Madhusudan Gordhandas and Co. vs Commissioner of Income Tax

D.R. Dhanuka J.

By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question of law to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the assessments made on the assessee in the status of association of persons for the assessment years 1966-67 and 1967-68 ?"

For the reasons briefly indicated hereinafter, we answer the question against the assessee and in favour of the Revenue. We hold that the finding of fact arrived at by all the authorities below that the assessee was a member of an association of persons is correct. We also hold that the Tribunal and the authorities below applied the relevant principles laid down by the judgments of the Supreme Court while deciding this question and the order of the Tribunal does not suffer from any legal infirmity.

Let us summarise the material facts.

At all material times, the French Government, in Pondicherry, used to issue two kinds of import permits known as "attestations" and "authorisations", also called "customs clearance permits", i.e., CCPs, authorising the permit holders to import certain goods. The holders of the permits were entitled to import the goods from the countries with which France had trade agreements. Three individuals by names B. B. Bawa, S. L. Sharma and Narain Cheimull joined together for the purpose of contacting 24 CCP holders of Pondicherry who were ready to sell the permits obtained by them as aforesaid on premium. The said three individuals decided to embark on a joint venture for importation of goods from abroad and sale thereof at a profit in active collaboration with Madhusudan Gordhandas, the assessee herein. The assessee joined and participated in the joint venture. A very large number of transactions of import of goods were effected by an on behalf of the joint venture to which the assessee was a party. The imported goods were sold by the parties to the joint venture including the assessee. The assessee was the principal party to the joint venture as more particularly indicated below. The assessee arranged for opening of letters of credit and finance of imports. The assessee arranged for release of the shipping documents concerning the imports, receipt of advances from the parties interested in purchase of imported goods and sale thereof. Powers of attorney were obtained from the CCP holders in favour of Madhusudan Gordhandas and Co. or their nominees or one Shri S. L. Sharma. The accounts of large scale transactions of import of goods and the sale thereof were maintained by the ''assessee at Bombay. However, no return was filed by the assessee in respect of the above-referred transactions effected on a large scale involving crores of rupees. Some time in August, 1966, the Income Tax Department conducted a search u/s 132 of the Act at the office of Madhusudan Gordhandas and Co. and also at the residential premises of its partners. Such search was also conducted at the place of B. B. Bawa, S. L. Sharma and Narain Cheimull and at the place of some of the persons who were holders of customs clearance permits. A large number of books of account, documents and incriminating papers were seized. Scrutiny of these documents revealed that there was a planning on the part of the said B. B. Bawa, S. L. Sharma and Narain Cheimull and the assessee to obtain customs clearance permits from the Pondicherry parties, import goods against such permits and make profits as a result of sale thereof. Notices were issued by the Income Tax Officer u/s 148(1) of the Income Tax Act, 1961, read with section 147(a) thereof. Such notice were served on the assessee. No return was filed by the assessee. The assessee committed various defaults in respect of is obligation to comply with the said notices. Statements of various persons including that of Shri P. K. Katakia, partner of Madhusudan Gordhandas and Co. were recorded. In the statement dated December 9, 1980, Shri P. K. Katakia stated that up to March 31, 1966, the entire work in connection with the acceptance of the CCPs was done by his firm but thereafter the said work was entrusted by Shri Bawa and Sharma to Narain Cheimull but the details of all transactions used to be furnished by the assessee. The assessee contended before the Income Tax Officer and other authorities below that the assessee was not a member of the association of persons and only the above referred three individuals, i.e., Bawa, Sharma and Cheimull, were members of the association of persons. The assessee also contended that the assessee was merely performing some of the duties entrusted to it by the said three individuals on their promise to pay commission to the assessee at the rate of 1 1/2 to 2 per cent. of the profits. This story of the assessee is not proved. The three authorities below reached the conclusion that the assessee was a live wire of the association of persons and the assessee was the effective and principal party to the joint venture for making income from the above referred transaction for the benefit of all of them. The three authorities below did not accept the assessee''s contention that the assessee was merely performing some of the duties assigned to the assessee by the above-referred three individuals named hereinabove. The Income Tax Tribunal took the view that in any event the ratio in which the profits of the joint venture were shared or agreed to be shared between the four members of the association of persons including the assessee as alleged by the assessee, even if true, was not germane for the consideration of the question as to whether the assessee was liable to be assessed in the status of an association of persons or not. In this situation, the Income Tax Officer was constrained to finalise the assessment on the footing of best judgment assessment u/s 144 of the Income Tax Act, 1961, in view of continuous defaults and lack of co-operation on the part of the assessee to comply with the statutory notices. The findings recorded by the Income Tax Officer on the question referred to us were duly confirmed by the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal as valid grounds.

