# THE COMMISSIONER OF INCOME-TAX, POONA v. BULDANA DISTRICT MAIN CLOTH IMPORTERS GROUP

- **Citation:** [1962] 1 S.C.R. 181
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Case number:** Civil Appeals Nos. 41-44of1960
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-poona-v-buldana-district-main-cloth-importers-1983
- **Pages:** 6

## Headnote

Income Tax-Business by group of persons-Profits ascertained and shared on joint basis-If Association of Persons-Indian
Income-tax Act, r922 (II of r922), s. J.
A scheme for the distribution of cloth was evolved by the
Deputy Commissioner of the District who appointed a group of
persons as sole agents for the import of cloth from Mills and distribntion of the same to retailers. Though for different periods
the group was differently constituted, one of the members, firm
'H' remained a common member. The profits of the business
were distributed amongst the members of the group in proportion of the capital contributed by them. The Income-tax Officer
issued notice under s. 22(4) of the Indian Income-tax Act, and
on production of books of account assessed the respondent as an
11Association of Persons". The High Court ¥/as of the opinion,
inter alia, that before a group of persons could be called an
"Association of Persons" it had to be established that they were
in the "nature of partners'', which was not so in the instant
case, as the members of the group were appointed by the Deputy
Commissioner as importers; the participation of the group could
not be held to be of free will but under compulsion and therefore \hey were not an "Association of Persons" within the
meaning of s. 3 of the Indian Income-tax Act.
Held, that where a business is carried on and the profits
·ascertained on a joint basis, and then distributed according to
the capital contributed by each member of the group, the group
is an "Association of Persons'.' and it makes no difference that
the scheme which produced profits was at the instance of or
under the control of the Deputy Commissioner or that he had
appointed the members constituting the group.
Commissioner of Income-tax, Bombay North v. Indira Balkrishna, [1960] 3 S.CoR. 5r3, referred to.
Mohamed Noorullah v. Commissioner of Income-tax, [rg6r]
3 S.C.R. 515, relied on.
CIVIL
APPELLATE
JURISDICTION:
Civil
Appeals
Nos. 41-44of1960.
March 6.
182
SUPREME COURT REPORTS
[1962]
r96x
Appeals by special leave from the judgment and
Th c --. .
order dated April 13, 1956, of the former Nagpur
~ 1;:::';::~"High Court in Misc. Civil Case No. 27 of 1954,
Poona
K. N. Rajagopal Sastri and D. Gupta, for the appelv.
!ant.
Buldana District
Main Cloth
Iniporters Group
J.M. Thakar, S.. N. Andley, Rameshwar Nath, P. L.
Vohra and J.B. Dadachanji, for the respondent.
1961. March 6.
The Judgment of the Court was
delivered by
Kapur J.
KAPUR, J.-These are four appeals by the Commissioner of Income-tax in Income-tax Reference made
under s. 66-A(2) of the Income-tax Act (hereinafter
termed the 'Act'). The question for decision is whether
the respondent is "an association of persons" within
the meaning of s. 3 of the Act.
The appeals relate to two Income-tax assessments
and two Excess Profits Tax assessments; the former for
the years 1946-47 and 1947-48 respectively, corresponding to the accounting years February 1, 1945, to
September 30, 1945, and October 1, 1945, to August
21, 1946, the latter are in regard to chargeable accounting periods February I, 1945, to September 30, 1945,
and October 22, 1945, to March 31, 1946. The decision
of the Excess Profits Tax appeals is consequent upon
the decision of the Income-tax appeals.
The facts may now be stated: In 1945 the Deputy
Commissioner of Buldana evolved a scheme for the
distribution of cloth in his district and with the sanction of the Government of C. P. appointed four persons,
viz., Haji Ahmed Haji Ali & Co., Bhanji Kuwarji,
Trimbaklal Tribhovan Das and Deolal Rangulal as
sole agents for the import of cloth from mills in
various places in India and for distribution of the
same to retailers.
