Commissioner Of Income-Tax, Poona vs Buldana District Main Cloth Importers

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 41-44 of 1960

Decision Date: 6 March 1961

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

The case was titled The Commissioner of Income‑Tax, Poona versus Buldana District Main Cloth Importers Group and was decided on 6 March 1961 by the Supreme Court of India. The judgment was authored by Justice J. L. Kapur and the bench comprised Justices J. L. Kapur, M. Hidayatullah and J. C. Shah. The formal citation for the decision is reported as 1961 AIR 1261 and 1962 SCR (1) 181, with the related citator reference F 1970 SC 1707 (9). The matter concerned the interpretation of the Indian Income‑Tax Act, 1922 (Eleventh Amendment) section 3, which defines an “Association of Persons” for the purpose of ascertaining and sharing business profits on a joint basis when carried on by a group of persons.

According to the headnote, the Deputy Commissioner of the district devised a scheme for the distribution of cloth in which he appointed a group of persons as sole agents for importing cloth from mills and supplying it to retailers. Although the composition of the group changed over time, one firm, identified as ‘H’, remained a constant member. The profits generated by the business were allocated among the group members in proportion to the capital each contributed. The Income‑Tax Officer issued a notice under section 22(4) of the Act and, after examining the books of account, assessed the respondent group as an “Association of Persons”. The High Court, however, expressed the view that a group could be termed an Association of Persons only where the members were in the nature of partners, a condition it found lacking because the members were appointed by the Deputy Commissioner and their participation was not voluntary but compelled.

The Supreme Court held that when a business is conducted and its profits are determined jointly and then distributed according to each member’s capital contribution, the group constitutes an “Association of Persons” irrespective of the fact that the scheme was initiated or controlled by the Deputy Commissioner or that he appointed the members. The Court referred to the decisions in Commissioner of Income‑Tax, Bombay North v. Indira Balakrishna (1960 3 SCR 513) and Mohamed Noorullah v. Commissioner of Income‑Tax (1961 3 SCR 515) in support of its conclusion.

The appeals fell under civil appellate jurisdiction, specifically Civil Appeals Nos. 41‑44 of 1960, and were filed by special leave against the judgment and order dated 13 April 1956 of the former Nagpur High Court in Miscellaneous Civil Case No. 27 of 1954. Counsel for the appellant represented the Commissioner of Income‑Tax, while counsel for the respondent represented the Buldana District Main Cloth Importers Group. The judgment was delivered on 6 March 1961 by Justice Kapur.

The reference under section 66‑A(2) of the Income‑Tax Act raised the question whether the respondent could be classified as “an association of persons” within the meaning of section 3 of that Act. The appeals concerned two separate Income‑Tax assessments and two Excess Profits Tax assessments. The Income‑Tax assessments were for the assessment years 1946‑47 and 1947‑48, which corresponded respectively to the accounting periods from 1 February 1945 to 30 September 1945 and from 1 October 1945 to 21 August 1946. The Excess Profits Tax assessments related to the chargeable periods from 1 February 1945 to 30 September 1945 and from 22 October 1945 to 31 March 1946. The determination of the Excess Profits Tax issues was to follow the decision on the Income‑Tax issues. The factual background was as follows: in 1945 the Deputy Commissioner of Buldana devised a scheme for distributing cloth within the district and, with the approval of the Government of C. P., appointed four individuals—Haji Ahmed Haji Ali & Co., Bhanji Kuwarji, Trimbaklal Tribhovan Das and Deolal Rangulal—as sole agents for importing cloth from mills in various parts of India and for supplying it to retailers. During the period from 1 February 1945 to the end of September 1945 only Haji Ahmed Haji Ali & Co. and Bhanji Kuwarji actually conducted the business, and the profits earned were divided between them in proportion to the capital each had contributed. After September 1945 the composition of the importer group changed; additional persons joined, and the profits for the subsequent period were likewise divided among all members according to each member’s capital contribution. On 12 March 1947 the Income‑Tax Officer issued a notice under section 22(2) of the Act to the respondent, demanding a return of the group’s income for the assessment year 1946‑47. The notice was served on Haji Ahmed Haji Ali & Co., which refused to file a return, arguing that there was no contractual relationship (“privity”) among the group members. Consequently, a further notice was issued under section 22(4) of the Act, and after the books were produced the Officer determined the income for the year ending September 1945 and assessed income‑tax liability under section 23(4) of the Act. In doing so, the Officer treated the respondent as an “association of persons” for both Income‑Tax and Excess Profits Tax purposes, and dismissed an application made under section 27 of the Act. In the following assessment year, 1947‑48, a similar notice was served on Haji Ahmed Haji Ali & Co.; the group was again assessed as an association of persons for Income‑Tax and also for Excess Profits Tax for the period from 22 October 1945 to 31 March 1946, and a further application under section 27 of the Act was likewise dismissed.

