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K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. and anr. Vs. the Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai
Decided On
Reported in(1948)2MLJ528
AppellantK.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. and anr.
RespondentThe Commissioner of Income-tax
Cases ReferredMian Channu Factories Union v. Commissioner of Income
Excerpt:
- - clearly, therefore to constitute an association, within the meaning of the section, the existence of a legal relation between more than 20 persons giving rise to joint rights or obligations or mutual rights and duties is absolutely necessary. i think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which i have to decide. 43, the well known case of bootlegging that was carried by an american wine merchant who joined with two other persons in england in a venture of running whisky into the united states. 13. thus whatever may be the legal effects and consequences under the company law or under the law of contracts, we entertain little doubt that associations like those in the present.....yahya ali, j.1. under section 66(1) of the income-tax act, the income-tax appellate tribunal has, at the instance of the assessees concerned in these cases, referred to this court, the following identical question in both the cases:whether on the facts and in the circumstances of the case, the tribunal's finding that the assessee is an ' association of persons' within the meaning of section 3 of the income-tax act is correct in law.the facts in both the cases are also identical and it is convenient to treat them together.2. several persons formed into a partnership agreeing that all the shops leased in the names of those persons should be run by the partnership. in referred case no. 18 there were ten persons who had taken leases of ten arrack shops separately and had constituted.....
Judgment:

Yahya Ali, J.

1. Under Section 66(1) of the Income-tax Act, the Income-tax Appellate Tribunal has, at the instance of the assessees concerned in these cases, referred to this Court, the following identical question in both the cases:

Whether on the facts and in the circumstances of the case, the Tribunal's finding that the assessee is an ' association of persons' within the meaning of Section 3 of the Income-tax Act is correct in law.

The facts in both the cases are also identical and it is convenient to treat them together.

2. Several persons formed into a partnership agreeing that all the shops leased in the names of those persons should be run by the partnership. In Referred Case No. 18 there were ten persons who had taken leases of ten arrack shops separately and had constituted themselves into a partnership by deed dated 24th February, 1943, and agreed that the firm should conduct business in the vilasam of K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Karim and Co. In R.C. No. 19, sixteen persons who had taken out separately leases of sixteen different toddy shops agreed by partnership deed dated 1st October, 1942, that the business should be conducted by the partnership under the vilasam of P.M.U.B.M.K. Kathan Hadar and Co. Except for the differences indicated above, which are wholly immaterial for the purpose of these references, the questions arising for consideration are identical.

3. On foot of the deeds of partnership, applications were made for registration of the firms under Section 26-A which were rejected for the reason that the formation of a partnership with regard to arrack and toddy shops was prohibited by the Abkari Law without the previous permission of the District Collector. That order was confirmed on appeal by the Appellate Assistant Commissioner and a further appeal preferred to the Tribunal against that order was rejected as it was represented that the appeal was filed only as a formality.

4. The Income-tax Officer assessed each firm in the status of 'an association of persons.' Objection was taken to this course before the Appellate Assistant Commissioner and the Tribunal and it was contended that as there was no lawful partnership, assessment could be made only upon each individual lessee and not upon the entire body of lessees as an association. There was no objection however raised on the merits of the assessment. The contention of the assessees in both the cases that they did not constitute an 'association of persons' within the meaning of Section 3 was rejected by both the Appellate Assistant Commissioner and the Tribunal and hence these references.

5. The arguments advanced by learned Counsel for the assessees, briefly put, are that in order to attract liability under Section 3, an association of persons must be a lawful association and the test of a lawful association, so the argument runs, is whether under the terms of association, mutual rights and obligations arise which are enforceable in a court of law. It was pointed out that the agreements of the nature embodied in the two partnership deeds in these cases are unlawful and have been held to be so, as being forbidden by law and opposed to public policy. As association formed for such an unlawful purpose has no legal existence and cannot be recognised as an assessable unit under the taxing statute. To support this contention, reference was made, followed by extensive citation of authority to the provisions of the English and Indian Companies Act which render unlawful companies doing business (other than banking) whose members exceed twenty in number. On that analogy and similar analogies, it was urged that the combination of the various individuals in the present cases for carrying on business did not amount to an 'association of persons' so as to attract liability to tax under Section 3.

