UMAMAHESWARAM J. - The question that is referred to for our decision under section 66(2) of the Indian Income-tax Act is a follows :
'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was correct in concluding that only half the income from the Abkari contracts was liable to be assessed in the assessees hands, having regard to the provisions of sections 14 and 15 of the Hyderabad Abkari Act that a partnership in Abkari contracts without the prior approval of the Talukdar is void ?'
For the purpose of dealing with the above question it is necessary to set out a few relevant facts. The assessee, G. Krishna Reddy, and D.D. Italia carried on Abkari business under the name and style of 'M/s. G. Krishna Reddy and Din Sha-ji'. The licence for carrying on the Abkari business under the Hyderabad Abkari Act was issued by the Government only in the name of G. Krishna Reddy. Without obtaining the prior approval of the Talukdar as required by section 14 of the Hyderabad Abkari Act, the partnership was entered into by the licensee with D.D. Italia. A return of O.S. Rs. 41,260 was made by the firm as the income liable to be assessed. G. Krishna Reddy also filed a return as an individual, showing half the income from the Abkari contracts as being the assessable income. The Income-tax Officer held that as the prior approval of the Talukdar was not obtained under section 14 of the Hyderabad Abkari Act, the firm had no legal existence and that G. Krishna Reddy was assessable to income-tax on the entire income made in respect of the Abkari contracts. On appeal to the appellate Assistant Commissioner, he took a different view. It was held that the assessee was liable to pay income-tax only on half the income earned from the Abkari contracts. When the matter was taken to the Appellate Tribunal, Hyderabad Bench, a statement was filed by D.D. Italia, where in the admitted his liability to be taxed for half of the profits from the excise contracts taken by the assessee, G. Krishna Reddy. Acting on the statement the Tribunal confirmed the conclusion reached by the Appellate Assistant Commissioner. The order is very laconic and is in the following terms :
'The Appellate Assistant Commissioner was, therefore, right in his conclusion that only half the income from those contracts was liable to be assessed in the assessees hands and not the whole. The appeal thus becomes infructuous and is consequently dismissed.'
The reference under section 66(2) of the Income-tax Act arises our of this order of the Appellate Tribunal confirming the order of the Appellate Assistant Commissioner.
The terms of section 14 of the Hyderabad Abkari Act are quite clear. Section 14 enacts that no lessee shall, except with the permission of Government, declare any person to be his shikmidar or partner; and such shikmidar or partner shall not be competent to act as such until be has obtained a licence to that effect from the Talukdar or any other competent officer. The identical question arose for decision before a Full Bench of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai. Dealing with the terms of the Madras Abkari Act the learned judges there held that such a partnership was void ab initio. The learned advocate for the assessee did not contest this position.
It is clear law that if the partnership was a valid one and was not registered under the provisions of section 26A of the Income-tax Act, the entire income earned by the unregistered partnership is liable to be assessed as a single unit. This position is made quite clear by the Supreme Court in Rao Bahadur Ravulu Subba Rao v. Commissioner of Income-tax. Venkatarama Ayyar J., dealing with the rights conferred by section 26A of the Income-tax Act, observed as follows :
'Another factor material for the determination of this question is the nature of the right conferred by section 26A. Under the common law of England, a firm is not Juristic person, the firm name being only compendious expression to designate the various partners constituting it. But, as pointed out by this court in Dulichand Laxminarayan v. Commissioner of Income-tax inroads have been regarded as distinct entities for the purpose of those statutes. One of those statutes is the Indian Income-tax Act, which treats the firm as a unit for purposes of taxation. Thus under section 3 of the Act the charge is imposed on the total income of a firm, the partners as such being out of the picture, and accordingly under section 23 of the Act, assessment will be on the firm on its total profits. Section 23(5) enacts an exception to this in the case of firms registered under the Act,......... Thus, registration confers on the partners a benefit to which they would not have been entitled but for section 26A..............'
The distinction between an assessment of a registered firm and an unregistered firm is neatly pointed out by the Bombay High Court in In re Parekh Wadilal Jiwanbhai in the following terms :
In the assessment of the firm, if the firm is registered, the income of the firm is not taxed in the hands of the firm, but income is allocated among its partners according to their shares and is taxed in their hands in accordance with their shares in the income of the firm. On the other hand, if the firm is not registered, the entire income of the firm is taxed in the hands of the firm, as contradistinguished from its partners. It is not in dispute that, when the income of the firm is taxed in its hands, the rate at which it is taxed is high; while, on the other hands, if the income of the firm is taxed in the hands of the partners accoring to the shares of the partners in its income, the rate of tax is lower.'
There can be no doubt that as the partnership was an illegal one, the firm could not be registered under section 26A of the Income-tax Act. This question came up for consideration in Mohideen Sahib & Co. v. Commissioner of Income-tax. Viswanatha Sastri J. delivering the judgment of the Bench, held that as the partnership which was formed in contravention of the terms of the Madras Abkari Act was illegal and as the partnership was void ab inito, the Income-tax Officer was justified in refusing to register the firm under section 26A of the Income-tax Act. The contention of the assessee as accepted by the Appellate Assistant Commissioner of Income-tax and the Income-tax Tribunal in effect amounts to this, viz., that he is entitled to the same rights and benefits which he is entitled to under section 26A of the Income-tax Act even though the partnership is unregistered and is also unlawful an d void ab initio.
