V.S. Desai, J.
1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the department and it arises out of the Tribunal's order disposing of six consolidated appeals filed by the assessee relating to the assessment years 1954-55, 1955-56 and 1956-57. Two questions have been referred to us in this reference and they are as follows :
'1. Whether, on the facts and in the circumstances of the case, the income of the assessable entity was assessable under section 10 of the Income-tax Act
2. Whether the status of the said assessable entity is 'firm' for income-tax purposes and as such registrable under section 26A of the Income-tax Act ?'
2. The facts necessary to be stated in order to appreciate the questions raised are as follows : Hindustan Sugar Mills (which will hereafter be referred to as the sugar mills) is a public limited company. Its managing agents were Bachhraj & Co. Private Limited. Four of the directors of the managing agents' company were also directors of the sugar mills. The sugar mills had appointed the Upper India Commission Agents Ltd. to be their selling agents in December, 1947, and the said selling agents continued up to the assessment year 1953-54. In October, 1951, the sugar mills decided to terminate the selling agency of the Upper India Commission Agents Ltd. and informed the selling agents of their intention, requesting them, however, to continue work as agents till a new agent was appointed by the sugar mills. Thereafter, on the 1st September, 1952, by a deed of partnership executed on the said date, the assessee firm was constituted consisting of five partners and admitting a minor to the benefits of the partnership. Two of the partners of this assessee partnership firm were the regular employees of Bachhraj Trading Corporation Private Ltd. and Jivanlal & Sons Private Ltd., who were the sister concerns of the managing agency company. Two other partners, who were ladies, were related to Shri Kamalnayan Bajaj, who was a director of the sugar mills as well as of the managing agents. The other two partners were the husbands of those two ladies and one of them, namely, Shri. S. N. Agrawal, was a person, who according to the replies given by the assessee to certain questions asked of them by the Income-tax Officer, was a very influential person and was rendering very valuable services to the company by advising them from time to time on the question of means of production as well as policy. The minor admitted to the benefits of the partnership was the son of one of the directors of the managing agents' firm. The assessee firm was appointed by the sugar mills as their selling agents from 1st July, 1952. The letter confirming the appointment and embodying the terms of the agreement relating to the selling agency was sent by the sugar mills to the assessee firm on the 5th July, 1952. The assessee firm in their turn appointed Messrs. Upper India Commission Agents Ltd. as their sub-agents on the 9th July, 1952. On the same day, the assessee also appointed the firm of Messrs. Hardayal Nevatia of Bombay as their broker in Bombay and, after having made the appointments of the sub-agents and the broker instructions for sale delivery. The assessee also informed that they will be responsible for any loss sustained by the sugar mills for the non-fulfilment of any contract or non-realisation of the money in respect of the goods which will be sold through the sub-agents and the broker. With these arrangements the work of selling agency, in fact, continued to be carried on by the Upper India Commission Agents Ltd. as before, though in the capacity of sub-agents. During the assessment years 1954-55, 1955-56 and 1956-57, with which we are concerned in the present case, the total selling agency commission paid to the assessee firm was Rs. 1,80,462 for the first year, Rs. 2,73,417 for the second year and Rs. 1,28,102 for the third year. Out of the said amounts, the assessee firm paid to their sub-agents Rs. 77,187, Rs. 91,187 and Rs. 65,684, respectively, for the said three years. The assessee firm claimed registration of the firm under section 26A of the Income-tax Act and further claimed that its income should be taxed on the basis of the income from the business of a registered firm. The Income-tax Officer treated the assessee firm as an association of person in receipt of income taxable under section 12 as income from other sources. The Income-tax Officer rejected the assessee's application for registration on the ground that the assessee firm was not a genuine firm. In the appeals which the assessee firm filed against the orders of the Income-tax Officer, the Appellate Assistant Commissioner upheld the view taken by the Income-tax Officer and dismissed the appeals. In the appeals before the Tribunal, there was a difference of opinion between the two Members who constituted the Bench of the Tribunal which heard the assessee's appeals. According to the Accountant Member, the profits were assessable under section 10 as profits of business and the assessee was a firm which was carrying on business and was entitled to registration under section 26A. According to the Judicial Member, it was very doubtful whether the activity of the assessee could be business in the strict sense of the word used in the Income-tax Act and also whether it could be deemed to be business for the purposes of and within the meaning of the Partnership Act. At any rate, according to him, the assessee could not be said to have carried on any business and, since for the purposes of the profits to come under section 10, the profits must be from a business which is carried on, the profits in the present case could not be computed under section 10(1), but under section 12(1) of the Income-tax Act. He further took the view that the assessee could not be said to be a partnership firm within the meaning of the Partnership Act, since in order that the relationship of partnership should exist between parties, there must be an agreement to share the profits of a business which is carried on by all or any one of them acting for all and, as in the present case, there was no business carried on, there could not be such relationship between the persons which constituted the assessee firm. On this difference between the two members, the case was referred to a Bench of three Members to consider the question on which difference had arisen, namely, whether the income was assessable under section 10, and whether the assessee was a firm entitled to registration under section 26A. The Full Bench agreed with the view taken by the Accountant Member, and, in accordance with that view, allowed all the appeals which the assessee had filed. Thereafter, on an application under section 66(1), the Tribunal drew up the statement of the case and referred to this court the two questions which we have already stated.