6. We will first take up the law and the cases bearing upon the English Companies Act. Section 4 of that Act provides that no company, association or partnership consisting of more than 20 persons shall be formed for the purpose of carrying on any business (other than banking) that has for its object acquisition of gain unless it is registered as a company under the Act. Ten legal position with reference to illegal companies on the score of their consisting of more than 20 persons is discussed in Halsbury's Laws of England (Hailsham) 5th volume, page 840 and it is stated that where a company is formed, contravening the provisions of that section, the law can take no cognizance of its existence except perhaps from a penal point of view. It is also stated at page 842 that if a company is formed for legal purposes, the commission by it of illegal acts does not make it an illegal company. Palmer says in his 'Company Law' (16th edition) that the Act of 1929 declares illegal all large unregistered companies or associations thus indirectly compelling associations with anything but a very small membership to avail themselves of the provisions of the Act. After citing a number of cases to some of which reference will be made presently, the learned author says referring to associations consisting of more than 20 persons. 'In a word, the association is a phantom. It has no legal existence.' The leading case on the subject is Smith v. Anderson (1879) 15 Ch. D. 247. That was a case of an association of more than 20 persons formed for the purpose of carrying on business. The Court of Appeal held that the certificate holders did not form an association within the meaning of Section 4 of the Companies Act. James, L.J., referring to the word 'association' occurring in Section 4 said that properly and etymologically it describes the act of associating together, from which act of associating, there is formed a company or partnership. At page 274 it was observed that there was never anything creating mutual rights or obligations between those persons and then came the following dictum:

Persons who have no mutual rights and obligations do not, according to my view, constitute an association because they happen to have common interestor several interests in something which is to be divided between them.

Brett, L.J., was of the opinion that the association mentioned in Section 4 although not, strictly speaking, a company or a partnership must be something of a similar kind. Cotton, L.J., said:

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 associates are in the nature of partners....But whatever may have been the object of using the word ' association,' what we have to consider, in my opinion is whether this conglomeration, as I will call it, of the persons who subscribe their money under this trust deed, is an association formed to carry on any business within the meaning of this section having for its object the acquisition of gain.

The view taken in this case was re-affirmed in In re Padstow Total Loss and Collision Assurance Association (1882) 20 Ch.D. 137. With reference to an association which infringed the provisions of Section 4, it was held by Brett, L.J., that since it was prohibited by law there never existed at any time any company, association, or partnership of which the law could properly take cognizance and with regard to which the Court could' properly make a winding up order. To the same effect is the observation of Lindley, L.J., at page 149 where he said that such a company which is not registered is illegal in this sense, that it is a prohibited thing, and the law cannot take notice of it except, perhaps, in a penal point of view.

7. In the Indian Companies Act the relevant provision is in the same terms and the case law has also proceeded upon much the same lines. Panchana Mancha Nayar v. Gadishare Kumaranchath Padmanabhan Nair (1896) 7 M.L.J. 26 : I.L.R. 20 Mad. 68, was a case of a lottery in which more than 20 persons took tickets. It was held by Subramania Iyer and Dayies, JJ., that there was no association of 20 persons for the purpose of gain and consequently, the plaintiffs were not precluded from suing for want of registration under Section 4 of the Companies Act. The principle as applied was stated at page 73 in these terms:

Clearly, therefore to constitute an association, within the meaning of the section, the existence of a legal relation between more than 20 persons giving rise to joint rights or obligations or mutual rights and duties is absolutely necessary. Otherwise there would be a mere conglomeration of persons as Cotton, L.J., put it, but not an 'association'.

