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Buldana District MaIn Cloth Vs. Commissioner of - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Nagpur
Decided On
Reported in195630ITR61(Nag.)
AppellantBuldana District MaIn Cloth
RespondentCommissioner of
Excerpt:
.....of persons" should be read ejusdem generis with the word firm. suffice it to say that before any group of persons can be called as association of persons it must be established on facts that they are in the nature of partners, i.e., in our opinion, the established facts of the case must at least lead to an inference that the members of the group of their volition or free will have joined in a venture with a view to earn profit.15. the facts of this case are that the deputy commissioner, buldana, evolved a scheme for the distribution of cloth in his district during the period when this business was controlled by the government. he recommended that the following persons, viz., be jointly allowed to import cloth in the buldana district from the mills in india. this recommendation was.....
Judgment:
The order in this case will govern the disposal of Miscellaneous Civil Cases Nos. 24 to 28 of 1951.

2. These are applications under section 66 (2) of the Income-tax Act by the assessee, the Buldana District Main Cloth Importers Group, Khamgaon, requiring the Income-tax Appellate Tribunal, Bombay, to state the case. The Tribunal by its order, dated 4th August, 1950, dismissed the applications under section 66 (1) of the Act on the ground that the questions of law formulated by the assessee did not arise out of its order, dated 18th April, 1950, dismissing the appeal.

3. The Income-tax Officer, Khamgaon, issued a notice under section 22(2) of the Act on 12th March, 1947, directing the Buldana District Main Cloth Importers Group to submit a return of income for the assessment year 1646-47. Notice was served on Haji Ahmed Haji Ali, a member of the aforesaid group. On 16th April, 1947, one Shakoor Bhai, agent of Haji Ahmad Haji Ali, sent a letter to the Income-tax Officer, Khamgaon, expressing his inability to furnish the return of total income on the ground that there was no privity of contract between the parties described as the Buldana District Main Cloth Importers Group.

thus no return was filed. Thereafter, a notice under section 22(4) was issued and account books were produced before the Income-tax Officer.

It was found that the profits made by Haji Ahmad Haji Ali and one Harji was Kuwarji in the months of February, March and April, 1945, were Rs. 15,093 and were payable as under : After April, 1945, the aforesaid two members made re-adjustment about the distribution of profits. It was decided that the profits should be divided equally. The profits for the months of May, June, July, August and September, 1945, were determined at Rs. 39,181. After September, 1945, there was a change in the ownership of firm according to the Income-tax Officer. The material portion of the order, dated 11th September, 1947, was as follows : Allowing Rs. 4,000 for earned income relief, assessment is made under section 23(4) as per details in I. T. 30." 4. Similarly, a notice under section 22(2) of the Act was served on 16th August, 1947, for the assessment year 1947-48 on Haji Ahmad Haji Ali. This time also no return was filed. A notice under section 22(4) was accordingly issued and in response to this notice account books were produced by the assessees agent who appeared with his counsel.

Time was given for submitting the return, but no return was submitted.

In holding the assessee liable to pay the tax, the Income-tax Officer by his order, observed : "The facts of the case have been discussed in detail in the assessment order dated 11th September, 1947. On the basis of assessment made in the past, nature and extent of assessees business, trade conditions prevalent during the previous year and the result of examination of accounts produced by the assessee, I proceed to determine the total income of the assessee at Rs. 98,345 to the best of my judgment." 5. The first order in the excess profits tax assessment case was passed on 29th November, 1947, which related to the accounting period commencing from 1st February, 1945, and ending on 30th September, 1945.

The second order in excess profits tax assessment case was passed on 31st December, 1947, for the period commencing from 22nd October, 1945, and ending on 31st March, 1946.

6. The assessee filed applications under section 27 of the Act which were dismissed by the Income-tax Officer by two separate orders passed on 25th January, 1949. These orders were upheld in appeal by the Appellate Assistant Commissioner of Income-tax." 7. The Appellate Tribunal also dismissed the appeals. In dismissing the appeals it observed : "In our opinion the assessment has already been made in the status of an association of persons. In respect of the appeals under section 27, was are satisfied that sufficient cause has not been shown for not filing the return as required by law." 8. The application under section 66(2) of the Act has been filed by Tar Mohammad, a partner of the firm Haji Ahmed Haji Ali who is a member of the above-named Group. Shri Thakkar, learned counsel for the assessee, contends that the Group was not an association of persons. He says that the view taken by the Tribunal is erroneous. the questions of law which arise out of the order are stated in paragraphs 8 and 9 of the application in this Court. He has reframed these questions and has formulated 8 questions which he filed on 27th February, 1953.