Two of them Haji Ahmed Haji
Ali & Co. and Bhanji Kuwarji carried on the business
as from February 1, 1945, to the end of September
1945. The profits of the business in proportion of the
capital contributed by these persons were distributed
between these two persons.
After September 1945
there was a

## Text

•
1 S.C.R. SUPREME COURT REPORTS
181
THE COMMISSIONER OF INCOME-TAX,
POONA
v.
BULDANA DISTRICT MAIN CLOTH
IMPORTERS GROUP
(J. L. KAPUR, M. HIDAYATULLAH and
J. c. SHAH, JJ.)
Income Tax-Business by group of persons-Profits ascertained and shared on joint basis-If Association of Persons-Indian
Income-tax Act, r922 (II of r922), s. J.
A scheme for the distribution of cloth was evolved by the
Deputy Commissioner of the District who appointed a group of
persons as sole agents for the import of cloth from Mills and distribntion of the same to retailers. Though for different periods
the group was differently constituted, one of the members, firm
'H' remained a common member. The profits of the business
were distributed amongst the members of the group in proportion of the capital contributed by them. The Income-tax Officer
issued notice under s. 22(4) of the Indian Income-tax Act, and
on production of books of account assessed the respondent as an
11Association of Persons". The High Court ¥/as of the opinion,
inter alia, that before a group of persons could be called an
"Association of Persons" it had to be established that they were
in the "nature of partners'', which was not so in the instant
case, as the members of the group were appointed by the Deputy
Commissioner as importers; the participation of the group could
not be held to be of free will but under compulsion and therefore \hey were not an "Association of Persons" within the
meaning of s. 3 of the Indian Income-tax Act.
Held, that where a business is carried on and the profits
·ascertained on a joint basis, and then distributed according to
the capital contributed by each member of the group, the group
is an "Association of Persons'.' and it makes no difference that
the scheme which produced profits was at the instance of or
under the control of the Deputy Commissioner or that he had
appointed the members constituting the group.
Commissioner of Income-tax, Bombay North v. Indira Balkrishna, [1960] 3 S.CoR. 5r3, referred to.
Mohamed Noorullah v. Commissioner of Income-tax, [rg6r]
3 S.C.R. 515, relied on.
CIVIL
APPELLATE
JURISDICTION:
Civil
Appeals
Nos. 41-44of1960.
March 6.
182
SUPREME COURT REPORTS
[1962]
r96x
Appeals by special leave from the judgment and
Th c --. .
order dated April 13, 1956, of the former Nagpur
~ 1;:::';::~"High Court in Misc. Civil Case No. 27 of 1954,
Poona
K. N. Rajagopal Sastri and D. Gupta, for the appelv.
!ant.
Buldana District
Main Cloth
Iniporters Group
J.M. Thakar, S.. N. Andley, Rameshwar Nath, P. L.
Vohra and J.B. Dadachanji, for the respondent.
1961. March 6.
The Judgment of the Court was
delivered by
Kapur J.
KAPUR, J.-These are four appeals by the Commissioner of Income-tax in Income-tax Reference made
under s. 66-A(2) of the Income-tax Act (hereinafter
termed the 'Act'). The question for decision is whether
the respondent is "an association of persons" within
the meaning of s. 3 of the Act.
The appeals relate to two Income-tax assessments
and two Excess Profits Tax assessments; the former for
the years 1946-47 and 1947-48 respectively, corresponding to the accounting years February 1, 1945, to
September 30, 1945, and October 1, 1945, to August
21, 1946, the latter are in regard to chargeable accounting periods February I, 1945, to September 30, 1945,
and October 22, 1945, to March 31, 1946. The decision
of the Excess Profits Tax appeals is consequent upon
the decision of the Income-tax appeals.
The facts may now be stated: In 1945 the Deputy
Commissioner of Buldana evolved a scheme for the
distribution of cloth in his district and with the sanction of the Government of C. P. appointed four persons,
viz., Haji Ahmed Haji Ali & Co., Bhanji Kuwarji,
Trimbaklal Tribhovan Das and Deolal Rangulal as
sole agents for the import of cloth from mills in
various places in India and for distribution of the
same to retailers.
