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TMI Blog1948 (8) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... lves into a partnership by deed dated 24th February, 1943, and agreed that the firm should conduct business in the vilasam of K.P.G.B.U.G. M.S.S.A. Mohammed Abdul Kareem Co. In Referred Case No. 19, sixteen persons who had taken out separately leases of sixteen different toddy shops agreed by partnership deed dated 1st October, 1942, that the business should be conducted by the partnership under the vilasam of P.M.U.B.M.K. Kathan Nadar Co. Except for the differences indicated above, which are wholly immaterial for the purpose of these references, the questions arising for consideration are identical. On foot of the deeds of partnership, applications were made for registration of the firms under Section 26A which were rejected for the reason that the formation of a partnership with regard to attract and toddy shops was prohibited by the abkari law without the previous permission of the District Collector. That order was confirmed on appeal by the Appellate Assistant Commissioner and a further appeal preferred to the Tribunal against that order was rejected as it was represented that the appeal was filed only as a formality. The Income-tax Officer assessed each firm in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, page 840, and it is stated that where a company is formed, contravening the provisions of that section, the law can take no cognisance of its existence except perhaps from a penal point of view. It is also stated at page 842 that if a company is formed for legal purposes, the commission by it of illegal acts does not make it an illegal company. Palmer says in his Company Law (16th Edition) that the Act of 1929 declares illegal all large unregistered companies or associations thus indirectly compelling associations with anything but a very small membership to avail themselves of the provisions of the Act. After citing a number of cases to some of which reference will be made presently, the learned author says referring to associations consisting of more than 20 persons: In a word, the association is a phantom. It has no legal existence. The leading case on the subject is Smith v. Anderson [1879] 15 Ch. D. 247. That was a case of an association of more than 20 persons formed for the purpose of carrying of business. The Court of appeal held that the certificate holders did not form an association within the meaning of Section 4 of the Companies Act. James, L.J., referring to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n much the same lines. Panchena Manchu Nayar v. Gadinhare Kumaranchath Padmanabhan Nayar [1906] I.L.R. 29 Mad. 477 was a case of a lottery in which more than 20 persons took tickets. It was held by Subramania Iyer and Davis, JJ., that there was no association of twenty persons for the purpose of gain and consequently, the plaintiffs were not precluded from suing for want of registration under Section 4 of the companies Act. The principle as applied was stated at page 73 in these terms:― Clearly, therefore, to constitute an association, within the meaning of the section, the existence of a legal relation between a more than twenty persons giving rise to join rights or obligations or mutual rights and duties is absolutely necessary. Otherwise there would be a mere conglomeration of persons as Cotton, L.J., put it, but not an 'association'. In Neelamega Sastri v. Appiah Sastri [1896] I.L.R. 20 Mad. 68 more than 20 persons entered into an agreement for creating a chit fund, but the only proprietors of the fund were the two organisers; it was held that the parties to such an agreement did not form an association of which registration was necessary under Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Companies Act or under the Indian Income-tax Act. It was held that the company was assessable as a firm or an association within the meaning of the Income-tax Act, its illegal constitution on account of the non-compliance with the provisions of the Companies Act not affecting its liability to assessment on its profits. Jai Lal, J., advertising to the claim of the company that it was not capable of being assessed to income-tax because it could not be deemed to exist in the eye of law, made the following observation:― The claim of the company is, in my opinion, preposterous on the face of it. It amounts to this that, because the assessee is carrying on business without complying with the provisions of the law as to the mode of its constitution, it is not liable to pay income-tax on its profit. It is all the same a firm or an association within the meaning of the Indian Income-tax Act. For analogous cases reference may be made to Birendra Kishore Manikya v. Secretary of State for India [1921] I.T.C. 67 in which it was held that abwab income illegally realised by the assessee was liable to be assessed to income-tax, and to In re Chunni Lal Kalyan Das [1925] I.L.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wful'; that is immaterial altogether and I do not see that there is any contract between the two propositions. It was said in the Irish case that allegans suam turpitudinem non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says: 'It is a business'; the appellant says: 'It is an unlawful one': he is alleging his own turpitude. It is said again: 'Is the State coming forward to take a share of unlawful gain?' It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality, or shares in the illegality; they are merely taxing a man in respect of those resources. I think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide. There is no doubt that a partnership for carrying on today business without the Collector's previous permission is illegal as the rule under the Abkari Act provides that no privilege of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stoms authorities of this country, is not a contract which this country's law will enforce. I do not, however, think that, merely because