1. By this reference under section 66(1) of the Indian Income-tax Act, 1922, read with section 21 of the Excess Profits Tax Act, the question that is referred for our determination is :
'Whether, on the facts of the case, the Tribunal is right in holding that the Wholesale Cloth Dealer's Importers' Group did not form a partnership ?'
2. Due to scarcity of cloth in C.P. and Berar, the Government evolved a scheme for distribution of cloth under its supervision and control. Three categories of dealers in the new set up were classified. Under this scheme they were known as importers, semi-wholesalers and retailers. Government selected and appointed certain people out of the wholesale dealers of cloth who were importers of cloth from other States as a group of importers. These importers were not permitted to do business in cloth except as directed by the Government; no person other than a person or a party who was selected in the importers' group could import textile cloth into the area. Pursuant to this policy, in Akola District, five dealers whose names are specified in the statement of case were appointed as a group of importers for the district. At each time of selection of groups, a nominee was chosen by the Government for the purpose of distribution to semi-wholesalers under the directions of the Deputy Commissioner. The nominee so selected on each occasion made distribution of cloth as directed by the authorities and collected the sale proceeds. The net profits as a result of these operations were distributed amongst the five members of the group in certain fixed proportion on each occasion. The proportion was arrived at by taking into account the turnover of each importer in a basic period.
3. For the assessment year 1947-48, this group of five importers whose names are specified in the statement of case were assessed by the Income-tax Officer as an unregistered firm, on the footing that it was a partnership firm, which was not registered under section 26A of the Act. The Income-tax Officer took the view that having regard to the nature of the business carried on by this group, all the legal requirements to constitute a partnership-firm were fulfilled in the legal requirements to constitute a partnership-firm were fulfilled in the case and as the firm was not registered, it was liable to be assessed as an unregistered firm. This finding of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in the appeal preferred by the assessee. He took the view that in fact all the members were doing business jointly; that definite shares were fixed; that profits were being divided in definite shares and this in his opinion was sufficient to constitute them into a partnership. Before the Appellate Assistant Commissioner, an application was made in the alternative for registration of the partnership-firm. Such application for registration was rejected by him on several grounds stated in his order. On appeal by the assessee, the Tribunal held that the scheme of distribution of cloth was organised and carried out by the Government through the above persons; that no business was carried on in partnership and that it accordingly set aside the order passed by the Income-tax Officer.
4. Mr. Joshi, on behalf of the revenue, has contended that all essential ingredients required to constitute a partnership in law are fulfilled; that there was an agreement entered into by all the members of the group of importers concerned; that the agreement provided for sharing the profits of the business and that the business was carried on by a nominee appointed by Government on behalf of the members of the group. according to his submission, these factors are established in the present case and are sufficient to constitute a partnership in law.
5. When a partnership comes into existence is provided in section 4 of the Partnership Act, 1932. A partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Before a partnership is constituted under law, three requirements must be fulfilled, viz., (1) there must be an agreement entered into by all the persons concerned, (2) the agreement must be to share the profits of a business and (3) the business must be carried on by all or any one of the persons concerned acting for all. In view of these ingredients, an agreement inter se between the partners is sine qua non for the constitution of a partnership. It is not necessary that such agreement must be in writing. It can be even implied either from conduct or otherwise. Mr. Joshi is unable to point out any piece of evidence which goes to support that such an agreement existed between the five persons of the wholesaler's group. The members of the group themselves have no choice as to who should be selected for the wholesaler's group, the selection being made by the Government, the members so selected have no choice but to act as contemplated under the scheme. Thus, there is no evidence whatsoever than an agreement existed between the persons concerned to form a partnership of the importer's group. The matter, however, does not rest there. It is further required that before the partnership is formed, the business must be carried on by all or any one of the persons concerned, acting for all. In view of the scheme and policy laid down by the Government, it is the nominee chosen by the Government who has to do the work of distribution of cloth to semi-wholesalers. Thus, there is no agency inter se between the members of the group but a man chosen by the Government has to do the work of distribution. In what manner the business is to be carried on is not even left to the discretion of these persons. A nominee selected by the Deputy Commissioner of the district has from time to time to import cloth that may be allotted and to distribute the said cloth among the semi-wholesalers in accordance with the orders issued by the Government. Thus even the nominee so selected has no volition as regards the manner in which the business has to be carried on. Simply because ultimately whatever net profit is earned is divided, it cannot be understood that in law right in taking the view that no business as such was carried on by a partnership as suggested on behalf of the revenue.
6. Our attention was invited by Mr. Joshi to a decision of the Nagpur High Court in the case of Commissioner of Income-tax v. Cloth Semi-wholesales, Akola. He fairly conceded that the findings in this judgment were against him. The Division Bench there took the view that the partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all. The facts of the case show that during an acute scarcity of cloth, the Government evolved a scheme for distribution of cloth to consumers. There were two sets of distributors, importers and semi-wholesalers. The Government appointed a nominee for each set. The importers had to take delivery of the bales from the mills according to the quota allotted by the Government and distribute the quota in bales to semi-wholesalers in accordance with the orders of the Government. The quota of goods to be supplied to each semi-wholesalers was fixed by the Government but the goods were not to be supplied to him but were to be received from the importer by a nominee of the semi-wholesalers appointed by the Government on behalf of all. These semi-wholesalers supplied the finance to the nominee in proportion to the quota. After the monthly quota distributed to the retailers the nominee returned the capital supplied by such semi-wholesaler and paid him his share of the excess of receipt over expenditure. Eleven semi-wholesalers were assessed as an unregistered firm to income-tax as well as excess profits tax. The Tribunal was of the view that the relation of one wholesaler to another could not be the relation of partnership and that the mere fact that each one got a share of profits did not make him a partner. Upon a reference to the High Court, it took the view that the business was carried on under orders of the Government and the share of profits was also fixed by it and the return which the semi-wholesalers received was in lieu of the supply of capital and not as a share of any partnership business and that, therefore, the eleven semi-wholesalers did not form a partnership and could not be assessed an an unregistered firm. In this case, the High Court declined to take the view that there was a partnership because no evidence of any agreement either to carry on business or to share the profits was found. This case, as fairly conceded by Mr. Joshi, is against his contention.
7. An attempt was made to distinguish this case by relying upon the decision of the Supreme Court in Commissioner of Income-tax v. Buldana District Main Cloth Importers Group. This case is of no assistance to the revenue because the question whether the members of the group constituted a partnership did not at all arise for consideration of the Supreme Court. The view taken by the Supreme Court was that the group was an association of persons and could be assessed on its profits as such to income-tax and excess profits tax. It made 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.
8. As there is nothing to show that there was an agreement entered into between the members of the group and whether any business was to be carried on by them or on behalf of them and as there is no discretion as to the manner in which the business was to be carried on, the essential ingredients to form a partnership are lacking in the present case. In the circumstances, our answer to the question is in the affirmative. The revenue shall pay the costs of the assessee.
9. Question answered in the affirmative.