9. We are satisfied that questions of law arise out of the order of the Tribunal dismissing the appeals of the assessee. In paragraph 2 of its order the Tribunal has described the formation of the Group. It has found that there was a change in the constitution of the Group. It observed : "From 25th February, 1945, to the end of the accounting year relevant to the assessment year 1947-48, various changes took place in the Group of importers who in fact imported the cloth. Sometimes it was Haji Ahmed Haji Ali and Harjiwandas Kuwarji, sometimes Haji Ahmed Haji Ali, Bhanji Kuwarji and Trimbaklal Tribhuwandas and sometimes Haji Ahmad Haji Ali and Trimbaklal Tribuwandas. Haji Ahmed Haji Ali was always there. The books relating to the import of cloth and sale of cloth in this account have been maintained by Haji Ahmed Haji Ali. Every time there was a change in the constitution of the Group, separate set was maintained by him".

10. Shri Thakkar filed a statement in this Court on 21st January, 1953, showing the names of persons and the period during which they did the business of importing cloth. It is clear that the Group did not consist of the same persons. Only one of them, viz., Haji Ahmad Haji Ali, was a member throughout. We do not agree that the decision of the Tribunal involves question of fact and not of law.

(i) Whether under the facts and circumstances of the case, the Buldana District Main Cloth Importers Group constituted an association of persons within the meaning of section 4 of the Income-tax Act, 1922, and was liable to be assessed to income-tax and excess profits tax in that status (ii) Whether each member of the Group should have been assessed on the income derived by him as a member of the Group (iii) If the answer to the first question is in the affirmative, whether the various groups did not constitute independent associations of persons liable to be assessed separately (iv) Whether the notice under section 22(2) of the Act served on Haji Ahmad Haji Ali was a valid notice to the assessee The question whether there was sufficient cause for the failure of the petitioner to submit the return as required is one of fact and not of law. The sufficiency of cause cannot be raised in this Court, under section 66(2) of the Act.

12. The Appellate Tribunal is accordingly required to state and refer the case to this Court. The application is allowed with costs.

In compliance with the order of this Court the Income-tax Appellate Tribunal (hereinafter called the Tribunal) has stated the case.

2. The questions of law on which the Tribunal was directed to state the case are as follows : "(i) Whether under the facts and circumstances of the case, the Buldana District Main Cloth Importers Group constituted an association of persons within the meaning of section 4 of the Income-tax Act, 1922, and was liable to be assessed to income-tax and excess profits tax in that status (ii) Whether each member of the Group should have been assessed on the income derived by him as a member of the Group (iii) If the answer to the first question is in the affirmative, whether the various groups did not constitute independent association of persons liable to be assessed separately (iv) Whether the notice under section 22(2) of the Act served on Haji Ahmed Haji Ali was a valid notice to the assessee 3. Facts relevant for purposes of this care are as follows. The Income-tax Officer, Khamgaon, issued a notice under sub-section (2) of section 22 of the Indian Income-tax Act, 1922 (hereinafter called the Act), on 12th March, 1947, against the assessee (Buldana District Main Cloth Importers Group, Khamgaon) to submit a return of income for the assessment year 1946-47. The notice was served on Haji Ahmed Ali, a member of the aforesaid group. On 15th April, 1947, one Shakoor Bhai, agent of Haji Ahmed Haji Ali, sent a letter to the Income-tax Officer, Khamgaon expressing inability to furnish the return of the total income on the ground that there was no privity of contract between the parties described as the Buldana District Mian Cloth Importers Group. As no return was filed, a notice under sub-section (4) of section 22 was issued and in response thereof account books were produced before the Income-tax Officer. It was found that the Profits made by Haji Ahmed Haji Ali and one Harjiwan Kuwarji in the months of February, March and April, 1945, were Rs. 15,093 and were payable as under : After April, 1945, the aforesaid two members made re-adjustment about the distribution of the profits. The profits for the months of May, June, July, August and September, 1945, were determined at Rs. 39,181.

By order, dated 11th September, 1947, the Income-tax Officer determined the total income of the assessee as follows : 5. Similarly, another notice under sub-section (2) of section 22 of the Act was served on the assessee through Haji Ahmad Ali on 16th August, 1947. This time also no return was filed. A notice under sub-section (4) of section 22 was, therefore, issued : account-books were filed and the Income-tax Officer determined the total income for that year under sub-section (4) of section 23 of the Act to the beset of his judgment at Rs. 98,345. It us an admitted position that there were changes in the membership of the group during the year. Only Haji Ahmad Haji Ali was a common member throughout.

6. The first order in excess profits tax assessment case was passed on 29th November, 1947, which related to the accounting period commencing from 1st February, 1945, to 30th September, 1945 and ending on 31st March, 1946. The assessee filed applications under section 27 of the Act which were dismissed by the Income-tax Officer by two separate orders on 25th January, 1949. These orders were upheld in appeal by the Appellate Assistant Commissioner of Income-tax. The Tribunal also dismissed the appeals. The assessee then moved the Tribunal to state the case to this Court, but those applications were also dismissed. The assessee then moved this Court by applications under sub-section (2) of section 66 of the Act. These were Miscellaneous Civil Cases Nos. 23 to 28 of 1951. All these cases were heard together and by order, dated 10th March, 1953, this Court directed the Tribunal to state the case on the aforesaid questions of law. The Tribunal has now stated the case.