Sri. C. Kondaiah, the learned advocate for the Income-tax department, contended that if the partnership is unlawful and hit at by the provisions of section 14 of the Hyderabad Abkari Act, the assessment should have been made on G. Krishna Reddy and D.D. Italia as an association of persons under section 3 of the Income-tax Act. This contention is directly supported by the decision of a Division Bench of the Madras High Court in Mohamad Abdul Kareem & Co. v. Commissioner of Income-tax. In that case an association of persons who had taken lease of arrack shops, entered into a partnership with third parties and the new partnership so formed earned profits. The question that was referred was whether on the facts and int eh circumstances of the case the Tribunals finding that the assessee was an 'association of persons' within the meaning of section 3 of the Income-tax Act was correct in law. The learned judges held at page 429 as follows :
'Thus whatever may be the legal effects and consequence under the company law or under the law of contracts, we entertain little doubt that association is like those in the present cases are other associations of persons' and their income, profits and gains are assessable to tax, so far at any rate as the Indian income-tax is concerned.'
At page 430 they summed up and held that the words 'other association of persons' in section 3 have to be construed in their plain ordinary meaning and not ejusdem generis with the word 'firm' immediately preceding or the other words going before that word. They held that the profits earned by the association of persons should be taxed under section 3 of the Act. As to the meaning of the words 'association of persons' within the meaning of section 3 of the Income-tax Act, there is a clear discussion by S.K. Das J. in Commissioner of Income-tax v. Indira Balkrishna. The learned judge observed at page 551 that 'an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains'. This decision was followed by the Supreme Court in Mohamed Noorullah v. Commissioner of Income-tax. We have no doubt that the test as laid down in these decisions is satisfied in the present case and that G. Krishna Reddy and D.D. Italia formed an association of persons falling within the meaning of section 3 of the Income-tax Act.
Sri Venugopala Reddy, the learned advocate for the assessee, contended that this question as to whether G. Krishna Reddy and D.D. Italia formed an association of persons under section 3 and whether they are liable to be assessed as an association of persons, was not referred to this court under section 66(2) of the Act and that inasmuch as G. Krishna Reddy was assessed to income-tax in the status of an individual, this question ought not to be permitted to be raised. In support of the first contention as to the scope of a reference under section 66 of the Income-tax Act, reference was made to the recent decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. The conflict authority between the Bombay High Court followed by the Nagpur High Court, and the decisions of the other High Court followed by the Nagpur High Court was set at rest in the above decision. Venkatarama Ayyar J. summed up the legal position in the following terms at page 611 :
'The result of the above discussion may thus be summed up :
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising our of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be question arising out of its order notwithstanding that it may arise on the findings given by it.
Stating the position compendiously, it is only question that has been raised before or decided by the Tribunal that could be held to arise out of its order.'
For the purpose of ascertaining whether the question raised by Sri C. Kondaiah, the learned advocate for the income-tax department, can be permitted to be raised, we have to consider whether the question of law raised by him arises out of the order of the Appellate Tribunal. The order of the Appellate Tribunal shows that the members approved the decision of the Appellate Assistant Commissioner. We have carefully looked into the terms of the order of the Appellate Assistant Commissioner and the question that was raised before him was whether half the profits arising from the Abkari contracts should be assessed to income-tax or whether the entire income arising from those contracts should be assessed in the hands of the assessee. The contention that was raised by the income-tax department was that the partnership should be ignored and that the assessee, i.e., G. Krishna Reddy, should be made liable for the tax on the entire profits. What is now contended is that as G. Krishna Reddy and D.D. Italia formed an association of persons within the meaning of section 3 of the Income-tax act, G. Krishna Reddy is jointly and severally liable for the tax on the entire profits along with D.D. Italia. In support of the contention that G. Krishna Reddy is liable to pay tax on the entire profits, an additional ground is raised by the Income-tax department. The appellate Assistant Commissioner clearly finds that 'in the present case there is clear indication on the record that Mr. Italia did join hands with the appellant and conducted the Abkari business.' This order was confirmed by the Appellate Tribunal and they agreed with the conclusion of the Appellate Assistant Commissioner. Even in the statement of case, referring to the order of the Appellate Assistant Commissioner the Tribunal states as follows :
'He considered that the business in question should be considered as a joint venture business when it was found that the Abkari business was really carried on by two persons by contributing their capital and sharing the profits as mutually agreed upon. From a perusal of the account books he found that D.D. Italia had invested his capital and his account was credited with the profits which fell to his share as agreed upon.'
So, it is clear from a perusal of the orders that this question as to association of persons was raised before the Tribunal. The question that is referred to us under section 66(2) is whether the assessee is liable to tax only on half the income. This means that the question to be decided is whether the assessee is liable to pay tax on half the income, or the entire income. As we are clear that the order of the Tribunal is contrary to the decision of the Madras High Court in Mohamad Abdul Kareem & Co. v. Commissioner of Income-tax, we answer the question in the negative, viz., that the assessee is not liable to be taxed on half the income only. It follows from our conclusion that both G. Krishna Reddy and D.D. Italia are jointly and severally liable for the tax as an association of persons within the meaning of section 3 of the Income-tax Act. The view taken by the Income-tax Officer that as the partnership was illegal the licensee, G. Krishna Reddy, and D.D. Italia, who had carried on the business as an association of persons, are jointly and severally liable under section 3 of the Income-tax Act is correct. In the particular circumstances of the case we make no order as to costs. Counsels fee is fixed at Rs. 250.
Reference answered accordingly.