHY. (B) SHRI V.PULLA REDDY OF M/S PULLA REDD Y WINES HAVE NOT ACCEPTED HIS INCLUSION IN THE MEMBERSHIP OF THE LARGER AOP A ND CLAIMS THAT HE HAS CARRIED THE BUSINESS ON HIS OWN. (C) SHRI KURRA KRISHNAMURTHY SAMMETA DURGA PRASA D TALASILA SIVA NAGESWARA RAO AND TALASILA SIVA NAGESWARA RAO HAVE CHALLENGED THEIR INCLUSION IN THE SMALLER AOP RELATING TO M/S SAI DU RGA WINES. (LICENSE HOLDER SHRI GHANTA NARENDRA). THUS ALL THE MEMBERS OF SMALLER AOP RELATING TO M/S SAI DURGA WINES HAVE CHALLENGED THE ORDER OF THE AO. (D) SRI MYNENI RAGHAVA RAO OF M/S RAGAVENDRA WINES ; SRI KAMMELA SAMBASIVARAO OF M/S SRI SAI WINES AND SRI GAJULA SR INIVASA RAO OF M/S KANAKA DURGA WINES HAVE ACCEPTED THEIR INCLUSION AS MEMBERS OF LARGER AOP BY FILING A VOLUNTARY RETURN IN THE NAME OF M/S KOLLURU LIQUOR SYNDICATE. (E) IT IS NOT KNOWN WHETHER THE MEMBERS OF SMALLER AOP RELATING TO M/S SRI SAI WINES AND M/S KANAKA DURGA WINES HAVE A CCEPTED THEIR INCLUSION AS MEMBERS OF RESPECTIVE SMALLER AOP. 7. ON UNDERSTANDING OF THE FACTS OF THE CASE W E ARE OF THE VIEW THAT WE NEED TO ANSWER FOLLOWING QUESTIONS. A) WHETHER THE CONSTITUTION OF LARGER AOP IS RIGHT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. B) WHETHER THE CONSTITUTION OF SMALLER AOPS IS RIGHT I N THE FACTS AND CIRCUMSTANCES OF THE CASE. C) IF THE CONSTITUTION OF LARGER AOP AND SMALLER AOPS A RE HELD TO BE CORRECT THEN WHETHER THE CONSTITUENT MEMBERS DETER MINED BY THE AO IS CORRECT. D) WHETHER THE AO HAS CORRECTLY COMPUTED THE TOTAL INC OME. 8. AS STATED EARLIER THE REVENUE CAUGHT HOLD O F COMMON SET OF BOOKS OF ACCOUNT DURING THE COURSE OF SURVEY. THE SAID COMM ON SET OF BOOKS OF ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 11 OF 29 ACCOUNT INDICATED THAT ALL THE LICENSE HOLDERS OF T HE FIVE SHOPS HAVE FORMED A SYNDICATE. THE SAID BOOKS OF ACCOUNT CONTAINED T HE PURCHASE AND SALE DETAILS OF ALL THE LIQUOR SHOPS AND ALSO THE NAMES OF THE LICENSE HOLDERS. BESIDES THE ABOVE FOLLOWING COMMON BANK ACCOUNTS O PERATED BY THESE FIVE SHOPS WERE ALSO FOUND OUT. A. CP-189 SBI KOLLURU B. ABG-8423 ANDHRA BANK KOLLURU C. ABG 200555 ANDHRA BANK KOLLURU D. ABG 500045 ANDHRA BANK KOLLURU E. ACCOUNT NO.200006 ANDHRA BANK KOLLURU ACCORDINGLY THE AO HAS COME TO THE CONCLUSION THAT AN UNOFFICIAL AOP WAS FUNCTIONING DURING ALL THE YEARS RELEVANT FROM THE ASSESSMENT YEAR 1999- 2000 ONWARDS. THE AO TERMED THIS SYNDICATE AS A GR OUP OF INDIVIDUALS (REPRESENTING EACH LICENSED SHOP) WHO HAVE ACTED WI TH A COMMON PURPOSE TO MAXIMIZE THEIR PROFITS AND HENCE IT IS AN ASSOCI ATION OF PERSONS FOR THE PURPOSE OF INCOME TAX. THE AO HAS PLACED HIS RELIA NCE ON THE FOLLOWING DECISION OF HONBLE SUPREME COURT. A. CIT VS. INDIRA BALAKRISHNA (1960) 39 ITR 546 (S C ) B. BIHARILAL JAISWAL VS. CIT (217 ITR 746) 8.1 NOW LET US CONSIDER THE LEGAL PROPOSITION T HAT HAS BEEN LAID DOWN BY THE HONBLE SUPREME COURT WITH REGARD TO THE INFERE NCE OF ASSOCIATION OF PERSONS AND CLUBBING OF INCOME OF TWO DIFFERENT EN TITIES. 9. THE TESTS THAT ARE REQUIRED TO BE CONDUCTED TO INFER THE EXISTENCE OF ASSOCIATION OF PERSON HAS BEEN DISCUSSED AT LENGT H BY THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF MILAN SUP ARI STORES VS. ITO REPORTED IN 184 ITR 106 BY PLACING RELIANCE ON THE PROPOSITION LAID DOWN BY THE HONBLE SUPREME COURT IN THIS REGARD. THE R ELEVANT PORTIONS OF THE ORDER ARE EXTRACTED BELOW: IN VIEW OF THE AFORESAID ARGUMENTS FIRST OF ALL W E HAVE TO SEE AS TO IN WHAT CIRCUMSTANCES AN INFERENCE OF ASSOCIA TION OF ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 12 OF 29 PERSONS CAN BE DRAWN. IN THE CASE OF COMMR. OF AGRL . I. T. V. RAJA RATAN GOPAL [1966] 59 ITR 728 THE SUPREME COU RT HAS HELD THAT TO CONSTITUTE AN ASSOCIATION OF INDIVIDUA LS TWO OR MORE INDIVIDUALS SHOULD HAVE JOINED IN THE PROMOTIO N OF A JOINT ENTERPRISE WITH THE OBJECT OF PRODUCING INCOME PRO FITS OR GAINS. IN THE CASE OF G. MURUGESAN AND BROS. V. CIT [1973] 88 ITR 432 THE SUPREME COURT HAS HELD THAT FOR FORMING AN 'ASSOCIATION OF PERSONS' THE MEMBERS OF THE ASSOCI ATION MUST JOIN TOGETHER FOR THE PURPOSE OF PRODUCING AN INCOM E. AN 'ASSOCIATION OF PERSONS' CAN BE FORMED ONLY WHEN TW O 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 ALWAYS OPEN TO ITS MEMBERS TO WITHDRAW FROM THE ASSOCIATION. NO ONE CAN BE COMPELLED TO CONTINUE AS A MEMBER OF THE ASSOCIATIO N. NO PARTICULAR FORM NEED BE OBSERVED FOR WITHDRAWING FR OM AN ASSOCIATION. IN THE CASE OF REALIZATION OF DIVIDENDS IF THE INDIVIDUAL MEMBERS OF AN ASSOCIATION CHOOSE TO REAL IZE THEIR DIVIDENDS AS INDIVIDUALS THERE IS AN END OF THE AS SOCIATION. IN THE CASE OF CIT V. INDIRA BALKRISHNA [1960] 