In Neelamega Sastri v. Appiah Sastri : (1906)16MLJ385 more than 20 persons entered into an agreement for creating a chit fund, but the only proprietors of the fund were the two organisers; it was held that the parties to such an agreement did not form an association of which registration was necessary under Section 4 of the Indian Companies Act. The firm of Pannaji Devichand v. The firm of Senaji Kapurchand : AIR1927Mad123 was a case in which four unregistered firms entered into a partnership to purchase certain goods and to sell them at different times and divide the profits and it appeared that the total number of members of all the firms together came to twenty two. On a suit instituted by three of the firms against the fourth for dissolution of partnership and taking of accounts it was held that the suit partnership being composed of more than 20 persons, was illegal for want of registration and where a plaintiff comes to Court on allegations which on the face of them show that the contract of partnership on which he sues is illegal, he is not entitled to any relief. This case was taken up on appeal to the Privy Council and was confirmed without any discussion whatever. Vide The firm of Sanaji Kapurchand v. Firm of Pannaji Devichand (1930) 59 M.L.J. 435.

8. Turning to the other Indian High Courts reference may be made to Mewaram v. Ramgopal I.L.R. (1926) All. 735 in which case two ginning factories consisting of more than 20 shareholders from the very beginning started under an agreement. It was held that none of its members could sue in a Court of law for partition of the existing assets. Sulaiman, J., on whose dissent the matter was referred to a third judge who agreed with Mukherji, J., observed that any person who comes to Court and asks for its wassistance in a way which would necessarily imply a recognition of the existence of such an association is out of Court. The Court must refuse to help him, even though he may have to suffer an injustice. The Lahore High Court in Madangopal v. Shewal Das I.L.R. (1934) Lah. 574 dealing with a similar case pointed out that Section 4 of the Indian Companies Act is mandatory and any association formed in violation thereof is an illegal body and its existence cannot be recognised by law. It may be fitting to conclude this line of cases by reference to an income-tax case decided by the Lahore High Court in Shri Gopalji Company v. Commissioners of Income-tax, Punjab and North West Frontier Provinces (1931) 5 I.T.C. 257. There the assessee company constituted by 13 firms as partners with specified shares was carrying on business and the Company and the constituent firms were not registered under the Indian Companies Act or under the Indian Income-tax Act. It was held that the company was assessable as a firm or an association within the meaning of the Income-tax Act, its illegal constitution on account of the non-compliance with the provisions of the Companies Act not affecting its liability to assessment on its profits. Jailal, J., adverting to the claim of the company that it was not capable of being assessed to income-tax because it could not be deemed to exist in the eye of law made the following observation:

The claim of the company is, in my opinion, preposterous on the face of it. It amounts to this that, because the assessee is carrying on business without complying with the provisions of the law as to the mode of its constitution it is not liable to pay income-tax on its profits. It is all the same a firm or an association within the meaning of the Indian Income-tax Act. For analogous cases reference may be made to Birendrakishore Manikya v. Secretary of State for India 1 I.T.C. 67, in which it was held that abwab income illegally realised by the assessee was liable to be assessed to income-tax, and to In re Chunnilal Kalyandas 1 I.T.C. 418 where it was held that income or profits derived by the assessee from wagering contracts was liable to income-tax. In my opinion, whatever penalties or disabilities the Sri Gopalji Company may have incurred by not complying with the provisions of the Indian Companies Act, the matter does not affect its liability to pay income-tax on its profits.

