1965 PLP 349 (PTD)

Some ten days later, the Authority nominated two persons (Pir Badshah Qadri and Shaikh Abdul Hasan) to take the sixth share and these may be described as group No.

5. In consequence of the second order of the Authority, groups Nos. 2, 3 and 4 commenced Management of the cinema. At a lat6r date viz., the 31st October 1951, they executed an agreement among themselves for the operation of the cinema, which provided for the payment by them of the fixed sum mentioned in the order of the Authority to the group No. 1 and a specific sum to each of the two persons in the fifth group, which is in correct proportion to the amount specified for payment to the first group. However, group No. 5 had received these amounts from the managing group from the time of their nomination. It would seem that the actions of the 22nd January 1951, and the 31st October 1951, were steps in implementation of the original order of the 6th December 1950, the only practical difference being a transfer of the Management of the cinema to groups Nos. 2, 3 and 4 by the order of the 22nd January 1951. The question as to whether the groups or any of them constituted an association of persons arose in respect of the assessment of tax for the assessment year 1952-1953. It should be mentioned that the allotment has long since come to an end and the cinema has for several years now been in the possession of quite other persons. For the year 1952-53, the five allottee groups were assessed as an "association of persons", disallowing a deduction of Rs. 38,911 claimed by the managing groups being the sum paid by them to groups Nos. 1 and

5. There was an appeal and the Appellate Assistant Commissioner held that the payment to group No. 1 was to be treated as a, charge on the profits of the concern, and therefore the deduction of the amount of Rs. 23,992 paid to this group should have been allowed, but as to the sum of about Rs. 14,919 paid to group No. 5, the deduction was rightly disallowed, the reason given being that there was no written order from the Rehabilitation Authority for making this payment. The matter going before the Income-tax Appellate Tribunal, the conclusions of the Appellate Assistant Commissioner were confirmed in the following words, viz :- "We are of the opinion that after this order of the Rehabilitation Commissioner the first group of persons cannot be said to be the members of the association. The order of the Rehabilitation Commissioner directed payment of Rs. 2,125 monthly and this was a charge on the income derived from the business . . . ." "As to the other amount of Rs. 708 payable to each of the two persons forming the 5th Group there is no written order of the Rehabilitation Commissioner. We agree with the view of the Appellate Assistant Commissioner that in the absence of such an order the agreement made with the fifth group was of no effect." This decision by the Income-tax Appellate Tribunal was given in the disposal of three separate appeals. The first appeal was by the Income-tax Officer challenging the correctness of the Appellate Assistant Commissioner's direction that a deduction of Rs. 23,992 paid to group No. 1 was admissible. The second appeal was by the assessee claiming that deduction should have been allowed to the full amount of the sums paid to both groups Nos. 1 and

5. The third appeal related to refusal of registration as a firm of groups Nos. 2, 3 and 4, but that is a question with which we are not concerned in this appeal. An application was made to the Tribunal by the Star Company being group No. 2, for reference to the High Court of two questions, namely, (1) whether the allottees, viz., all the five groups, constituted an "association of persons", and (2) whether each alleged group should be assessed on its separate income. The Tribunal referred only a single composite question to the High Court, expressed as below :- "Whether on facts and circumstances of the case the Tribunal rightly held that the allottees of the Majestic Cinema were to be assessed as `Association of Persons' and not separately ?" It is clear that the reference to the Tribunal having "held that the allottees of the Majestic Cinema were to be assessed as an `association of persons" was incorrect. The actual finding in this respect was that only groups 2, 3, 4 and 5 out of the five allottee groups were to be treated as an association of persons. When the case came up before the High Court, this anomaly gave rise to some difficulty, which the High Court resolved by interpreting this part of the question as being confined to the actual finding of the Tribunal, viz., that groups 2, 3, 4 and 5 constituted an association of persons. The learned Judges next expressed the opinion that in order to constitute a number of individuals into an association of persons within the meaning of the Income-tax Act "what is necessary is that there should be a joint enterprise, the purpose of which should be to produce profit and income." They then proceeded to express the opinion that the Tribunal had "rightly held" that the first group could not be said to be a member of the association in question, and that the reason given, namely, that the first group was to receive a fixed amount, irrespective of any profit or loss out of the enterprise, was a good reason. But the learned Judges could not see how after reaching this conclusion with respect to group No. 1, the Tribunal "could rightly reach a different conclusion with regard to group No. 5." They thought that both groups Nos. 1 and 5 were "exactly in the same position vis-a-vis the cinema business with which they had nothing to do, and were merely to receive a certain specified amount regardless of any profit or loss." They thought that the payment which group No. 5 was to receive from the managing groups must be deemed to flow from the order of the Rehabilitation Commissioner dated the 22nd January 1951. Upon this reasoning, the learned Judges returned an answer in the negative to the question referred which in the long form of words could be put as below :- "The Tribunal wrongly held that groups Nos. 2, 3, 4 and 5 were to be assessed as an association of persons and not separately." As the learned Judges had already excluded consideration of the position of group No. I from the purview of the question, the material effect of the answer which they returned was to exclude group No. 5 from the association of persons in the case. Special leave to appeal was granted to the Income-tax Commissioner to appeal to this Court against this conclusion of the High Court, on a petition which raised the following contentions. Firstly, it was submitted that the High Court could not, on its own view of the question referred to it, decide upon the correctness of the conclusion of the Tribunal regarding the status of group No. 1, and use that as a ground for excluding group No. 5 from the association and it was stressed that the position of group No. 5 was distinguishable 'from group No.

