major issue involved in this appeal pertains to implication of provisions of section 167A of Income-tax Act, 1961 ('the Act'), which were inserted by Finance Act, 1981, with effect from 1-4-1981. 2. assessee is company. assessment year is 1981-82 and relevant previous year is calendar year 1980. 3. facts in brief are as follows: (i) assessee is member of thirty associations of persons (AOPS) having major share in each of them. Seven of these AOPs had not made any profits or incurred losses, while other twenty-two AOPs had made profits. One AOP, viz., Aradhna Corpn. had incurred loss, in which assessee's share was Rs. 41,192. (ii) It is admitted fact that all agreements entered into between assessee and other members of various AOPs are identical in terms. Under these agreements, 10 per cent of income of each of AOPs was to be accumulated, while 90 per cent of such income was to be distributed amongst members of AOPS, as per shares specified in each of agreements. (iii) assessee's share in twenty-two AOPS, which made profits, amounted to Rs. 4,12,744, while its share of loss in Aradhna Corpn. as mentioned above, was Rs. 41,192. 4. In its return of income, as well as at time of assessment proceedings, assessee claimed that Rs. 3,71,552 (Rs. 4,12,744-Rs. 41,192) could not be included in its total income, by virtue of fact that each of AOPs has to be assessed separately under Act. ITO, however, rejected assessee's claim in following manner: " It is noticed that in computing total income assessee has excluded amount of Rs. 3,71,552 claiming same to be exempt. Section 86(v) contemplates that income-tax shall not be payable by assessee in respect of portion of amount which it is entitled to receive from associations of persons on which Income-tax has already been paid by associations or body. assessee has merely submitted list of associations of persons in which assessee is member and also list showing profit and loss received from said associations of persons. There is nothing on record from which it can be said that concerned association of persons have already paid income-tax on portion of amount received by assessee as income. exemption under section 86(v) is, therefore, not available to assessee. Even if said income from share of associations of persons is held to be exempt under section 86(v), it would merely be exempted from charge of income-tax and would in no case be exempt from aggregation of income as contemplated under section 66 of Act. total exemption claimed by assessee for this income is, therefore, not in order and is, accordingly, added back to total income of assessee. loss of share shown in Aradhna Corpn. amounting to Rs. 41,192 shall be taken at Nil in absence of any material. share of profit in respect of remaining 22 associations of persons amounting to Rs. 4,12,744 shall be added back to total income of assessee under section 66 of Act. " 5. In appeal, assessee once again urged for exclusion of Rs. 3,71,552 from its total income, on ground that under Act revenue did not have right to choose whether tax should be levied on individual members of AOPs or AOPs themselves, as far as that portion of profit of AOP was concerned in which individual shares of members were (not) specified. According to assessee, by virtue of section 167A, revenue is obliged to assess income in hands of AOP only, even on that part of profits in which individual shares of members are specified. It was further submitted that by virtue of provisions of section 86(v) of Act read with Explanation thereto inserted by Finance Act, 1981, with effect from 1-4-1981, assessee's share in each of AOPs could be considered for rate purposes only. However, assessee being company, it would not make any difference, since companies are taxed at flat rate. In support of these submissions, reliance was placed on decisions in Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688 (Pat.), Rodamal Lalchand v. CIT [1977] 109 ITR 7 (Punj. & Har.) and Punjab Cloth Stores v. CIT [1980] 121 ITR 604 (Delhi) and relevant commentaries from books of Sundaram, 604 (Delhi) and relevant commentaries from books of Sundaram, Chaturvedi and Pithisaria and Sampath Iyengar as well as Circular No. 308 [F. No. 131(31)/81-TPL], dated 29-6-1981---[1981] 131 ITR (St.) 119---issued by Board. 6. Commissioner (Appeals), however, upheld action of ITO by holding that reported decisions, commentaries and Board's circular nowhere say that revenue cannot assess shares from AOPs in hands of its members. As regards assessee's claim for set off of loss of Rs. 41,192, Commissioner (Appeals) gave following directions to ITO: " This brings us to share of loss of Rs. 41,192 claimed from AOP, viz., Aradhna Corpn. ITO has ignored this loss and taken appellant's share at Rs. nil, 'in absence of any material.' Obviously, ITO has held that there is no material produced before him for supporting claim of share of loss of Rs. 41,192. On other hand, it is appellant's claim that on basis of accounts of that AOP share of loss was rightly claimed at Rs. 41,192. Taking