The whole position has been put in the most telling manner by Rowlatt, J., in Mann v. Nash (1932) 16 T.C. 523. There the assessee was carrying on the business of providing automatic machines, the use of which had been held to be illegal. It was claimed that the portion of profits derived from that business was immune from taxation on the ground that it had been earned by unlawful means. It was held that the profits were chargeable with income-tax. Three arguments were addressed and each of them was met by Rowlatt, J., in his own inimitable manner:

The great mainstay of Mr. Field's argument quite rightly from his point of view, was the case of Hayes v. Duggan (1929) I.R. 406, decided in the Irish Free State, and that decision of the Supreme Court seems to have gone upon this principle that no construction could be admitted which recognised that the State should come forward and seem to take a profit from what the State prohibited, because the State ought to have prevented it; and it was argued, if I may venture to say so, in a somewhat rhetorical style; Does the State keep its revenue eye open and its eye of justice closed?I must say, I do not feel the force of that observation at all. Would it have made any difference, I ventured to ask in the argument, if the State had kept both its eyes open and prosecuted the man for the lottery and taxed him for the profits at the same time?That would at any rate have protected the State from the reflections which were made upon it in the words I have quoted. But, in truth, it seems to me that all that consideration is misconceived. The Revenue representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it. It merely finds profits made from what appears to be a trade, and the Revenue laws happen to say that the profits made from trades have to be taxed, and they say: 'Give us the tax.' It is not to the purpose in my judgment to say: 'but the same State that you represent has said they ' are unlawful'; that is immaterial altogether and I do not see that there is any contact between the two propositions.

It was said in the Irish case that allegans sham turpitudenum non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says: 'It is a business'; the appellant says ' It is an unlawful one; ' he is alleging his own turpitude.

It is said again: 'Is the State coming forward to take a share ' of unlawful gains?' It is mere rhetoric. The State is doing nothing of the kind; they are taking the individual with reference to certain facts. They are not partners; they are not principals in the illegality or sharers in the illegality; they are merely taxing a man in respect of those resources. I think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide.'

9. There is no doubt that a partnership for carrying on toddy business without the Collector's previous permission is illegal as the rule under the Abkari Act provides that no privilege of supply or vend shall be sold, transferred or subrented without the Collector's permission. It was so held in Ramanayudu v. Seetharamayya (1934) 68 M.L.J. 570 : I.L.R. 58 Mad. 727 and a suit laid upon a promissory note executed by one partner after he became the successful bidder in favour of another for advances to be made by the latter for carrying on the business which they agreed to work as partners was dismissed as being not maintainable. This view was followed in a number of cases. It is sufficient to refer to Italia v. Cowasjee (1944) 1 M.L.J. 97 : I.L.R. 1944 Mad. 697, where the entire case law was reviewed and the principle was re-affirmed as being in contravention of Rule 27 of the Abkari Rules and Section 23 of the Contract Act. Reference may in this connection be made to the decision of the Court of Session in Scotland, in Lindsay, Woodward and Hiscox v. Commissioners of Inland Revenue (1919) 18 T.C. 43, the well known case of bootlegging that was carried by an American wine merchant who joined with two other persons in England in a venture of running whisky into the United States. In making the shipments from the United Kingdom to America deception had to be practised on Customs authorities of the United Kingdom by means of untrue declarations as to the destination of the whisky. The question came before the Court in the usual form as to whether there was evidence upon which the Special Commissioners of Income-tax could come to the conclusion that a partnership or joint adventure subsisted and that the profits of the sale of whisky were assessable to income-tax. The Court held that there was evidence. The Lord President (Clyde) made certain observations which are apposite to the present case. Considering the question whether the transactions were in the nature of trade, His Lordship observed:

This point cannot be dissociated from another, namely, whether the trading transactions, if such they were, were so tainted with illegality and wrong doing that the profits made by means of them fall outside 'the profits of trade ' which are assessable to income-tax under the Act of 1918....There are many transactions which are illegal in the sense that the obligations upon which they depend are not such as the law will enforce. I think it is plain that a contract of partnership the object of which is to trade in a way which necessarily involves resort to fraud on the Customs authorities of this country, is not a contract which this country's law will enforce. I do not, however, think that, merely because the contract was not enforceable by law, profits actually made by the partnership's trading operations must necessarily be placed beyond assessment to income-tax as profits of 'trade'....But in the present case, the 'trade' did not consist in the commission of crime; it consisted in the marketing of a commercial article. The frauds on the Customs authorities were only 'incidents of that trade.' Frauds are sometimes incidents of some 'trades' without exempting their profits from assessment to income-tax. On the other hand, it is true in this case that the frauds on the customs authorities were inseparable incidents of the conduct of the partnership trade. Is this enough to exempt the profits of the trade from assessment to income-tax?I think not, because the marketing of the whisky in the United States was undoubtedly ' trade,' or ' in the nature of trade,' and was not less so because, in order to enable the whisky to be so marketed, it was necessary to commit a fraud on the Customs authorities at the stage of export.