1. It was urged that manifestly, the case was one satisfying the conditions laid down by the High Court for a finding as to an association of persons, viz., that there was a joint enterprise, and that its purpose was to produce profit and income. It was urged further that the High Court's finding that the monthly payment to group No. 5 "must be deemed to flow from the order of the Rehabilitation Commissioner" was wrong. In the concise statement furnished by the appellant, the first point taken was that the High Court was wrong in holding that it was precluded from going into the question whether group No. 1 was a member of the association of persons. But having held to this effect, it was wrong in finding that the decision of the Tribunal on this point was correct and then holding, on this basis alone, that group No. 5 also was not a member. The further contention was made, expressly without prejudice to the first mentioned contention that the cases of groups Nos. 1 to 5 were distinguishable, because group No. 5 had voluntarily accepted Management by groups Nos. 2, 3 and 4, in lieu of a fixed payment. It was finally urged that the High Court should have come to the conclusion that group No. 5 was a member of the association of persons. Thus, in consequence of the interpretation placed upon the question as referred by the Tribunal and of the presentation of the Income-tax Commissioner's case before this Court in the petition for leave to appeal and in the concise statement, the question before this Court has been narrowed down to the single point whether group No. 5 is to be regarded as a member of an association of persons along with groups Nos. 2, 3 and

4. Upon the argument presented by Mr. Noorul Arfin for the Income-tax Commissioner, the answer to this question would turn upon considerations which would unfailingly include group No. 1 as well within the association of persons. Mr. Noorul Arfin throughout his argument maintained that the correct view of the case, in accordance with principle and precedent judgments, was that group No. 1 was also within the association, but in view of the narrowing down of the question which has taken place in the proceedings prior to the coming of this matter before this Court, he was only able to advance this as a ground in support of his case for the inclusion of group No.