39 I TR 546 THE SUPREME COURT HAS HELD THAT THE WORD 'ASSOCIATE' ME ANS 'TO JOIN IN COMMON PURPOSE OR TO JOIN IN AN ACTION'. T HEREFORE 'ASSOCIATION OF PER-SONS' 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 W HICH IS TO PRODUCE INCOME PROFITS OR GAINS. AS SUCH IN VIEW OF THE AFORESAID DECISIONS OF THE SUPREME COURT INTERPRETING THE TERM 'ASSOCIATION OF PERSON S' AS USED IN SECTION 3 OF THE INCOME-TAX ACT THE SUPREME COURT HAS CONSISTENTLY TAKEN THE VIEW THAT IF TWO OR MORE PER SONS WITH A COMMON PURPOSE ACT JOINTLY WITH A MOTIVE TO PRODUCE INCOME PROFITS OR GAINS THEN THEY CAN BE TREATED AS AN AS SOCIATION OF PERSONS. THE SUPREME COURT HAS ALSO HELD THAT 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 PARTICU LAR FACTS AND CIRCUMSTANCES OF EACH CASE AS TO WHETHER THE CO NCLUSION CAN BE DRAWN OR NOT- CIT V. INDIRA BALKRISHNA [1960 ] 39 ITR 546 (SC). THEREFORE IN THE LIGHT OF THE AFORESAID POSITION O F LAW IT HAS TO BE EXAMINED WHETHER THE PETITIONER FIRM ALONG WITH THE RESPONDENT-FIRMS IN THE THREE PETITIONS CONSTITUTED AN ASSOCIATION OF PERSONS WITH THE INTENTION OF EARNIN G PROFITS OR DOING BUSINESS FOR GAIN JOINTLY. IT IS COMMON GROUN D THAT ALL THE ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 13 OF 29 FIRMS ARE REGISTERED SEPARATELY AS PARTNERSHIP FIRM S AND ARE BEING ASSESSED TO TAX SEPARATELY. THEIR OPENING AND CLOSING BALANCES OF STOCK CASH ETC. ARE REGULARLY KEPT A ND PLACED BEFORE THE ASSESSING AUTHORITIES. THE COLLECTION OF THE ENTIRE INCOME FROM THE ESTATE BY ONE OF THE SHARERS OR EVE N BY A COMMON MANAGER WOULD NOT MAKE THE OWNERS ASSESSABLE AS AN ASSOCIATION OF PERSONS AS HAS BEEN HELD IN COMMR . OF AGRL. I.T. V. RAJA RATAN GOPAL [1966] 59 ITR 728 (SC). TH E SUPREME COURT AT PAGE 732 OF THE AFORESAID JUDGMENT CONSI DERING THE EARLIER CASE IN MOHAMMED NOORULLAH V. CIT [1961] 42 ITR 115 (SC) HAS HELD THAT THE TEST FOR COMING TO A CONCLU SION THAT THERE IS AN ASSOCIATION OF INDIVIDUALS IS THAT TWO OR MORE INDIVIDUALS SHOULD HAVE JOINED IN THE PROMOTION OF A JOINT ENTE RPRISE WITH THE OBJECT OF PRODUCING INCOME PROFITS OR GAI NS. THEN CONSIDERING THE FACTS OF THE CASE IT WAS FOUND THAT WHEN THE NEPHEWS OF RAJA KHAJA PERSHAD SUCCEEDED TO THE ESTA TE AS CO- SHARERS AND EACH ONE OF THEM WAS ENTITLED TO 1/4TH SHARE OF THE INCOME FROM THE ESTATE THEY DID NOT FORM A UNIT FO R THE PROMOTION OF ANY JOINT ENTERPRISE TO EARN INCOME P ROFITS OR GAINS. THE COLLECTION OF THE ENTIRE INCOME FROM THE ESTATE BY ONE OF THE SHARERS OR EVEN BY A COMMON EMPLOYEE WIL L NOT MAKE THAT INCOME AN INCOME FROM A JOINT VENTURE. EACH OF THE SHARERS GETS HIS INCOME AS AN INDIVIDUAL AND NO T AS AN ASSOCIATION OF INDIVIDUALS. AS SUCH MERELY BECAUSE SOME PERSONS ARE COMMON IN DIFFERENT FIRMS AND THEY ARE INTERRELATED WOULD NOT BY ITSELF BE A REASON FOR TREATING THEM A S AN 'ASSOCIATION OF PERSONS'. SIMILARLY COMMON RESIDENC E BY THE BROTHERS CANNOT ALSO BE GROUND FOR TREATING THE DIF FERENT FIRMS AS AN ASSOCIATION OF PERSONS. 9.1 THUS THE BASIC FEATURES OF AN ASSOCIATION OF PERSON ARE : A) AOP CAN BE FORMED ONLY WHEN TWO OR MORE PERSONS VOL UNTARILY COMBINE TOGETHER FOR A CERTAIN PURPOSE. VOLITION ON THE PART OF MEMBERS TO JOIN TOGETHER IS AN ESSENTIAL INGREDIENT . B) THE OBJECT OF SUCH JOINING TOGETHER IS TO CARRY ON A JOINT ENTERPRISE IN ORDER TO PRODUCE INCOME PROFIT OR GA INS. C) NO ONE CAN BE COMPELLED TO CONTINUE AS A MEMBER OF AOP. D) IT IS ALWAYS OPEN FOR THE MEMBERS TO WITHDRAW FROM T HE AOP. 10. WITH REGARD TO THE CLUBBING OF INCOME OF T WO DIFFERENT ENTITIES IT IS A WELL SETTLED PRINCIPLE THAT SUCH CLUBBING IS PERMIS SIBLE FOR THE PURPOSE OF ASSESSMENT UNDER THE INCOME TAX ACT WHEN THERE IS INTER LOCKING (OR INTER ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 14 OF 29 LACING) OF FUNDS AND UNITY OF CONTROL BETWEEN THE T WO BUSINESS ENTITIES. REFERENCE MAY BE MADE IN THIS REGARD TO THE FOLLOWI NG DECISIONS OF HONBLE SUPREME COURT. A. CIT VS. KELUKUTTY (155 ITR 158 (SC)) B. CIT V G.PARTHASARATHY NAIDU (236 ITR 350 (SC)) 11. NOW LET US TURN TO THE FACTS OF THE INSTANT CA SE AND APPLY THE LEGAL PRINCIPLES STATED ABOVE. THE AO IS ON RECORD THAT CERTAIN COMMON BANK ACCOUNTS HAVE BEEN OPERATED BY ALL THE LICENSE HOLD ERS WHEREIN THE SALES REALIZATION WERE DEPOSITED AND THE DEMAND DRAFTS WE RE TAKEN ON BEHALF OF THE ALL THE SHOPS. THUS THE EXISTENCE OF COMMON BA NK ACCOUNT VERY MUCH INDICATES INTER-LACING OF FUNDS. THE REVENUE HAS C AUGHT HOLD OF COMMON SET OF BOOKS OF ACCOUNTS WHERE IN THE CAPITAL CONTRIBUT ION MADE BY EACH LICENSE HOLDER DETAILS OF PURCHASES SALES AND EXPENSES OF ALL THE SHOPS WERE FOUND RECORDED. IT WAS ALSO NOTICE THAT IN THE PRIOR YEAR S THE PROFIT ARRIVED IN THE COMMON BOOKS HAS BEEN DIVIDED BETWEEN THE MEMBERS O N CERTAIN BASIS. THUS THE COMMON SET OF BOOKS OF ACCOUNT INDICATES T HE VOLITION ON THE PART OF THE LICENSE HOLDERS TO JOIN TOGETHER FOR THE PUR POSE OF PRODUCING INCOME. BOTH COMMON SET OF BOOKS OF ACCOUNT; THE COMMON BAN K ACCOUNTS AND RUNNING THE BUSINESS FOR COMMON PURPOSE INDICATE T HE UNITY OF CONTROL. 