totality of circumstances into account, it would be reasonable to direct that within reasonable time (say fortnight) of receipt of this order by appellant, if appellant produces before ITO adequate material and papers to show that there would be some share of loss, then ITO would examine it and determine for himself whether prima facie there would be any such loss to be considered in appellant's case even before completion of regular assessment of that AOP and of course, subject to rectification under section 155. This direction is considered reasonable because even before regular assessment of AOP concerned, appellant is entitled to prove that there would be some loss to be considered in its case subject to rectification under section 155. It may be further clarified that until and unless appellant proves before ITO that AOP concerned, viz., Aradhna Corpn., has been finally denied benefit of carry forward of loss, appellant's share of loss, if any, would be considered for rate purposes only and of course, subject to rectification under section 155. " 7. Being aggrieved by order of Commissioner (Appeals), assessee has come up in appeal before Tribunal. learned counsel for assessee submitted that income-tax authorities have failed to comprehend provisions of section 167A, which were inserted with effect from 1-4-1981. In this connection, he invited our attention to said provisions, as well as relevant portion of memorandum explaining provisions of Finance Bill, 1981-[1981] 128 ITR (St.) 93---to impress upon us that ITO had n o choice, but to assess AOP in manner laid down in that section. He further submitted that even though Hon'ble Supreme Court and other Hon'ble High Courts while interpreting analogous provisions contained in Indian Income-tax Act, 1922 ('the 1922 Act') have held that ITO had option either to assess AOP or its individual members, same position is not available under 1961 Act. However, he hastened to state that we need not go into question whether ITO had option to tax individual members or AOP, as after insertion of section 167A, ITO is bound to assess AOP only in manner laid down in that section. share of each of members of AOP is to be considered for rate purposes only as provided in section 86(v). At this stage, he pointed out that provisions of section 167A are meant for special cases like AOPs as would appear from sub-title DD mentioned in Chapter XV of Act, 'Liability in Special Cases'. In this view of matter, he urged that Rs. 3,71,552 would not be included in total income of assessee in manner income-tax authorities have included. said amount, at best, could be considered for rate purposes only, as contemplated under section 86(v) read with Explanation thereto. However, since income of company is taxed at flat rate, it has no consequence regarding tax collection. 8. learned representative for revenue, on other hand, justified action of income-tax authorities. In this connection, he referred to following clauses of agreement of AOP, in case of Rajiv Trading Co.: " 4. income arising out of business carried on by association of persons shall be distributed amongst members of association following manner: 90 per cent of income shall be distributed as under: (1) Mr. Prayasvin B. Patel 2 per cent (2) Mr. Bhanubhai I. Patel 2 per cent (3) Western Metal Caps (P.) Ltd. 86 per cent remaining 10 per cent of income is to be accumulated and shall form part of capital and assets of association. 5. On expiry of said period of 10 years or earlier determination thereof association of persons shall stand dissolved. 6. In course of distribution of assets amongst members of association of persons, assets of association excluding accumulated profits shall be distributed amongst members of association in following manner: 1. Mr. Prayasvin B. Patel 2 per cent 2. Mr. Bhanubhai I. Patel 2 per cent 3. Western Metal Caps (P.) Ltd. 86 per cent and for accumulated profits shall be distributed amongst members o f association in proportion as they may agree in course of such distribution. 7. During period of this agreement of association of persons no members can claim any interest either in assets of association of persons or accumulated profits or income of association of persons. 8. Members of association of persons shall contribute towards capital of said business such amount as may be mutually agreed upon amongst members. 9. Any member desiring to retire from said business of association of persons can do so by giving notices of one month to other members but on his or her such retirement he is not entitled to any share either in assets or accumulated income of association of persons. " and submitted that once 10 per cent of income is accumulated and form part of capital and assets of association [clause 4], same could not be excluded in manner provided in clause 6 at time of distribution of assets. According to learned representative for department, provisions of section 167A would not be attracted in respect of specified shares of members, and, therefore, income-tax authorities were justified in including Rs. 3,17,552 in total income of assessee. 