COMMISSIONER OF INCOME-TAX VS S. MARIAPPAN
2001 P T D 347
[238 I T R 826]
[Madras High Court (India)]
Before Janarthanam and Mrs. A. Subbulakshmy, JJ
COMMISSIONER OF INCOME‑TAX
versus
S. MARIAPPAN
T. C. Nos.1070 and 1071 of 1987 (References Nos.655 and 656 of 1987), decided on 19/03/1998.
Income‑tax‑‑‑
‑‑‑‑Firm‑‑‑Registration‑‑‑Condition precedent‑‑‑Valid partnership‑‑‑Essentials of valid partnership‑‑‑Business must be carried on‑‑‑Partnership formed with object of purchasing lottery tickets and sharing prize money‑‑‑No business was carried on‑‑‑Firm was not entitled to registration‑‑‑Indian Income Tax Act, 1961, S. 185.
While according registration, the Income‑tax Officer should inquire into the genuineness of the firm and its constitution, as specified in the instrument of partnership, pursuant to the salient provisions adumbrated under subsection (1) of section 185 of the Income Tax Act, 1961. If he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year. If he is not so satisfied, he shall pass an order in writing refusing to register the firm. The following important elements must be there in order to establish a partnership: (i) There must be an agreement entered into by all the parties concerned; (ii) The agreement must be to share profits of business; and (iii) The business must be carried on by all or any one of the persons concerned acting for all. The expression "business" has been defined in section 2(13) of the Income Tax Act, 1961 as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Whatever else may or may not be regarded as falling within the meaning of those words, gambling cannot certainly be taken as one of them:
Held, accordingly, that the assessee‑firm which had been constituted with the object of purchasing lottery tickets and sharing the prize money was not entitled to registration. The transaction of the assessee‑firm could not be taken as activities relatable to trade, commerce, intercourse or business.
State of Bombay v. R.M.D. Chamarbaugwala AIR, 1957 SC 699 applied.
Douglas v. Commonwealth Kentucky (1897) 168 US 488; Phalen v. Commonwealth of Virginia (1850) 49 US 163 and Ramloll v. Soojunmull (1847) 4 Moo. Ind. App. 339 (PC) ref.
S.V. Subramaniam for the Commissioner.
P.P.S. Janathana Raja: Amicus curiae.
JUDGMENT
JANARTHANAM, J.‑‑‑The assessee "S. Mariappan", it is said, is a partnership firm. The said firm was stated to have been constituted with four partners. It is located at No.444. Trichy Main Road, Sanjeevirayanpet, Salem‑6. The said partnership had been constituted with the avowed purpose of purchasing lottery tickets and sharing the profits among them in agreed proportion, in case of one of the tickets purchased winning prize in a lottery.
The assessee‑firm filed Form No.11 before the Income‑tax Officer, Circle II(4), Salem‑1, on March 31, 182, under section 185 of the Income Tax Act, 1961 (Act No.43 of 1961‑for short "I.T. Act"), with a deed of partnership drawn on May 4, 1981, seeking registration to the firm.
The Income‑tax Officer found that though the partnership firm was in order and the application for registration was in time, the assessee‑firm is not entitled to registration, for the reasons, as below:
(i) The lottery winning is part and parcel of income from other sources, as this is a wind‑fall income; ?????
(ii) Purchase of lottery tickets will not be considered as "business activity"; and
(iii) If the tickets are purchased for sale and if an unsold ticket wins a prize, then the matter will be different.
Therefore, the Income‑tax Officer was of the view that winning of lottery ticket cannot be said as "business activity", profession, vocation or occupation and, consequently, he refused the registration sought for by the firm.
The consequence of non‑grant of registration was that the assessment was completed under the status of "body of individuals".
Aggrieved by the order of the Income‑tax Officer, two appeals had Appellate Assistant Commissioner of Income‑tax, Coimbatore Range, Coimbatore (for short "the AAC"). They are: Appeals Nos. 1057 of 1982‑83 and 1058 of 1982‑83.
The former appeal is relatable to the refusal of grant of registration under section 185 of the Income‑tax Act and the latter is relatable to the assessment order being passed, treating the four partners of the alleged firm as "association of persons", relatable to the assessment year 1982‑83.
The Appellate Assistant Commissioner allowed both the appeals by his individual orders of even date, namely September 1, 1984.