3. It was contended before the Tribunal by the department that the assessee firm had come into existence for the sole purpose of providing an entity to divide up the selling commission and thereby assist the Upper India Commission Agents Ltd. in its taxation problem. It was pointed out in support of this contention that the assessee had done nothing to earn a very large income except to sign the selling agency agreement, the work necessary to earn it continuing to be done by the Upper India Company as before. It was the Upper India Company who knew the nature of the business and the constituents, and it was that company that had kept detailed books of all transactions connected with the sale of the products of the sugar mills. None of the partners of the assessee firm had looked to the work of selling these products and the small note-books and registers, which had been maintained by the assessee firm, were prepared at the close of each year from the entries contained in the books of the sugar mills and/or of the sub-agents. It was urged that there was no activity carried on by the assessee firm which could be called a business activity and the assessee firm, though styled as a firm, was merely an association of persons in receipt of income which could appropriately fall under section 12 of the Indian Income-tax Act. Majority of the Members of the Tribunal did not accept this contention. It is difficult to understand the stand taken by the department that the assessee firm had come into existence for the purpose of assisting the Upper India Company in its taxation problem. There is nothing on the record which shows that the persons constituting the assessee firm had any connection or relation with the Upper India Company, nor is there any evidence to show that the Upper India Company were responsible for bringing into existence the assessee firm. There was no doubt connection and relationship between the members of the assessee firm and the directors of the sugar mills or the directors of the managing agents of the sugar mills and it could also be said that the assessee firm had been brought into existence by the directors of the sugar mills or of the managing agency company. There is, however, no reason suggested why these directors, who are not shown to have any concern, connection or relationship with the Upper India Commission Agents Ltd., should bother to bring into existence the assessee firm in order to help the Upper India Commission Agents Ltd. Neither can the existence of the assessee firm help in the taxation problems, if there are any, either of the sugar mills or of the managing agency firm. The department's stand, therefore, that the assessee firm has been brought into existence with the ulterior object of helping in the taxation problems either of the Upper India Commission Agents Ltd. or of the sugar mills or the managing agents, is not sustainable.
4. Mr. Joshi, learned counsel for the revenue, has urged before us that the assessee firm has been brought into existence with a view to entitling the persons who constituted the firm to earn some profits without doing anything and the firm has been constituted in order that the incidence of the taxation on the profits so distributed amongst them should be smaller Mr. Joshi has argued that although styled as a firm the assessee firm is only an association of persons and the profits which it has obtained are not profits obtained in business. It is only in receipt of non-business income which can be said to be profits under section 12(1) of the Act. His further argument is that, if the assessee could not be said to be carrying on business, it could not be a partnership firm under the Partnership Act and, therefore, would not be entitled to registration under section 26A.
5. The main question, therefore, which is required to be decided in the present case is whether the assessee firm was carrying on any business. Mr. Joshi has argued that in order that an activity should be business, there must be an active occupation or profession continuously carried on. The assessee in the present case has not carried on any continuous activity at all. All that it has done is that it has signed one agreement with the mills under which it has agreed to be the selling agents of the mills and it has signed two other agreements, under one of which it has made the Upper India Commission Agents Ltd., its sub-agents, and under the other, Messrs. Hardayal Nevatia, their broker in Bombay. Thereafter, it has done nothing further in the matter of selling the mills' products, not even supervising or controlling the sub-agents or the brokers appointed by it. It is evident on the record, says Mr. Joshi, that none of the partners of the assessee firm was in a position to take any active interest in the work as selling agents of the sugar mills and, in fact, none of them has been even aware in the least of any of the transactions carried on by the selling agents or the brokers. In the vast business which has resulted in the commission accruing to the selling agents of more than a couple of lakhs of rupees, the only books and ledgers maintained by the assessee are the tiny note books of about 5 to 6 pages, entries wherein are copied from the books of the mills or of the sub-agents. The activities of the assessee, in these circumstances, according to Mr. Joshi, cannot be regarded as a business activity even within any wide sense of the term which can be given to it within the meaning of the Income-tax Act.