12. THUS WE NOTICE ALL THE INGREDIENTS VIZ. I NTERLACING OF FUNDS BETWEEN THE SHOPS; UNITY OF CONTROL OVER ALL SHOPS AND VOLI TION ON THE PART OF MEMBERS TO COMBINE TOGETHER. THE OBJECT OF JOINING TOGETHER IS TO EARN INCOME. HENCE IN OUR VIEW THE ASSESSING OFFICER I S RIGHT IN CLUBBING ALL THE FIVE SHOPS FOR THE PURPOSE OF ASSESSMENT AND TREATI NG THE STATUS AS ASSOCIATION OF PERSONS. FURTHER THE ASSESSEE HAS ALSO FILED RETURN OF INCOME IN THE STATUS OF AOP THOUGH IT WAS SIGNED B Y THREE PERSONS. THUS THE AO IS RIGHT IN LAW IN INFERRING THE EXISTENCE O F LARGER AOP CONSISTING OF FIVE MEMBERS. ACCORDINGLY WE APPROVE THE ORDER OF THE LD CIT(A) ON THIS ISSUE. THUS THE FIRST QUESTION FRAMED BY US IS ANS WERED IN FAVOUR OF THE REVENUE. ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 15 OF 29 13. SHRI GHANTA NARENDRA THE LICENSE HOLDER OF M/S SAI DURGA WINES HAS CLAIMED THAT HE HAS LENT OUT THE LICENSE TO SHRI KU RRA KRISHNAMURTHY. HOWEVER THE SAID CLAIM HAS BEEN REJECTED BY THE TAX AUTHORITIES. AS OBSERVED BY THE TAX AUTHORITIES SHRI GHANTA NAREND RA HAS NOT SUBSTANTIATED HIS CLAIM WITH ANY MATERIAL. SHRI KURRA KRISHNAMU RTHY TO WHOM THE LICENSE HAS BEEN CLAIMED TO HAVE BEEN TRANSFERRED HAS ALSO NOT ACCEPTED THE SAID CLAIM. THE TAX AUTHORITIES HAVE FURTHER NOTICED TH AT SHRI G. NARENDRA HAS RENEWED THE LICENSE FOR MORE THAN THREE YEARS FILE D ALL STATUTORY AND OTHER PAPERS IN HIS NAME AND ALSO OPERATED THE BANK ACCOU NT OF THE CONCERNED LIQUOR SHOP. THE TAX AUTHORITIES HAVE ALSO NOTICED THAT SUCH TRANSFER OF LICENSE IS RESTRICTED UNDER THE EXCISE LAWS AND THE RE IS NO EVIDENCE TO SHOW THAT THE CONDITIONS PRESCRIBED UNDER THE EXCISE LAW WAS FOLLOWED. IN THESE CIRCUMSTANCES WE ARE UNABLE TO AGREE WITH THE CONT ENTIONS OF SHRI GHANTA NARENDRA. FURTHER THE COMMON BOOKS OF ACCOUNT CLEA RLY SHOW THAT HE IS ONE OF THE MEMBERS OF THE LARGER AOP AND ACCORDINGL Y WE APPROVE THE ORDER OF AO IN TREATING HIM AS ONE OF THE MEMBERS O F LARGER AOP. 14. SIMILARLY SHRI V.PULLA REDDY OF M/S PULLA R EDDY WINES HAVE OBJECTED TO HIS INCLUSION AS A MEMBER OF LARGER AOP. HOWEVE R THE COMMON SET OF BOOKS OF ACCOUNT SHOW THAT HE IS THE MEMBER OF THE SYNDICATE SINCE MAY 2002. FURTHER THE CLAIM OF SHRI V.PULLA REDDY THA T HE LEFT THE SYNDICATE IN NOVEMBER 2002 INDICATES THAT HE WAS A MEMBER OF SY NDICATE AT LEAST UPTO NOVEMBER 2002. HOWEVER AS POINTED OUT BY THE AO HE COULD NOT SUBSTANTIATE HIS CLAIM WITH ANY EVIDENCE. ACCORDING LY WE UPHOLD THE ORDER OF THE AO IN TREATING SHRI V.PULLA REDDY ALSO AS ON E OF THE MEMBERS OF LARGER AOP FOR ELEVEN MONTHS. 15. HOWEVER WITH REGARD TO THE FORMATION OF SMA LLER AOP FOR EACH SHOP IS CONCERNED THE MATERIALS AVAILABLE WITH THE AO E VIDENCES WHICH SHOW THE OPERATION OF BANK ACCOUNTS SIGNING OF VOUCHERS ETC . THE AO HAS ALSO PLACED RELIANCE ON STATEMENTS GIVEN BY SOME PERSONS IN THIS REGARD. IN OUR ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 16 OF 29 OPINION THE OPERATION OF PARTICULAR BANK ACCOUNT LIKE WITHDRAWAL AND DEPOSIT OF CASH CANNOT BE TAKEN AS A CONCLUSIVE PR OOF FOR TREATING A PERSON AS ONE OF THE PARTNERS OF THE CONCERNED SHOP. THER E IS A POSSIBILITY THAT THE CONCERNED PERSON COULD HAVE FACILITATED OR HELPED T HE LICENSE HOLDER FOR CARRYING ON THE BUSINESS. IN OUR OPINION THE DETER MINING FACTOR IS THE LEGAL RIGHT / LIABILITY TO SHARE THE PROFIT OR LOSS OF TH E BUSINESS ACTIVITY AND VOLITION ON THE PART OF THE MEMBERS TO JOIN TOGETHER. IN TH E ABSENCE OF ANY EVIDENCE TO SHOW THAT THE MEMBERS OF SMALLER AOP AR E UNDER LEGAL RIGHT / OBLIGATION TO SHARE THE PROFIT OR LOSS OF THE CONCE RNED BUSINESS ACTIVITY AND IN THE ABSENCE OF VOLITION ON THE PART OF THE MEMBE RS TO JOIN TOGETHER THE AO IS NOT ENTITLED TO INCLUDE ANY PERSON AS A MEMBE R OF SMALLER AOP . 15.1 IN THE CASE OF BIHARILAL JAISWAL V CIT (217 IT R 746 (SC) ON WHICH THE AO HAS PLACED HIS RELIANCE THE PARTNERSHIP DEED WA S THE EVIDENCE OF VOLITION ON THE PART OF THE PARTNERS TO JOIN TOGETH ER TO CARRY ON THE BUSINESS. SINCE THE RELEVANT EXCISE LAWS PROHIBITED THE FORMA TION OF PARTNERSHIP THE REGISTRATION UNDER THE INCOME TAX ACT WAS DENIED TO THE SAID PARTNERSHIP FIRM. SINCE THERE WAS VOLITION ON THE PART OF THE MEMBERS OF THE FIRM THE HONBLE SUPREME COURT HELD THAT THE FIRM IS BOUND T O BE TAXED EITHER AS AN UNREGISTERED PARTNERSHIP FIRM OR AS AN ASSOCIATION OF PERSONS. 