The Commissioner of Income-Tax, Poona
Vs. Buldana District Main Cloth Importers Group  INSC 78 (6 March 1961)
CITATION: 1961 AIR 1261 1962 SCR (1) 181
CITATOR INFO :
F 1970 SC1707 (9)
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.
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 Balkrishna,  3 S.C.R. 513, referred to.
Mohamed Noorullah v. Commissioner of
Income-tax,  3 S.C.R. 515, relied on.
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
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 accounting 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
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 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 incometax 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
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 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
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)  3 S.C.R.513.
(2)  Supp. 1 S.C.R. 39,43196 persons
and was rightly so assessed to Income-tax and Excess Profits Tax.
The appeals are therefore allowed with costs.
One hearing fee.