6. We find it difficult to accept the contention which has been raised before us by Mr. Joshi. It is no doubt true that the assessee firm by itself has not done any transactions of sale of the mills' sugar. It has, however, carried out the said work through its sub-agents by appointing them. It is not necessary that, in order that a business activity may be carried on by a person, he has to carry on transactions by himself only. He can as well carry them out through agents or servants or employees appointed by him for the purpose, himself remaining inactive. The transactions, however, carried out by the agents on behalf of the principal will be business transactions of the principal. The work of selling agents which the assessee firm had taken under their agreement with the principal was carried out throughout the year, and the mills' sugar was sold, although this work was executed by the selling agents not by themselves but through the sub-agents and brokers appointed by them. There was a continuous business activity which was carried on on behalf of the selling agents by the sub-agents and brokers appointed by them. Under the agreement with the principal, the assessee had undertaken all liabilities and were responsible for the losses which were caused by the work executed through their sub-agents and brokers. In our opinion, there was no absence of business activity in the present case simply because the assessee firm was itself not putting through the transactions of sale of sugar. In support of his proposition that, on the facts and in the circumstances of the case, the assessee could not be said to be carrying on business activity, Mr. Joshi has sought to derive support from certain decisions. He has referred to us in that connection Mazagaon Dock Ltd. v. Commissioner of income-tax and Excess Profits Tax, Lala Indra Sen, In re and Board of Revenue, Madras v. Ramanadhan Chetty. The observations from Mazagaon Dock Ltd. v. Commissioner of Income-tax on which he has relied, occur at page 377 of the report, and are as follows :
''The word 'business' connotes, it was observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax some real, substantial and systematic or organised course of activity or conduct with a set purpose'.'
7. We do not see how these observations help him. As we have already pointed out, there is a systematic or organised course of activity or conduct involved in the present case also. The work of selling sugar constitutes that organised course of activity or conduct. The question to be considered is whether that organised course of conduct has been carried out by the assessee or not. As we have already observed earlier, the fact that the assessee itself has not put through the transactions, but has done them though their sub-agents and brokers, will not mean that the systematic and organised course of conduct with the purpose of earning profit has not been carried out by the assessee. The observations in Lala Indra Sen's case which occur at page 203 of the report, are to the same effect. It is observed there :
'The word 'business', however, is also used in another and a very different sense, as meaning an active occupation or profession continuously carried on and it is in this sense that the word is used in the Act with which we are here concerned.'
8. In view of what we have already stated in connection with the observations referred to us by Mr. Joshi in the other case, Mazagaon Dock Ltd. v. Commissioner of Income-tax these observations also do not help him. In Board of Revenue, Madras v. Ramanadhan Chetty it was held that 'a resident in British India owning a money-lending business carried on for him outside British India by agents resident there, who merely keeps himself acquainted with the progress of the business and occasionally issues general instructions, is not liable to be taxed under the Act where the income from such business is not remitted to British India.' It was held in that case that the mere conduct of occasionally issuing general instructions to the agents outside British India would not have the effect of making the business one which was carried on in British India. The case was dealing with the question of situs of business. Mr. Joshi, however, has relied on the said case for the limited purpose of showing that mere issuing of instructions would not constitute a business activity. According to him, in the present case, the activity of the assessee is even much lesser and does not extend to even issuing of instructions to the sub-agents or the brokers. We do not think that the decision cited by Mr. Joshi is an authority for the proposition that where a person is not actively concerned with the carrying on of business himself but gets it done entirely and wholly through his servants and agents without even exercising least control over them, could not be said to be carrying on business. The decision in the case referred to by Mr. Joshi was in the context of the circumstances that the business was entirely carried out in places outside British India and the only connection of that business on the basis of which the business was said to have been carried on within British India was the instructions issued by the principal who was in India to his agents, and it was held that mere issue of occasional instructions emanating from within British India was not sufficient to shift the situs of the business from where it was actually carried on to British India. The question in that case was not whether the assessee was carrying on any business at all but the question was where that business was carried on, whether in India or outside. None of the decisions referred to by Mr. Joshi therefore helps him and our conclusion is in view of what we have already discussed above that the assessee firm was engaged in business and the income received by it was income from business under section 10 of the Indian Income-tax Act.
9. Our answer to the first question, therefore, must be in the affirmative. We answer it accordingly.
10. It is not disputed that the answer to the second question must follow the answer which we give to the first question, because if it can be said that the assessee firm was carrying on business, it would be a partnership Act, and since there is no other defect in the application which it has made for registration, it would also be entitled to registration under section 26A of the Income-tax Act. Our answer to the second question, therefore, is also in the affirmative.
11. The department will pay the costs of the assessee.
12. Questions answered in the affirmative.