Decided on October 05,1972



KANTAWALA, J. - (1.) BY this reference under S. 66(1) of the Indian INCOME TAX ACT, 1922, r/w S. 21 of the EPT Act, the question that is referred for our determination is : "Whether, on the facts of the case, the Tribunal is right in holding that the Wholesale Cloth Dealers' Importers' Group did not form a partnership ?"
(2.) DUE to scarcity of cloth in C. P. and Berar, the Government evolved a scheme for distribution of cloth under its supervision and control. Three categories of dealers in the new set up were classified. Under this scheme they were known as importers, semi - wholesalers and retailers. Government selected and appointed certain people out of the wholesale dealers of cloth who were importers of cloth from other States as a group of importers. These importers were not permitted to do business in cloth except as directed by the Government ; no person other than a person or a party who was selected in the importers' group could import textile cloth into the area. Pursuant to this policy, in Akola District, five dealers whose names are specified in the statement of case were appointed as a group of importers for the district. At each time of selection of groups, a nominee was chosen by the Government for the purpose of distribution to semi -wholesalers under the directions of the Deputy Commissioner. The nominee so selected on each occasion made distribution of cloth as directed by the authorities and collected the sale proceeds. The net profits as a result of these operations were distributed amongst the five members of the group in certain fixed proportion on each occasion. The proportion was arrived at by taking into account the turnover of each importer in a basic period. For the asst. year 1947 -48, this group of five importers whose names are specified in the statement of case were assessed by the ITO as an unregistered firm, on the footing that it was a partnership firm, which was not registered under S. 26A of the Act. The ITO took the view that having regard to the nature of the business carried on by this group, all the legal requirements to constitute a partnership -firm were fulfilled in the case and as the firm was not registered, it was liable to be assessed as an unregistered firm. This finding of the ITO was confirmed by the AAC in the appeal preferred by the assessee. He took the view that in fact all the members were doing business jointly ; that definite shares were fixed ; that profits were being divided in definite shares and this in his opinion was sufficient to constitute them into a partnership. Before the AAC, an application was made in the alternative for registration of the partnership -firm. Such application for registration was rejected by him on several grounds stated in his order. On appeal by the assessee, the Tribunal held that the scheme of distribution of cloth was organised and carried out by the Government through the above persons ; that no business was carried on in partnership and that it accordingly set aside the order passed by the ITO.
(3.) MR . Joshi, on behalf of the Revenue, has contended that all essential ingredients required to constitute a partnership in law are fulfilled ; that there was an agreement entered into by all the members of the group of importers concerned ; that the agreement provided for sharing the profits of the business and that the business was carried on by a nominee appointed by Government on behalf of the members of the group. According to his submission, these factors are established in the present case and are sufficient to constitute a partnership in law. When a partnership comes into existence is provided in S. 4 of the Partnership Act, 1932. A partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Before a partnership is constituted under law, three requirements must be fulfilled, viz., (1) there must be an agreement entered into by all the persons concerned, (2) the agreement must be to share the profits of a business and (3) the business must be carried on by all or any one of the persons concerned acting for all. In view of these ingredients, an agreement inter se between the partners is sine qua non for the constitution of a partnership. It is not necessary that such agreement must be in writing. It can be even implied either from conduct or otherwise. Mr. Joshi is unable to point out any piece of evidence which goes to support that such an agreement existed between the five persons of the wholesalers' group. The members of the group themselves have no choice as to who should be selected for the wholesalers' group, the selection being made by the Government, the members so selected have no choice but to act as contemplated under the scheme. Thus, there is no evidence whatsoever that an agreement existed between the persons concerned to form a partnership of the importers' group. The matter, however, does not rest there. It is further required that before the partnership is formed, the business must be carried on by all or any one of the persons concerned, acting for all. In view of the scheme and policy laid down by the Government, it is the nominee chosen by the Government who has to do the work of distribution of cloth to semi -wholesalers. Thus, there is no agency inter se between the members of the group but a man chosen by the Government has to do the work of distribution. In what manner the business is to be carried on is not even left to the discretion of these persons. A nominee selected by the Dy. CIT of the district has from time to time to import cloth that may be allotted and to distribute the said cloth among the semi -wholesalers in accordance with the orders issued by the Government. Thus even the nominee so selected has no volition as regards the manner in which the business has to be carried on. Simply because ultimately whatever net profit is earned is divided, it cannot be understood that in law a partnership came into existence. In our opinion, the Tribunal was right in taking the view that no business as such was carried on by a partnership as suggested on behalf of the Revenue. ;

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