Lord Sands said at page 56:

Crime, such as house breaking, is not trade, and therefore the proceeds are not caught by the tax. It does not follow, however, that there cannot be a business answering to the description of trade, albeit it is tainted with illegality. Trafficking in drugs, for example, is of the nature of trade, albeit such trafficking may in the circumstances be illegal. I respectfully adopt the dictum of Lord Haldane, in delivering the judgment of the Privy Council in the case of Canadian Minister of Finance v. Smith (1927) A.C. 193, that once the character of a business has been ascertained as being of the nature of trade, the person who carries it on cannot found upon elements of illegality to avoid the tax.

Lastly the dictum of Lord Morison is equally forcible:

It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest gains escape: To hold otherwise would involve a plain breach of the rules of the Statute, which require the full amount of the profits to be taxed and merely put a premium on dishonest trading. The burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest businessman, and, in addition, they get their deserts elsewhere.

Southern (H.M. Inspector of Taxes) v. A.B. Ltd. (1933) 18 T.C. 59, dealt with the business of a bookmaker and it was held that although the business was unlawful it nevertheless constituted a trade within the meaning of the Income-tax Acts and the profits therefrom were assessable to income-tax. Finlay, J., noticed the important distinction with reference to the illustration of a burglar that was given before him that if the burglar's income does not come within the purview of the Income-tax Acts, it was because what he does is not the carrying on of a 'trade' within case I, and it is not because, carrying on a trade within case I, he is taken out by some considerations of morals or anything of that sort. In the case of Minister of Finance v. Smith (1927) A.C. 193 which came before the Judicial Committee from Canada there is the following observation:

Nor does it seem to their Lordships a natural construction of the Act to read it as permitting persons who come within its terms to defeat taxation by setting up their own wrong. There is nothing in the Act which points to any intention to curtail the statutory definition of income, and it does not appear appropriate under the circumstances to impart any assumed moral or ethical standard as controlling in a case such as this the literal interpretation of the language employed.

The principles deducible from the cases discussed above are clear. An association which contravenes the provisions of Section 4 of the English Companies Act or the Indian Companies Act is unlawful and on foot of the contract or agreement amongst its members or partners, no relief will be granted by a Court as in the eye of law no company or association duly constituted is in existence. The same will be the position with reference to associations or partnerships formed in contravention of Rule 27 of the Abkari rules. But that would not by itself conclude the question of the liability of the association to tax if the association comes within the scope of the charging section of the taxing statute. This will be so for the reason that so long as the object and purpose of the association is to carry on business which is not illegal (the case of an association to commit crime being distinguishable as an instance of an association formed for a criminal or unlawful object), its income is not immune from taxation because of the employment of unlawful means for achieving the income. The only test to be applied as indicated in the case of the Ministry of Finance cited above is whether the income falls within the purview of the charging section. That was also a case of illicit traffic in liquor and, as already stated, it was held, relying upon the dictum of Lord Haldane that Income-tax Acts are not necessarily restricted in application to lawful businesses only.

