Unlawful partnership can still be taxed as an association of persons where parties combine to earn profits.

Persons who combined to carry on business for gain were treated as an association of persons under the income-tax charging provision, even though the underlying partnership was unlawful under abkari law. The Court applied the plain ordinary meaning of "association of persons" and held that enforceable mutual rights and obligations inter se were not an essential condition for taxability. Illegality in the mode of constitution did not, by itself, exempt the income where the group in fact joined together to earn profits. The income was therefore taxable as an association of persons, and the reference was answered in favour of the Revenue.

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Issues: Whether persons who joined together to carry on business for gain, though the underlying partnership was unlawful under the abkari law, constituted an "association of persons" taxable under Section 3 of the Income-tax Act.

Analysis: The expression "association of persons" in the charging provision was held to bear its plain ordinary meaning. The existence of enforceable mutual rights and obligations inter se was not treated as an essential condition. The Court distinguished the position under company law and contract law from the scope of the taxing statute, and held that illegality in the mode of constitution did not, by itself, exempt the income from tax where the group in fact combined to earn profits. The reasoning was supported by authorities showing that unlawful or unenforceable arrangements may still yield taxable income if the charging provision is otherwise attracted.

Conclusion: The assessees were taxable as an association of persons; the question referred was answered in the affirmative, against the assessee and in favour of the Revenue.

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