the contract was not enforceable by law, profits actually made by the partnership's trading operations must necessarily be placed beyond assessment to income-tax as profits of 'trade'.....But, in the present case, the 'trade' did not consist in the commission of crime; it consisted in the marketing of a commercial article. The frauds on the customs authorities were only incidents of that 'trade'. Frauds are sometimes incidents of some 'trades' without exempting their profits from assessment to income-tax. On the other hand, it is true in this case that the frauds on the customs authorities were inseparable incidents of the conduct of the partnership trade. Is its enough to exempt the profits of the trade from assessment to income-tax? I think not, because the marketing of the whisky in the United States was undoubtedly 'trade', or 'in the nature of trade', and was not less so because, in order to enable the whisky to be so marketed, it was necessary to commit a fraud on the customs authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Act which points to any intention to curtail the statutory definition of income, and it does not appear appropriate under the circumstances to impart any assumed moral or ethical standard as controlling in a case such as this the literal interpretation of the language employed. The principles deducible from the cases discussed above are clear. An association which contravenes the provisions of Section 4 of the English Companies Act or the Indian Companies Act is unlawful and on foot of the contract or agreement amongst its members or partners, no relief will be granted by a Court as in the eye of law no company or association duly constituted is in existence. The same will be the position with reference to associations or partnerships formed in contravention of rule 27 of the Abkari Rules. But that would not by itself conclude the question of the liability of the association to tax if the association comes within the scope of the charging section of the taxing statute. This will be so for the reason that so long as the object and purpose of the association is to carry on business which is not illegal (the case of an association to commit crime being distinguishable as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority, and of every firm and other association individually. The argument is that with regard to all the other units preceding the words other association of persons , viz., Hindu undivided family, company, local authority and firm, the common feature is the existence of such mutual rights and obligations. In one case, it may be the incident of status by birth; in the case of companies it is the result of incorporation; in the case of a local authority is by operation of a statute and in the case of a firm it is attributable to the contract between the parties. Since in the present case the contract is void ab initio and there are no mutual obligations there can be no association. The doctrine of ejusdem generis was also invoked in this connection but with reference to these contentions learned counsel was unable to cite any authority in his favour. On the contrary all the cases bearing on the point tend to discountenance the position he contends for. In Commissioner of Income-tax v. Mohideen Sahib of Bellary [1927] 53 M.L.J. 719 a body of individuals agreed to take in auction, work and share the profits from four today shops. It was held that they could be taxed under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members of a company are associated in such a manner that they become a legal entity; and a firm is an association depending on contract but is not in itself a legal entry; and I think it would be very difficult-if not impossible-to suggest any other association of individuals which embodies substantially the peculiarities of the three particular types to which the Act refers. In my opinion, the only limit to be imposed on the words 'other association of individuals' is such as naturally follows from the fact that the words appear in an Act imposing a tax on income, profits and gains, so that the association must be one which produces income, profits or gains. It seems to me that an association of two or more persons for the acquisition of property which is to be managed for the purpose of producing income, profits or gains falls within the words 'other association of individuals' in Section 3. It is significant that in this case, of the two individuals, one was a minor. For that reason also there could be no partnership between an adult member and a minor. None the less in that case it was held that since in point of fact the two assesses had associated toget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of Section 3. Another illustration is found in Mian Channu Factories Union v. Commissioner of Income-tax, Punjab [1936] 4 I.T.R. 203, where it was held that two firms and a Hindu undivided family could not constitute themselves into a firm within the meaning of the Income-tax Act but the larger group formed thereby was liable to be assessed as an association of individuals. The question has arisen in the Courts constantly as to whether co-owners can be assessed as an association. A line of distinction has always been drawn, as in some of the cases which have been discussed above, between persons who have become co-owners by succession or inheritance and persons who combine in a joint enterprise to purchase property for the purpose of making profits by the joint enterprise. Thus whatever may be the legal effects and consequences under the company law or under the law of contracts, we entertain little doubt that associations like those in the present cases are other associations of persons and their income, profits and gains are assessable to tax, so far at any rate as the Indian Income-tax Act is concerned. It must be remembered that there is no provision in the United ..... X X X X Extracts X X X X X X X X Extracts X X X X
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