10. The question then that remains for determination is whether an association constituted as the two assessees in the present cases comes within the meaning of the term 'other association of persons' occurring in Section 3 of the Indian Income-tax Act which is the relevant charging provision. The expression itself is not defined in the Act and hence it follows that it must be understood in its plain and ordinary sense. In one of the cases cited already, it was pointed out that 'association' properly and etymologically describes the act of associating together. But the dictionary meaning of the word 'associate' is to join in common purpose or to join in an action. Any combination of persons who have joined together in a profit making enterprise would, according to ordinary parlance, amount to an association. The main argument of learned Counsel for the applicants was that according to the frame of Section 3, the words 'other association of persons' in the context in which they appear should be deemed to have in them implicit the idea of there being in existence among the members of the association inter se certain mutual rights and obligations which can be legally enforced. It is to gain support for this argument that detailed reference was made to the provisions in the Companies Act and the Abkari Act and to the case law bearing upon them which has been already fully discussed.

11. Section 3 of the Income-tax Act runs thus:

Where any (Act of the Central Legislature) enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of (the total income) of the previous year of every (individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually).

The argument is that with regard to all the other units preceding the words 'other association of persons,' viz., Hindu undivided family, company, local authority and firm, the common feature is the existence of such mutual rights and obligations. In one case, it may be the incident of status by birth; in the case of companies it is the result of incorporation; in the case of a local authority it is by operation of a statute and in the case of a firm it is attributable to the contract between the parties. Since in the present case the contract is void ab initio and there are no mutual obligations there can be no association. The doctrine of ejusdem generis was also invoked in this connection but with reference to these contentions learned Counsel was unable to cite any authority in his favour. On the contrary all the cases bearing on the point tend to discountenance the position he contends for. In the Commissioner of Income-tax v. Mohideen Sahib, Bellary : (1927)53MLJ719 , a body of individuals agreed to take in auction, work and share the profits from four toddy shops. It was held that they could be taxed under Section 3 of the Income-tax Act on the combined profits of the four shops. This decision is not of much direct assistance as it was found on an examination of the record that there was no evidence that the licence-holders had either sold, transferred or sub-rented the shops which they had taken on lease and hence there was no infringement of the provisions of Rule 27 of the general conditions applicable to those licences and naturally the Court declined to presume illegality in the absence of any evidence of such illegality. The argument based on ejusdem generis was raised in a number of cases. In In re B. N. Elias I.L.R. (1935) Cal. 538, three individuals had combined to purchase various properties which they proposed to manage for the purpose of making profits and they were held to be an association of individuals. In Mufti Mahomed v. I. T. Commissioner : AIR1936All817 , however, the Allahabad High Court expressed the view that the term 'association of individuals' as it then existed in the old Act should be read ejusdem generis with the word 'firm' immediately preceding. The same question arose in the Bombay High Court in The Commissioner of Income-tax v. Laxmidas Devidas I.L.R. 1937 Bom. 830 in a case where two persons associated together for the purpose of buying property and managed it so as to produce income. It was held that they constituted an 'association of individuals' within the meaning of Section 3. Beaumont, C.J., agreed with the view expressed by the Calcutta High Court in In re B. N. Elias I.L.R. (1935) Cal. 538 and differed from the view of the Allahabad High Court in Mufti Mahomed v. I. T. Commissioner : AIR1936All817 . It was pointed out by the learned Chief Justice that the rule of ejusdem generis being one of construction should never be invoked when its application appeared to be to defeat the general intent of the instrument to be construed and then it was pointed out:

Moreover, I know of no authority for applying the rule so as to limit the meaning of general words to the last of the particular words preceding. Here, there are three associations of individuals referred to in Section 3 of the Act,--A Hindu undivided family, a company and a firm; and those three associations of individuals are marked by widely different characteristics. A Hindu undivided family is an association united by ties of birth; members of a company are associated in such a manner that they become a legal entity; and a firm is an association depending on contract but is not in itself a legal entity; and I think it would be very difficult,--if not impossible,--to a suggest any other association of individuals which embodies substantially the peculiarities of the three particular types to which the Act refers. In my opinion, the only limit to be imposed on the words 'other association of individuals' is such as naturally follows from the fact that the words appear in an act imposing a tax on income, profits, and gains, so that the association must be one which produces income, profits or gains. It seems to me that an association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains falls within the words 'other association of individuals' in Section 3.