By allowing the former appeal, the Appellate Assistant Commissioner directed the Income‑tax Officer to grant registration of the firm under section 185 of the Income‑tax Act. The consequence of the order passed in the said appeal, resulted in passing an order in the other latter appeal in issuing a consequential direction to the Income-tax Officer to have the assess is completed at the hands of the partners of the firm in proportion to the share of income according to their share in the firm.
The Revenue, aggrieved by the orders of the Appellate Assistant Commissioner as above, filed Income‑tax Appeals Nos. 2764 and 2765/Mds. of 1984 before the Income‑tax Appellate Tribunal, Madras "C" Bench. Madras (for short "the Tribunal).
The Tribunal, by a common order, dated March 18, 1986, dismissed both the appeals confirming the view taken by the Appellate Assistant Commissioner.
The Commissioner of Income‑tax, Coimbatore filed R.A. No.558 (Mds.) of 1986 in I.T.A. No.2764 (Mds.) of 1984 requiring the Tribunal to state the question of law, as below, arising out of the order of the Tribunal, for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in upholding the order of the Appellate Assistant Commissioner and directing the Income‑tax Officer to grant registration and cancelling the assessment made in the status of 'body of individuals'?"
The Commissioner of Income‑tax, Coimbatore, filed Reference Application No.559 (Mds.) of 1986 in I.T.A. No.2765 (Mds.) of 1984 requiring the Tribunal to refer the question of law, as below, for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and has any material in holding that the assessee is a partnership and is entitled to the benefit of registration under section 185(1)(a) of the Income‑tax Act, even though no business was carried on by the firm?" On the foregoing facts, the questions of law as mentioned above had been referred to this Court for its opinion by the Tribunal by individual orders of even date, namely October 20, 1986.
The reference so made had been taken on file by this Court as Tax Case (References) Nos. 1070 and 1071 of 1987.
In these actions, notices had been served on the assessee and despite service of notices, the assessee did not opt to engage a counsel of its choice to defend it in these actions.
These actions were listed in the monthly list and when they came up for hearing yesterday (March 18, 1998), and this day (March 19, 1998), no one on behalf of the petitioner‑assessee was/is present in Court to defend it in these actions. In such a situation, we could have decided the questions involved in these actions, on their merits, on perusal of the materials available on record and of course, after hearing Mr. S.V. Subramaniam, learned senior standing counsel representing the Revenue. We do not, however, propose to do so. We, therefore, requested Mr. P.P.S. Janarthana Raja, learned counsel present in Court to assist the Court, as amicus curiae and he too readily agreed to do so; a fine gesture indeed;
We heard the arguments of the said learned senior standing counsel representing the Revenue as well as the said learned amicus curiae counsel.
During the course of their arguments, it transpired that the question of law under reference in both the actions had not been properly framed. Consequently, we refrained the question as below:
Tax Case (Reference) No. 1070 of 1987):
''Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the Appellate Assistant Commissioner in directing the Income‑tax Officer to grant registration and consequently cancelling the assessment made in the status of body of individuals'?"
Tax case (Reference) No. 1071 of 1987):
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the‑ assessee is entitled to the benefit of registration under section 185(l)(a) of the Income‑tax Act?"
In both the questions of law, as refrained above, arising from the orders of the Tribunal, the primary question that evolves for consideration is as to whether the assessee‑firm is entitled to the benefit of registration under section 185(1)(a) of the Income‑tax Act.
If the answer to this question could solve the tangle, as relatable to the mode of assessments, then the assessee‑firm is entitled to be registered under section 185(l)(a) of the Income‑tax Act and, consequently, it registered, the partners of the assessee‑firm shall have to be assessed individually in proportion to the share of income received by them from the firm.
If the answer is the other way about the assessment for the relevant assessment year has to be necessarily completed under the statute of "association of persons or individuals". Thus, the mode of assessment is entirely dependent upon their entitlement to the registration under the Income‑tax Act.
While according registration, the Income‑tax Officer shall inquire into the genuineness of the firm and its constitution, as specified in the instrument of partnership, pursuant to the salient provisions adumbrated under subsection (1) of section 185, of the Income‑tax Act. If he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year. If he is not so satisfied; he shall pass an order in writing refusing to register the firm.