16. IN THE CASE OF SMALLER AOPS THE AO HAS NOT FOU ND OUT ANY MATERIAL TO SUGGEST THAT THE CONCERNED MEMBERS HAVE VOLUNTARILY JOINED TOGETHER FOR THE PURPOSE OF PRODUCING INCOME WITH THE RIGHT TO S HARE THE PROFITS. HOWEVER IF THE LICENSE HOLDER AND OTHER MEMBERS CO NCERNED AGREE TO THE EXISTENCE OF PARTNERSHIP INTERSE THEN THE AO CAN T REAT THE CONCERNED SHOP AS AN AOP FOR THE PURPOSE OF ASSESSMENT. 16.1 THE MEMBERS OF THE SMALLER AOP RELATING TO M/ S SAI DURGA WINES (LICENSEE SHRI GHANTA NARENDRA) VIZ. SHRI KURRA KRISHNAMURTHY SAMMETA DURGA PRASAD TALASILA SIVA NAGESWARA RAO AND TALAS ILA SIVA NAGESWARA RAO HAVE OBJECTED TO THEIR INCLUSION AS MEMBERS OF SMALLER AOP. AS STATED ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 17 OF 29 EARLIER THE ESSENTIAL INGREDIENT IS THE VOLITION O N THE PART OF THE MEMBERS TO JOIN TOGETHER. IN THE ABSENCE OF VOLITION INTERSE THE MEMBERS THE PRESUMPTION OF EXISTENCE OF SMALLER AOP IN THE CASE OF M/S SAI DURGA WINES IS NOT IN ACCORDANCE WITH THE LAW. ACCORDINGLY WE DIRECT THE AO TO TREAT THE SHOP M/S SAI DURGA WINES AS THE PROPRIETARY CON CERN OF SHRI GHANTA NARENDRA. 16.2 AS STATED EARLIER IT IS NOT KNOWN WHETHER TH E MEMBERS OF SMALLER AOP RELATING TO M/S KANAKA DURGA WINES AND M/S SRI SAI WINES HAVE ACCEPTED THE EXISTENCE OF THEIR RESPECTIVE SMALLER AOP. HEN CE WE SET ASIDE THE ISSUE OF PRESUMPTION OF EXISTENCE OF SMALLER AOP RE LATING TO THESE TWO SHOPS TO THE FILE OF THE AO WITH A DIRECTION TO RE- EXAMINE THE SAID ISSUE IN THE LIGHT OF THE PRINCIPLES ELABORATED ABOVE. ACCOR DINGLY THE SECOND QUESTION FRAMED BY US IS ANSWERED. 17. THE THIRD QUESTION RELATES TO THE MEMBERSHIP O F THE AOP. IN VIEW OF THE PRIOR DISCUSSIONS THE MEMBERSHIP DETERMINED FO R THE LARGER AOP IS APPROVED. WITH REGARD TO THE SMALLER AOPS THE MEM BERSHIP DETERMINED FOR M/S SAI DURGA WINES IS QUASHED. THE MATTER REL ATING TO THE MEMBERSHIP FOR OTHER TWO SMALLER AOPS IS SET ASIDE TO THE FILE OF THE AO FOR FRESH CONSIDERATION. 18. NOW THE LAST QUESTION RELATES TO THE DETERM INATION OF INCOME OF THE LARGER AOP. WE NOTICE THAT THE AO HAS TREATED THE RETURN OF INCOME FILED BY THE ASSESSEE AS AN INVALID RETURN FOR THE REASON TH AT THE SAID RETURN OF INCOME WAS NOT SIGNED BY ALL THE CONSTITUENT MEMBER S. SECTION 140 OF THE ACT PRESCRIBES THE PERSONS WHO CAN SIGN THE RETURN OF INCOME. AS PER CLAUSE (F) THE RETURN OF INCOME OF ANY OTHER PERSO N CAN BE SIGNED BY THAT PERSON OR BY SOME PERSON COMPETENT TO ACT ON HIS BE HALF. THUS THERE IS NO CONDITION THAT THE RETURN OF INCOME OF AN ASSOCIATI ON OF PERSON (AOP) SHOULD BE SIGNED BY ALL THE MEMBERS OF THE AOP. HE NCE THE AO IS NOT RIGHT ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 18 OF 29 IN LAW IN TREATING THE RETURN FILED BY THE ASSESSEE AS AN INVALID RETURN OF INCOME. 18.1 THE METHODOLOGY ADOPTED BY THE AO TO DETER MINE THE INCOME ALSO SUFFERS FROM MANY INFIRMITIES. AFTER THE REJECTING THE RETURN OF INCOME FILED BY THE ASSESSEE AND FURTHER AFTER TAKING THE DECISI ON TO FRAME THE ASSESSMENT TO THE BEST OF HIS JUDGMENT U/S 144 OF T HE ACT THE AO HAS AGAIN PLACED HIS RELIANCE ON THE REJECTED RETURN OF INCOME TO PREPARE A PROFIT AND LOSS ACCOUNT ON HIS OWN. THE FACT REMAI NS THAT THE COMMON SET OF BOOKS OF ACCOUNTS WAS AVAILABLE ONLY UP TO JULY 2002 AND HENCE MUCH RELIANCE CANNOT BE PLACED UPON AN INCOMPLETE BOOK. THE CASE OF THE ASSESSEE IS THAT THE COMMON SET OF BOOKS OF ACCOUNT IS ALSO NOT COMPLETE IN ALL RESPECTS AND IT SUFFERS FROM MANY INFIRMITIES A ND OMISSIONS. IT IS ALSO AN ADMITTED FACT THAT ALL THE LICENSE HOLDERS HAVE PRE PARED SEPARATE BOOKS OF ACCOUNT INDIVIDUALLY FOR THEIR RESPECTIVE SHOP. HO WEVER IT SEEMS THAT THE AO DID NOT CALL FOR THE SAID BOOKS OF ACCOUNT MAINT AINED BY EACH SHOP. 18.2 HENCE IN OUR OPINION THE INDIVIDUAL BOOK S OF ACCOUNT MAINTAINED BY THE EACH LICENSE HOLDERS SHOULD HAVE BEEN TAKEN AS THE STARTING POINT FOR THE PURPOSE OF COMPUTATION OF INCOME OF THE AOP. T HEREAFTER THE AO SHOULD HAVE REFERRED TO THE COMMON BOOKS OF ACCOUNT TO IDENTIFY ANY REVENUE LEAKAGE AND ITS PROPER TREATMENT. IN VIEW O F THE ABOVE WE ARE OF THE VIEW THAT THE ISSUE OF COMPUTATION OF INCOME OF THE AOP ALSO NEEDS REEXAMINATION. ACCORDINGLY WE SET ASIDE THE ISSUE RELATING TO THE COMPUTATION OF INCOME TO THE FILE OF THE AO WITH A DIRECTION TO COMPUTE AT THE INCOME OF THE ASSESSEE BY DULY CONSIDERING THE INDIVIDUAL BOOKS OF ACCOUNTS MAINTAINED BY THE LICENSE HOLDERS AND ALSO THE COMMON SET OF BOOKS OF ACCOUNT. IN VIEW OF THE ABOVE ALL THE LIC ENSE HOLDERS ARE ALSO DIRECTED TO PRODUCE THE BOOKS OF ACCOUNT OF THEIR R ESPECTIVE SHOPS BEFORE THE AO AND COOPERATE WITH THE AO TO COMPLETE THE AS SESSMENT. IF THE LICENSE HOLDERS FAIL TO PRODUCE THE BOOKS OF ACCOUN T OR DO NOT COOPERATE WITH THE AO IN COMPLETION OF ASSESSMENT THE AO IS FREE TO DETERMINE THE ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 19 OF 29 INCOME OF THE ASSESSEE IN ACCORDANCE WITH THE LAW. NEEDLESS TO MENTION THE ASSESSEE SHOULD BE GIVEN SUFFICIENT OPPORTUNITY OF BEING HEARD. 