P L D 1962 (W (PLP)

FARUQUI, J.--‑ The Income‑tax Appellate Tribunal by its order dated 7th January 1958 has, under section 66 (1) of the Income tax Act, referred the following three questions to this Court for decision:‑ "(1) Whether, in the circumstances of the case, It was open to the Income‑tax Officer at all to make an assessment on the applicant in view of the fact that he had already included the income from the gram business in the personal assessments of the Pakistan Roller Flour Mills, the Light Flour Mills and the Faruqui Flour Mills ? (If the answer be in the affirmative). (2) Whether the Income‑tax Officer was justified in making the assessment in the status of an Association of Persons 7 (3) Whether the notice Issued under section 34 was valid in law?" The relevant facts are concisely stated In the statement of the case in the referring order and may be conveniently reproduced:‑ "(2) We are concerned with the charge year 1951‑52, the account year being the financial year 1950‑

51. The facts as given in our appellate order are accepted as correct. The assessment was made under section 23 (4), read with section

34. In July 1950, the then Government of Sind invited tenders for the purchase of a certain quantity of gram. The Pakistan Roller Flour Mills (a registered firm) offered a tender which was accepted on the 6th July 1950. Along with the tender the firm also sent a cheque for Rs. 50,000 by way of security. After the acceptance of the tender a further sum of Rs. 1,50,000 was paid to Government. The whole amount of Rs. 2,00,000 was contributed by three parties in the following proportion:

Rs. (a) The Pakistan Roller Mills 70,000 (b) The Light Flour Mills 65,000 (c) The Faruqui Flour Mills 65,000 On the 7th July 1950, the three above‑named parties (all of them being registered firms) entered into an agreement which provided as follows:- "This agreement made at Karachi this 7th day of July 1950, between (1) The Pakistan Roller Flour Mills, (2) The Light Flour Mills and (3) The Faruqui Flour Mills, owners carrying on business at Karachi, whereby ft is agreed as follows:‑ Whereas the parties hereto have purchased jointly 20,000 (Twenty thousand) Tons of gram from the Government of Sind at the rate of ks.20 (Rupees twenty) per bag of 2 maunds net in the name of the Pakistan Roller Flour Mills as per letter No. C/129 dated the 6th July 1950, issued by the Director of Civil Supplies, Sind and on the terms and the conditions set out therein and whereas the said sum of Rs. 2,00,000 (Rupees two lacs) deposited with the Government of Sind as deposit has also been paid and contributed by the parties in equal proportion as under. Rs. By the Pakistan Flour Mills 70,000 By the Light Flour Mills 65,000 By the Faruqui Flour Mills 65,000 and whereas the parties have agreed that each of them will have one‑third share in the above goods and that the same will be exported from Pakistan or sold in Pakistan on the joint account of the parties, now therefore this agreement witnesses as follows: (1) That each party will pay for the price and expenses in equal proportions and the amounts will be paid as soon as the same have to be paid to Government or for expenses of shipment, weighment or of any other nature whatsoever. (2) That the goods will be shipped or disposed of by the parties in consultation with each other and by mutual agreement. (3) That the accounts will be kept by the Pakistan Roller Flour Mills, copies of which will be supplied by them to the parties. (4) That any amounts received by sale or disposal of the goods will be distributed by the parties in equal shares. (5) That when all the goods have been disposed of, the parties will settle and adjust their accounts and pay or receive as the accounts may show. (6) The parties will carry out and observe the terms and conditions of sale imposed by the Government of Sind. In witness whereof the parties have set their hands and signature the day and year as shown above." In accordance with the aforesaid agreement the accounts of all the transactions were maintained by the Pakistan Roller Flour Mills and the sales were all conducted by and in the name of that firm. The expenses were met on joint account and whatever surplus remained at any time it was distributed equally between the three parties. On the close of the transactions the accounts were finally settled and adjusted. In the year under review each of the three parties got a sum of Rs. 1,40,000 by way of profits. The transactions in respect of which the profits were earned were completed in about two months' time. The Income‑tax Officer construed the agreement and came to the conclusion that it constituted a partnership agreement. Since, however, in point of law a firm cannot enter into a contract of partnership with another firm or a stranger, the partners of the three smaller firms were taken to constitute a bigger firm for the purpose of carrying on a business or a venture in the nature of trade. It was not disputed that where a firm enters Into a partnership with some other person or a firm, the legal position would be that the partners of that firm will be taken to be the partners of the bigger firm. A firm is not a legal person but is only combined name of all the partners constituting the firm. According to the Income‑tax Officer, the partners under the "agreement of the 7th July 1950, would be all the partners of the three firms combined and since their number was 23, it would not be treated as a valid partnership by virtue of the provisions contained in section 4 of the Companies Act. He, therefore, treated all the 23 persons (two partners in the Pakistan Roller Flour Mills, seven partners In the Light Flour Mills and 14 partners in the Faruqui Flour Mills) as members of an Association of Persons, which, during the relevant year of account, earned profits arising from the purchase and sale of gram."

2. The determination by the Income‑tax Officer was on appeal upheld by the Appellate Assistant Commissioner and the same view has been taken by the Appellate Tribunal.