The Income‑tax Officer shall have to inquire, into not only the genuineness of firm, but also its constitution as specified in the instrument of partnership. The order of the Income‑tax Officer reveals that he did not entertain anything about the genuineness of the firm and the principal reason for his refusing to accord registration eras that the activity of the firm cannot at all be stated to be a trading or business activity. Such a reason did not find favour with the Appellate Assistant Commissioner and the Tribunal. We are unable to affix our seal of approval to the view so entertained by the Appellate Assistant Commissioner and the Tribunal, in opposition to the view entertained by the Assessing Officer, on the facts and in the circumstances of the cases.
Section 4 of the Indian Partnership Act, 1932 (Act No.9 of 1932), defining "partnership", "partner", and "firm name" reads as under:
"(4) Definition of "partnership', 'partner' 'firm' and 'firm name'.‑‑?'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.
Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their business is carried on is called the 'firm names'."
Whether there was a partnership or not may, in certain cases, be a mixed question of law and fact, in the sense that whether the ingredients of partnership as embodied in the law of partnership were there or not, in a particular case, must be judged in the light of the principles applicable to partnership. The following important elements must be there in order to establish partnership:
(i) There must be an agreement entered into by all the parties concerned;
(ii) The agreement must be to share the profits of a business; and
(iii) The business must be carried on by all or any one of the persons concerned, acting for all.
The sharing of profits and contributing to losses were not the only elements to the partnership; but the existence of agency was essential.
In the instant case, there is no pale of controversy as to the existence of the first two ingredients of partnership, as stated above. The existence or otherwise of the third ingredient, namely, business aspect carried on by all or any one of their, acting for all, is the moot question deciding the fate of these actions.
The expression "business" is defined in section 2(13) of the Income?, tax Act, and it reads as under:
"(2) Definitions.‑‑‑In this Act, unless the context otherwise requires,‑‑
(13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;"
According to learned amicus curiae counsel the concept of "business", as contemplated by section 2(13) of the Income‑tax Act, by way of inclusive definition, taking in its fold any trade, commerce, or manufacture or any adventure or concern in the name of trade, commerce or manufacture, but must not be given any restricted meaning. But, on the contrary, to give wide meaning, in rather a bid to a term the development of trade and commerce, Mr. P.P.S. Janarthana Raja would further submit that lottery tickets must have to be construed to fall within the definition of "goods", as contemplated by section 2(7) of the Sale of Goods Act, 1930 (Act No.3 of 1930), and this would be apparent, he would say, by a cursory perusal of the said definition.' He would further elaborate his submission by stating that once the lottery tickets fall within the definition of "goods" under section 2(7) of the Sale of Goods Act, the purchase of the lottery tickets and holding them in stock till up to the date of draw would become "stock‑in-?trade" of the assessee‑firm and the prize money won by the winning ticket shall be deemed to be the profits of the concern requiring to be shared among the partners in accordance with their shares. If no prize is won, then the total value of the tickets purchased by the firm should have to be construed as a loss to be shared among the partners in accordance with their shares. Such being the case, he would say, the "business activity" carried on by the assessee‑firm is in accord with the "common course of events".
Mr. S.V. Subramaniam, learned senior standing counsel representing the Revenue, would, however, strike a discordant note to the submissions, as projected by learned amicus curiae counsel; as stated above. According to him, if the nature of the activity carried on, by the assessee‑firm is thoroughly sifted, and scanned, what would emerge to the surface is that there is no element of trade or business in the activity carried on by the assessee‑firm. He would further say that if the assessee‑firm purchased lottery tickets for resale, then it could be said that there is an element of trade of business activity in such transactions. But that is not the case here. The business activity of the assessee‑firm, he would say, consists of only the purchase of lottery tickets and to wait for the result of the trade to find out whether any of the tickets purchased by the assessee‑firm happened to win a prize in the trade. Such an activity, according to him, cannot at all be elevated to the status of trade or commerce or intercourse and if at all it may be akin to, an activity, which encourages a spirit of feckless propensity for making easy gain by lot or chance.
Rival submissions of either counsel may now fall for consideration in the arena of discussion to be entered into by us.
In untying the knot of the knotty question posed for our consideration, we may now refer to a constitution Bench decision of the apex Court in the case of State of Bombay v. R.M.D. Chamarbaugwala AIR 1957 SC 699. A scintillating discussion in that case had been entered into by their Lordships of the Supreme Court, as relatable to the trade, commerce and inter‑course, etc., in paragraphs 38 to 42 (at pages 719 and 720), which is relevant for our present purpose, is getting reflected as below:
"(38) From ancient times seers and law givers of India looked upon gambling as a sinful and pernicious vice and deprecated its practice. Hymn XXXIV of the Rigveda proclaims the demerit of gambling. Verses 7, 10 and 13 say:
'(7) Dice verily are armed with goads and driving hooks, deceiving and tormenting, causing grievous woe. They give frail gifts and then destroy the man who wins, thickly anointed with the player's fairest good.