Two of them Haji Ahmed Haji
Ali & Co. and Bhanji Kuwarji carried on the business
as from February 1, 1945, to the end of September
1945. The profits of the business in proportion of the
capital contributed by these persons were distributed
between these two persons.
After September 1945
there was a change in the group of importers and
some others also joined the group and the profits of
..
•
..
l S.C.R. SUPREME COURT REPORTS
183
•
the subsequent period were similarly distributed
1961
betw~en tdhe members .of the hgroup .as
1
it wa~bthend The co:;;:issioner
constitute in proport10n to t e capita contn ute
of Tncome-tax,
by each of them.
Poona
On March 12, 1947, the Income-tax Officer issued a
v.
notice under s. 22(2) of the Act to the respondent Bulda~a District
calling upon it to submit a return of the income of the
Main Cloth
group for the assessment year 1946-4 7.
This was Importm Group
served on Haji Ahmed Haji Ali & Co but that firm
Kapur J.
did not furnish any return contending that there was
no privity of contract among members of the group.
A notice was then issued under s. 22(4) of the Act and
on the production of the books, the Income-tax Officer
ascertained the income for the year ending September
1945 and assessed liability for payment of income-tax
under s. 23( 4) of the Act. He assessed the respondent
as "an association of persons" both for purposes of
Income-tax and Excess Profits tax.
An application
under s. 27 of the Income-tax Act was dismissed by the
Income-tax Officer.
Similarly for the year 1947-48 a
notice was again issued and served on Haji Ahmed
Haji Ali & Co. and similarly the group was assessed as
an association of persons to Income-tax and it was
also assessed to Excess Profits tax for the period
October 22, 1945, to March 31, 1946, and an application under s. 27 of the Income-tax Act was dismissed
in regard to this period also.
Appeals were taken against the orders of assessments of Income-tax and Excess Profits tax but they
were dismissed by the Appellate Assistant Commissioner. Appeals were then taken to the Income-tax
Appellate Tribunal but they also were dismissed by an
order dated April 18, 1950. An application for
making a reference to the High Court was dismissed
by the Tribunal but an order was obtained from the
High Court under s. 66(2) of the Act and four questions were ordered to be referred to the High Court.
The question relevant for the appeals is the following.
"Whether under the facts and circumstances of
the case, the Buldana District Main Cloth Importers'
Group constituted an 'Association of persons' within the meaning of section 4 of the Income-tax Act,
184
SUPREME COURT REPORTS
[1962]
•
I96I
1922, and was liable to be assessed to income-tax
n c
. .
and excess profits tax in that status?"
~~ !>~;;::~;::""The order of the Tribunal dated April 18, 1950, shows
Poona
' that for different periods the group which imported
v.
the cloth was differently constituted but Haji Ahmed
Buldana District Haji Ali & Co. was a common member. The books
Main Cloth
relating to the business were maintained by Ha.ji Ahmed
Importers G'°up H ·· Al' & C
d
t'
h
h
·
_
aJI
1
o. an every 1me t. ere was a c ange Ill
Kapur J.
the constituents of the group separate set of books was
maintained by them and the profits from those enterprises were divided between the various persons who
formed the group at the material times. It was contended before the Tribunal that there was no "Association of persons" and that the cloth imported was issued
to the importers who sold the cloth on their own
account. The Tribunal however found:-
"The accounts themselves show that the import
and distribution of cloth was done on joiut basis.
The purchases were on joint account, the sales were
on joint account, the profit was first ascertained on
the joint account and then distributed according to
their agreed share of profits. In our opinion the
assessment has been rightly made on the status of
an association of persons."
The High Court, when the matter went to it after the
statement of the case by the Tribunal, held that before
a group of persons could be called an "association of
persons" it had to be established that they were in
the nature of partners, i.e., the mem.):Jers of the group
of their own volition or free will had joined in a venture with a view to earn profits.
