Commissioner of Income Tax vs S.N. Narayana Raja and Co. and Another

Yeeraswami, J.—The first of these references relates to the assessment year 1960-61. The assessee was a firm of partnership with 9

partners and carried on business as forest coupe contractors with head office at Ambasamudram and branch offices at several other places within

the State of Madras, now Tamil Nadu. The partnership was governed by a deed dated January 25, 1959, which provided, inter alia, for one or

more of the partners taking contracts in their names and placing such contracts for the benefit of the firm. As a matter of fact, individual partners

entered into coupe contracts with the Government in respect of particular forests, and the same were, however, exploited by the firm on its own

account. The income tax Officer declined to register the firm u/s 26A of the Income Tax Act, 1922, on various grounds. But the Appellate

Assistant Commissioner reversed the order, and the Tribunal concurred with him. At the stage of the Tribunal, only two grounds survived which

the department pressed, (1) the partnership was formed with a view to work contracts taken in the names of individual partners and outsiders; and

(2) the contracts were obtained through the process of rigging and knock-out bids, and were, therefore, opposed to public policy and so void. As

to the second ground, the Tribunal, after scrutinising the evidence, could not discover any proof of the existence of any activity like rigging and

knock-out syndicates. The Tribunal, therefore, rejected this ground. It declined to accept the other ground as well, on the view that there was

nothing in the Forest Act which prohibited exploitation by the firm of coupe contracts obtained in the names of one or more of the partners.

Referring to Clause 2 of the agreement, which apparently was in a stereotyped form and which was entered into between the Government and

individual contractors for exploitation of forest, the Tribunal held that any infringement of the clause did not attract any penalty. The revenue has

brought this reference and the question for consideration is :

Whether the Appellate Tribunal was right in holding that the assessee was a lawfully constituted partnership firm entitled to registration u/s 26A of

the Income Tax Act, 1922, for the assessment year 1960-61 ?

The facts as well as the question for consideration in the other reference are similar, and they need not be, therefore, reiterated.

We are clearly of opinion that the Tribunal was right in the view it expressed, and the questions should be answered in favour of the assessee.

So far as the ground based on alleged rigging and knock-out is concerned, it is concluded by the factual finding of the Tribunal, which we are not

prepared to reopen for the purpose of this reference. On the other ground, which is reiterated for the revenue, we have examined the provisions of

the Forest Act and are satisfied that exploitation by a firm of coupe contracts taken from the Government by the individual partners is nowhere

prohibited and is not illegal. The right to exploit the forest, in these references, flowed from the contracts entered into as between individual

partners and the Government. Such contracts are authorised by Section 18. The contracts themselves, by their preambles, make it clear that the

right to exploit is not only available to the party directly contracting with the Government but also to their assigns. Far from the exploitation of the

forest contracts by the firm which were taken in the names of individual partners being illegal, it is authorised by and also within the contemplation

of such contracts. Clause 2 of the agreement, to which specific reference has been made, no doubt, prohibits the contractor from disposing of or

subletting the right of exploitation or any part thereof without the written permission of the specified officer. But the infringement of this clause may,

at best only amount to a breach of contract, not an illegality from the standpoint of the provisions of the Forest Act.

The question in each of these references is answered in favour of the assessee with costs in each. Counsel''s fee Rs. 250 also in each.