5. We consider it appropriate at this stage to make two observations relevant to the complete dispensation of justice in cases of this kind. The first is that it might have been a more appropriate course for the High Court to take, when it discovered a clear anomaly in the question referred to it, to send the case back to the Tribunal for clarification of the question, so that the High Court should have known whether it was asked to consider a question of law applying to the whole matter before the Income-tax Authorities, or only to a part. As a result of the view which the High Court took, its answer was confined to a part of the matter before the Income-tax Authorities, a significant part, in respect of which the decision was covered by the same principle, being effectively (from the point of view of imposition of tax) excluded as a result of the High Court's interpretation of the question referred, It is evident that if the decision of the question as to whether the five separate groups constituted an association of persons was given in accordance with a principle laid down, as being applicable to the case, on its facts, as a whole, the imposition of tax in accordance with law would be on a more just basis than by division of the case into parts and imposition of tax in respect of each part on a differential basis. The order of the Tribunal was made in relation not to a single appeal, but to two appeals, and taken together, these appeals raised as a main and primary question the point whether the relationship between the five groups was such as to constitute them under the Income-tax law as an association of persons. In the view which we take of the present case, the circumstances established that at all material times, the five groups did constitute, in the eye of principle, a single association of persons, but as the case has proceeded, there is a resultant differentiation in the application of tax of which the consequence may well be inconsistent with equality in respect of taxation, and perhaps even with justice. The second observation which we have to make is of a general nature. It is that consideration should be given to the question whether the procedure of ascertainment of the proper law applying to cases arising out of imposition of the income-tax, by the method of reference under section 66 of that Act is, in actual practice, entirely apt for the resolution of the questions of law arising, owing to the danger which appears in a fairly considerable number of cases, of there being produced through this process a distortion of the case both as to facts and law in its presentation to the High Court. It is in our view a matter for serious consideration whether a truer interpretation of the legal provisions could not be achieved by a process of direct appeal to the High Curt from the decisions of the Tribunal, so limited however, that the determination of questions of fact is left within the exclusive responsibility of the Tribunal, subject to directions by the High Court, as to error of law or material error of procedure) in such determination. We observe that in nearly all cases the question referred is prefaced by the expression "in the facts and' circumstances of the case", and on occasions, these words seem to convey a request for a final ascertainment of the facts and circumstances. Cases are not infrequent where the presentation of ?facts and circumstances' in the `statement of facts appears in. the course of the argument before the High Court and the Supreme Court, not to be entirely consistent with those appearing from the record. The Courts are then faced with a difficulty in formulating an answer to the question of law which would not operate a distortion in the imposition of the tax. In the present case, the facts are certainly clear, and the indefiniteness appeared in the question as referred to the High Court, but that is without effect on the observation that a direct appeal from the decisions of the Income-tax Tribunal in the two appeals before, it, might have led to a more consistent decision in the present case, on the basis of the settled facts as they appeared, The procedure of reference is cumbersome and experience show increasingly that it lends itself to possibilities of distortion not only in the presentation of facts relevant to the question of law referred, but even to distortion of the question of law itself. We think it is a mater for serious consideration by the authorities concerned whether the present procedure should not be replaced by a direct appeal, limited as to facts, to a Superior Court. A further clear advantage from a direct appeal would be a considerable saving of time in the finalisation of taxation matters. The view taken by the High Court that to constitute an association of persons within the meaning of the Income-taxi Act what is necessary is that a number of individuals. should be associated with each other in a joint enterprise for the purpose of profits and income, is, we say so with respect, entirely correct and consistent with precedent judicial decisions. There are some observations in the orders of the Income-tax Authorities regarding the association between the five groups of allottees in the present case being in its origin not a voluntary act of these groups, but one which was forced upon them by order of the Rehabilitation Commissioner. We do not see that the involuntary nature of the association has any material effect upon the fact that it was an association. What the Rehabilitation Commissioner did was to constitute a consortium of these five groups for the" purpose of operating the cinema and appropriating the income from it to themselves in stated proportions. Consortiums are of frequent: occurrence in present day industrial activities. A reported case of business firms being brought into association with each other by order of an executive authority is that of the Buldana District Main Cloth Importers Group's case (42 ITR 172). The business of distribution of cloth in the district of Buldana was in the year 1945 entrusted by the Deputy Commissioner of that district to a group of four persons, and the facts of the case show that for different periods, the group was differently constituted, but whenever there was a change a new set of books was maintained. The profits from this enterprise were divided between the persons constituting the group at the material time. Cloth was procured and sold on a joint basis and profits were similarly ascertained and then distributed. It was held by the Supreme Court of India that each group was an association of persons, and that the decision of the High Court to the contrary, on the basis that the association among the groups was brought about by compulsion and not by the free consent of the members was not correct. Other cases of persons being brought together in such an association involuntarily to which Mr. Noorul Arfin, referred are those of Dwarakanath Harischandra Pitale's case (511 TR 716) and Muhammad Noorullah's case (42 I T R 115). In the first case, the assessees were two brothers who had inherited joint property under the will of their grand-father, and had maintained the property jointly and had managed it ever since as joint owners. A Division Bench of the Bombay High Court held that although their association was not originally of a voluntary nature, yet as soon as they "elected to retain the property and manage it as a joint venture producing income" they became an association of persons within the meaning of Income-tax Act. The element of enterprise and jointness in such enterprise, was supplied by the agreement to hold and manage jointly. The case of Muhammad Noorullah was also one of acquisition of property by inheritance. The individuals were the heirs of a Mohamedan, who carried on a business, which after his death continued to be operated as a single business unit. There had been brought a suit for administration of the estate of the deceased and for separation of the shares of the co-heirs but in the view of the Supreme Court of India, that did not affect the incidence of taxation, for none of the co-sharers wanted to break the unity of control of the business or its continuity, and the business was of such a nature that it could not be carried on without such consensus. In fact the co-heirs had sought appointment of receivers to manage the business, but in the premises it would appear that if by agreement among themselves, one of them had undertaken to manage the business and to share the income with the others in due proportions, the case would have been no different. As in the case of Dwarakanath, the association was established by the agreement to retain the business and to carry it on as a single unit, for the purpose of producing income which was to be shared. Mr. Pasha placed before us, on behalf of the assessee (in particular group No. 5) the case of Indra Balkrishna (1960 I T R 546), where three widows were receiving income, jointly, from the estate of their deceased husband. The judgment emphasised that under Mitakshara law, widows succeed as coheirs and joint tenants. The mere fact of thus receiving the income was held insufficient to constitute them an "association of persons". There was nothing in the nature of a joint enterprise. The ratio decidendi of these cases is clearly applicable to the facts of the present case and is sufficient to avoid any conclusion that because the five groups of the allottees were brought into association with each other by order of an executive authority', there was no partnership between them, or that they were not within the meaning of an association of persons in the light of Income-tax Act. It is clear that the cinema was throughout run as a single business unit, and it was run for the making of profit or income. By the second order of the Rehabilitation Commissioner. which has been thought by the Income-tax Appellate Authority to have the effect of removing the first group from the association, nothing more was in our opinion effected than a transference of the responsibility of management from two persons in group No. 1 to the persons who were members of groups Nos. 2, 3 and