(10) The gambler's wife is left forlorn and wretched; the mother mourns the son who wanders homeless. In constant fear, in debt, and seeking riches, he goes by night unto the home of others.
(11) Play not with dice; no, cultivate they corn‑land. Enjoy the gain and deem that wealth sufficient. There are thy cattle, there they wife, O gambler, so this good savitar himself hath told me.'
The Mahabharata deprecates gambling by depicting the woeful conditions of the Pandavas who had gambled away their kingdom. Manu forbade gambling altogether. Verse 221 advises the king to exclude from his realm gambling and betting, for those two vices cause the destruction of the kingdom of princes. Verse 224 enjoins upon the king the duty to corporally punish all those persons who either gamble or bet or provide an opportunity for it. Verse 225 calls upon the king to instantly banish all gamblers from his town.
In verse 226 the gamblers are described as secret thieves who constantly harass the good subjects by their forbidden practices. Verse 227 calls gambling a vice causing great enmity and advises wise men not to practice it even for amusement. The concluding verse 228 provides that on every man who addicts himself to that vice either secretly or openly the king may inflict punishment according to his discretion.
While Manu condemned gambling outright, Yajnavalkya sought to bring it under State control but he too in verse 202(2) provided that persons gambling with false dice or other instruments should be branded and punished by the king. Kautilya also advocated State control of gambling and, practical person that he was, was not adverse to the State earning some revenue therefrom.
Vrihaspiti dealing with gambling in Chapter XXVI, verse 199, recognises that gambling had been totally prohibited by 'Manu because it destroyed truth, honesty and wealth, while other law‑givers permitted it when conducted under the control of the State so as to allow the King a share of every stake. Such was the notion of Hindu‑law givers regarding the vice of gambling. Hamilton in his Hedya, Volume IV, Book XLIV, includes gambling as a Kiraheeat or abomination.
He says: 'It is an abomination to play at chess, dice or any other game; for if anything is staked it is gambling, which is expressly prohibited in the Koran; or if on the other hand, nothing be hazarded it is useless and vain.' The wagering contracts of the type which formed the subject‑matter of the case of Ramall v. Soojunmull. 4 MIA 339 (PC), and was upheld by the Privy Council as not repugnant to the English Common law were subsequently prohibited by Act XXI of 1948 which was enacted on the suggestion of Lord Campbell made in that case and introduced in India provisions similar to those of the English Gaming Act (8 and 9 Vict c. 109).
The Bengal Gambling Act (Beng. Act 2 of 1867) provided for the punishment for public gambling and the keeping of common gaming house in the territories subject to the Lieutenant Governer of Bengal. Lottery has been, since 1870 made an offence under section 294A of the Indian Penal Code. Gambling agreements have been declared to be void under the Indian Contract Act, 1872 (S. 30). This is short in how gambling is viewed in India.
(39) Before the Legislature intervened, gambling and wagering were not prohibited by the English Common Law although the English Courts looked upon it with disfavour and discouraged it on grounds of public policy by denying procedural facilities which were granted to other litigants. The Scottish Courts, however, have always refused to recognise the validity of wagering contracts and have held, that sponsiones ludicroe, as they style such contracts, are void by the Common Law of Scotland.
The Gambling and Betting Act, 1664 (16 Car. II c. 7) was directed against fraudulent and excessive gambling and betting at games or sports. This was followed by the Gaming Act of 1710 (9 Ane C. 19). The Marine Insurance Act, 1745 (19 Geo. II c: 37) for the first time prohibited wagering policies on risks connected with British Shipping. This was supplemented by the Marine Insurance Act, 1788 (28 Geo. III, c. 56).
The Life Insurance Act, 1774 (14 Geo. II c. 48), though not intended to prohibit wagering in general, prohibited wagering under the cloak of a mercantile document. which purported to be a contract of insurance. Then came the Gaming Act of 1845 (8 and 9 Viet. c. 109) which for the first time declared all contracts made by way of gaming or wagering void irrespective of their form or subject‑matter. The provisions of this Act were adopted by our Act XXI of 1948 as hereinbefore mentioned. The Gaming Act of 1892 (55 and 56 Viet c. 9), further tightened up the law.
