SANKAR PRASAD MITRA J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1959-60, the corresponding previous year being 1365 B. S. Two persons named Anil Krishna Paul and Jogendralal Nandy had acquired a right of receiving commission of 1 per cent. on sales by Messrs. Annapurna Cotton Mills Ltd. by an agreement dated the 26th January, 1950. Thereafter, the benefits of the agreement with the said cotton mills were transferred to the present applicants, Sunil Krishna Paul and Amar Krishna Poddar, by a deed of assignment dated the 10th December, 1951. The deed of assignment was executed by Anil Krishna Paul and the legal heirs of Jogendralal Nandy. As consideration for the assignment the applicants had to pay a sum of Rs. 50,000. Thereafter, on August 9, 1954, the two assignees, Sunil Krishna Paul and Amar Krishna Poddar, entered into an agreement of partnership to share the aforesaid commission.
For the assessment year 1959-60 the assessee-applicants, viz., Sunil Krishna Paul and Amar Krishna Poddar, claimed before the Income-tax Officer that their status should be taken as that of a firm. The Income-tax Officer rejected the claim and determined that these two persons constituted an 'association of persons'.
Before the Appellate Assistant Commissioner the assessee-applicant raised two contentions, viz :
(1) That the Income-tax Officer should have taken their status as that of a firm and should have granted registration under section 26A of the Act; and
(2) That, in the alternative, the assessee-applicants should have been held to be joint owners of their respective shares of incomes taxed separately in their individual assessments.
The Appellate Assistant Commissioner rejected the first contention aforesaid on the ground that the question had already been decided by the Appellate Tribunal in assessments relating to the assessment year 1956-57; and the decision of the Tribunal had also been upheld by this court in Sunil Krishna Paul v. Commissioner of Income-tax. So far as the second contention was concerned the Appellate Assistant Commissioner held that the applicants, by virtue of their agreement dated the 10th December, 1951, had jointed in a common purpose or common action, the object of which was to derive income. According to the Appellate Assistant Commissioner, the Income-tax Officer had come to the correct conclusion in determining the status of the applicants as that of an association of persons.
The Appellate Tribunal also rejected the first contention aforesaid on the same ground, viz., that the position had already been decided by this court in Sunil Krishna Pauls case. So far as the second contention is concerned, the Appellate Tribunal has upheld the conclusion of the Appellate Assistant Commissioner.
In these premises, the following question has been referred to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment made on the two appellants in the status of an association of persons is legal and valid in law ?'
Mr. Somnath Chatterjee, learned counsel for the assessee, has argued that a mere association for the purpose of acquisition of a property, which produces income, is not sufficient to make the persons concerned an 'association of persons' within the meaning of the Income-tax Act, 1922. To be an 'association of persons', says Mr. Chatterjee, the property which is acquired and which produces income must be managed by such persons for the purpose of producing income. Mr. Chatterjee contends that in each case it has to be seen whether the persons who have combined in acquiring property are actually managing the property or performing some act which results in producing income. In other words, according to learned counsel, unless there is an element of joint management or joint activity resulting in income, a combination of two persons does not make it an 'association of persons'. Reliance was first placed on the case of the Commissioner of Income-tax v. Laxmidas Devidas. In this case two individuals joined together in purchasing certain immovable properties, contributing the purchase monies in equal shares, and the properties were jointly held and managed by or on behalf of them. The management resulted in certain profits or gains which the assessee shared equally. The assessee claimed that each of them should be assessed individually as a co-owner of his share in the income of the properties. The Bombay High Court held, inter alia, (i) that, in the circumstances of the case, the assessees constituted an association of individuals within the meaning of section 3 of the Income-tax Act; (ii) that the said association was the owner of the properties within the meaning of section 9 of the Income-tax Act and was rightly assessed as such; (iii) that, in any event, the assessees were rightly assessed as owners of the said properties under section 9(1) of the Act. Beaumont C.J., in this case, expressed the view that the words 'association of individuals' in section 3 of the Indian Income-tax Act must be construed in their plain and ordinary meaning. They are not ejusdem generis with the word immediately preceding, viz., 'firm'. The only limit imposed on the words is such as necessarily 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.
The next case on which Mr. Chatterjee relied was In re Dwarkanath Harischandra Pitale. This is also a decision of the Bombay High Court. The assessee were two brothers, they became entitled to a certain house as tenants-in-common in equal shares under the will of their grandfather.
From 1929 they held and managed the properties as joint owners and derived profits therefrom. The net income after defraying expenses was equally divided between them. The assessee were, however, jointly assessed on the aggregate rental value as an association of individuals. The Bombay High Court held that, though the assessee, in the first instance, did not constitute an association of individuals, they became an association of individuals within the meaning of section 3 of the Income-tax Act when they elected to retain the property and manage it as a joint venture producing income; that the said association was the owner of the properties within the meaning of section 9 of the Indian Income-tax Act and was rightly assessed as such; that, in any event, the assessees were rightly assessed as owners of the properties under section 9(1) of the Act.
Mr. Chatterjee points out that these two cases of the Bombay High Court placed side by side conclusively establish his proposition that the element of joint management is an essential ingredient to be taken into consideration for determining whether two persons have constituted an 'association of persons'.
