Share of Syndicate (AOP/BOI) Income Not Taxable in Member's Hands If Syndicate Taxed at MMR (S. 86 r/w S. 67A, 167B Income Tax Act, 1961): MP HC - 2025-04-26

MP High Court Affirms: Syndicate Income Taxable Only in Syndicate's Hands, Not Members'

Jabalpur , MP: In a significant ruling concerning the taxation of income derived from informal business groups, the High Court of Madhya Pradesh at Jabalpur has dismissed a batch of appeals filed by the Principal Commissioner of Income Tax. The court upheld the decisions of the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Appeals) [CIT(A)], affirming that the share of profit earned by individuals from syndicates, classified as Association of Persons (AOP) or Body of Individuals (BOI), is not taxable in the members' hands if the syndicate itself is chargeable to tax at the maximum marginal rate.

The judgment was delivered by the division bench comprising Hon'ble Shri Justice Sushrut Arvind Dharmadhikari and Hon'ble Smt. Justice Anuradha Shukla . The appeals, including the lead case ITA No. 272 of 2022, involved multiple assessees such as Shri Ramesh Chandra Rai , Shri Harmindar Singh Bhatia, Shri Ramswaroop Shivhare, Vikram Singh , Laxmi Narayan Shivhare, and Hari Mohan Shivhare . Advocate Shri Siddharth Sharma appeared for the appellant (Revenue), while Advocate Shri Vashistha Narayan Dubey represented the respondents (assessees).

Background of the Case

The case originated from search and seizure operations conducted under Section 132 of the Income Tax Act, 1961, at the premises of the 'Shivhare group' and the assessees on January 7, 2016. Following the search, notices under Section 153A were issued, leading to reassessments for Assessment Years 2010-11 to 2015-16, and a regular assessment for AY 2016-17.

The Assessing Officer (AO), relying partly on a special audit report under Section 142(2A), made substantial additions to the assessees' individual incomes. These additions were primarily on account of the assessees' alleged share in the undisclosed income and inadmissible expenses of various 'syndicates' involved in the liquor business. The total additions across the different assessment years for Shri Ramesh Chandra Rai alone amounted to several crores of rupees.

Appellate Proceedings

Aggrieved by the AO's order, the assessees filed appeals before the CIT(A). The CIT(A) provided significant relief by deleting the additions related to the share of syndicate profits and expenses. However, the CIT(A) also made enhancements to the assessee's income under Section 251 for unexplained investments in land for certain assessment years (AY 2012-13, 2013-14, 2014-15, and 2016-17).

The CIT(A) held that despite the assessees forming syndicates/groups for business with a definite profit share, their share of profit and inadmissible expenses from these syndicates could not be added to their individual income. The CIT(A) reasoned that the syndicates functioned as AOPs or BOIs, which are distinct taxable entities under Section 2(31) of the Act. As such, the income of these syndicates was taxable in their own hands, potentially at the maximum marginal rate under Section 167B. Crucially, the CIT(A) relied on Section 86 read with Section 67A, which provides that income-tax shall not be payable by an assessee in respect of their share in the income of an AOP/BOI if the association/body is chargeable to tax at the maximum marginal rate or any higher rate. The CIT(A) emphasized the principle against double taxation and the rule that the right income must be taxed in the hands of the right person, citing the Supreme Court decision in ITO Vs. CH. Atchaiah - (1996) 218 ITR 239 (SC) .

The Revenue challenged the relief granted by the CIT(A) before the ITAT. The assessees also filed cross-appeals against the confirmed additions and enhancements. The ITAT, in its consolidated order dated 18.04.2022, largely concurred with the CIT(A)'s findings regarding the taxation of syndicate income.

High Court's Analysis and Decision

The Revenue argued before the High Court that the ITAT erred in deleting the additions, contending that the syndicates were merely "colourable devices" for tax evasion and that the members' share should be taxed in their hands, relying on the Supreme Court's observations in Mcdowell & Co. Ltd. Vs Commercial Tax Officer 154 ITR 148 .

The High Court carefully examined the relevant provisions of the Income Tax Act, 1961, particularly Sections 67A, 86, and 167B.

• Section 67A outlines the method for computing a member's share in the income of an AOP/BOI where shares are determinate and known.
• Section 86 specifies that income-tax shall not be payable by a member on their share of income from an AOP/BOI computed under Section 67A, provided certain conditions are met. The first proviso to Section 86 is key: if the AOP/BOI is chargeable to tax at the maximum marginal rate or any higher rate, the member's share shall not be included in their total income.

The High Court noted that both the CIT(A) and ITAT found that the assessees were members of AOPs/BOIs (syndicates) with determinate shares. Therefore, the provisions of Section 167B(2), which mandates charging tax at the maximum marginal rate on the AOP/BOI's entire income in such cases, would apply to the syndicates. Consequently, the first proviso to Section 86 would be attracted, excluding the member's share from their individual total income.

The court strongly relied on the Supreme Court's judgment in ITO vs. Ch. Atchaiah (supra), which held that under the 1961 Act, unlike the previous Act, the AO does not have the discretion to choose whether to assess the income in the hands of the AOP/BOI or its members. The assessment must be made in the hands of the AOP/BOI. The principle is clear: the right income must be assessed in the hands of the right person. The court also referred to the Karnataka High Court decision in Pr. CIT vs. Ind Sing Developers (P) Ltd. - (2016) 288 CTR 0154 (Kar) , which, following Ch. Atchaiah , stated that if the right person cannot be taxed, the Revenue cannot tax a wrong person. Decisions from the ITAT Special Bench (Pradeep Agencies) and other benches were also cited in support.

The High Court found no perversity in the concurrent findings of the CIT(A) and the ITAT. They correctly applied the provisions of Section 86 read with Section 67A and the ratio laid down by the Supreme Court. The court rejected the Revenue's argument regarding "colourable devices," implicitly finding that the taxation framework under the Act specifically addresses the taxation of such entities and their members.

Conclusion

Holding that the issue was squarely covered by the statutory provisions and settled legal precedents, the High Court concluded that no substantial question of law arose from the Tribunal's order as required under Section 260A of the Act. The court stated there was "no merit in these appeals," and they were dismissed in limine. The judgment reinforces the statutory scheme of taxing AOPs/BOIs directly at specified rates (like MMR when members' shares are known) and exempting the members' share income in such cases to prevent double taxation.