1961-VIL-16-SC-DT

Equivalent Citation: [1961] 42 ITR 172

SUPREME COURT OF INDIA

C.A. 490 OF 1957

Dated: 06.03.1961

COMMISSIONER OF INCOME-TAX, POONA

BULDANA DISTRICT MAIN CLOTH IMPORTERS GROUP

Bench

Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH

JUDGMENT

The judgment of the court was delivered by

KAPUR, J.--These are four appeals by the Commissioner of Income-tax in an income-tax reference made under section 66A(2) of the Income-tax Act (hereinafter termed the " Act "). The question for decision is whether the respondent is " an association of persons " within the meaning of section 3 of the Act.

The appeals relate to two income-tax assessments and two excess profits tax assessments ; the former are for the years 1946-47 and 1947-48 respectively, corresponding to the accounting years February 1, 1945, to September 30, 1945, and October 1, 1945, to August 21, 1946, and the latter are in regard to the chargeable accounting periods February 2, 1945, to September 30, 1945, and October 22, 1945, to March 31, 1946. The decision of the excess profits tax appeals is consequent upon the decision of the income-tax appeals.

The facts may now be stated: In 1045 the Deputy Commissioner of Buldana evolved a scheme for the distribution of cloth in his district and with the sanction of the Government of C.P. appointed four persons, viz., Haji Ahmed Haji Ali & Co., Bhanji Kuwarji, Trimbaklal Tribhovan Das and Deolal Rangulal as sole agents for the import of cloth from mills in various places in India and for distribution of the same to retailers. Two of them, Haji Ahmed Haji Ali & Co. and Bhanji Kuwarji, carried on the business as from February 1, 1945, to the end of September, 1945. The profits of the business in proportion to the capital contributed by these persons were distributed between these two persons. After September, 1945, there was a change in the group of importers and some others also joined the group and the profits of the subsequent period were similarly distributed between the members of the group as it was then constituted in proportion to the capital contributed by each of them.

On March 12, 1947, the Income-tax Officer issued a notice under section 22(2) of the Act to the respondent calling upon it to submit a return of the income of the group for the assessment year 1946-47. This was served on Haji Ahmed Haji Ali & Co. but that firm did not furnish any return contending that there was no privity of contract among members of the group. A notice was then issued under section 22(4) of the Act and on the production of the books, the Income-tax Officer ascertained the income for the year ending September, 1945, and assessed liability for payment of income-tax under section 23(4) of the Act. He assessed the respondent as " an association of persons " both for purposes of income-tax and excess profits tax. An application under section 27 of the Income-tax Act was dismissed by the Income-tax Officer. Similarly for the year 1947-48 a notice was again issued and served on Haji Ahmed Haji Ali & Co. and similarly the group was assessed as an association of persons to income-tax and it was also assessed to excess profits tax for the period October 22, 1945, to March 31, 1946, and an application under section 27 of the Income-tax Act was dismissed in regard to this period also.

Appeals were taken against the orders of assessments of income-tax and excess profits tax but they were dismissed by the Appellate Assistant Commissioner. Appeals were then taken to the Income-tax Appellate Tribunal but they also were dismissed by an order dated April 18, 1950. An application for making a reference to the High Court was dismissed by the Tribunal but an order was obtained from the High Court under section 66(2) of the Act and four questions were ordered to be referred to the High Court. The question relevant for the appeals is the following :

" Whether, under the facts and circumstances of the case, the Buldana District Main Cloth Importers' Group constituted an 'association of persons' within the meaning of section 4 of the Income-tax Act, 1922, and was liable to be assessed to income-tax and excess profits tax in that status ? "

The order of the Tribunal dated April 18, 1950, shows that for different periods the group which imported the cloth was differently constituted but Haji Ahmed Haji Ali & Co. was a common member. The books relating to the business were maintained by Haji Ahmed Haji Ali & Co. and every time there was a change in the constituents of the group a separate set of books was maintained by them and the profits from those enterprises were divided between the various persons who formed the group at the material times. It was contended before the Tribunal that there was no " association of persons " and that the cloth imported was issued to the importers who sold the cloth on their own account. The Tribunal, however, found :

" The accounts themselves show that the import and distribution of cloth was done on joint basis. The purchases were on joint account, the sales were on joint account, the profit was first ascertained on the joint account and then distributed according to their agreed share of profits. In our opinion the assessment has been rightly made in the status of an association of persons. "

The High Court, when the matter went to it after the statement of the case by the Tribunal, held that before a group of persons could be called an " association of persons " it had to be established that they were in the nature of partners, i.e., the members of the group of their own volition or free will had joined in a venture with a view to earn profits. As the members of the group were appointed by the Deputy Commissioner as importers their participation could not be held to be of free will but it was under compulsion and, therefore, they were not an " association of persons " within the meaning of the Act. The High Court referred to and relied upon various cases to which it is not necessary to make any reference.

As to what constitutes an association of persons was laid down by this court in Commissioner of Income-tax v. Indira Balkrishna and in Mohamed Noorullah v. Commissioner of Income-tax decided on January 18, 1961, where the business was carried on as one unit and by the consent of all the parties who were heirs of the deceased Mohamed Omer Sahib and during the period when an administration suit between them was being fought in courts of law. In the present case the Tribunal has found that the import and distribution of cloth which was the business carried on by the respondent was done on a joint basis. The purchases were joint, so were the sales and the profits were ascertained on a joint basis and then distributed according to the capital contributed by each member of the group. This finding which is one of fact makes the respondent an " association of persons " and it makes no difference that the business was carried on because the Deputy Cornmissioner of the district had appointed the members constituting the group to import and distribute the cloth in the district.

The respondent, it is not disputed, worked the scheme which was framed by the Deputy Commissioner and the working of the scheme produced profits and it made no difference that the scheme was at the instance of or under the control of the Deputy Commissioner. Dealing with the argument of similar control, Sarkar, J., in Commissioner of Income-tax v. Vyas & Dhotiwala observed as follows :

" The Tribunal thought that since the scheme was completely under the control of the Deputy Commissioner, the assessees could not be said to have carried on business by working the scheme. We are unable to see that the fact of the control of the Deputy Commissioner can prevent the working of the scheme by the assessees from being a business carried on by them. In our view, it only comes to this that the assessees had agreed to do business in a certain manner. "

We are in respectful agreement with this observation. In our view the respondent was an association of persons and was rightly so assessed to income-tax and excess profits tax.

The appeals are, therefore, allowed with costs. One hearing fee.

Appeals allowed.