(1.) THE following question of law has been referred to us for opinion : " Whether, on the facts and in the circumstances of the case and on the true interpretation of the partnership deed, the Tribunal was right in holding that the assessee did not carry on any business activities and that it was not liable to be taxed under the Indian Income-tax Act, 1922 ? "
(2.) THE assessee in this case is Messrs. Ferozepur Ice Manufacturers' Association, Ferozepur City, and the assessment year concerned is 1961-62. It appears that on 1st April, 1960, nineteen individuals, who were partners in seven ice factories at Ferozepur, executed a deed of partnership. The purpose for which this partnership was entered into was given in the preamble of the deed and it was to "create and maintain good and friendly relations amongst the ice manufacturers in Ferozepur and arrange conditions in business which would prevent under-selling and harmful competitions ". The agreement was to take effect for a period of one year from 1st April, 1960. It was also agreed that this term may be extended by mutual consent of the partners after the above-mentioned date. One of the nineteen members of the partnership, namely, Harnam Singh Sethi, died on 12th July, 1960, and in his place Shrimati Sumitra Rani Sethi was taken as a partner on 13th July, 1960. Consequently, two income-tax returns were filed by the assessee--one relating to the period commencing from 1st April, 1960, till 12th July, 1960, and the other from 13th July, 1960, to 31st March, 1961. In the first return the income declared was Rs. 51,272 and in the other it was Rs. 20,663. The assessee filed two different applications for registration of the firm for the two different periods, one on 21st May, 1960, and the other on llth January, 1961. On 1st Septem ber, 1962, the Income-tax Officer served a notice on the assessee to show cause why registration should not be refused on the ground that the partner ship was void in law as one of the partners was a minor. Thereupon, the assessee filed two revised returns for the two periods in question on 20th September, 1962, in which it was mentioned that the income
Please Login To View The Full Judgment!
for both the periods was nil. During the assessment proceedings before the Income-tax Officer, the position taken up by the assessee was that it did not constitute a partnership, but it was a mutual association formed to safeguard the interests of the members of that association and prevent under-selling of ice by way of competition inter se. It did not carry on any trade or business activity and earn any income, profit or gain. This contention did not prevail with the Income-tax Officer, who held that the assessee carried on business. He completed the assessment on it as an unregistered firm on a total income of Rs. 71,936. He also assessed the different members of the partnership in respect of the shares received by them from it. The assessee then preferred an appeal before the Appellate Assistant Commissioner, who dismissed the same after confirming the order of the Income- tax Officer. Being aggrieved by the decision of the Appellate Assistant Commissioner, the assessee filed an appeal before the Income-tax Appellate Tribunal. The said Tribunal, after going through the facts of the case, came to the conclusion that the assessee did not carry on any business activity, but it merely received defined contributions from its members, which it redistributed to them at the end of the year. There was complete identity between the persons who made such contributions and those to whom they were redistributed at the end of the year. The assessee, in the opinion of the Tribunal, did not derive any income, profit or gain. As a result, the Tribunal accepted the appeal filed by the assessee and determined its income as nil in both the periods in question. Thereafter, the Commissioner of Income-tax moved the Tribunal by an application under Section 66 of the Indian Income-tax Act, 1922, for referring to this court the question of law mentioned above. His application was accepted and that is how the said question of law has come before us.