4. What has been overlooked in the orders of the Income Tax Authorities as well as in the judgment of the High Court is that this transferance of management was not only conditional on the payment of a sum of Rs. 2,125 p.m. to group No. 1, but was also subject to another condition namely, that if the aforesaid payments were not made regularly, the management would revert to group No. 1, under different conditions as to payment of specified sums to groups Nos. 2, 3 and

4. This second condition should, in our opinion, have been sufficient to show that group No. 1 despite its acceptance of a monthly payment nevertheless retained a real and lively interest in the running of the enterprise, which in a certain contingency, it was entitled to undertake, and thus to produce income which all the groups were to share. On this finding, the view of the High Court that group No. 5 was also disassociated from the managing groups is unsustainable. It is evident that group No. 5 was given a real interest in the joint enterprise, together with a specified share in the profits, The arrangement by which groups Nos. 2, 3 and 4 continued to manage the enterprise after the induction of group No. 5, can only have been made within the consent of the latter group. Their acceptance of a limited sum per month instead of a one sixth share of the net results of the working, which might have been profit or might have been loss, and if profit, might not have been sufficient to provide the aforesaid sum, clearly indicates entrustment of the management to the managing groups. Moreover, the sum in the case is clearly in proportion to that fixed in favour of group No. 1, which itself was evidently based on an estimate of the possible profits of the enterprise made by the Rehabilitation Commissioner in January 1951. Therefore, it would seem that group No. 5 had a direct interest both in the enterprise and in the profits thereof. The result is that we find that the High Court was wrong in excluding group No. 5 from the association, and we accordingly allow the appeal and accepting the interpretation placed upon by the High Court on the question referred to it, we return the following answer to the question, viz., the Tribunal rightly held that groups Nos. 2, 3, 4 and 5 being allottees of the Majestic Cinema were to be assessed as an association of persons. The appeal is allowed accordingly, but in the circumstances we leave, the parties to bear their own costs. A. H.??????????????????????????????????????????????????????????????????????????????????????????????????? Appeal allowed.