1962 (1) TMI 75 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the partnership under the Hyderabad Abkari Act.
2. Tax liability of the assessee based on the partnership's legality.
3. Assessment of income based on the status of the partnership or association of persons.
4. Scope of reference under section 66(2) of the Indian Income-tax Act.

Detailed Analysis:

1. Validity of the partnership under the Hyderabad Abkari Act:
The partnership between the assessee, G. Krishna Reddy, and D.D. Italia was formed without obtaining the prior approval of the Talukdar as required by section 14 of the Hyderabad Abkari Act. Section 14 explicitly states that no lessee shall declare any person as a partner without the government's permission, and such a partner must obtain a license from the Talukdar or another competent officer. This partnership was thus void ab initio, as confirmed by the precedent set in Velu Padayachi v. Sivasooriam Pillai [1950] 1 M.L.J. 315, where such partnerships were deemed illegal.

2. Tax liability of the assessee based on the partnership's legality:
The Income-tax Officer initially assessed the entire income from the Abkari contracts in the hands of G. Krishna Reddy, given the partnership's illegality. The Appellate Assistant Commissioner, however, held that the assessee was liable for only half the income. The Tribunal confirmed this view, relying on a statement from D.D. Italia admitting his liability for half the profits. However, as the partnership was illegal, the firm could not be registered under section 26A of the Income-tax Act, as established in Mohideen Sahib & Co. v. Commissioner of Income-tax [1950] 18 I.T.R. 200.

3. Assessment of income based on the status of the partnership or association of persons:
Given the illegality of the partnership, the correct approach was to assess the income as that of an association of persons under section 3 of the Income-tax Act. This position is supported by the decision in Mohamad Abdul Kareem & Co. v. Commissioner of Income-tax [1948] 16 I.T.R. 412, where profits earned by an association of persons were taxed under section 3. The Supreme Court in Commissioner of Income-tax v. Indira Balkrishna [1960] 39 I.T.R. 546 (S.C.) clarified that an association of persons involves individuals joining for a common purpose to produce income. This was applicable here, as both G. Krishna Reddy and D.D. Italia conducted the business together, sharing profits and contributing capital.

4. Scope of reference under section 66(2) of the Indian Income-tax Act:
The question referred under section 66(2) was whether the assessee was liable to be taxed on only half the income. The Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 I.T.R. 589 (S.C.) outlined that a question must be raised before or decided by the Tribunal to be considered under section 66(2). The Tribunal's order confirmed the Appellate Assistant Commissioner's decision, which considered whether the entire income or only half should be assessed. The Income-tax department's contention that the income should be assessed as that of an association of persons was thus validly raised.

Conclusion:
The High Court concluded that the Tribunal's order was contrary to the decision in Mohamad Abdul Kareem & Co. v. Commissioner of Income-tax [1948] 16 I.T.R. 412. The assessee, G. Krishna Reddy, was not liable to be taxed on only half the income. Instead, both G. Krishna Reddy and D.D. Italia were jointly and severally liable for the tax as an association of persons under section 3 of the Income-tax Act. The reference was answered in the negative, and no order as to costs was made, with counsel's fee fixed at Rs. 250.