COMMISSIONER OF INCOME TAX Vs. SALKIA TRANSPORT ASSOCIATES

JUDGEMENT

(1.) In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court :

(2.) The consolidated reference relates to the assessment years 1966-67 to 1972-73 involving the question of registration of the respondent as a partnership firm under Section 185 of the Income-tax Act, 1961. Shortly stated, the facts are that a private limited company known as Messrs. Salkia Transport Agency Ltd. was owning and operating a fleet of buses. For the purpose of running 23 of its buses on route Nos. 51, 54 and 56 on the strength of stage carriage permits granted to it by the transport authorities, it entered into an agreement, styled as an "agency agreement", with four members of the Khanna family (hereinafter referred to as the "Khannas"). For the purpose of carrying on the business of running the buses on the aforementioned routes, in pursuance of the agency agreement, the Khannas entered among themselves into a partnership agreement dated March 15, 1964. It was under this partnership agreement that the assessee-firm, known as "Salkia Transport Associates", came into being with effect from March 29, 1963, the date on which the Khannas had commenced business under the agency agreement referred to above. It was not in dispute that, since the partnership came into being, the assessee-firm had been operating the buses on the strength of the stage carriage permits which did not stand in its name but in the name of the aforementioned limited company. When the limited company owning the buses and previously operating the buses went into liquidation, the partners of the assessee-firm filed an application in the High Court in the year 1969 for a direction to the provisional liquidator not to interfere with their running of the 23 buses under the aforesaid agency agreement and with the running of another 11 buses taken by them from the same company under an earlier agreement. That application was dismissed by the High Court by its judgment dated October 10, 1969. In that judgment, the scope of the agency agreement and the right of the Khannas in the buses covered by the agency agreement were considered by the High Court. It was held that though the agreements were styled as agency agreements, they were in reality contracts for hire of the 34 buses with their stage carriage permits. On the question of title to the buses, the High Court held in those proceedings that the ownership of the 34 buses vested in the limited company only.

(3.) The assessee-firm applied for initial registration for the assessment year 1964-65 and for continuance of registration for the subsequent assessment years including the assessment years now under reference (1966-67 to 1972-73). One of the grounds on which the Income-tax Officer refused initial registration for the assessment year 1964-65 was that the object of the partnership was unlawful, being violative of the provisions of the Motor Vehicles Act. In his view, the stage carriage permits granted under the Motor Vehicles Act would be available only to the person to whom it was granted, that the operation of the stage carriage permits by anybody other than the persons to whom they were granted was not sanctioned by the Motor Vehicles Act and hence illegal and that the object of the partnership, i.e., running of the motor vehicles by the assessee-firm under the stage carriage permits granted to the limited company was unlawful. Since initial registration was refused for the assessment year 1964-65, the Income-tax Officer refused continuance of registration for the subsequent assessment years, sought by the assessee on the basis of the declarations filed in the prescribed form along with the returns.