The Commissioner of Income-tax, Poona v. Buldana District Main Cloth Importers Group

**1** S.C.R. SUPREME COURT REPORTS **181** THE COMMISSIONER OF INCOME-TAX, POONA _**March**_ _**6.**_ _v._ BULDANA DISTRICT MAIN CLOTH IMPORTERS GROUP (J. L. KAPUR, M. HIDAYATULLAH and ###### J. c. SHAH, JJ.) _Income_ _Tax-Business by_ _group of persons-Profits ascertain-_ _ed_ _and shared_ _on_ _joint_ _basis-If_ _Association of_ _Persons-Indian_ _Income-tax Act,_ _r922_ _(II of r922),_ _s._ J. 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 distribntion 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** **11** **Association of** **Persons". The High Court ¥/as 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 \hey 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.CoR. 5r3, referred to. _Mohamed Noorullah_ v. _Commissioner of Income-tax,_ [rg6r] 3 S.C.R. 515, relied on. CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 41-44of1960. 182 SUPREME COURT REPORTS [1962] _r96x_ Appeals by special leave from the judgment and #### Th c --. . order dated April 13, 1956, of the former Nagpur ~ 1;:::';::~"High Court in Misc. Civil Case No. 27 of 1954, _Poona_ _K. N. Rajagopal Sastri_ and _D._ _Gupta,_ for the appelv. !ant. _Buldana District_ _Main Cloth_ _Iniporters Group_ _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._ 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 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, the latter are in regard to chargeable accounting periods February I, 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 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 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 l S.C.R. SUPREME COURT REPORTS 183 ###### • the subsequent period were similarly distributed _1961_ # .. ###### • ##### .. betw~en tdhe members .of the hgroup .as it wa~bthend _The co:;;:issioner_ constitute in proport10n to t e capita 1 contn ute _of_ _Tncome-tax,_ by each of them. _Poona_ On March 12, 1947, the Income-tax Officer issued a v. notice under s. 22(2) of the Act to the respondent Bulda~a _District_ calling upon it to submit a return of the income of the _Main_ _Cloth_ group for the assessment year 1946-4 7. This was _Importm Group_ served on Haji Ahmed Haji Ali & Co but that firm _Kapur_ _J._ 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 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 SUPREME COURT REPORTS [1962] ##### • _I96I_ 1922, and was liable to be assessed to income-tax n _c_ . . and excess profits tax in that status?" ~~ !>~;;::~;::""The order of the Tribunal dated April 18, 1950, shows _Poona_ ' that for different periods the group which imported v. the cloth was differently constituted but Haji Ahmed _Buldana_ _District_ Haji Ali & Co. was a common member. The books _Main_ _Cloth_ relating to the business were maintained by Ha.ji Ahmed _Importers_ _ _G'°up_ H aJI ·· Al' 1 & C o. an d every t' 1me t. h ere was a c ange h Ill _Kapur_ _J._ 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 con tended 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 joiut 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 mem.):Jers 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 the _Commissioner of In-_ _come-tax, Bombay North_ v. _Indira Balkrishna_ ( [1] ) and in (I) [1960] 3 5.C.R. 513. **1** S.C.R. SUPREME COURT REPORTS 185 _Mohammad Noorulla v. Commissioner of Income-tax_ (1) _'9_ _[6]_ _'_ decided on January 18, 1961, where the business was _The Commissioner_ carried on as one unit and by the consent of all the _of_ _tncome-tox,_ parties who were heirs of deceased Mohammad Omer _Poona_ Sahib and during the period when an administration v. suit between them was being fought in courts of law. _Buldana_ _Dist.ice_ _**Main**_ _**Cloth**_ In the present case the Tribunal has found that the _I>nporem Group_ import and distribution of cloth which was the business carried on by the respondent was done on a joint _H apur_ _J._ 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 _Comm·issioner of Income-tax, Madhya_ _Pradesh_ _&_ _Bhopal v._ _Vyas and 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 (1) [1961] 3 S.C.R. 515. 24 (2) [1959] Supp. t S.C.R. 39, 43 •. 186 SUPREME COURT REPORTS [1962] _r96r_ persons and was rightly so assessed to Income-tax - and Excess Profits Tax. _The Commission"_ Th ] h _c_ ]] d - h _of Income-tax,_ e appea s are t ere1ore a owe wrt costs. One _Poona_ hearing fee. v. _**Buldana**_ _**District**_ _**Main Cloth**_ _**Importers Group**_ _Kapur_ _1_ _**March**_ **7.** _Appeals allowed._ THE COMMISSIONER OF INCOME-TAX, MAD HY A PRADESH _v._ SETH KHUSHAL CHAND DAGA (J. L. KAPUR, M. HIDAYATULLAH and ###### J. c. SHAH, JJ.) _Income_ _Tax-Set-of! of_ _loss-Amount computed_ _not notified in_ _writing-Effect-Income-tax Act, 1922_ (XI _of 1922), ss._ _24,_ _24(3)._ For the accounting year 1941 the assessee's profits from his share in an unregistered firm were set off against his losses in the individual business and the Income Tax Officer determined the loss to be carried forward at Rs. 53,840, but did not notify to the assessee by order in writing the amount of the Joss as computed by him as required by s. 24(3) of the Act. The assessee appealed against the assessment but did not question the amount of the loss which had been determined. In the year 1942-43 the assessee claimed to re-open the question of the Joss to be carried forward stating that it was Rs. 2,u,760. This **contention was rejected** **by** **the Tribunal.** **The contention was** again raised by the assessee in the assessment years 1948-49 and 1949-50. The question was whether the loss which had been determined and ordered to be carried forward must be deemed to haye become final because no appeal was filed against that **determination.** _Held,_ that computation of the amount of loss under s. 24 of the Income-tax Act does not become final unless the Income-tax Officer notifies by order in writing, the amount of the loss as com. puted by him to the assessee. The assessee was entitled to have ## •