Commissioner of Income Tax vs Pure Dhansar Coal Co.

The Tribunal, Patna Bench, has submitted a statement of the case u/s 256(1) of the income tax Act, 1961 (''the Act''). The following questions of law have been submitted for the opinion of this Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the income derived by the assessee-firm was taxable under the head ''Profits and gains of business or profession'' and not under the head ''Income from other sources''?

Whether, on the facts and in the circum stances of the case, the Tribunal was justified in law in granting registration for the assessment year 1965-66 and continuing the registration for the assessment year 1967-68?

The relevant facts as evidenced by the statement of the case are these. The assessee, Pure Dhansar Coal Co., had claimed that the assessee was a firm and registration for the same had been claimed u/s 185 of the Act. According to the assessee, the firm was constituted by an instrument of partnership dated 1-7-1963. The ITO found that on 7-6-1955, the assessee had entered into an agreement with one Shri Basant Kumar Agrawal by which the management of colliery mine was handed over to him for a period of 10 years. Before that agreement expired, there was a fresh agreement dated 2-9-1963, under which the colliery was given on lease to one Shri Indra Kumar Agrawal, who was appointed as an agent to carry on the colliery and mine business of the assessee, who had executed a general power-of-attorney in favour of the agent. Under the agreement, the agent had to pay to the assessee-firm a profit at the rate of 8 per cent of the net sale proceeds for the coal despatched subject to a minimum of Rs. 18,000 per year. The agent was to remain in full charge of the sale as well as the dealings during the subsistence of the agreement without any hindrance, interference or objection whatsoever. The ITO was of the view that the assessee was not carrying on any business with effect from the date of commencement of the agreement and the income derived was not an income from ''business'' but it could be treated as income from ''other sources''. He further held that as no business was being carried on by the assessee, the firm could not be treated as a partnership firm. According to him, the correct status of the assessee would be that of an AOP deriving income from their assets. In his view, therefore, as no partnership was in existence in the eyes of law, registration could not be granted. According to the ITO, during the period of agreement, the amounts were not treated as a commercial asset by the assessee and, therefore, the income could not be assessed u/s 28 of the Act. He further held that the payment of commission was based on despatches but it was only a measure for calculating the payments to the assessee. The orders of the ITO for the two assessment years in question, namely, 1965-66 and 1967-68, have been marked Annexures A and Al to the statement of the case. 2. On appeal, the AAC generally agreed with the ITO and upheld the orders of refusal of registration for the assessment years in question. The consolidated order of the AAC has been marked Annexure B to the statement of the case.

On further appeal to the Tribunal, it was submitted on behalf of the assessee that the business still belonged to the assessee and the assessee had appointed an agent for managing the mines on his behalf. It was submitted that there was a contract for management and there was no agreement to lease out the mine or the machinery. It was further submitted that the agents carried on the business in the name of the assessee and the lease of the mine continued to be in the name of the assessee. Under the agreement it was stated that after the death of partners, it became very difficult to manage and run the colliery and it was decided to take the help of the agents. The agents had to carry on the business in their capacity as agents and the payments to the assessee were related to the despatches from the coal-mines. If there were more despatches, the assessee was to get more payment though a minimum had been fixed. The bank account was also opened in the name of Pure Dhansar Coal Co. and it had also been provided in the agreement that on termination of the agreement the agent was not entitled to any compensation for structures, buildings and other development made by him at his cost during the period of agreement. It was also brought to the notice of the Tribunal that from 13-6-1967, the business was being continued by the firm itself and the agency agreement had been terminated. With regard to the question of registration, it was claimed that even if the nature of income was held to be an income from other sources, the registration of the firm should be granted. On behalf of the revenue, it was contended before the Tribunal that the business was being carried on not by the assessee but by the agents and, thus, there was no business carried on by the firm. It was further submitted that it was necessary for a firm to carry on the business and in absence of business there could not be the existence of any legal partnership. The Tribunal, after considering the terms of the deed and on the facts and in the circumstances of the case, held that the assessee had stopped managing the colliery itself and had given the management to an outsider due to certain difficulties. The Tribunal further held that there was no mention in the lease deed of the mines or of the machinery in the agreement and the mines and machineries continued to be used as commercial assets by the firm. Though wide powers were given to the agents, they continued to be agents of the assessee, who continued to carry on business. The Tribunal also found that the business was being carried on in the same name and the management was to revert to the assessee on termination of the agreement. According to the Tribunal, there was no cessation of business though the actual management had been handed over. Thus, the Tribunal held that the assessee was carrying on the business. It was further held by the Tribunal that even if the income of the firm was assessable u/s 56 of the Act, it would not come in the way of the grant of registration of the firm. The consolidated order of the Tribunal has been marked Annexure C to the statement of the case.

Mr. B.P. Rajgarhia, the learned senior standing counsel for the revenue, contended that the finding of the Tribunal regarding the relationship of principal and agent was erroneous. He further invited our attention to a decision of this Court in the case of Khas Benedih Colliery v. CIT [1974] BBCJ 440 . That decision, in our view, however, can hardly be pressed into service on the facts and in the circumstances of the instant case because at page 442, Untwalia, C.J. speaking for the Bench, held that that was not a case where the agent was appointed to carry on the business on behalf of the principal. It was further observed that the use of the words ''principal'' and ''agent'' throughout the lease is a misnomer. Insofar as the present case is concerned, the finding of the Tribunal is that there was a relationship of principal and agent between the parties and that the assessee was actually carrying on its business through its agent. There is no perversity in the findings recorded by the Tribunal. The learned counsel for the assessee placed reliance on a Bench decision of this Court in the case of Commissioner of Income Tax Vs. S.K. Sahana and Sons Ltd., . That Bench which decided the case to which one of us (S.K. Jha, J.) was a party and presided over by Untwalia, C.J. held that the assessee-company, which owned a colliery, having entered into an agreement with another company under which the latter was to carry on the coal business of the assessee and to pay to it profit at a certain rate on the amount of coal and coke raised and manufactured subject to a guaranteed minimum. The Tribunal held in that case that the relationship was clearly one of ''principal'' and ''agent'' and the income of the assessee was income from business. It was held by this Court that the decision of the Tribunal was correct. The case of S.K. Sahana (supra) squarely covers this case and there is no distinguishing feature. We. accordingly, following the decisions in S.K. Sahana''s case (supra), answer the questions referred to this Court in favour of the assessee and against the revenue and hold on the facts and in the circumstances of the case, that the Tribunal was correct in law in holding that the income derived by the assessee was taxable under the head ''Profits and gains of business or profession'' and not under the head ''Income from other sources''. We further hold that the Tribunal was justified in granting registration for both the assessment years in question, namely, 1965-66 and 1967-68. In the circumstances, however, we shall make no order as to costs.