V.S.DESAI, J. - (1.)THIS is a reference under section 66(1) of the Indian Income -tax Act, 1922, at the instance of the department and it arises out of the Tribunal's order disposing of six consolidated appeals filed by the assessee relating to the assessment years 1954 -55, 1955 -56 and 1956 -57. Two questions have been referred to us in this reference and they are as follows : '1. Whether, on the facts and in the circumstances of the case, the income of the assessable entity was assessable under section 10 of the Income -tax Act ?
(2.)WHETHER the status of the said assessable entity is 'firm' for income -tax purposes and as such registrable under section 26A of the Income -tax Act ?' 2. The facts necessary to be stated in order to appreciate the questions raised are as follows : Hindustan Sugar Mills (which will hereafter be referred to as the sugar mills) is a public limited company. Its managing agents were Bachhraj and Co. Private Limited. Four of the directors of the managing agents' company were also directors of the sugar mills. The sugar mills had appointed the Upper India Commission Agents Ltd. to be their selling agents in December, 1947, and the said selling agents continued up to the assessment year 1953 -54. In October, 1951, the sugar mills decided to terminate the selling agency of the Upper India Commission Agents Ltd. and informed the selling agents of their intention, requesting them, however, to continue work as agents till a new agent was appointed by the sugar mills. Thereafter, on the 1st September, 1952, by a deed of partnership executed on the said date, the assessee firm was constituted consisting of five partners and admitting a minor to the benefits of the partnership. Two of the partners of this assessee partnership firm were the regular employees of Bachhraj Trading Corporation Private Ltd. and Jivanlal and Sons Private Ltd., who were the sister concerns of the managing agency company. Two other partners, who were ladies, were related to Shri Kamalnayan Bajaj, who was a director of the sugar mills as well as of the managing agents. The other two partners were the husbands of those two ladies and one of them, namely, Shri. S. N. Agrawal, was a person, who according to the replies given by the assessee to certain questions asked of them by the Income -tax Officer, was a very influential person and was rendering very valuable services to the company by advising them from time to time on the question of means of production as well as policy. The minor admitted to the benefits of the partnership was the son of one of the directors of the managing agents' firm. The assessee firm was appointed by the sugar mills as their selling agents from 1st July, 1952. The letter confirming the appointment and embodying the terms of the agreement relating to the selling agency was sent by the sugar mills to the assessee firm on the 5th July, 1952. The assessee firm in their turn appointed Messrs. Upper India Commission Agents Ltd. as their sub -agents on the 9th July, 1952. On the same day, the assessee also appointed the firm of Messrs. Hardayal Nevatia of Bombay as their broker in Bombay and, after having made the appointments of the sub -agents and the broker instructions for sale delivery. The assessee also informed that they will be responsible for any loss sustained by the sugar mills for the non -fulfilment of any contract or non -realisation of the money in respect of the goods which will be sold through the sub -agents and the broker. With these arrangements the work of selling agency, in fact, continued to be carried on by the Upper India Commission Agents Ltd. as before, though in the capacity of sub -agents. During the assessment years 1954 -55, 1955 -56 and 1956 -57, with which we are concerned in the present case, the total selling agency commission paid to the assessee firm was Rs. 1,80,462 for the first year, Rs. 2,73,417 for the second year and Rs. 1,28,102 for the third year. Out of the said amounts, the assessee firm paid to their sub -agents Rs. 77,187, Rs. 91,187 and Rs. 65,684, respectively, for the said three years. The assessee firm claimed registration of the firm under section 26A of the Income -tax Act and further claimed that its income should be taxed on the basis of the income from the business of a registered firm. The Income -tax Officer treated the assessee firm as an association of person in receipt of income taxable under section 12 as income from other sources. The Income -tax Officer rejected the assessee's application for registration on the ground that the assessee firm was not a genuine firm. In the appeals which the assessee firm filed against the orders of the Income -tax Officer, the Appellate Assistant Commissioner upheld the view taken by the Income -tax Officer and dismissed the appeals. In the appeals before the Tribunal, there was a difference of opinion between the two Members who constituted the Bench of the Tribunal which heard the assessee's appeals. According to the Accountant Member, the profits were assessable under section 10 as profits of business and the assessee was a firm which was carrying on business and was entitled to registration under section 26A. According to the Judicial Member, it was very doubtful whether the activity of the assessee could be business in the strict sense of the word used in the Income -tax Act and also whether it could be deemed to be business for the purposes of and within the meaning of the Partnership Act. At any rate, according to him, the assessee could not be said to have carried on any business and, since for the purposes of the profits to come under section 10, the profits must be from a business which is carried on, the profits in the present case could not be computed under section 10(1), but under section 12(1) of the Income -tax Act. He further took the view that the assessee could not be said to be a partnership firm within the meaning of the Partnership Act, since in order that the relationship of partnership should exist between parties, there must be an agreement to share the profits of a business which is carried on by all or any one of them acting for all and, as in the present case, there was no business carried on, there could not be such relationship between the persons which constituted the assessee firm. On this difference between the two members, the case was referred to a Bench of three Members to consider the question on which difference had arisen, namely, whether the income was assessable under section 10, and whether the assessee was a firm entitled to registration under section 26A. The Full Bench agreed with the view taken by the Accountant Member, and, in accordance with that view, allowed all the appeals which the assessee had filed. Thereafter, on an application under section 66(1), the Tribunal drew up the statement of the case and referred to this court the two questions which we have already stated.
It was contended before the Tribunal by the department that the assessee firm had come into existence for the sole purpose of providing an entity to divide up the selling commission and thereby assist the Upper India Commission Agents Ltd. in its taxation problem. It was pointed out in support of this contention that the assessee had done nothing to earn a very large income except to sign the selling agency agreement, the work necessary to earn it continuing to be done by the Upper India Company as before. It was the Upper India Company who knew the nature of the business and the constituents, and it was that company that had kept detailed books of all transactions connected with the sale of the products of the sugar mills. None of the partners of the assessee firm had looked to the work of selling these products and the small note -books and registers, which had been maintained by the assessee firm, were prepared at the close of each year from the entries contained in the books of the sugar mills and/or of the sub -agents. It was urged that there was no activity carried on by the assessee firm which could be called a business activity and the assessee firm, though styled as a firm, was merely an association of persons in receipt of income which could appropriately fall under section 12 of the Indian Income -tax Act. Majority of the Members of the Tribunal did not accept this contention. It is difficult to understand the stand taken by the department that the assessee firm had come into existence for the purpose of assisting the Upper India Company in its taxation problem. There is nothing on the record which shows that the persons constituting the assessee firm had any connection or relation with the Upper India Company, nor is there any evidence to show that the Upper India Company were responsible for bringing into existence the assessee firm. There was no doubt connection and relationship between the members of the assessee firm and the directors of the sugar mills or the directors of the managing agents of the sugar mills and it could also be said that the assessee firm had been brought into existence by the directors of the sugar mills or of the managing agency company. There is, however, no reason suggested why these directors, who are not shown to have any concern, connection or relationship with the Upper India Commission Agents Ltd., should bother to bring into existence the assessee firm in order to help the Upper India Commission Agents Ltd. Neither can the existence of the assessee firm help in the taxation problems, if there are any, either of the sugar mills or of the managing agency firm. The department's stand, therefore, that the assessee firm has been brought into existence with the ulterior object of helping in the taxation problems either of the Upper India Commission Agents Ltd. or of the sugar mills or the managing agents, is not sustainable.

(3.)MR . Joshi, learned counsel for the revenue, has urged before us that the assessee firm has been brought into existence with a view to entitling the persons who constituted the firm to earn some profits without doing anything and the firm has been constituted in order that the incidence of the taxation on the profits so distributed amongst them should be smaller Mr. Joshi has argued that although styled as a firm the assessee firm is only an association of persons and the profits which it has obtained are not profits obtained in business. It is only in receipt of non -business income which can be said to be profits under section 12(1) of the Act. His further argument is that, if the assessee could not be said to be carrying on business, it could not be a partnership firm under the Partnership Act and, therefore, would not be entitled to registration under section 26A.