As the members of
the group were appointed by the Deputy Commissioner
as importers their participation could not be held to
be of free will but it was under compulsion and therefore they were not an "association of persons" within
the meaning of the Act. The High Court referred to
and relied upon various cases.to which it is not necessary to make any reference.
As to what constitutes an association of persons was
laid down by this Court in the Commissioner of Income-tax, Bombay North v. Indira Balkrishna (1) and in
(I) [1960] 3 5.C.R. 513.
•
1 S.C.R. SUPREME COURT REPORTS
185
Mohammad Noorulla v. Commissioner of Income-tax (1)
'96'
decided on January 18, 1961, where the business was The Commissioner
carried on as one unit and by the consent of all the of tncome-tox,
parties who were heirs of deceased Mohammad Omer
Poona
Sahib and during the period when an administration
v.
suit between them was being fought in courts of law. Buldana Dist.ice
Main Cloth
In the present case the Tribunal has found that the I>nporem Group
import and distribution of cloth which was the business carried on by the respondent was done on a joint
H apur J.
basis. The purchases were joint; so were the sales
and the profits were ascertained on a joint basis and
then distributed according to the capital contributed
by each member of the group.
This finding which is
one of fact makes the respondent an "association of
persons" and it makes no difference that the business
was carried on because the Deputy Commissioner of
the district had appointed the members constituting
the group to import and distribute the cloth in the
district.
The respondent, it is not disputed, worked the
scheme which was framed by the Deputy Commissioner and the working of the scheme produced profits
and it made no difference that the scheme was at the
instance of or under the control of the Deputy Commissioner.
Dealing with the argument of similar control
Sarkar, J., in Comm·issioner of Income-tax, Madhya
Pradesh & Bhopal v. Vyas and Dhotiwala (') observed
as follows:-
"The Tribunal thought that since the scheme was
completely under the control of the Deputy Commissioner, the assessees could not be said to have
carried on business by working the scheme.
We
are unable to see that the fact of the control of the
Deputy Commissioner can prevent the working of
the scheme by the assessees from being a business
carried on by them. In our view, it only comes to
this that the assessees had agreed to do business in
a certain manner."
We are in respectful agreement with this observation.
In our view the respondent was an association of
(1) [1961] 3 S.C.R. 515.
24
(2) [1959] Supp. t S.C.R. 39, 43 •.
186
SUPREME COURT REPORTS
[1962]
r96r
persons and was rightly so assessed to Income-tax
-
and Excess Profits Tax.
The Commission"
Th
]
h
c
]]
d
· h
of Income-tax,
e appea s are t ere1ore a owe wrt
costs. One
Poona
hearing fee.
v.
Buldana District
Main Cloth
Importers Group
Kapur 1
March 7.
Appeals allowed.
THE COMMISSIONER OF INCOME-TAX,
MAD HY A PRADESH
v.
SETH KHUSHAL CHAND DAGA
(J. L. KAPUR, M. HIDAYATULLAH and
J. c. SHAH, JJ.)
Income Tax-Set-of! of loss-Amount computed not notified in
writing-Effect-Income-tax Act, 1922 (XI of 1922), ss. 24, 24(3).
For the accounting year 1941 the assessee's profits from his
share in an unregistered firm were set off against his losses in
the individual business and the Income Tax Officer determined
the loss to be carried forward at Rs. 53,840, but did not notify
to the assessee by order in writing the amount of the Joss as
computed by him as required by s. 24(3) of the Act. The assessee appealed against the assessment but did not question the
amount of the loss which had been determined. In the year
1942-43 the assessee claimed to re-open the question of the Joss
to be carried forward stating that it was Rs. 2,u,760. This
contention was rejected by the Tribunal.
The contention was
again raised by the assessee in the assessment years 1948-49 and
1949-50.
The question was whether the loss which had been determined and ordered to be carried forward must be deemed to
haye become final because no appeal was filed against that
determination.
Held, that computation of the amount of loss under s. 24 of
the Income-tax Act does not become final unless the Income-tax
Officer notifies by order in writing, the amount of the loss as com-
. puted by him to the assessee. The assessee was entitled to have
•