9. We have carefully considered rival submissions of parties and we find considerable force in submissions made on behalf of assessee. t this stage, it would be better to reproduce below provisions of section 167A of Act: " DD.---Associations of persons---special cases. Charge of tax where shares of members unknown.---(1) Where individual shares of members of association of persons (other than company or co-operative society) in income of such association are indeterminate or unknown, tax shall be charged on total income of association at maximum marginal rate. (2) Where individual shares of members of association of persons (other than company or co-operative society) in any part of income of such association are indeterminate or unknown, income-tax payable by association shall be aggregate of--- (i) amount of income-tax calculated on aforesaid part of total income, at maximum marginal rate; and (ii) amount of income-tax with which it would have been chargeable had remaining part of total income been its total income. Explanation: For purposes of this section,---- (a) 'maximum marginal rate' shall have meaning assigned to it in Explanation 2 below sub-section (3) of section 164; (b) individual shares of members of association of persons in income of such association shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on date of formation of such association or at any time thereafter. " 10. While inserting section 167A, in his Budget Speech for 1981-82, Hon'ble Finance Minister observed as under: " Another device being used for avoiding proper tax liability is creation of associations of persons without defining shares of members. This enables creation of large number of taxable entities which, under existing law, will be chargeable to income-tax separately. I now propose that such associations of persons be charged to income-tax at maximum marginal rate and to wealth-tax at flat rate of 3 per cent or at appropriate rate applicable in case of individual, whichever is higher. This proposal will also take effect from assessment year 1981-82. "---[1981] 128 ITR (St.) 3 11. notes on relevant clauses of Finance Bill read as under: " Under existing provisions, no income-tax is payable by member of n association of persons on any portion of amount which he is entitled to receive from association on which income-tax has already been paid by association of persons. Under proposed amendment, in case of association of persons which is assessable under section 167A, members of association whose shares in income or part of income of association are indeterminate o r unknown, will be deemed to be entitled to receive equal shares in total income or part of total income of association and individual share of such member in total income or part of total income will be determined accordingly. Sub-section (1) of new section 167A seeks to provide that where individual shares of members of association of persons in income of individual shares of members of association of persons in income of such association are indeterminate or unknown, income-tax will be charged on total income of association at maximum marginal rate. Sub-section (2) of new section 167A seeks to provide that where individual shares of members of association of persons in any part of income of such association are indeterminate or unknown, income-tax payable by association will be aggregate of amount of income-tax on such part of total income at maximum marginal rate and amount of income-tax which would have been chargeable if remaining part of total income were its total income."---[1981] 128 ITR (St.) 72 12. In order to understand implication of provisions of section 86(v) and 167A, it would be necessary to refer to memorandum explaining relevant provisions in Finance Bill, 1981: " 25. Measures to plug loopholes for tax avoidance through medium of associations of persons wherein shares of members are not defined.---Under existing provisions, 'association of persons' is assessable entity. expression 'association of persons' has not been defined in Income-tax Act. For forming association of persons, it is, however, necessary that members must join together for purposes of producing income. 26. income of association of persons is charged to income-tax at rates applicable to individual. Further, in case of member of association of persons, no tax is payable on any portion of amount which such member is entitled to receive from association of persons on which income- tax has already been paid by association. Such portion is, however, taken into account for determining rate of tax in case of member. 