(3.) FOR the determination of the question of law referred to us, the only point that needs consideration is whether the association formed by the ice manufacturers is a " partnership" within the meaning of Section 4 of the Indian Partnership Act or a mutual association brought about to safeguard their interests and it did not carry on any trade or business activity and thus earn any income, profits and gains as alleged by the assessee. " Partnership" has been defined in Section 4 of the Partnership Act, which says: " 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. "
(4.) THE definition contains three elements (a) There must be an agreement entered into by all the persons concerned. (b) The agreement must be to share the profits of the business. (c) The business must be carried on by all or any of the persons acting for all,
(5.) LEARNED counsel for the revenue submitted that the assessee was a partnership firm and it carried on the business of manufacturing and selling ice and thus earned income. All the ice manufacturers had entered into an agreement to share the profits or losses of the said business. The business was carried on by individual members, who owned the ice factories, but that was done on behalf of the association. Towards, the end of the year, they were to distribute the profits or losses, as the case may be, amongst themselves. They had contributed their factories in a running condition towards the capital of the partnership. In support of his submission, he mainly relied on two decisions--D. M. Stewart, Commissioner of Income-tax v. Lucknow Ice Association, A. I. R. 1926 Oudh. 191 and Baroda City Ice Co. v. Commissioner of Income-tax,  44 I. T. R. 56 (Guj.).
(6.) COUNSEL for the assessee, on the other hand, contended that his client was not a partnership, but a mutual association. The assessee did not carry on any business or trade activity, with the result that they did not earn any income. He submitted that all the seven factories were managed and run by the partnership which owned them at their own cost and risk and they bore the losses. The assessee merely regulated the price at which all the factories had to sell the ice manufactured by them and it did not carry on any business or a trading activity. It neither purchased not sold any ice. The contribution made by the various factories went in a common pool and they were distributed amongst them at the end of the year. All this was done to prevent under-cutting of price by the various factories, with the result that ice was sold at a uniform rate throughout the city.
(7.) WE may now briefly refer to the relevant clauses of the alleged partnership deed to see the nature of the activities carried on by the assessee.
(8.) IT might be stated that the parties to the deed had all been separately carrying on business of manufacturing ice either as partners or proprietors of their respective factories. According to the preamble of the deed, the parties had agreed to join together to form a partnership firm which would create and maintain good and friendly relations amongst the ice manufacturers in Ferozepur and arrange conditions in business, which would prevent under-selling and harmful competitions. The partnership was to commence on 1st April, 1960, and it had to , in the first instance, continue for a period of one year only, but the term could be extended by mutual consent of the partners. According to Clause 6, the parties agreed to place the respective factories at the disposal of the partnership firm for the entire manufacture of ice and its total supplies according to the direction of the partnership. Clause 7 stated that all the factories would be kept in proper working order. If there was a breakdown in any factory, the said party would be required to get his plant in working order within 15 days from the breakdown. According to Clause 8, it had been agreed that the manufacturing cost of per maund of ice for the sake of uniformity be fixed at 10 annas exclusive of sales tax. According to Clause 9, each factory could, out of the sale price, keep to itself the manufacturing cost of the entire ice at 10 annas per maund as also the sales tax recovered on the sales. The balance selling price representing the difference between the sale price and the manufacturing cost would be sent to the office of the partnership firm by each member on the following day of the sale by 1. 00 p. m. In case of supplies made to the military by any factory, however, payment @ 5 annas per 100 lbs. of ice so supplied would be made to the firm by the factory concerned. If any member failed to send his daily deposits the managing committee was authorised to take such action against the defaulting member as it might deem it. The respective production capacity of the various factories was mentioned in the agreement. It was on that basis that the partners had agreed to share the profits and losses in the proportion mentioned in the deed. In Clause 11, it was stated that the managing committee of the firm would control its business. It would fix the market rate of ice from time to time. It would direct and control the supplies of ice of any factory belonging to any of the parties to the deed and demand supply of ice from any party to the partnership business at any time as per the terms and conditions of the agreement. Under Clause 12, no partner could lend any money of the partnership or deliver upon credit any of the goods of the partnership to any person without the consent of the managing committee. Besides, no partner could either directly or indirectly engage or be concerned in any business similar to that of the partnership. According to Clause 15, each constituent factory had to deposit with the firm security @ Rs. 100 per ton of the respective capacity of the factory. The said security money was to be refunded to the members on the termination of the deed. Under Clause 16, each member (or factory) was permitted to issue ice free of cost by means of complimentary pass or coupon, but the ice so issued could in no case be resold. According to Clause 17, no partner could carry on or be engaged or connected with directly or indirectly or set up any rival business similar to the business of the partnership firm. No partner was entitled to sell any ice except on account of and for the benefit of the partnership. As per Clause 20, on the 31st day of March every year during the continuance of the partnership business an account was to be taken of all the assets and liabilities of the firm and all the profits and losses in the preceding year. Net profit or loss of the year was to be divided between and borne by the partners in the proportion mentioned in the deed. Under Clause 21, if there was a dispute among the parties on any point or on the interpretation of any of the clauses of this deed then the matter was to be referred to Shri Harnam Singh Modi, who will act as arbitrator, and his decision had to be final and binding on the parties.