19. DURING THE COURSE OF HEARING SOME COUNSEL ARG UED THAT THE BUSINESS OF THE ASSESSEE BEING ILLEGAL NO CREDENCE SHOULD BE G IVEN TO THE LICENSE FORMALITIES AND FURTHER ALL ILLEGAL EXPENDITURE SHO ULD BE ALLOWED. HOWEVER THE LIQUOR BUSINESS WAS CARRIED UNDER THE LICENSE G RANTED BY THE GOVERNMENT AND HENCE WE ARE UNABLE TO AGREE WITH TH E CONTENTION OF THE COUNSEL THAT THE LIQUOR BUSINESS IS ILLEGAL BUSINES S. IN OUR OPINION THE BUSINESS IS VERY MUCH LEGAL BUT ONLY THE SYNDICATIO N FORMED BY THE LICENSE HOLDERS MAY BE ILLEGAL AS PER THE PROVISIONS OF EXC ISE LAWS. ACCORDINGLY THE LICENSE FORMALITIES HAVE A BEARING ON DETERMINATION OF OWNERSHIP AND ALSO THE QUESTION OF ALLOWABILITY OF ANY EXPENDITURE IS ALSO GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT. ASSESSMENT YEAR 2002-03: 20. THE APPEALS LISTED IN SERIAL NO. 8 & 9 RELATE TO THE ASSESSMENT YEAR 2002-03. THE APPEAL NUMBERED AS ITA NO.370/V/09 HA S BEEN FILED BY THE AOP NAMED KOLLURU LIQUOR SYNDICATE AND THE APPEAL N UMBERED AS ITA NO.345/V/09 HAS BEEN FILED BY SHRI GHANTA NARENDRA WHO WAS CONSIDERED AS ONE OF THE MEMBERS OF M/S KOLLURU LIQUOR SYNDICA TE-AOP. THE SAID APPEAL HAS ALSO BEEN FILED IN THE NAME OF KOLLURU LIQUOR SYNDICATE. BOTH THE ASSESSEES HAVE TAKEN IDENTICAL GROUNDS AS DISCU SSED IN THE EARLIER PARAGRAPHS RELATING TO THE ASSESSMENT YEAR 2003-04. 20.1. IN THIS YEAR FOLLOWING LIQUOR SHOPS OPER ATING IN KOLLURU AREA HAVE FORMED INTO A SYNDICATE. NAME OF SHOP LICENSE HOLDER S NAME A. RAGAHAVENDRA WINES MYNENI RAGHAVENDRA RA O B. SRI SAI WINES KAMMELA SAMBASI VA RAO C. KANAKA DURGA WINES GAJULA SRINIVASA RAO D. SAI DURGA WINES GHANTA NARENDRA ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 20 OF 29 20.2 IT IS PERTINENT TO NOTE THAT THE LARGER AOP CONSISTING OF THE ABOVE SAID FOUR LICENSE HOLDERS WAS TREATED AS A SEPARAT E ASSESSEE IN THIS YEAR SINCE THE COMPOSITION OF MEMBERS HAVE CHANGED. THE FACTS AND CIRCUMSTANCES PREVAILING IN THESE TWO APPEALS ARE I DENTICAL WITH THE FACTS AND CIRCUMSTANCES OF THE APPEALS RELATING TO THE AS SESSMENT YEAR 2003-04 DISCUSSED IN THE EARLIER PARAGRAPHS EXCEPT WITH RE GARD TO THE COMPOSITION OF MEMBERS. IN THE EARLIER PARAGRAPHS WE HAVE DIS MISSED THE APPEAL FILED BY SHRI GHANTA NARENDRA AND CONFIRMED THE EXISTENCE OF LARGER AOP. FURTHER WE HAVE SET ASIDE THE MATTER RELATING TO TH E SMALLER AOP TO THE FILE OF THE AO IN ORDER TO DECIDE THE ISSUE IN THE LIGH T OF THE PRINCIPLES DISCUSSED IN EARLIER PARAGRAPHS. SO ALSO THE MATT ER RELATING TO THE DETERMINATION OF INCOME WAS ALSO SET ASIDE TO THE F ILE OF AO WITH CERTAIN DIRECTIONS. CONSISTENT WITH THE VIEW TAKEN IN EARL IER PARAGRAPHS FOR THE ASSESSMENT YEAR 2002-03 ALSO WE DISMISS THE APPEAL FILED BY SHRI GHANTA NARENDRA IN THE NAME OF KOLLURU LIQUOR SYNDICATE. SIMILARLY THE EXISTENCE OF LARGER AOP IS CONFIRMED FOR THAT YEAR. THE MATT ERS RELATING TO THE SMALLER AOP AND THE DETERMINATION OF INCOME FOR THE ASSESSMENT YEAR 2002-03 ARE ALSO SET ASIDE TO THE FILE OF THE AO. 21. VEMPATI PULLAREDDY ITA NO.320/VIZAG/2008 A.Y.20 03-04 21.1 FOLLOWING ISSUES ARE CONTESTED BY THE ASSESSEE IN T HIS APPEAL. A.ADDITION OF RS.2 50 000/- RELATING TO TH E CAPITAL INVESTMENT IN KOLLURU LIQUOR SYNDICATE. B. ADDITION OF RS.50 000/- MADE TOWARDS LOW DRAWIN GS. C. ADDITION OF RS.1 50 000/- RELATING TO UNEXPLAINED CREDIT. D.MEMBERSHIP OF AOP NAMED KOLLURU LIQUOR SYNDICAT E. 21.2 THE ASSESSEE IS THE LICENSE HOLDER OF LIQU OR SHOP NAMED M/S PULLA REDDY WINES ONE OF THE MEMBERS OF THE UNOFFICIAL S YNDICATE (LARGER AOP). THE ASSESSEE FILED HIS RETURN OF INCOME FOR THE ASS ESSMENT YEAR 2003-04 ON 26.3.2004 DECLARING A TOTAL INCOME OF RS.65 930/-. HOWEVER THE AO COMPLETED THE ASSESSMENT AS UNDER: INCOME RETURNED - 65 930 CAPITAL INVESTMENT 2 50 000 LOW DRAWINGS 50 000 ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 21 OF 29 SHARE OF PROFIT FROM AOP** 14 34 750 (** PROTECTIVE BASIS) -------------- 18 00 680 ====== == AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE CARR IED THE MATTER IN APPEAL BEFORE THE LD CIT(A). THE FIRST APPELLATE A UTHORITY DELETED THE PROTECTIVE ADDITION OF SHARE INCOME FROM AOP FOR TH E REASON THAT THE LD CIT(A) HAD HELD THAT THE INCOME IS ASSESSABLE IN TH E HANDS OF THE AOP. THE LD CIT(A) CONFIRMED OTHER ADDITIONS. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 21.3 WE HAVE HEARD THE PARTIES AND CAREFULLY PER USED THE RECORD. THE ASSESSEE HAS RAISED A GROUND RELATING TO CASH CREDI T AMOUNTING TO RS.1 50 000/-. ON VERIFICATION OF THE SEIZED MATER IAL THE AO NOTICED THAT THE ASSESSEE HAS INTRODUCED FOLLOWING AMOUNTS IN TH E BUSINESS. 1.5.2002 CAPITAL 1 50 000 LICENSE FEE 1 50 000 8.5.2002 1 00 000 ------------- 4 00 000 ======= THE ASSESSING OFFICER ADDED THE CAPITAL AMOUNT OF R S.2 50 000/-. WHEN ASKED ABOUT THE SOURCES FOR THE PAYMENT OF LICENSE FEE THE ASSESSEE CLAIMED THAT HE HAS USED HIS SAVINGS AMOUNT OF RS.3 0 000/- AND ALSO LOAN AMOUNT OF RS.1 20 000/- BORROWED FROM EIGHT PERSONS FOR PAYMENT OF LICENSE FEE. THE ASSESSEE IS UNDER AN IMPRESSION T HAT THE AO HAS ADDED THE LICENSE FEE OF RS.1 50 000/- ALSO. HOWEVER ON A CAREFUL PERUSAL OF ASSESSMENT ORDER WE NOTICE THAT THOUGH THE AO DIS CUSSED ABOUT THE LOAN CREDITORS AND FURTHER STATED THAT THE LOAN AMOUNT O F RS.1 20 000/- WERE TREATED AS BOGUS CASH CREDITS YET NO ADDITION WAS MADE WHILE ARRIVING AT THE TOTAL INCOME OF THE ASSESSEE. IN VIEW OF THE A BOVE IN OUR OPINION THE GROUND RELATING TO UNEXPLAINED CASH CREDIT DOES NOT SURVIVE. ACCORDINGLY WE REJECT THE SAME. ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 22 OF 29 21.4. WITH REGARD TO THE GROUND RELATING TO THE DEN IAL OF MEMBERSHIP IN THE AOP NAMED KOLLURU LIQUOR SYNDICATE VIDE PARA 14 OF THIS ORDER WE HAVE HELD THAT THE ASSESSEE HEREIN IS ONE OF THE MEMBERS OF THE SYNDICATE AND ALSO THE LARGER AOP. HENCE WE REJECT THIS GROUND OF THE ASSESSEE ALSO. 21.5 WITH REGARD TO THE ADDITION OF CAPITAL INT RODUCTION OF RS.2 50 000/- AND LOW DRAWINGS OF RS.50 000/- THE ASSESSEE HAS S UBMITTED THAT HIS CLAIM OF AVAILABILITY OF AGRICULTURAL INCOME IN THE HANDS OF HIS HUF WAS NOT PROPERLY EXAMINED BY THE TAX AUTHORITIES. THE ASSE SSEE HAS FILED COPIES OF LAND HOLDING RECORDS IN THE PAPER BOOK COMPILED BY HIM. FROM THE ASSESSMENT ORDER WE NOTICE THAT THE AO HAS NOT MAD E ANY DISCUSSION/OBSERVATION WITH REGARD TO THE ADDITION OF RS2.50 000/-. IN VIEW OF THE ABOVE WE THINK IT PROPER TO SET ASIDE THESE TWO ISSUES TO THE FILE OF THE AO FOR FRESH CONSIDERATION. ACCORDINGLY WE SET ASIDE THESE TWO ISSUES TO THE FILE OF THE AO WITH A DIRECTION TO CONSIDER THE CLAIM OF AVAILABILITY OF AGRICULTURAL INCOME IN THE HANDS OF THE HUF STATUS OF THE ASSESSEE AND DECIDE THE MATTER IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION THE ASSESSEE SHOULD BE GIVEN PROPER OPPORTUNITY OF BEIN G HEARD. 22. NOW LET US DEAL WITH THE APPEALS FILED BY THE DEPARTMENT. 22.A) ITA NO. 236 241 239 AND 240 OF 2009 RELATIN G TO S.DURGA PRASAD KURRA KRISHNAMURTHY T.SIVA NAGESWARA RAO A ND T.SRINIVASA RAO. 2003-04 22.A.1 THE SOLITARY ISSUE AGITATED IN THESE APPEA LS IS WHETHER THE LD CIT(A) IS JUSTIFIED IN DELETING THE SHARE INCOME FR OM AOP WHICH WAS INCLUDED BY THE AO ON PROTECTIVE BASIS. 22.A.2 THESE FOUR ASSESSEES WERE TREATED AS THE MEMBERS OF SMALLER AOP RELATING TO M/S SAI DURGA WINES. AS STATED EA RLIER THE SHARE INCOME ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 23 OF 29 FROM LARGER AOP RELATING TO M/S SAI DURGA WINES WAS DIVIDED BETWEEN THE MEMBERS OF SMALLER AOP AND ACCORDINGLY THE SHARE OF EACH OF THE MEMBER OF SMALLER AOP WAS ASSESSED IN THEIR RESPECTIVE HAN DS ON PROTECTIVE BASIS. IN THE APPEAL PREFERRED BY THE ASSESSEE LD CIT(A) D ELETED THE PROTECTIVE ADDITION SINCE THE LD CIT(A) HAD CONFIRMED THE ASS ESSMENT OF INCOME IN THE HANDS OF LARGER AOP. AGGRIEVED BY THE ORDERS P ASSED BY THE LD CIT(A) THE DEPARTMENT IS IN APPEAL BEFORE US. 22.A.3 HOWEVER VIDE PARA 16.1 SUPRA IT HAS BE EN HELD THERE EXISTED NO SMALL AOP RELATING TO M/S SAI DURGA WINES AND THE S AID SHOP WAS HELD TO BE THE PROPRIETARY CONCERN OF SHRI GHANTA NARENDRA. IN VIEW OF THE SAID DECISION THESE ASSESSEES CAN NO LONGER BE TREATED AS THE MEMBERS OF THE AOP. IN THAT CASE THE QUESTION OF ASSESSING THE SH ARE INCOME FROM AOP IN THE HANDS OF THESE ASSESSEES DOES NOT ARISE. ACCOR DINGLY THE FINAL DECISION OF LD CIT(A) IS UPHELD THOUGH FOR THE DIFFERENT RE ASONS STATED ABOVE. 22.B) ITA NO.237 AND 238 OF 2009 RELATING TO S.SIV ARAMA KRISHNA PRASAD AND S. MURALI KRISHNA PRASAD. 2003-04 22.B.1 THE SOLITARY ISSUE AGITATED IN THESE APPEA LS FILED BY THE DEPARTMENT IS WHETHER THE LD CIT(A) IS JUSTIFIED IN DELETING T HE SHARE INCOME FROM AOP INCLUDED BY THE AO ON PROTECTIVE BASIS. 