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PETITIONER: THE COMMISSIONER OF INCOME-TAX, POONA

       Vs.

RESPONDENT: BULDANA DISTRICT MAIN CLOTH IMPORTERS GROUP

DATE OF JUDGMENT: 06/03/1961

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR 1261            1962 SCR  (1) 181  CITATOR INFO :  F          1970 SC1707  (9)

ACT: Income Tax-Business by group of Persons-profits  ascertained and shared on joint basis-If Associations of  Persons-Indian Income-tax Act, 1922 (11 of 922), s. 3.

HEADNOTE: A  scheme for the distribution of cloth was evolved  by  the Deputy Commissioner of the District who appointed a group of persons  as sole agents for the import of cloth  from  Mills and  distribution  of  the same to  retailers.   Though  for different periods the group was differently constituted, one of  the  members, firm ’H’ remained a  common  member.   The profits of the business were distributed amongst the members of  the  group in proportion of the capital  contributed  by them.   The Income-tax Officer issued notice under S.  22(4) Of the Indian Income-tax Act, and on production of books  of account  assessed  the  respondent  as  an  "Association  of Persons".   The  High Court was of the opinion,  inter  alia 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", which was not so  in  the instant case, as the members of the group were appointed  by the  Deputy Commissioner as importers; the participation  of the  group  could not be held to be of free will  but  under compulsion  and therefore they were not an  "Association  of Persons" within the meaning Of s. 3 Of the Indian Income-tax Act. Held,  that where a business is carried on and  the  profits ascertained on a joint basis, and then distributed according to the capital contributed by each. member of the group, the group  is  an  "Association  of Persons"  and  it  makes  no difference that the scheme which produced profits was at the instance of or under the control of the Deputy  Commissioner or that he had appointed the members constituting the group. Commissioner  of  Income-tax, Bombay North  v.  Indira  Bal- krishna, [1960] 3 S.C.R. 513, referred to. Mohamed  Noorullah v. Commissioner of Income-tax,  [1961]  3 S.C.R. 515, relied on.

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JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  41-44  of 1960. 182 Appeals ’by special leave from the judgment and order  dated April  13,  1956, of the former Nagpur High Court  in  Misc. Civil Case No. 27 of 1954. K.   N. Rajagopal Sastri and D. Gupta, for the appel. lant. J.   M.  Thakar, S. N. Andley, Rameshwar Nath, P.  L.  Vohra and J. B. Dadachanji, for the respondent. 1961.  March 6. The Judgment of the Court was delivered by KAPUR,  J.-These  are four appeals by  the  Commissioner  of Income-tax in Income-tax Reference made under s. 66-A(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 s. 3  of  the Act. The  appeals  relate to two Income-tax assessments  and  two Excess  Profits  Tax assessments the former for  the  year,% 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, the  latter  are  in regard to chargeable account. ing periods February 1,  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 1945 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 mils 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 of 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 183 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 s. 22(2) of the Act to the respondent callinga 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  s. 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  s.  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 s. 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

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for  the period October 22, 1945, to March 31, 1946, and  an application under s. 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 s. 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,               184               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 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 on 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 a,% 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 the Commissioner of Income-tax, Bombay North v. Indira Balkrishna (1) and in 185 Mohammad,Noorulla  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 deceased  Mohammad Omer Sahib and during the period when  an administration  B  suit  between them was  being  fought  in

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courts  of law. In the present case the Tribunal  has  found that  the It import and distribution of cloth which was  the business  carried on by the respondent, was dune 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 Commissioner 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,  Madhya Pradesh  &  Bhopal  v. Vyas and Dhotiwala  (2)  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  asaessees 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 (1) [1961] 3 S.C.R.513. (2) [1959] Supp. 1 S.C.R. 39,43- 196 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.