(9.) IT is true that the deed had been described as a partnership deed, but a perusal of its various clauses and the actual activity carried on by the association showed that it did not carry on any business but it was only a mutual association. It is further true that in the clauses of the deed it was mentioned that the assessee could purchase the ice manufactured by the factories and sell the same, but it has been found that it did not carry on any business activity and run any factory or purchase or sell any ice. The assessee did not carry on any business. The contributions made by the members went to a common pool and they were distributed among them at the end of the year. The only reason why the association was formed was that all the factory owners should sell ice at a uniform rate, and there should not be undercutting in the price of the ice.
(10.) AS I have already said, in order to constitute a valid partnership, it was necessary that some business must be carried on by the partnership concern. In the instant case, it has been found by the Tribunal that the assessee did not purchase the ice produced by the various factories and then sell the same in the market. The various proprietors of the factories were running them at their own expense and risk. They themselves sold the ice in the open market and not on behalf of or at the cost and risk of the assessee. All the individual factory owners found their own finances to run them and they also managed the same in their own independent right and discretion without reference to the assessee. They were free to sell as much ice as they liked to military personnel at any price they wished, subject to the contribution of five annas per 100 lbs. to the assessee. The bad debts arising out of sales were to be borne by them and not by the assessee. Each factory bore the losses resulting from its inability to sell a portion of the ice manufactured by it, because it was not always that they were able to sell the entire quantity with them. The association merely fixed the selling price of the ice from time to time. Under the. deed, the factories had to furnish security deposits, which was foreign to a normal partnership. The whole purpose of the agreement seemed to be to ensure that the ice was sold at a fixed rate and there was no competition between the various factory owners. It is true that in the deed it had been mentioned as a partnership, but the nature of the agreement has to be determined with reference to the various clauses of the deed. It is further true that according to the deed the assessee could carry on business, but it has been found as a fact by the Tribunal that the assessee did not carry on any business or trading activity and it only received contributions from its members which were again redistributed amongst them. There was complete identity between the persons who made such contributions and the persons to whom they were redistributed at the end of the year. Thus, in my opinion, the Tribunal was right in holding that the assessee did not derive any income, profit or gain.
(11.) THE essential features of a mutual association have been mentioned by the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club,  24 I. T. R. 551, 560;  S. C. R. 289 (S. C.) thus: " Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. "
(12.) THE assessee in the instant case answers the description of such an association.
