1962 (7) TMI 64 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the assessment of Rs. 15,232.
2. Double taxation.
3. Exemption under Section 14(2)(a) of the Indian Income-tax Act.
4. Exemption under Section 14(2)(b) of the Indian Income-tax Act.
5. Existence of a partnership.
6. Existence of an association of individuals.

Issue-wise Detailed Analysis:

1. Legality of the Assessment of Rs. 15,232:
The main issue referred to the court was whether the assessment of Rs. 15,232 was legal. The assessee, a private limited company, received this amount from Ramaswami Naidu as a part of the managing agency remuneration of Krishna & Co. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all upheld the assessment of this amount as taxable income, leading to the reference under section 66 of the Indian Income-tax Act.

2. Double Taxation:
The assessee argued that the Rs. 15,232 had already suffered tax in the hands of Ramaswami Naidu, and taxing it again would amount to double taxation. The court rejected this contention, stating that the principle of double taxation implies that the same income cannot be taxed twice in the hands of the same person. However, this principle does not mean that income which has borne tax in one person's hands becomes immune from taxation when it passes to another person. The court concluded that the Rs. 15,232 received by the assessee was not in the "same passage" as the managing agency remuneration received by Krishna & Co., and hence, it was taxable.

3. Exemption under Section 14(2)(a) of the Indian Income-tax Act:
The assessee contended that the relationship between it and Ramaswami Naidu was that of partners, and therefore, the amount should be exempt from taxation under Section 14(2)(a). The court examined the agreement dated October 30, 1956, and concluded that the terms did not indicate a partnership. The agreement did not show an intention to share profits of a business carried on by all or any of them acting for all. Thus, the exemption under Section 14(2)(a) was not applicable.

4. Exemption under Section 14(2)(b) of the Indian Income-tax Act:
Alternatively, the assessee argued that if the relationship was not of partners, it should be considered an "association of individuals" and thus be exempt under Section 14(2)(b). The court held that an association of individuals implies a joint venture or common enterprise, which was not evident from the agreement. The agreement was a simple contract for payment of a fraction of the managing agency income, not a joint enterprise. Hence, the exemption under Section 14(2)(b) was also not applicable.

5. Existence of a Partnership:
The court analyzed whether the agreement constituted a partnership. According to Section 4 of the Partnership Act, a partnership involves an agreement to share the profits of a business carried on by all or any acting for all. The court found that the agreement did not indicate an intention to share profits or that the business was carried on by Ramaswami Naidu on behalf of the assessee. Therefore, no partnership existed.

6. Existence of an Association of Individuals:
The court also considered whether the assessee and Ramaswami Naidu formed an association of individuals. An association of individuals requires a common endeavor to earn income. The court found no evidence of a joint enterprise or common management of the business. The agreement only allowed Ramaswami Naidu to deduct Rs. 9,000 as salary, which did not indicate a joint endeavor. Thus, the assessee and Ramaswami Naidu did not form an association of individuals.

Conclusion:
The court concluded that the assessment of Rs. 15,232 was legal and did not amount to double taxation. The assessee was not exempt under Sections 14(2)(a) or 14(2)(b) of the Indian Income-tax Act, as there was no partnership or association of individuals. The reference was answered against the assessee, who was ordered to pay the costs of the department, with counsel's fee fixed at Rs. 250.