Learned counsel for the assessees then referred to Indira Balakrishna v. Commissioner of Income-tax. We shall discuss this case a little later as the matter went to the Supreme Court and the Supreme Courts decision is Commissioner of Income-tax v. Indira Balkrishna.
Reference was then made to an observation of the Patna High Court in Kumar Taranand Sinha v. State of Bihar. The Patna High Court has observed that, to constitute an association of individuals, there must be present not merely co-ownership but also other indicia of joint enterprise-there must be a combination of persons for promotion of a joint enterprise banded together as co-adventures. Mr. Chatterjee submits that the evidence of this joint enterprise is lacking in the instance case.
Our attention was then drawn to Commissioner of Income-tax v. N. V. Shanmugan & Co. The Madras High Court at page 708 observes :
'It is clear from these decided cases in the context of section 3 that an association of persons is a combination of persons for the purpose of producing income by their joint act or venture in that direction. It is unlike a contract of partnership. An association of persons need not necessarily be on the basis of a contract. But when persons combined for such a purpose, it should be assumed that it is a consensual act on their part and is the result of some understanding between them.'
Counsel for the assessee, in relying on this judgment, reminds us that there is no evidence in the instance reference of any joint act or venture.
In our view, to answer the question raised in this reference, we have to analyse carefully the various steps that were taken by the assessee-applicants resulting in the commission income they had been earning. Initially, as we have seen there was an agreement dated the 26th January, 1950, between Anil Krishna Paul and Jogendralal Nandy, on the one hand, and M/s. Annapurna Cotton Mills Ltd., on the other, that Paul and Nandy would receive a commission of one per cent. on the sales of the cotton mills. After the death of Nandy, the assessee-applicants, Sunil Krishna Paul and Amar Krishna Poddar, jointly took an assignment of the benefits conferred by that agreement for consideration. Thereafter, they entered into an agreement of partnership for sharing the commission to be received. It is clear, therefore, that the income, i.e., the commission receivable from the Annapurna Cotton Mills Ltd., with which we are concerned in the present reference, accrues or arises or is produced to the assessees by virtue of (a) a deed of assignment, and (b) a deed of partnership. That is to say, the two assessees have combined in joint action in obtaining or securing the income and in sharing it between themselves. This joint venture on their part is further borne out by the fact that they have been jointly incurring expenses for earning the commission and these expenses have been claimed by them in their income-tax returns and have been duly allowed. We find from page 8 of the paper-book that in the assessment year 1959- 60 the following expenses were allowed :
4. Bank charges
6. Legal charges
It is in the context of these facts that we have to determine whether the two assessees constituted an association of persons. We should first refer to the judgment of our court in In re B. N. Elias. A certain property called the Norton Buildings was purchased by A, B, C and D in 1920. Their respective shares in the property were 1/3, 1/6, 1/6 and 1/3. In the sale deed these four individuals were described as the purchasers and the purchasers were to have and to hold the said premises absolutely and for ever as tenants-in-common in the above-mentioned shares. A, B and C subsequently executed a joint power of attorney in favour of D to manage all their affairs in relation to the above-mentioned property and other properties belonging to them. D continued to manage these properties till the year 1933. In 1933-34 A, B, C and D were assessed to income-tax and super-tax on the income derived from Norton Buildings as an 'association of individuals.' The assessees contended that they did not constitute an 'association of individuals' and could be taxed only as co-owners. This court held that the assessees constituted an 'association of individuals' within the meaning of the Indian Income-tax Act and were rightly assessed as such. At page 415 Derbyshire C.J. has observed :
'Those words association of individuals have to be construed in their plain, ordinary meaning. There is no difficulty about the word individuals. `Associate means, according to the Oxford Dictionary, to join in common purpose, or to join in an action. Did these individuals join in a common purpose, or common action, thereby becoming an association of individuals In my view, they did. In the first place, they joined together in the purchase of this property on the 9th January, 1920. In the second place they have remained joint as co-owners of this property from the date of the purchase down to the present time. Thirdly, they have joined together, as the powers of attorney show, for the purpose of holding this property and of them all. Under these circumstances, it seems to me that looking at the position and construing the words of the Act in their ordinary common meaning, the four persons named are an association of individuals.'
We find that these observations of the learned Chief Justice were expressly approved by the Supreme Court in an appeal from the Bombay High Court in Commissioner of Income-tax v. Indira Balkrishna. The Supreme Court at page 551, after referring to Chief Justice Derbyshires views, has proceeded to observe :
'Therefore, 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.'
In our case also two persons, namely, the assessee-applicants, joined together in obtaining the assignment. They decided on enjoying the property or income jointly as evidenced by the deed of partnership and they have been jointly incurred expenses year after year with the object of earning the commission that is to be earned by virtue of the assignment. On these facts, we cannot but hold that they constituted an 'association of persons' within the meaning of section 3 of the Indian Income-tax Act, 1922.
Our answer, therefore, to the question referred to us in the affirmative. The applicants will pay to the respondent the costs of this reference.
K. L. ROY J. - I agree.