(13.) THE view that I have taken finds support in a Division Bench decision of the Nagpur High Court, consisting of Stone C. J. and Vivian Bose J. in Radhakisan Jaikisan Ginning and Pressing Factory v. Jamnadas Nursery Ginning and Pressing Co. Ltd. , A. I. R. 1940 Nag. 228 where it Was held: " Various businesses combined inter se to keep up prices and as a consequence to benefit the members. There was throughout no sign that anything had to be done other than the observance of the restrictive clauses contained in the agreement, the payment over into the pool of a particular amount of money and the payment out of the pool of a particular share of the accumulated proceeds. There were clauses which provided for what would happen if there was breach of this contract including the arbitration clause and there were all kinds of detailed restrictions to guard against such difficulties as might arise owing to the breakdown of the machinery : Held that the case was a combination and not a case of partnership. "
(14.) AGAIN, a Division Bench of the Lahore High Court, consisting of Tek Chand and Bhide JJ. , in Madan Gopal v. Shewal Dass, A. I. R. 1954 Lah. 882 observed : " Section 4 requires that the 'association should be ' carrying on a business ' and the expression ' carrying on business ' implies some continuous control of the business by the association. The proprietors of the wool factories at Fazilka in the Ferozepur District entered into a pooling contract by virtue of which they agreed to work on factories in a certain manner and to share the total profits in certain proportions. The contract was for a period of five years. Defendant 1 was to work his factory for the next two and half years. Plaintiff and defendant 2 had the option of working their factories or not as they pleased, but if they worked the factories; they were bound to share profit with the other parties to the contract according to the terms thereof. The parties who worked their factories were bound to submit their accounts of the earnings to the other parties: Held, that the contract did not constitute any partnership or association and the proprietors were not carrying on any business jointly within Section 4. "
(15.) THE two authorities relied upon by the learned counsel for the revenue are distinguishable. In Lucknow Ice Association's case, A. I. R. 1926 Oudh 191 it was said : " Association formed among certain ice manufacturing firms by an agreement in order to prevent under-selling by the constituent firms, a certain fixed rate to be paid by the association for ice manufactured by the constituent firms having been agreed, is a firm within the meaning of Section 3 and as such is liable to assessment under the Act. "
(16.) IN the above authority, the association formed under the agreement was to have the entire control over the management of sales and distribution of the profits to the constituent factories, and the proprietors and managers of those factories were bound to assist the association "in making the work easy and more successful. ' In that case, a selling association to prevent under-selling by the constituent firms had been formed. It is, therefore, quite clear that the business of selling ice had to be done by the association itself and not by the constituent firms and this is not the position in the present case.
(17.) IN Baroda City Ice Co. 's case in the head-note it is said ; " The partners or representatives of six concerns (some of which were themselves firms) which carried on independent businesses in the manufacture and sale of ice in Baroda entered into a deed of partnership. The business of the partnership was to sell the ice manufactured by the six concerns in their respective factories. Under Clause 5 of the deed the partnership was to purchase ice from each of the concerns on credit and sell it in local and up-country markets at a price fixed by it and pay each of the concerns as and when the moneys on the sale of their respective goods were recovered. In addition to clauses relating to the sharing of profit and loss and regulating the management of its affairs there was a further provision prohibiting the expansion by the concerns of the capacity of their ice plants or the getting interested in other concerns for the manufacture and sale of ice : Held, that, on the facts, the test of partnership was fully satisfied in this case and the partnership was entitled to be registered under Section 26a of the Indian Income-tax Act, 1922. "
(18.) IT is clear from the head-note itself reproduced above that in that case the firm was itself to sell the ice manufactured by its six constituents in their respective factories. It had to purchase the ice from those factories on credit and then sell it in the market at a price fixed by it and pay to each of those factories as and when the sale money of their respective goods was recovered. The whole business in that case was done by the firm itself.
(19.) IT appeared that the agreement in question had been entered into to avoid unhealthy competition amongst the various ice factories which were carrying on the same trade. It is not unusual to find certain owners of factories entering into pooling arrangements, which are also sometimes called " combinations ". In such an arrangement, they agree to sell their products at a fixed price in order to avoid cut-throat competition. They, however, continue to have full control over their factories which they run at their risk. They work independently of each other. They make contributions out of their profits to a common pool and at the end of a year divide the same among themselves in defined proportions. Under these circumstances, it could not be said that there was any partnership between various factory owners, because such an arrangement does not amount to carrying on a common business conducted by all or any one of them acting for all.
(20.) IN view of what has been said above, I hold that the Tribunal was right in observing that the association formed by the ice manufacturers in the present case was not a partnership concern, as it was not carrying on any business activity within the meaning of Section 4 of the Indian Partnership Act, and as such it was not liable to be taxed under the Indian Income-tax Act, 1922. The answer to the question referred to us is, therefore, in the affirmative. There will, however, be no order as to costs