Taxability of unregistered associations: treated as firms for income tax; depreciation denied for assets assessed to constituent firms.

An unregistered association carrying on business constitutes a firm or other association of individuals for income tax purposes and is therefore taxable on its profits under the Income tax Act, 1922; outcome: the association is liable to assessment. Depreciation allowance attaches to the assessee in whose assessment the assets are used and profits are computed, so assets owned or leased and separately assessed in constituent firms do not support a depreciation claim by the association; outcome: depreciation claim by the association disallowed.

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Issues: (i) Whether an unregistered association/firm (Sri Gopalji Company) composed of more than twenty persons is liable to assessment to Income-tax on its profits despite not being registered under the Companies Act, 1913; (ii) Whether the association is entitled to an allowance for depreciation for machinery, plant and buildings owned or leased by its constituent firms.

Issue (i): Whether the unregistered association is taxable as a firm or other association of individuals under the Income-tax Act, 1922 notwithstanding non-registration under the Companies Act, 1913.

Analysis: Section 3 of the Income-tax Act, 1922 makes income-tax leviable on companies, firms and other associations of individuals, and Section 2(6) defines "company" for the purposes of the Act. The association does not fall within the statutory definition of a company but does fall within the definition of a firm or other association of individuals. The Companies Act, 1913 prohibition on formation without registration does not exempt an association from liability to tax on profits earned from carrying on business. Precedents confirm taxable status of income even if constitution or activity is otherwise unlawful.

Conclusion: The association is liable to assessment to Income-tax on its profits; issue decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the association can claim depreciation allowance for assets owned or leased by constituent firms.

Analysis: Section 10 of the Income-tax Act, 1922 permits allowance for depreciation where the assets are used for the purposes of the business in respect of the profits whereof the assessment is made. The constituent firms have been separately assessed and granted depreciation allowances in respect of those assets; the association itself is not assessed in respect of the profits of those constituent firms and the assets are not used in the business for which the association is assessed.

Conclusion: The association is not entitled to an allowance for depreciation for machinery, plant or buildings of the constituent firms; issue decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference questions are answered in favour of the Revenue: the unregistered association is taxable under the Income-tax Act, 1922 and cannot claim depreciation allowance for assets in respect of which constituent firms have been separately assessed.

Ratio Decidendi: An unregistered association or firm carrying on business is taxable under Section 3 of the Income-tax Act, 1922 as a firm or other association of individuals despite non-registration under the Companies Act, 1913, and a depreciation allowance under Section 10 of the Income-tax Act, 1922 is available only to the assessee in whose assessment the assets are used and profits are computed.

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