1979 (2) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the partnership between British Drug Houses (India) Private Ltd. and Allen & Hansburys Ltd. under the agreement dated December 15, 1954.
2. Whether the assessee earned any income liable to tax.
3. Validity of the assessments initiated under Section 147(a) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Partnership:
The primary issue was whether a valid partnership existed between British Drug Houses (India) Private Ltd. (B.D.H.) and Allen & Hansburys Ltd. (A. & H.) under the agreement dated December 15, 1954. The Income Tax Officer (ITO) argued that the agreement constituted a partnership and assessed the entity as a registered firm. However, the Tribunal concluded that the agreement was a business arrangement aimed at eliminating competition and did not constitute a partnership. The Tribunal observed that the essential elements of a partnership, such as the sharing of profits and the relationship of principal and agent, were conspicuously lacking. The joint manufacturing activity ended with the production of insulin, and each party was individually responsible for the sale of insulin, negating the existence of a partnership.

2. Income Liable to Tax:
The second issue was whether the assessee earned any income liable to tax. The Tribunal held that the joint manufacturing activity did not result in any profit. The transfer value of insulin, calculated as 85% of the trade price, was an ad hoc payment subject to settlement of accounts. The Tribunal found that the activity was purely a manufacturing arrangement, and any surplus was merely a result of initial contributions exceeding the cost of production. Therefore, no profit was realized from the joint manufacturing activity, and no income liable to tax was earned by the entity. The High Court agreed with the Tribunal's analysis, concluding that the arrangement did not yield any profit and thus, no tax liability arose.

3. Validity of Assessments under Section 147(a):
The third issue was the validity of the assessments initiated under Section 147(a) of the Income-tax Act, 1961. The Tribunal upheld the assessee's objection, stating that all necessary particulars had been provided to the ITOs by the two companies, and nothing was kept back from the revenue. The High Court found it unnecessary to address this issue in detail, given its conclusion on the second issue that no income liable to tax was earned.

Conclusion:
The High Court ultimately answered question No. 2 in the negative, stating that no income liable to tax was earned by the assessee. Given this conclusion, the Court found it unnecessary to answer questions Nos. 1 and 3. The Commissioner was directed to pay the costs of the reference to the assessee.