Commissioner of Income Tax vs Ajax Products Co. Ltd.

R. Jayasimha Babu, J.—The Tribunal has held that a firm which had been formed in the year 1964, granted registration in the year 1966, but

had ceased doing the business for which the firm had been brought into existence from the year 1973-74 was nevertheless entitled to retain its

status of being a registered firm, and have the amounts which the relatives of the partners earned as insurance commission by practising his trade as

an insurance agent, treated as the income of the firm and have such income taxed as the income of a registered firm. The assessment years are

1973-74 to 1977-78.

Section 42 of the Insurance Act enables individuals, as also firms and companies to obtain licence to function as agents. However, by Sub-

sections (7) and (8) of Section 42 of the Act, it is an offence to carry on the trade of insurance agent without a licence. Admittedly, the firm here

had at no point of time obtained a licence u/s 42 of the Act. The firm had no business activity after 1973-74. The objects for which the firm had

been constituted were confined to the manufacture and sale of certain products and did not include the carrying on of any other activity. The

income made over by Alagappan to his mother and wife who were partners of the firm to enable the firm to treat his income as its, and take

advantage of the firm''s status as a registered firm, cannot constitute in reality the income of the firm. The fact that Alagappan and the firm had

entered into an agreement also does not make the activity carried on by Alagappan in securing insurance business and earning commission

therefrom the business of the firm. The business of the firm had stopped by the year 1973-74, and the so called business of receiving Alagappan''s

income and treating that income as the income of the firm cannot be regarded as the business of the firm.

The Income Tax Officer had, therefore, rightly cancelled the registration of the firm, as it could no longer be regarded as a genuine firm from the

assessment year 1973-74 onwards.

Learned counsel for the Revenue invited attention of the decision of the Calcutta High Court in the case of SUNIL KRISHNA PAUL AND

OTHER Vs. COMMISSIONER OF Income Tax, WEST BENGAL., , wherein, it was held that the activity of merely watching earnings did not

amount to carrying on the business, and in the absence of a business being carried on, the firm was not entitled to registration.

The Tribunal was in error in holding that on the facts before it the firm could continue to retain the status of being a registered firm even when it

had ceased to do business, even when the amount that it was receiving from the close relative of the partner was only the income earned by him,

and which income the firm could not have earned without a licence u/s 42 of the Insurance Act, which it admittedly did not possess.

The questions referred to us are, therefore, answered in favour of the Revenue and against the assessee.