1. At the instance of the assessee, the following question has been referred to this court :
'Whether, on the facts and in the circumstances of the case, profits arising out of the transactions of Lal Mills with certain parties should be assessed in the hands of Shri Ramchandra Lalbhai as an individual or they should be assessed in the hands of the HUF of which Shri Ramchandra Lalbhai was the karta, for the assessment year 1944-45, chargeable accounting period ending 31-3-1944 and assessment year 1947-48 ?'
2. We need state only the material facts which are relevant for the purpose of considering the above question. The assessee was a HUF consisting at the material time of one Ramchandra Lalbhai Banker, his wife and his son. The family held 350 shares in a private limited company called Chinubhai Lalbhai & Brothers Ltd. (referred to hereafter as the 'Managing Agency Co.'). The other shareholders in the company were Chinubahi Lalbhai, that is, brother of Ramchandra Lalbhai, holding 350 shares, Jasubhai Lalbhai, another brother of Ramchandra Lalbhai, also holding 350 shares and some other relations holding 130 shares. The managing Agency Co. was a public Lalbhai Tricumlal Mills Ltd. of Ahmedabad which was a public limited company owning a spinning and weaving mill and which was known as Lal Mills. The case of Lal Mills was referred to the Income-tax Investigation Commission on account of suspected concealment of profits during the war period. The cases of the HUFs of Ramchandra Lalbhai and Jasubhai Lalbhai were also referred to the Income-tax Investigation Commission. The Commission reported to the Government that there was concealment to the extent of Rs. 20,14,477 by the Lal Mills, its managing agents and the families controlling the Managing Agency Co. The Commission determined an amount of Rs. 4,28,239 as the assessee's share of the concealed income for the assessment year 1944-45. However, the Income-tax Investigation Commission Act having been declared ultra vires the proceedings under s. 34 (1A) of the Indian I.T. Act, 1922, which had by that time come to be enacted, were taken against the assessee and the ITO completed the assessment of the assessee and determined the total income at Rs. 7,07,879. This income consisted of Rs. 4,89,000 on account of secret transactions in cloth, Rs. 21,348 as the assessee's share in the profit in cotton, Rs, 7,031 as the assessee's share in the profit in hessian, Rs. 9,000 as the assessee's share in the profits in yarn and an amount of Rs. 28,980 as income from undisclosed sources. The ITO found as a fact that in the years 1943 and 1944, the Lal Mills had sold cloth respectively worth Rs. 39,31,012 and Rs. 9,58,459 to about 19 parties who were mere nominees of the managing agents and that in fact the families of the two brothers controlling the Managing Agency Co. had derived extra profits by sales through these nominees. The total sales were estimated at Rs. 48,90,000. The extra profits were determined at 20% of these sales and the profits having been arrived at Rs. 9,78,000, the ITO held that half of these profits belonged to the assessee-family while the other half belonged to the branch of Jasubhai Lalbhai.
3. The AAC confirmed these assessments and the assessee had then appealed to the Income-tax Appellate Tribunal. We are not concerned with the merits of the figures of profits determined in respect of the several transactions. But one of the contentions raised before the Tribunal was that there was no evidence that the assessee-HUF had anything to do with the profits which were determined by the ITO. The Tribunal found that the assesssee had purchased the shares of the Lal Mills and the Managing Agency Co. with the HUF's funds and that the dividends derived from these two companies were also accounted for by the HUFs of Ramchandra and Jasubhai. The finances of both the companies were also found to have been provided by the HUFs. Thus, according to the Tribunal, the opportunities for making extra profits which the control of the Managing Agency Co. provided to the two shareholders must be treated as opportunities related to the HUFs which they represented. The Tribunal, therefore, took the view that if any profits were earned by reason of the control of the Managing Agency Co. by Ramchandra Lalbhai, that income without a shadow of doubt belonged to the HUF of which he was the karta and it was the HUF which provided him with this nucleus for the control of the company and it was the HUF, therefore, which would be entitled to the benefits accruing therefrom. Subject to the exclusion of an amount of Rs. 28,980, the assessment of the assessee was confirmed by the Tribunal. On these facts the question reproduced earlier has been referred at the instance of the assessee.
4. Mr. Munim, who appeared for the assessee, argued that the income which has been taxed in the hands of the HUF was really the income of Ramchandra Lalbhai and not of the HUF because no nexus has been established between that income and the HUF.
5. It is difficult to see how it can be contended that there was no nexus established between the HUF and the income earned by Ramchandra Lalbhai. It has not been disputed before us that it was the HUF which had purchased the shares of the Lal Mills and the Managing Agency Co. and that Ramchandra was acting on behalf of the HUF when he was managing the affairs of the Managing Agency Co. and the Lal Mills. It is obvious that but for the fact that the HUF was a shareholder of the Managing Agency Co. and the Lal Mills, Ramchandra Lalbhai, who was the manner of the HUF, would not have been able to earn the amounts which have been brought to tax. It was by virtue of his capacity as the manager of the HUF that he was in a position to deal with the goods produced by Lal Mills. On the finding recorded by the Tribunal, it is clear that the finances for both the Companies were provided by the HUFs. Ramchandra must, therefore, be said to be acting on behalf of the HUF when he was entering into the transactions from which the income, which has been brought to tax was earned. As found by the Tribunal it was the HUF, of which he was the manager, which had afforded him an opportunity and occasions for dealing with the goods produced by Lal Mills and since the funds were provided by the HUFs all earnings made by virtue of the position which Ramchandra Lalbhai occupied must be treated as the income of the HUF. The contention that there was no nexus between the HUF and the income earned by Ramchandra must, therefore, be rejected.
6. In this view of the matter, the question referred must be answered as follows : The profits earned out of the transaction of Lal Mills with certain parties should be assessed in the hands of the HUF, of which Shri Ramchandra Lalbhai was the karta, for the assessment year 1944-45, chargeable accounting period ending 31st March 1944, and assessment year 1947-48.
7. The assessee to pay the costs of this reference.