3. The first question relates to the competency of the Income‑tax Officer to make an assessment on the applicants (the group of three firms) though the particular income had already been included by him in the personal assessment of the three firms. On this question the main argument of Mr. Ali Athar, the learned counsel for the applicants, was that there existed a valid assessment of each of the three firms of their personal account and, therefore, the same income could not be made the basis of another assessment on the basis of an association of these three firms, and the Income‑tax Officer had no power under the law to do so. Before we proceed to examine this contention it may be useful to reproduce an extract from the order of the Tribunal:‑ "It may be pointed out that the amounts in question which have been included in the assessment of all the three firms will in any case remain in the assessment. If the assessment on the Association of Persons is finally maintained, the share of the profits will be included in its total income for rate purposes. The amounts will not be effectively charged to tax. In view of the decision in this appeal, it would be open to the Income‑tax Officer to refund the tax under section 48, read with section 14 (2) (b). The Department is prepared to refund or adjust the tax if and when the matter is finally decided." It is plain from this extract that the Department is not seeking to tax the same income twice over. All that they have done is that they have assessed the Association of Persons, which association had not been as such previously assessed. But Mr. Ali Athar contended that under the charging section 3 of the Act, the Income‑tax Officer had the option to tax the income in question either as the income of the three separate firms or that of the Association, and he having chosen to tax the income in the assessment of the three firms it was not open to him to make another assessment in respect of the same income upon the basis that the partners of the three firms who joined in this business constituted an Association of Persons. It was contended that there was no power in the Income‑tax Officer to refund the tax which had been levied upon the three firms separately and that section 14 (2) (b) had no application. Mr. Ali Athar in support of his contention mainly relied upon a decision of the Allababad High Court reported in Joti Prasad Agarwal and others v. Income‑tax Officer ((1959) 37 I T R 107). That case related to an association which was formed under a scheme for the distribution of Khandsari sugar. Out of 30 members of the association 23 were assessed to income‑tax and in their individual assessments their respective shares of Mew profits earned by the association during that period were Included, and the tax levied thereon was paid by them. Later the Income -tax Officer initiated assessment proceedings and assessed the Income of the association in its hands and served notices of demand. Upon these facts it was observed by the High Court as follows:‑ "Section 3 of the Act, which is the main charging section, only talks of charging the income of certain persons and does not talk of Income‑tax being charged on persons. This "implies that the charge is to be levied on an income only once". The section is clear enough to indicate that the same income cannot be charged repeatedly in the hands of different persons or 1n the hands of the same person." It was further observed that: "Once the income of the association was charged to Income -tax in the hands of the members individually and the assessments of the members remained valid assessments there could be no fresh assessment of the income In the hands of the association."

4. The above decision is clearly distinguishable. In that case the Department was seeking to tax the same income twice over first in the hands of the Association and then in the hands of the individual. And this was clearly in violation of the principle of the charging section in the Act. Section 14 (b) provides that the tax shall not be payable by an assessee, if a member of an Association of Persons . . . . . in respect of any portion of the amount which he is entitled to receive from the association on which the tax has already been paid by the association. This provision again prohibits the recovery of tax twice over in respect of the same income. But is this what the Department is seeking to do in this case? The answer to this must be in the negative. The first assessment was on the income of the gram business in the hands of the firms in their personal capacity. It was then discovered that these three firms had joined in this business venture, and the total number of their partners exceeded 20 and as such the combine amounted to an association within the meaning of the Act and should have been assessed as such. A notice was then given under section 34 of the Act and the matter was re‑opened and an assessment was made upon the income of the association, and it was expressly stated that the tax paid by the firms on the basis of the previous assessment would either be adjusted or refunded. This was, therefore, not a case in which the same income had been charged repeatedly. The previous assessment of the three firms separately in respect of their shares of income in the gram business was in effect superseded by the subsequent assessment of that income in the hands of the association which was formed by the combination of the members of the three firms.

5. The further argument that there was no power of adjust ment and refund in the Income‑tax Officer is devoid of any sub stance. Upon the finding that the assessment should have been on the basis of the association and not on individual basis the refund or adjustment of the tax realised on the same income in the hands of the individuals becomes consequential and incidental to the finding. Our answer to the first question is, therefore, in the affirmative.

6. The next question is whether the assessment could be made in this case in the status of an Association of Persons. The expression `Association of Persons' has not been defined in the Act though it is made liable to be charged under section

3. Mr. Ali Athar's contention was that the expression "Association of Persons" in section 3 must be read as ejusdem generis with the proceeding entitles such as a firm and a company. Upon this basis he contended that the gram transaction in this case was a one single venture in which the elements of partnership were wanting. We find no substance in this contention. 'Partner ship' has been defined In the Partnership Act as 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. Section 6 of the said Act lays down that in determining that a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken together. The relevant facts in this case are that the three firms entered into an agreement on 7th July 1950 in respect of the 20,000 tons of gram which had been jointly purchased by them. Amongst the terms of this agreement it was provided that each of the three parties will have 1 /3rd share in the commodity purchased, each will pay the price and expenses in equal proportion and the goods will be shipped or disposed of by mutual agreement and the amounts received by sale or disposal will be, distributed amongst the parties in equal share ; that the accounts will be kept by the Pakistan Rollers Flour Mills and when all the goods have been disposed of the parties will settle and adjust their accounts and pay or receive as the accounts may show. It is a matter of admission that out of this joint venture each of the three firms earned a profit of Rs. 1,40,

