[BREAKING] Income of the Association of Persons (Syndicates) cannot be clubbed with Members': Supreme Court

The Supreme Court of India has upheld the decision of the Madhya Pradesh High Court, ITAT and CIT(A) observing that income earned by an Association of Persons (AOP) or syndicate cannot be directly clubbed with or taxed in the hands of its individual members.

While dismissing the Income Tax Department’s Special Leave Petition, the apex court ruled that where income is taxable in the hands of the syndicate itself, a parallel or direct assessment in the hands of the members is impermissible.

The Supreme Court was considering a challenge filed by the Principal Commissionerof Income Tax against a detailed judgment of the Madhya Pradesh High Court, which had upheld orders of the Commissioner (Appeals) and the Income TaxAppellate Tribunal (ITAT) granting relief to the assessee, Ramswaroop Shivhare.

The Madhya Pradesh High Court had ruled that profits earned by various liquor business syndicates could not be added to the individual income of their members.

In its brief order, Justice Pankaj Mithal and S.V.N.Bhatti observed, “The income of the Association of Persons (Syndicates) cannot be clubbed with the assessees.”

On this basis, the Court concluded that the High Court had not erred in passing the impugned judgment and dismissed the Department’s petition.

The issue began from search proceedings conducted on the Shivhare group, following which the Assessing Officer made additions across multiple assessment years by taxing the assessee’s alleged share of profits from various syndicates and also disallowing expenses incurred by those syndicates in the hands of the assessee.

The Department’s case was that the syndicates were merely colourable devices and that income should be taxed directly in the hands of the individual members.

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However, the assessee contended that the syndicates constituted Associations of Persons (AOPs) with determinate and known shares, and that under the Income Tax Act, such income was required to be assessed only at the syndicate level, not in the hands of the members.

The Madhya Pradesh High Court, in its detailed judgment, analysed the scheme of Sections 67A, 86, and 167B of the Income Tax Act, 1961. It held that once an AOP or syndicate is treated as a separate taxable “person” under Section 2(31) and is chargeable to tax at the maximum marginal rate, the member’s share in such income cannot be included in the total income of the member.

The High Court upheld the concurrent findings of the CIT(A) and the ITAT, holding that the syndicates in question were separate and independent taxable entities under the Income Tax Act and that the income earned by such syndicates was required to be assessed only in their own hands.

It further observed that any issue relating to the admissibility or inadmissibility of expenditure incurred by the syndicates could be examined only at the syndicate level, and not in the assessments of individual members.

The High Court held that bringing the same income to tax again in the hands of the members would result in impermissible double taxation, which is contrary to the statutory scheme and settled principles of income-tax law.

By dismissing the SLP, the Supreme Court confirmed the observations and decisions of the High Court that income of syndicates cannot be clubbed with assessees.

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