22.B.2 THESE TWO ASSESSEES WERE TREATED AS THE M EMBERS OF SMALLER AOP RELATING TO M/S KANAKA DURGA WINES. AS STATED EARL IER THE SHARE INCOME OF THE LARGER AOP RELATING TO M/S KANAKA DURGA WINES W AS DIVIDED BETWEEN THE MEMBERS OF SMALLER AOP AND ACCORDINGLY THE SHAR E OF EACH OF THE MEMBER OF SMALLER AOP CAME TO BE ASSESSED IN THE HA NDS OF THESE ASSESSEES ON PROTECTIVE BASIS. IN THE APPEAL PREFERR ED BY THESE ASSESSEES THE LD CIT(A) DELETED THE PROTECTIVE ADDITION SINC E THE LD CIT(A) HAD CONFIRMED THE ASSESSMENT OF INCOME IN THE HANDS OF LARGER AOP. AGGRIEVED ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 24 OF 29 BY THE ORDERS PASSED BY THE LD CIT(A) THE DEPARTME NT IS IN APPEAL BEFORE US. 22.B.3. HOWEVER VIDE PARA 16.2. SUPRA WE HAD SE T ASIDE THE QUESTION OF DETERMINATION OF EXISTENCE OF SMALLER AOP RELATING TO THE KANAKA DURGA WINES TO THE FILE OF THE AO WITH A DIRECTION TO DEC IDE THE ISSUE OF EXISTENCE OF SMALLER AOP IN THE LIGHT OF PRINCIPLES EXPLAINED IN THAT ORDER. 22.B.4. WE ALSO NOTICE THAT THE METHOD OF ASSESS ING THE SHARE INCOME OF A MEMBER OF AOP IS GOVERNED BY SECTION 86 OF THE AC T. 22.B.5. SINCE THE BASIC ISSUE OF MEMBERSHIP OF T HESE TWO ASSESSEES HAS BEEN SET ASIDE TO THE FILE OF THE AO WE DEEM IT PR OPER TO RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO CO NSIDER THE QUESTION OF ASSESSING THE SHARE INCOME FROM THE AOP IF ANY AF TER DETERMINING THE MEMBERSHIP OF THESE ASSESSEES AS PER THE PRINCIPLE S DISCUSSED IN EARLIER PARAGRAPHS AND ALSO AS PER THE PROVISIONS OF THE AC T STATED ABOVE. 22.C) K.SAMBASIVA RAO ITA 67/VIZAG/09 2003-04 22.C.1. FOLLOWING TWO ISSUES ARE CONTESTED IN THIS APPEAL FILED BY THE DEPARTMENT. A. SHARE OF PROFIT FROM AOP DELETED BY LD CIT(A) - RS.7 50 340/- B. AS AGAINST THE ADDITION OF RS.10.06 LAKHS THE LD CIT(A) HAS SUSTAINED ONLY TO THE EXTENT OF RS.3.68 LAKHS. 22.C.2. THE ASSESSEE IS THE LICENSE HOLDER OF TH E LIQUOR SHOP NAMED M/S SRI SAI WINES. THE ASSESSEE IS ONE OF THE MEMBERS OF LARGER AOP. FURTHER THE AO TREATED THE LIQUOR SHOP VIZ. M/S S RI SAI WINES AS A SMALLER AOP CONSISTING OF THE ASSESSEE HEREIN AND ANOTHER P ERSON SHRI V.RAMMOHAN RAO . THE AO DETERMINED THE INCOME OF T HE LARGER AOP FOR THE ASSESSMENT YEAR 2003-04 AT RS.73.50 LAKHS AND T HE SAME WAS DIVIDED ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 25 OF 29 EQUALLY AMONG THE FIVE MEMBERS OF THE SYNDICATE. T HE SHARE INCOME OF EACH MEMBER WAS FURTHER DIVIDED BETWEEN THE MEMBERS OF SMALLER AOP. THUS THE SHARE INCOME OF THE ASSESSEE HEREIN WAS DE TERMINED AT RS.7 50 340/-. THE AO ASSESSED THE SAME ON PROTECT IVE BASIS. THE AO ALSO MADE ADDITIONS TO THE TUNE OF RS.10 06 850/- T OWARDS CASH CREDIT LOW DRAWINGS UNEXPLAINED INVESTMENT AND UNEXPLAINED EX PENDITURE. 22.C.3. IN THE APPEAL FILED BY THE ASSESSEE LD C IT(A) DELETED THE PROTECTIVE ADDITION OF SHARE INCOME FROM AOP FOR TH E REASON THAT THE LD CIT(A) HAD HELD THAT THE INCOME IS ASSESSABLE IN TH E HANDS OF THE LARGER AOP. BEFORE THE LD CIT(A) THE ASSESSEE FILED A CAS H FLOW STATEMENT WHERE IN THE ASSESSEE HAD INCLUDED ALL THE ITEMS OF ADDIT IONS MADE BY THE AO. ACCORDING TO THE CASH FLOW STATEMENT NET CASH DEFI CIT WAS ONLY RS.2 77 798/-. BY CONSIDERING THE SAID CASH FLOW STATEMENT THE LD CIT(A) DETERMINED THE CASH DEFICIT AT RS.3 53 866/- AND SU STAINED THE ADDITION TO THAT EXTENT. THE LD CIT(A) ALSO SUSTAINED ADDITION TOWARDS LOW DRAWINGS TO THE EXTENT OF RS.15 000/-. AGGRIEVED THE REVENUE I S IN APPEAL BEFORE US. 22.C.4 WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE RECORD. THE FIRST ISSUE RELATES TO THE DELETION OF SHARE INCOME FROM AOP. IN EARLIER PARAGRAPHS WE HAVE UPHELD THE EXISTENCE OF LARGER AOP. WITH REGARD TO THE SMALLER AOP RELATING TO M/S SRI SAI WINES VIDE PARA 16.2 SUPRA WE HAD SET ASIDE THE ISSUE TO THE FILE OF AO FOR FRESH EXA MINATION IN THE LIGHT OF PRINCIPLES DISCUSSED IN THAT ORDER. WE MAY ALSO ST ATE THAT THE ASSESSMENT OF SHARE INCOME FROM AOP IS GOVERNED BY SECTION 86 OF THE ACT. IN VIEW OF THE ABOVE WE SET ASIDE THE ISSUE RELATING TO THE A SSESSMENT OF SHARE INCOME FROM AOP TO THE FILE OF THE AO IN ORDER TO E NABLE HIM TO TAKE PROPER DECISION IN ACCORDANCE WITH THE PRINCIPLES DISCUSSE D IN EARLIER PARAGRAPHS AND ALSO IN ACCORDANCE WITH SECTION 86 OF THE ACT. 22.C.5. WITH REGARD TO THE PARTIAL RELIEF GRANTED BY THE LD CIT(A) ON OTHER ADDITIONS THE CONTENTION OF LD DR IS THAT THE LD CIT(A) HAS VIOLATED ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 26 OF 29 RULE 46A BY CONSIDERING THE CASH FLOW STATEMENT FUR NISHED BY THE ASSESSEE FOR THE FIRST TIME BEFORE HIM WITHOUT CONFRONTING T HE SAME TO THE AO. WE FIND MERIT IN THE SAID CONTENTION OF THE LD DR. AC CORDINGLY WE SET THIS ISSUE ALSO TO THE FILE OF THE AO FOR ADJUDICATION A FRESH BY TAKING INTO CONSIDERATION THE CASH FLOW STATEMENT FILED BY THE ASSESSEE. 