This is a reference under section 66(1) of the Indian Income-tax Act to decide the following question of law : "Whether the group of semi-wholesalers of the Akola district was liable in law to be assessed as an unregistered firm or as an association of persons to income-tax and excess profits tax in respect of the total profit distributed amongst them, in accordance with the scheme formulated by the Government of the Central Provinces and Berar".
2. The reference relates to the assessment year 1947-48 in respect of the income for the previous year ending Diwali 1946, and for the assessment year 1948-49. Eleven semi-wholesalers of cloth at Akola were assessed in the status of an unregistered firm. The same group was also assessed to excess profits tax in respect of the chargeable accounting year from November 18, 1945, to March 9, 1946.
3. In view of the acute scarcity of cloth in the Province, a scheme was evolved by the Government for equal distribution of cloth amongst the consumers. A press note dated May 21, 1945, and the memoranda dated September 11, and December 10, 1946, which are annexures A to C to the statement of the case, detail the scheme of distribution for the Akola district between the mills and the retailer from whom the consumer could obtain his supplies. There were two sets of distributors : importer and semi-wholesalers. The Government had appointed a nominee for each set. The importer had to take delivery of the bales from the mills according to the quota allotted by the Government and had to distribute that quota in bales to semi-wholesalers according to the orders of the Government. The semi-wholesalers had to distribute the quota received to the retailers. A nominee of the semi-wholesalers was appointed by the Government to receive the quota and distribute it to the retail dealers. The quota was supplied every month. Under the Control Orders the consumer could not be charged a price in excess of 20 per cent. over the ex-mill price. This percentage included the payments to be made to the quota-holders of the mills, the importers, the semi-wholesalers and the retailers as also the cost of transport and distribution. The shares receivable by each set of distributors were fixed by the Government and included the cost of transport and distribution.
4. The quota of goods to be supplied to each semi-wholesaler was fixed by the Government but the goods were not to be supplied to him in that proportion. They were to be received from the importer by a nominee of the semi-wholesaler appointed by the Government on behalf of all. These semi-wholesalers had to supply the finance to the nominee in proportion to quota. After the monthly quota was distributed the nominee had to return the capital supplied by each semi-wholesalers and pay him his share of the excess of receipt over expenditure.
5. On these facts the Appellate Tribunal held that "if at all anybody did business. It was, so to say, the Government or its agent, the Deputy Commissioner of Akola. True, he did not find the capital nor did he retain the profits, but that makes no difference." The Tribunal was of the view that the relation of wholesalers to each other 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. On this view, the order of assessment passed by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner was set aside.
6. From the assessment order it does not appear that any oral evidence was recorded. The semi-wholesalers filed identical written statements in which it was stated that every semi-wholesaler was entitled to purchase cloth from the importers and to sell it to the retailers, and that the nominee was an agent of the other wholesalers to receive and sell the cloth. It was also stated that the nominated semi-wholesalers received bardana and patti as his charges of the agency. We do not find any support for the statement of the Income-tax Officer that : "The most important facts which the assessee had all along tried to suppress are that these semi-wholesalers had agreed between themselves on the basis of their turnover during the basic period their profit sharing proportion of profit earned on the sale of cloth on their behalf. This profit sharing proportion was fixed between themselves." The learned counsel for the Commissioner has not brought to our notice any evidence in support of this assertion, nor is it to be found in the statement of the case.
7. The first question for decision is whether the eleven semi-wholesalers were partners carrying on any business of purchase and sale of cloth. 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. There must be an agreement to carry on a business and to share its profits and that business must be carried on by all or any of them acting for all. We do not find any evidence of any agreement either to carry on the business or to share the profits. The business was carried on under the orders of the Government and the share of profits was also fixed by the Government. It was of course open to any one of them to withdraw from the scheme. The only obligation incurred by a semi-wholesaler was to contribute working capital in proportion to his quota fixed by the Government. The benefit to share profits was conferred by the Government if the semi-wholesalers contributed his share of working capital. The return which the semi-wholesalers received was thus in lieu of the supply of capital and not as a share of any partnership business. We therefore hold that the eleven semi-wholesalers did not form a partnership and could not be assessed in the status of an unregistered firm.
8. The next question for consideration is whether they could be assessed in the status of an association of persons. Under section 3 of the Act the tax may be levied on the association itself or on the members of the association individually. Under that section an "association of persons" is the residuary class of assessees. The phrase is not defined in the Act. The words have therefore to be construed in their plain ordinary meaning. According to the Oxford Dictionary, "to associate" means "to join in common purpose or to join in an action". Under section 3(42) of the General Clauses Act, 1897, a "person" includes any company or association or body of individuals whether incorporated or not. The phrase "association of parsons" is thus of the most comprehensive import. In B. N. Elias and Others In re, it was held that individuals who join together and remain so joined for the purpose of buying, holding and using properties in order to gain by it constitute an "association of individuals" within the meaning of section 3 of the Act. The section was amended in 1939 by substituting "persons" for "individuals". Now an association may be a member of "an association of persons" within the meaning of the section. Chambers of commerce, clubs, co-operative buying and selling pools and other association for profits which are not partnerships, all fall under this class.
9. In Commissioner of Income-tax, Burma v. M. A. Baporia and Others, it was held that the expression "association of individuals" in section 3 of the Act must be construed ejusdem generis not only with the word immediately preceding, i.e. "firm", but with all other groups of assessees mentioned in the section. The common generic quality appears to be joint interest. There must be some kind of arrangement amongst the adult "persons" to indicate their intention to earn income, profits and gains in common. In Mohammad Aslam v. Commissioner of Income-tax, United Provinces, the learned Judges preferred to construe the expression as ejusdem generis with the word immediately preceding, i.e., "firm". According to them, such an association must have some at least of the attributes of a firm or partnership though not strictly in the legal sense of the term. For the purpose of this case it is not necessary to resolve this conflict. In any view, there must be some kind of scheme of common management for the purpose of earning profits, gain, or income and an agent to carry it out. In the instant case the nominee who acquired cloth with the working capital supplied by the semi-wholesalers, and who sold it, did not act under any scheme of common management framed by the semi-wholesalers but acted under the order of the Government.
10. There is considerable force in the contention that the buying and selling was done by Government through its nominee, and the semi-wholesalers who financed the purchases from the importers were given shares of the profits for this finance partly in consideration of the fact that they were dealers during the basic period.
11. In our view, therefore, the answer to the question must be in the negative. As held by the Appellate Tribunal, the semi-wholesalers could not be assessed to income-tax or excess profits tax either as an unregistered firm or as "an association of persons".
12. A copy of this judgment be sent to the Appellate Tribunal under section 66(5) of the Act. Costs of this reference, including paper book costs if any, will be paid by the Commissioner. Counsels fee Rs. 100.