000. We have no doubt that upon these facts the elements of partnership are fully established. But apart from the question whether this combination did or did not amount to a partnership there can be little doubt that this combination amounted to an Association of Persons within the meaning of Act. The total number of the members of the three firms which combined in this venture was

23. These 23 persons joined in a business venture of purchasing gram by a common fund raised by contribution of the three firms, of which they were the members. This combination had to act in the matter of disposal of the merchandise either in the local or the foreign market and after an account being taken of all the incomes and expenditures they were to receive their share of profit. [There was thus a joint investment and a joint sharing of profits. By no canons of interpretation can it be said that this combination did not amount to an Association of Persons for the purposes of section 3 of the Income‑tax Act.] In a case decided by the Federal Court reported in The Punjab Province v. The Federation of Pakistan (PLD 1956 FC 72) the question arose whether the Govern ment of a Province was an `Association of Persons' within the meaning of Income‑tax Act as amended by Act VII of 1939. Upon this question Munir, C. J., observed as follows: "The word `association' has no technical meaning and 1s wide enough to include all groups or aggregations of persons formed for the promotion of a joint enterprise, whether that enterprise is in the field of business or in the field of art, litera ture, science, philanthropy or some profession, and for the purposes of the section. "It is wholly immaterial whether such association is brought into existence by law or by agree ment or whether it is or it is not registered under the Registration of Societies Act. Thus a Bar Association, a Club, or a Society for the prevention of cruelty to animals, or for any other charitable, religious, or cultural purpose, would be an `associ ation of persons' though its liability, to income‑tax will, depend upon the other provisions of the Act. A firm is an Association of Persons and so is a company, though firms and com panies are separately mentioned in the section. What is of importance is that the association, whether it consists of indivi duals or of legal persons or both, its members must be capable of determination because the Income‑tax Officer has, in certain circumstances, the discretion either to tax the association as such or the members of the association individually." In the present case there was an aggregation formed for the promotion of a joint enterprise and its members were capable of determination. The requirements as pointed out in the above decision, with which we are in respectful agreement, are fully present in the case before us.

7. Mr. Ali Athar relied on a number of cases mostly dealing with the administration of immovable property belonging to co -owners. We may refer to one of these cases, because upon it the main reliance was placed. This is a judgment of the Supreme Court of India in the case of Commissioner of Income‑tax v. Indra Balkrishna reported in ((1960) 39 I T R 546). In this case the co‑widows of a Hindu governed by the Mitakshara Law inherited his estate which consisted of immovable properties, shares, money lying in deposit and a share in a registered firm. The Appellate Tribunal had found that they had not exercised their right to separate enjoyment and that except for receiving the dividends from the shares and the interests from the deposit jointly, they had done no act which had helped to produce the income. Upon these facts it was held that the widows could not be assessed as an Association of Persons. We are in agreement with the view taken in the case but it is plain that it cannot be applied to the facts of the present case. Can it be said here that the members of this association had done no act which had helped to produce the income ? The answer must obviously be in the negative. The case of joint administration of an immovable property inherited by heirs must stand on entirely a different footing than the case where persons enter upon joint enterprise, pool their money and dispose of the merchandise and divide the profits thereof, such as is the case here. We are, therefore, of the opinion that the combination of the three firms in the present case amounted an `association of persons' within the meaning of section 3 of the Act. Our answer to the second question is, therefore, in the affirmative. 8. 7 he last question is with regard to the validity of the notice under section 34, sub‑clause (1) of that section as amended reads as follows:‑ "34. (1) If for any reason income, profits or gains charge able to income‑tax have escaped assessment in any year, or have been under assessed, or have been assessed at too low a rate, or have been the subject of excessive relief under this Act, the Income‑tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof, at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or re‑assess such income, profits or gains, and the provisions of this Act, shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection: Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be . . ." It is not necessary for us to repeat some of the observations which we have made with reference to the first question and which would also be relevant for the consideration of this question. Upon the finding that the 23 persons who were partners of the three firms did constitute an Association of Persons within the meaning of section 3 of the Act for the purposes of the charging of the tax it must follow that if the income of this association had not been taxed upon that basis then the case would clearly be covered by section

34. This is not a case where an assessment has already been made on the association and a supplementary assessment was sought to be made by giving notice under section 34 of the Income‑tax Act. The Income‑tax Officer having come to know of the agreement between the three firms which, having regard to the total number of the partners, rendered their combin ation as an association, he was entitled to issue a notice upon the ground that the income of the association had escaped assessment altogether. The notice under section 34, therefore, was clearly valid in law.

9. Our answer to all the three questions referred to us is in the affirmative. Questions answered in affirmative.