(40) As far back as 1850, the Supreme Court of America in Phalen v. Commonwealth of Virgina (1850) 49 US 163; 12 Law Ed. 1030 (at page 1033) observed:.
'Experience has shown that the common forms of gambling are comparatively innocuous when placed in contrast with Widespread pestilence of lotteries. The former are confide to a few persons and places but, the latter infests the whole community; it enters every dwelling; it reaches every class; it preys upon the hard earnings of the poor; it plunders the ignorant and the simple.'
The observations were quoted with approval in Douglas v. Common Wealth Kentucky (1897) 168 U.S. 488; 42 Law Ed. 553 at page 555. After quoting the passage from (1850) 49 U. S. 163; 12 Law Ed. 1030 at page 1033, the judgment proceeded:
'Is the State forbidden by the supreme law of the land from protecting its people at all times from practices which it conceives to be attended by such ruinous results? Can the Legislature of State contract away its power to establish such regulations as are reasonably necessary from time to time to protect the public morals against the evils of lotteries'.
(42) It will be abundantly clear from the foregoing observations that the activities which have been condemned in this country from ancient times appear to have been equally discouraged and looked upon with disfavour in England, Scotland, the United States of America and in Australia in the cases referred to above.
We find it difficult to accept the contention that those activities which encourage a spirit of reckless propensity for making easy gain by lot or chance, which lead to the loss of the hard earned money of the undiscerning and improvident Common man and thereby lower his standard of living and drive him into a chronic state of indebtedness and eventually disrupt the peace and happiness of his humble home could possible have been intended by our Constitution makers to be raised to the status of trade, commerce or intercourse and to be made the subject‑matter of a fundamental right guaranteed by Article 19(1)(g).
We find it difficult to persuade ourselves that gambling was ever intended to form any part of this ancient country's trade, commerce or intercourse to be declared as free under Article 301. It is not our purpose nor is it necessary for us in deciding this case to attempt an exhaustive definition of the word 'trade', 'business' or 'intercourse'.
We are, however, clearly of opinion that whatever else may or may not be regarded as falling within the meaning of these words, gambling cannot certainly be taken as one of them. We are convinced and satisfied that the real purpose of Articles 19(1)(g) and 301 could not possibly have been to guarantee or declare the freedom of gambling. Gambling activities from their very nature and in essence are extra‑commercium although the external forms, formalities and instruments of trade may be employed and they are not protected either by Article 19(1)(g) or Article 301 of our Constitution. "
The observations of the apex Court, as extracted above, are applicable on all fours to the facts of the instant case. Taking into consideration the "business activity" of the assessee‑firm, as we have narrated above, we are clearly of opinion that the transactions of the' assessee‑firm cannot certainly be taken as activities relatable to trade, commerce, intercourse or business. The element of concept of business, not being there, in the assessee‑firm, to say that the assessee‑firm is a partnership firm entitled to be registered under section 185(1)(a) of the Income‑tax Act cannot at all be expected to commend acceptance at our hands.
The resultant product of the discussion, as above, leads to the irresistible conclusion as below:
The assessee‑firm can, by no stretch of imagination, be construed as a partnership firm entitled to the benefit of registration under section 185(1)(a) of the Income‑tax Act and the consequence to flow therefrom is that the assessment has to be made and completed treating the so‑called four partners of the firm as an "association of persons", as had been done by the Assessing Officer.
We answer the reframed question under reference in Tax Case (Reference) No. 1070 of 1987 that the Appellate Tribunal is not right in law in upholding the order of the Appellate Assistant Commissioner in directing the Income‑tax Officer to grant registration and consequently cancel the assessment made in the "status of body of individuals" and answer the refrained question in Tax Case (Reference) No. 1071 of 1987 that the Appellate Tribunal was not right in holding that the assessee is entitled to the benefit of registration under section 185(1)(a) of the Income‑tax Act.
Before parting with 'this matter, we owe a deep debt of gratitude to Mr. P.P.S. Jabarthana Raja, who readily agreed to assist this Court as amicus curiae counsel.
Both the tax case (references) are thus disposed of. No costs.
M.B.A./158/FC ?????????
Order accordingly.