A. K. Sarkar J. - (1.) This is an appeal brought by special leave against the judgment of the High Court at Nagpur, delivered on a reference under S. 66 (1) of the Income-tax Act. The appeal is by the Commissioner of Income-tax, Madhya Pradesh and Bhopal. The respondents are the assessees Vyas and Dhotiwala. The respondents have not appeared in this appeal. We shall presently set out the facts but before we do that, we wish to state that the assessment years concerned were 1945-46 and 1946-47. Though there were two separate assessment orders in respect of these years, ultimately when they came up before the Appellate Tribunal they were consolidated into one appeal. The appeal before us likewise concerns both these assessment years.
(2.) It appears that in or about July 1943 when considerable difficulty was being felt about cloth, the Deputy Commissioner, Amraoti, evolved a scheme to solve that difficulty. Under that scheme Kisanlal Vyas and a firm called Edulji Framji Dhotiwala who have in these proceedings been referred to as Dhotiwala, undertook to finance the scheme without charging any interest or profit and were appointed as financiers and also distributors of a variety of cloth called standard cloth for the town and camp of Amraoti and certain areas in the interior. It is not necessary to set out the various details of the scheme and it will be sufficient to state that Vyas and Dhotiwala, who as an association of persons are the assessees concerned, agreed to open an account in the Imperial Bank of India to be operated by them out of which the purchases of the cloth were to be financed. The orders for the cloth were to be placed by the Government with the mills and on the arrival of a consignment of cloth, the assessees were to pay to the Deputy Commissioner, Amraoti, the value of the consignment together with 6 1/4 per cent, of the ex-mill price. The consignment was thereupon to be opened and its contents checked by the assessees and the officials and delivered to the assessee on their granting a receipt for the same. The Deputy Commissioner would pay 4 1/2 per cent of the ex-mill price to the assessees out of the amount paid by the latter as aforesaid for contingent expenses of working the scheme. The scheme provided that the contingent expenses were not to exceed 3 per cent, of the ex-mill price. The cloth coming to the hands of the assessees was to be distributed in Amraoti town and camp through a shop to be opened by the assessees and in the interiors of the area concerned through Tehsildars with Patils under them. The substance of the arrangement of distribution appears to have been that it would be entirely under the control of the Deputy Commissioner who made himself responsible to the assessees for the sale proceeds receivable from the Tehsildars. The Deputy Commissioner was to decide the price for which the cloth was to be sold to the consumers and also the persons entitled to buy the cloth, out of the sale proceeds the Deputy Commissioner was to pay to the assessees whatever they had advanced on account of the cloth. The most important provision in this scheme in paragraph 14 which is set out below: Profits resulting from the scheme shall be utilised for such charitable purposes as may be decided on by the Deputy Commissioner in consultation with the advisory committee appointed to supervise the scheme.
(3.) It appears that the books of the assessees showed Rs. 34,737 for the assessment year 1945-46 and Rs. 17,682 for the assessment year 1946-47 as profits earned in working the scheme. The Income-tax Officer assessed the assessees to tax on the profits so earned. The assessment orders made by this officer would appear to show that the only point urged by the assessees before him against the assessment was that the income was exempt from taxation under S. 4 (3) (i-a) of the Indian Income-tax Act, 1922. The officer rejected this contention. The assessees went up in appeal to the Appellate Assistant Commissioner, before whom the same contention appears to have been repeated. The Appellate Commissioner confirmed the order of the Income-tax Officer. The assessees then appealed to the Appellate Tribunal. The Tribunal held that the assessees had objected to the assessment before the Income-tax Officer on two grounds, namely, that the income was not the income of the assessees and that the income was exempt from taxation under S. 4 (3) (i-a), as appeared from their letter dated January 22, 1947. One of these alone had been dealt with by that officer, as appears from his order earlier referred to. The Apellate Tribunal agreed with the contention of the assessees that they were not liable to be taxed on the profits because these did not form their income. The Tribunal was of the view that the scheme was the scheme of the Deputy Commissioner and completely under his control; that the assessees were merely the financiers and also managers under the Deputy Commissioner to carry out the scheme and that the assessees only helped to work the scheme. The Tribunal held that the profits that may have resulted from such working were not therefore theirs nor represented their income and the assessees could not be assessed to income-tax thereon. In this view of the matter the Tribunal set aside the orders of assessment.;