7. The main question to be decided is the first question referred to above, i.e., whether the assessee constituted an association of persons within the meaning of the Act. This expression is not defined in the Act.

8. Formerly, the expression used in the Act was "association of individuals" which was subsequently amended in the year 1939 to "association of persons" to make it more comprehensive. Nothing turns on the meaning of the word "individual" or "person" in the instant case. We are only concerned with ascertaining the exact import of the word "association." "to join in common purpose, action or condition; to link together, unite, combine, ally, confederate." In our opinion, this connotes that when two or more persons unite together of their own free volition in some common purpose or action they can be deemed to have associated together and formed an association.

10. The expression "association of individuals" was considered by a Division Bench of the Calcutta High Court in a decision reported in B.N. Elias and Others, In re. At page 415 Derbyshire, C.J., in delivering the judgment quoted with approval the following passage from the judgment of Lord Justice Cotton in Smith v. Anderson : "I do not think it very material to consider how far the word association differs from company or partnership, but I think we may say that if association is intended to denote something different from a company or partnership, it must be judged by its two companions between which it stands, and it must denote something where the association are in the nature of partners." Costello, J., in considering the same question, at page 417 observed : "Mr. Banerji invited us to take upon ourselves the difficult by not indeed impossible task of laying down a general definition of the expression association of individuals. In my opinion that is not desirable from any point of view whatever. Each case must be decided upon its own peculiar facts and circumstances. When we find as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers, to use an archaic expression, then I think no difficulty whatever arise in the way of saying that in this particular case these four persons did constitute an association of individuals within the meaning of both section 3 and section 55 of the Indian Income-tax Act, 1922".

11. The views taken in decisions reported in Mohammad Aslam v.Commissioner of Income-tax, United Provinces,. In the matter of Keshardeo Chamria and Mohamad Abdul Kareem and Co. v. Commissioner of Income-tax, Madras, have gone still further and held that the expression "association of persons" should be read ejusdem generis with the word firm immediately preceding it; and before there can be an association of individuals within the meaning of the Act it must be shown that the association has at least some of the attributes of a firm or partnership, though not in the strictly legal sense of the term.

12. Beaumont, C.J., in delivering judgment in Commissioner of Income-tax, Bombay v. Laxmidas Devidas and Another, preferred the rule laid down in B. N. Elias and Others, In re, and dissented from the one taken in Mohammad Aslam v. Commissioner of Income-tax, U.P.13. The expression was also considered in Commissioner of Income-tax, Burma v. M. A. Baporia and Others and Roberts, C.J., in considering the question cited with approval the observations of Costello, J., in B. N.Elias and Others.

14. For the purpose of this case, it is not necessary for us to express ourselves as to whether the expression "association of persons" should be read ejusdem generis with the word firm. Suffice it to say that before any group of persons can be called as association of persons it must be established on facts that they are in the nature of partners, i.e., in our opinion, the established facts of the case must at least lead to an inference that the members of the group of their volition or free will have joined in a venture with a view to earn profit.

15. The facts of this case are that the Deputy Commissioner, Buldana, evolved a scheme for the distribution of cloth in his district during the period when this business was controlled by the Government. He recommended that the following persons, viz., be jointly allowed to import cloth in the Buldana district from the mills in India. This recommendation was accepted by the Provincial Government. The Deputy Commissioner, therefore, issued an order, the relevant part whereof reads as follows : In accordance with the instructions of the Provincial Government, I hereby direct that the distribution of cloth from the Bombay and Ahmedabad mills and of local mills shall be carried on through the agency of the persons named below : Even though these persons were appointed by the Deputy Commissioner as a group of importers all of them did not participate in the scheme during the entire period. Changes in the personnel of the group occurred from time to time in this short period. It will further be seen that they had no option but to work the scheme if they desired to carry on their trade. Thus, even participation of some of the persons from the group in the scheme cannot be said to be at their free will but on the other hand it was under compulsion. In these circumstances, in our opinion, the assessee cannot be called an "association of persons" within the meaning of the Act.

16. We may point out that the view taken in Commissioner of Income-tax, Madras v. P. R. A. L. Muthu Karuppan Chettiar, Mohammad Aslam v.Commissioner of Income-tax, United Provinces, and Commissioner of Income-tax, Burma v. M. A. Baporia and others has been approved by a Division Bench of this Court in Commissioner of Income-tax, M.P. and Bhopal v. Cloth Semi-wholesalers, Akola. In that case certain semi-wholesale dealers were associated together under an order of the Deputy Commissioner for taken over certain quotas of cloth bale, and for distributing them amongst retailers. It was held that in the circumstances it could not be said that those persons had agreed to carry on the business or to share the profits. This case is not in any material way distinguishable from the present one.

18. In view of the answer to the first question, the remaining questions do not arise and need not be answered.

19. The costs of this application shall be borne by the Department Counsels fees Rs. 100.


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