27. Instances have come to notice of Government that some taxpayers are increasingly resorting to creation of associations of persons without defining shares of members with view to avoiding proper tax liability. modus operandi in such cases is that taxpayer with large income creates number of associations of persons without specifying shares of its members and each of such associations declaring small part of what in reality is income of taxpayer. No part of income of association is liable to b e taxed in hands of its members as their shares are indeterminate or unknown and care is taken to ensure that members do not receive any income during life of association. Under this situation, income-tax is payable only by association of persons on small income declared by it at normal rates. net result of this arrangement is that taxpayer pays only small fraction of tax that would otherwise be due from him. 28. In order to counter such attempts at tax avoidance through creation of multiple associations of persons without defining shares of members, Bill proposes to make provision in Income-tax Act in order to provide that such associations will be liable to tax at maximum marginal rate. Where, however, shares of members of association in its income are not specified in relation to only part of such income, only such part will be chargeable to income-tax at maximum marginal rate, while rest of income in which shares of members are specific, would be chargeable to tax at normal rates. 29. As mentioned above, shares of profit from association of persons is included in assessment of member of such association for rate purposes. It is further proposed to provide that in case of association of persons in which shares of members are indeterminate or unknown, t h e shares of all members will be deemed to be equal and amount so ascertained will be included in assessment of members of association for rate purposes. For this purpose, shares of members of association will be regarded as indeterminate or unknown if such shares are not ascertainable at time of formation of association or at any time thereafter."---[1981] 128 ITR (St.) 93 13. They only other thing which we should refer now is Board's Circular No. 308, dated 29-6-1981, titled 'The Finance Act, 1981---Explanatory note on provisions relating to direct taxes'. relevant paragraphs are from 15.1 to 15.7. However, for purpose of disposal of present appeal, it would be sufficient if we refer to paragraph 15.6 which reads as under: " 15.6 effect of aforesaid provisions will be as follows: (i) Where shares of members of association of persons in whole of its income are indeterminate or unknown, association will be chargeable to income-tax at maximum marginal rate on its entire income. Further, for purpose of determining rate of income-tax to be applied to income of member of such association, every member will be deemed to be entitled to receive equal share in total income of association and amount of income so determined will be included in his assessment for rate purposes. (ii) Where shares of members of association of persons in only p r t of its income are indeterminate or unknown, association will be chargeable to income-tax at maximum marginal rate in respect of such part while balance of its income in which shares of members are specific, will be chargeable at normal rates. Further, for purpose of determining rate of income-tax to be applied to income of member of such association, every member will be deemed to be entitled to receive equal share in that part of total income of association in which shares of members are indeterminate or unknown and amount of share so determined, as increased by share of member in that part of income of association in which shares of members are specified, will be included in assessment of member for rate purposes."---[1981] 131 ITR (St.) 139 14. On careful reading of aforesaid material, we have no doubt in our mind that ITO is bound to assess AOPs in manner laid down in section 167A and he has no choice to assess share of income of each of members of such AOPs by including same in their respective total incomes. In this view of matter, we entirely agree with submissions made on behalf of assessee that no useful purpose would be served in referring to various reported cases dealing with assessments of AOPs and their members rendered under 1922 Act or under 1961 Act, prior to insertion of section 167A of 1961 Act with effect from 1-4-1981. learned counsel for assessee has filed copies of assessment orders/notices of demand in case of some of AOPs and has also stated that other AOPs' assessments have to be framed in manner ITO is bound to frame as per provisions of section 167A. only thing which ITO assessing the provisions of section 167A. only thing which ITO assessing assessee is required to consider is assessee's share in profits/losses of various AOPs of which it is member, for rate purposes only as contemplated under section 86(v) read with Explanation thereto. Since assessee is company, it would have no effect if such share of profit/loss is considered for rate purposes, as companies are taxed at flat rate. In this view of matter, we direct ITO not to include Rs. 3,71,552 in total income of assessee and modify assessment accordingly. 15. [This para is not reproduced here as it involves minor issue.] 16. In result, appeal is partly allowed. *** WESTERN METAL CAPS (P) LTD. v. INCOME TAX OFFICER