It is significant that in this case, of the two individuals one was a minor. For that reason also there could be no partnership between an adult member and a minor. Nonetheless in that case it was held that since in point of fact the two assessees had associated together for the acquisition of property, whether or not the minor was bound by any contract entered into on his behalf was immaterial and since there was ownership of property by two persons and the production by that property of profits or gains, the assessee was taxable as an association.

12. Having bestowed close attention upon the question, we are inclined to agree with the view taken by the Calcutta and Bombay High Courts with regard to this matter in preference to the view of the Allahabad High Court. We may mention in passing that in a later decision of the Allahabad High Court, Chandrika Prasad Ram Swarup v. Commissioner of Income-tax I.L.R. 1939 All. 690, Iqbal Ahmed, J., as he then was, made the following important observation:

The question of the legality or illegality of transactions entered into by a firm is totally irrelevant in calculating the net profits or the loss incurred by the firm in a particular year. For example if the assessee firm had entered into a wagering contract which resulted in huge loss it would not have been open to the Income-tax Department to decline to take that loss into account simply because the contract by way of wager was void in law. The income assessable to tax is the actual income of an individual or of a firm irrespective of the manner in which the income was derived. Legality or illegality of transactions culminating in profit or loss is, therefore, foreign to the scope of an inquiry into the income of an individual or of a firm for the purpose of taxing the same.

In the Hotz Trust case (1930) 5 I.T.C. 8 it is to be noted that under the trust three trustees were appointed to conduct the business and the Court found that they could be grouped as a unit for the purposes of taxation and an assessment levied on them as such and that they could be held to be an association of individuals within the meaning of Section 3 of the Income-tax Act in spite of the circumstance that there could inter se be no mutual rights and obligations as between the three trustees. The other case in point is that of Commissioner of Income-tax v. Mrs. Saldanha : (1932)62MLJ600 . Although there could legally be no firm between an adult and minors it was held that a Christian mother and her minor children could legally constitute an association of persons within the meaning of Section 3. Another illustration is found in Mian Channu Factories Union v. Commissioner of Income-tax, Punjab (1936) I.T.R. 203; where it was held that two firms and a Hindu undivided family could not constitute themselves into a firm within the meaning of the Income-tax Act but the larger group formed thereby was liable to be assessed as an 'association of individuals.' The question has arisen in the Courts constantly as to whether co-owners can be assessed as an association. A line of distinction has always been drawn, as in some of the cases which have been discussed above, between persons who have become co-owners by succession or inheritance and persons who combine in a joint enterprise to purchase property for the purpose of making profit by the joint enterprise.

13. Thus whatever may be the legal effects and consequences under the Company Law or under the law of contracts, we entertain little doubt that associations 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 Act is concerned. It must be remembered that there is no provision in the United Kingdom Act corresponding to Section 3 of the Indian Act and in fact the expression 'association of persons' is foreign to English law. In Rule 1 of the General Rules applicable to schedules A, B, C, D and E of the English Act, the words employed are 'every body of persons shall be chargeable to tax in like manner as any person is chargeable under the provisions of this Act,' and the question for consideration under that Act always is whether the assessee falls within any one of the schedules or cases or rules forming part of the Act.

14. To sum up, 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. So long as it is an association which produces income, profits or gains, it is assessable to tax by force of Section 3. It is unnecessary in order to constitute an association that there should be any mutual rights or obligations among the members enforceable in a court of law. So long as the object of the association is to carry on for gain a business which is not unlawful--the object in the present case being to sell arrack or toddy as the case may be, under the authority of a licence duly granted by the Government--the supervening circumstance of the formation of a partnership in contravention of the Abkari law does not render the income, profits and gains of the association immune from taxation.

15. In view of these principles, we must answer the question in both the cases in the affirmative. In each case, the applicant will pay the Commissioner the costs of the reference, Rs. 250.


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