1948 (8) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee constitutes an "association of persons" under Section 3 of the Income-tax Act.
2. The legality of the partnership agreements under the abkari law.
3. The impact of the illegality of the partnership on the tax liability.

Detailed Analysis:

1. Whether the assessee constitutes an "association of persons" under Section 3 of the Income-tax Act:
The primary question referred to the court was whether the assessee is an "association of persons" within the meaning of Section 3 of the Income-tax Act. The court examined the facts, which were identical in both cases, where several individuals formed partnerships to run shops under a common vilasam. The partnerships were not registered under Section 26A due to the prohibition under the abkari law without prior permission from the District Collector. The Income-tax Officer assessed each firm as an "association of persons," a decision upheld by the Appellate Assistant Commissioner and the Tribunal.

The court referred to various precedents, including English and Indian case law, to determine the meaning of "association of persons." The court concluded that the term should be understood in its plain and ordinary sense, meaning any combination of persons who have joined together in a profit-making enterprise. The court rejected the argument that mutual rights and obligations enforceable in a court of law are necessary to constitute an "association of persons."

2. The legality of the partnership agreements under the abkari law:
The court acknowledged that the formation of a partnership for conducting business in arrack and toddy shops without the Collector's permission is illegal under the abkari law. This was supported by previous rulings, such as Ramanayudu v. Seetharamayya, which held that partnerships formed without such permission are void.

3. The impact of the illegality of the partnership on the tax liability:
Despite the illegality of the partnerships under the abkari law, the court held that this does not affect the tax liability under the Income-tax Act. The court cited various precedents, including Mann v. Nash, where it was held that profits derived from illegal activities are still subject to income tax. The court emphasized that the Income-tax Act does not distinguish between lawful and unlawful businesses for the purpose of taxation.

The court concluded that the income, profits, and gains of the associations are assessable to tax under Section 3 of the Income-tax Act. The court stated that the words "other association of persons" in Section 3 should be construed in their plain ordinary meaning and not ejusdem generis with the word "firm" or other preceding terms. The court affirmed that so long as the association produces income, profits, or gains, it is assessable to tax, regardless of the legality of its formation under other laws.

Conclusion:
The court answered the question in the affirmative, holding that the assessees are "associations of persons" within the meaning of Section 3 of the Income-tax Act. The court ordered the applicants to pay the costs of the reference to the Commissioner, amounting to Rs. 250 in each case.

Reference Answered:
Reference answered in the affirmative.