22.D ITA 378 & 379 OF 2009 RELATING TO K.SAMBASIVA RAO AND G.SRINIVASA RAO ASSESSMENT YEAR : 2002-03. 22.D.1 THE SOLITARY ISSUE AGITATED IN THESE APPEAL S FILED BY THE DEPARTMENT IS WHETHER THE LD CIT(A) IS JUSTIFIED IN DELETING T HE SHARE INCOME FROM AOP INCLUDED BY THE AO ON PROTECTIVE BASIS. 22.D.2 THESE TWO ASSESSEES ARE MEMBERS OF LARGER AOP. THE ASSESSING OFFICER INCLUDED THE SHARE INCOME FROM AOP ON PROTE CTIVE BASIS. HOWEVER THE SAME WAS DELETED BY THE LD CIT(A) IN THE APPEAL FILED BY THESES ASSESSEES AS THE FIRST APPELLATE AUTHORITY HAD HEL D THAT THE INCOME FROM LIQUOR BUSINESS IS ASSESSABLE IN THE HANDS OF LARGE R AOP. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 22.D.3. IN EARLIER PARAGRAPHS WE HAD SET ASIDE THE ISSUE OF DETERMINATION OF INCOME OF LARGER AOP WHERE IN THE ASSESSEES HER E IN ARE THE MEMBERS TO THE FILE OF THE AO FOR FRESH CONSIDERATION. FUR THER THE ASSESSMENT OF SHARE INCOME FROM AOP IS GOVERNED BY SECTION 86 OF THE ACT. WHILE DECIDING THIS ISSUE THE LD CIT(A) HAS NOT CONSIDER ED THE EFFECT OF SECTION 86 OF THE ACT. IN VIEW OF THE ABOVE WE REVERSE T HE ORDER OF LD CIT(A) AND SET ASIDE THE ISSUE RELATING TO THE ASSESSMENT OF SHARE INCOME FROM AOP TO THE FILE OF AO FOR FRESH CONSIDERATION OF TH E SAME IN ACCORDANCE WITH LAW. 23. WE ALSO NOTICE THAT THIS BENCH OF TRIBUNAL VIDE ITS ORDER DATED 30- 01-2008 HAVE CONFIRMED THE ORDER OF THE LD CIT(A) P ASSED IN THE HANDS OF ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 27 OF 29 KOLLURU LIQUOR SYNDICATE RELATING TO THE ASSESSME NT YEARS 1999-2000 2000-01 AND 2001-02. WE FURTHER NOTICE THAT THE SA ID ORDER WAS PASSED EX-PARTE QUA THE ASSESSEE. HENCE WE DID NOT HAVE THE BENEFIT OF HEARING THE ARGUMENT OF THE ASSESSEE AT THAT TIME. HOWEVE R IN THE CASE BEFORE US WE HAVE HEARD BOTH THE PARTIES AND HAVE TAKEN T HE DECISION AFTER FULLY APPRAISING THE FACTUAL ASPECTS AND FURTHER BY CONSI DERING THE LEGAL POSITION. ACCORDINGLY WE MIGHT HAVE DEVIATED FROM THE DECISI ON RENDERED IN THE ABOVE SAID EX-PARTE ORDER ON CERTAIN ISSUES. 24. THE RESULT OF THE APPEALS FILED BY THE ASSESSE ES IS STATED BELOW: S.NO NAME OF ASSESSEE ITA NOS. DECISION 1 KOLLURU LIQUOR SYNDICATE 319/V/08 & 370/V/09 TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES 2 KOLLURU LIQUOR SYNDICATE (REP. BY G.NARENDRA) 313/V/08 & 345/V/09 DISMISSED 3 SAMMETTA DURGA PRASAD 289/V/08 ALLOWED 4 KURRA KRISHNAMURTHY 290/V/08 ALLOWED 5 TALASILLA SIVA NAGESWARA RAO 291/V/08 ALLOWED 6 TALASILLA SRINIVASA RAO 292/V/08 ALLOWED 7 VEMPATI PULLA REDDY 320/V/08 TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 28 OF 29 25. THE RESULT OF APPEALS FILED BY THE REVENUE I S STATED BELOW: S.NO NAME OF ASSESSEE ITA NOS. DECISION 1 S.DURGA PRASAD KURRA KRISHNAMURTHY T.SIVA NAGESWARA RAO AND T.SRINIVASA RAO 236 241 239 AND 240 OF 2009 DISMISSED 2 S.SIVARAMA KRISHNA PRAS AD AND S. MURALI KRISHNA PRASAD 237 AND 238 OF 2009 TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 3 K.SAMBASI VA RAO 67/VIZAG/09 TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 4 K.SAMBASIVA RAO AND G.SRINIVASA RAO 378 & 379 OF 2009 TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL 2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE: 29-4-2010. COPY TO 1 M/S KOLLURU LIQUOR SYNDICATE C/O M/S V.RAO & GOPI CA 26-1-77 1 ST FLOOR NAGARAMPALEM GUNTUR-4 2 SHRI GHANTA NARENDRA D.NO.9-18 JANASWAMY VARI S TREET KOLLURU (POST & MANDAL) GUNTUR 522 324 3 SHRI SAMMETA DURGA PRASAD KOLLURU C/O SHRI B. H ARI BABU CA KOTHAPET TENALI 522 201 4 SHRI KURRA KRISHNA MURTHY KOLLURU C/O SHRI B. HA RI BABU CA KOTHAPET TENALI 522 201 5 SHRI TALASILA SIVA NAGESWARA RAO KOLLURU C/O SH RI B. HARI BABU CA KOTHAPET TENALI 522 201 6 SHRI TALASILA SRINIVASA RAO KOLLURU C/O SHRI B. HARI BABU CA KOTHAPET TENALI 522 201 7 SHRI VEMPATTI PULLA REDDY C/O K. TIRUMALA RAO C .A. D.NO.5-25-107 3/1 BRODIEPET GUNTUR 522002 8 SHRI S. MURALI KRISHNA PRASAD S/O SEETHARAMAIAH PROP: ASWINI FINANCE CORPORATION SSR COMPLEX 2 ND FLOOR 8-1 KOLLURU 9 SHRI S. SIVARAMA KRISHNA PRASAD S/O SEETHARAMAIA H D.NO.10-116 KOLLURU ITA NO.319/VIZAG/2008 & OTHERS KOLLURU PAGE 29 OF 29 10 SHRI KAMMELA SAMBASIVA RAO PROP: M/S SRI SAI WINES KOLLURU (V&M) GUNTUR 11 SHRI G. SRINIVASA RAO PROP: M/S KANAKA DURGA WINES KOLLURU (V&M) GUNTUR 12 THE DCIT CIRCLE-1(1) GUNTUR 13 THE ACIT CIRCLE-1(1) GUNTUR 14 THE ITO WARD-1 TENALI 15 THE CIT (A) GUNTUR 16 THE CIT GUNTUR 17 THE DR ITAT VISAKHAPATNAM. 18 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM