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TMI Blog1970 (10) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ge conditions in business which would prevent under-selling and harmful competitions ". The agreement was to take effect for a period of one year from 1st April, 1960. It was also agreed that this term may be extended by mutual consent of the partners after the above-mentioned date. One of the nineteen members of the partnership, namely, Harnam Singh Sethi, died on 12th July, 1960, and in his place Shrimati Sumitra Rani Sethi was taken as a partner on 13th July, 1960. Consequently, two income-tax returns were filed by the assessee-one relating to the period commencing from 1st April, 1960, till 12th July, 1960, and the other from 13th July. 1960, to 31st March, 1961. In the first return the income declared was Rs. 51,272 and in the other it was Rs. 20,663. The assessee filed two different applications for registration of the firm for the two different periods, one on 21st May, 1960, and the other on 11th January, 1961. On 1st September, 1962, the Income-tax Officer served a notice on the assessee to show cause why registration should not be refused on the ground that the partnership was void in law as one of the partners was a minor. Thereupon, the assessee filed two revised return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade or business activity and thus earn any income, profits and gains as alleged by the assessee. " Partnership" has been defined in section 4 of the Partnership Act, which says: " Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. " The definition contains three elements- (a) There must be an agreement entered into by all the persons concerned. (b) The agreement must be to share the profits of the business. (c) The business must be carried on by all or any of the persons acting for all. Learned counsel for the revenue submitted that the assessee was a partnership firm and it carried on the business of manufacturing and selling ice and thus earned income. All the ice manufacturers had entered into an agreement to share the profits or losses of the said business. The business was carried on by individual members, who owned the ice factories, but that was done on behalf of the association. Towards the end of the year, they were to distribute the profits or losses, as the case may be, amongst themselves. They had contributed their factories in a raining condition towards the capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing cost of per maund of ice for the sake of uniformity be fixed at 10 annas exclusive of sales tax. According to clause 9, each factory could, out of the sale price, keep to itself the manufacturing cost of the entire ice at 10 annas per maund as also the sales tax recovered on the sales. The balance selling price representing the difference between the sale price and the manufacturing cost would be sent to the office of the partnership firm by each member on the following day of the sale by 1.00 pm. In case of supplies made to the military by any factory, however, payment @ 5 annas per 100 lbs. of ice so supplied would be made to the firm by the factory concerned. If any member failed to send his daily deposits the managing committee was authorised to take such action against the defaulting member as it might deem it. The respective production capacity of the various factories was mentioned in the agreement. It was on that basis that the partners had agreed to share the profits and losses in the proportion mentioned in the deed. In clause 41, it was stated that the managing committee of the firm would control its business. It would fix the market rate of ice from time to ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll any ice. The assessee did not carry on any business. The contributions made by the members went to a common pool and they were distributed among them at the end of the year. The only reason why the association was formed was that all the factory owners should sell ice at a uniform rate, and there should not be undercutting in the price of the ice. As I have already said, in order to constitute a valid partnership, it was necessary that some business must be carried on by the partnership concern. In the instant case, it has been found by the Tribunal that the assessee did not purchase the ice produced by the various factories and then sell the same in the market. The various proprietors of the factories were running them at their own expense and risk. They themselves sold the ice in the open market and not on behalf of or at the cost and risk of the assessee. All the individual factory owners found their own finances to run them and they also managed the same in their own independent right and discretion without reference to the assessee. They were free to sell as much ice as they liked to military personnel at any price they wished, subject to the contribution of five annas per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usinesses combined inter so to keep up prices and as a quence to benefit the members. There was throughout no sign that anything had to be done other than the observance of the restrictive clause contained in the agreement, the payment over into the pool of a particular amount of money and the payment out of the pool of a particular share of the accumulated proceeds. There were clauses which provided for what would happen if there was breach of this contract including the arbitration clause and there were all kinds of detailed restrictions to guard a such difficulties as might arise owing to the breakdown of the machinery: Held, that the case was a combination and not a case of partnership." Again, a Division Bench of the Lahore High Court, consisting of Tek Chand and Bhide JJ., in Madan Gopal v. Shewal Dass, observed: " Section 4 requires that the association should be 'carrying on a business' and the expression 'carrying on business' implies some continuous control of the business by the association. The proprietors of the wool factories at Fazilla in the Ferozepur District entered into a pooling contract by virtue of which they agreed to work on factories in a certain manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective goods were recovered. In addition to clauses relating to the sharing of profit and loss and regulating the management of its affairs there was a further provision prohibiting the expansion by the concerns of the capacity of their ice plants or the getting interested in other concerns for the manufacture and sale of ice : Held, that, on the facts, the test of partnership was fully satisfied in this case and the partnership was entitled to be registered under section 26A of the Indian Income-tax Act, 1922. " It is clear from the head-note itself reproduced above that in that case the firm was itself to sell the ice manufactured by its six constituents in their respective factories. It had to purchase the ice from those factories on credit and then sell it in the market at a price fixed by it and pay to each of those factories as and when the sale money of their respective goods was recovered. The whole business in that case was done by the firm itself. It appeared that the agreement in question had been entered into to avoid unhealthy competition amongst the various ice factories which were carrying on the same trade. It is not unusual to find certain owners of factories ..... X X X X Extracts X X X X X X X X Extracts X X X X
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