The Tribunal dismissed the application for reference to the High Court, but the parties subsequently obtained an order from the High Court under section 66(2) of the Act. The High Court then directed that four specific questions be referred to it for determination. The question that was most relevant to the appeals asked whether, based on the facts and circumstances of the case, the Buldana District Main Cloth Importers’ Group could be characterized as an “association of persons” within the meaning of section 4 of the Income‑tax Act, 1922, and consequently whether the group was liable to be assessed to income‑tax and excess‑profits tax in that capacity. The Tribunal’s order dated 18 April 1950 revealed that the composition of the cloth‑importing group varied for different periods, although Haji Ahmed Haji Ali & Co. remained a constant member throughout. The business books were kept by Haji Ahmed Haji Ali & Co., and each time the group’s constituents changed a separate set of books was prepared by that firm. The profits generated by the various enterprises were apportioned among the persons who constituted the group at the relevant times. The respondents argued before the Tribunal that no “association of persons” existed and that the imported cloth was issued to the individual importers, who then sold the cloth on their own account.

In contrast, the Tribunal examined the accounts and concluded that the import and distribution of cloth were carried on jointly. It observed that purchases were made on a joint account, sales were effected on a joint account, and profit was first determined on the joint account before being distributed in accordance with the parties’ agreed shares of profit. On that basis, the Tribunal held that the assessment as an “association of persons” was correct. When the matter proceeded to the High Court, the Court analysed the requirements for a group to be described as an “association of persons.” It held that such a description could apply only where the members acted like partners, meaning that they voluntarily joined the venture of their own free will with a view to earning profit. Because the members of the group had been appointed by the Deputy Commissioner of the district as importers, their participation was not deemed voluntary but rather compulsory. Accordingly, the High Court concluded that the group did not qualify as an “association of persons” within the meaning of the Act. The High Court cited several authorities on the nature of an association of persons, referring particularly to the principles laid down by this Court in Commissioner of Income‑tax, Bombay North v. Indira Balkrishna and in the case of Mohammad Noorulla, without reproducing the full text of those precedents.

The Court observed that a decision rendered on 18 January 1961 in the case of Commissioner of Income‑tax established that the business in question had been operated as a single unit with the consent of all parties who were heirs of the deceased Mohammad Omer Sahib, even while an administration suit between them was pending before the courts. In the present matter, the Tribunal had found that the importation and distribution of cloth, which constituted the respondent’s business, had been conducted jointly. The Tribunal held that the purchases were made jointly, the sales were effected jointly, and the profits were determined on a joint basis and then allocated in proportion to the capital contributed by each member of the group. This factual finding, the Tribunal concluded, rendered the respondent an “association of persons.” The Court said that the fact that the Deputy Commissioner of the district had appointed the members of the group to import and distribute cloth did not alter this conclusion. The respondent had not disputed that it had operated the scheme formulated by the Deputy Commissioner, that the scheme generated profits, and that the scheme was instituted or controlled by the Deputy Commissioner. The Court noted that such control did not negate the existence of a business carried on by the assessees.

Addressing the argument that the Deputy Commissioner’s control precluded the assessees from carrying on a business, the Court referred to the observation of Justice Sarkar in Commissioner of Income‑tax, Madhya Pradesh and Bhopal v. Vyas and Dhotiwala, where the Tribunal had suggested that complete control by the Deputy Commissioner meant the assessees could not be said to have carried on the business. Justice Sarkar had replied that the presence of the Deputy Commissioner’s control did not prevent the assessees from conducting the scheme as their own business, noting that the assessees merely agreed to conduct business in a particular manner. The Court expressed respectful agreement with this reasoning. Consequently, the Court affirmed that the respondent was indeed an association of persons and was correctly assessed for Income‑tax and Excess Profits Tax. The appeals were therefore allowed, with costs awarded, and a single hearing fee was ordered.