In this reference, the court is not concerned with the quantum of tax liability of the assessee as such. The only question before this court is as to whether the Tribunal was justified in upholding the assessment made on the assessee in the status of an association of person. We are of the view that the three authorities below have carefully analysed the relevant material on record and arrived at proper findings of fact.

In Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, , the Supreme Court held that the word "associate" means "to join in common purpose or to join in an action". In this case, the apex court further held that the expression association of persons as used in section 3 of the Indian Income Tax Act, 1922, meant an association in which two or more persons joined in a common purpose, the object of which was to produce income, profits or gains. The question to be asked by the court is as to whether there was proper material before the Tribunal to reach the conclusion that the assessee was a party to the joint venture formed with the object of producing income. We have no hesitation whatsoever in reaching the conclusion that having regard to the facts and circumstances of the case, the assessee was a party to the joint venture or joint enterprise along with the three individuals named in the earlier part of the judgment for the purposes of producing income from the business of importing the goods and selling the same at a profit and the view taken by the Tribunal is correct.

Learned counsel for the assessee has relied upon the judgment of the Calcutta High Court in the case of SUNIL KRISHNA PAUL AND ANOTHER Vs. COMMISSIONER OF Income Tax, WEST BENGAL II., . We have carefully gone through the said judgment. The ratio of the said judgment is exactly the same as is the ratio of the judgment of the Supreme Court in the case of Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, . In our considered opinion, the Tribunal has correctly applied the relevant principles laid down in the above referred judgment to the facts of the case.

Learned counsel for the assessee has submitted that the assessee could not be treated as a member of an association of persons as the assessee was not the owner of the customs clearance permits. In our opinion, the reliance of learned counsel on this aspect is totally misplaced. The assessee obtained the requisite power of attorney from the CCP holders and operated thereon. The assessee imported the various goods on behalf of the association of persons and disposed of the same. In the very nature of things, the assessee and other members of the family were required to make imports apparently on behalf of the holders of permits. In reality, the assessee planned to make profits as a result of the joint venture as discussed above and the plan was executed for the benefit of all the member so the association of person including the assessee.

Learned counsel for the assessee also contended that the assessee cannot be treated as a member of the association of persons as the expenses were not to be shared by the assessee. There is no factual foundation for such a plea. The fact remains that the three individuals named in the opening part of this order and the assessee-firm had jointly effected all the transactions with the common purpose of producing income and the assessee played the most important role in connection with the carrying on and operation of business of the joint venture. Learned counsel for the assessee also submitted that the assessee cannot be considered as a member of the association of persons as the assessee joined the joint venture a little later and not from the inception. With respect, this submission is totally irrelevant. After careful consideration of the entire material on record, all the authorities below including the Income Tax Appellate Tribunal reached the conclusion of fact that the assessee was liable to be assessed in the status of an association of persons. We do not find any error, factual or legal, in the conclusion arrived at by the Tribunal.

In view of the above, we have answered the question set out in the opening art of this judgment in the affirmative and in favour of the Revenue.

Having regard to the facts and circumstances of the case, there shall be no order as to costs.