COMMISSIONER OF INCOME TAX Vs. OFFICIAL LIQUIDATOR
HIGH COURT OF BOMBAY
COMMISSIONER OF INCOME TAX/EXESS PROFITS TAX
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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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