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Issues Involved:
1. Whether the income of the assessable entity was assessable under section 10 of the Income-tax Act? 2. Whether the status of the said assessable entity is 'firm' for income-tax purposes and as such registrable under section 26A of the Income-tax Act? Detailed Analysis: Issue 1: Assessability of Income under Section 10 The primary question was whether the income of the assessable entity (the assessee firm) was assessable under section 10 of the Indian Income-tax Act, 1922. The department argued that the assessee firm was merely an association of persons and not engaged in any business activity, thus its income should be taxed under section 12 as income from other sources. The department contended that the firm was created solely to divide the selling commission and assist the Upper India Commission Agents Ltd. in its taxation problem. They pointed out that the assessee firm did nothing to earn the income except to sign the selling agency agreement, with the actual work being done by the Upper India Company as before. The Tribunal, however, did not accept this contention. It found no evidence showing that the assessee firm had any connection with the Upper India Company or that the firm was created to assist in any taxation problems. The Tribunal concluded that the firm was brought into existence by the directors of the sugar mills or the managing agency company, not to aid any other entity in tax matters. The court agreed with the Tribunal, stating that the assessee firm was engaged in business activities through its sub-agents and brokers. The firm had appointed sub-agents and brokers to carry out the selling of sugar, and it undertook all liabilities and responsibilities for losses. The court emphasized that business activity does not require the principal to carry out transactions personally; it can be done through agents or employees. The court cited several cases to support its view that a systematic and organized course of activity, even if carried out through agents, constitutes business activity. Therefore, the court concluded that the income received by the assessee firm was income from business under section 10 of the Income-tax Act. Issue 2: Status as 'Firm' and Registration under Section 26A The second question was whether the assessee firm qualified as a 'firm' for income-tax purposes and was thus registrable under section 26A of the Income-tax Act. The court noted that the answer to this question depended on the resolution of the first issue. Since the court determined that the assessee firm was carrying on business, it followed that the firm met the definition of a partnership firm under the Partnership Act. The court found no other defects in the assessee's application for registration. Therefore, the firm was entitled to registration under section 26A of the Income-tax Act. Conclusion: The court answered both questions in the affirmative, determining that the income of the assessee firm was assessable under section 10 as business income and that the firm was registrable under section 26A as a partnership firm. The department was ordered to pay the costs of the assessee.
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