23 October 1954
Supreme Court








DATE OF JUDGMENT: 23/10/1954


ACT: Excess  Profits  Tax Act (XV of 1940), ss.  2(5),  5,  10-A- Condition precedent to applicability of s. 10-A-  "Business" if can be defined-What is "business", how determined.

HEADNOTE: As condition precedent to the applicability of section  10-A of the Excess Profits Tax Act, 1940, it must be proved  that during  the  chargeable accounting period the  assessee  was carrying on the kind of business to which the Act applies by virtue of section 5 of the Act. Section 2(5) of the Act states what is included in the  word "business".   It  is  not possible to  lay  down  a  general definition   which  would  cover  all  cases  of   business. Business  involves  the  fundamental idea  of  a  continuous activity.  It connotes some real, substantial and systematic or organised course of activity with a set purpose.   Single isolated  transaction  may also bear the  clear  indicia  of trade  or  an  adventure in the nature  of  trade  which  is included  in the word "buisiness" mentioned in section  2(5) of the Act.  Hence whether a particular source of income  is business   or  not  must  be  decided  on  the   facts   and circumstances  of  each  case  according  to  our   ordinary conception of business. Since  1935  the assessee firm carried on  the  business  of manufacturing  ribbons and laces and for this purpose  owned buildings, leasehold rights, plant, machinery etc.  On April 7, 1940, a public limited liability company was incorporated with the object of acquiring and taking over the  buildings, leasehold  rights, plant, machinery etc., from the  assessee firm.   The company purchased leasehold rights in the  lands and  buildings where plant, machinery etc.  were  installed. The assesses firm as such ceased to manufacture ribbons  and laces  and was left with plant and machinery etc.  which  it did  not require and which ceased to be commercial asset  in the  hands of the firm.  The land and the  buildings  having been  sold the assessee firm put it out of its power to  use the  plant,  machinery  etc.   In  these  circumstances  the company  took and the assessee firm granted a lease  of  the plant, machinery etc., at an annual rent of Rs. 40,000. Held, that this lease of the plant, machinery etc., given by the assesses firm could not be "business" within the meaning of section 2(5) of the Excess Profits Tax Act, 1940. 953 Commissioner  of  Excess Profits Tax, Bombay  City  v.  Shri Lakshmi Silk Mills Ltd. ([1952] S.C.R. 1), distinguished. Inland  Revenue  Commissioner  v.  Broadway  Car  Co.,  Ltd. ([1946] 2 A.E.R. 609), relied upon. Commissioner  of Income-tax v. Shaw Wallace &  Co.,  ([1932]



I.L.R. 59 Cal. 1348), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 145 of 1953. Appeal  by Special Leave from the Judgment and  Order  dated the  8th  day  of  September, 1950, of  the  High  Court  of Judicature  for  the  State  of Punjab  at  Simla  in  Civil Reference No. 3 of 1949. Achhru Ram (R.  S. Narula and Naunit Lal, with him) for  the appellants. M.   C. Setalvad, Attorney-General for India, (G.  N.  Joshi and P. G. Gokhale, with him) for the respondent. 1954.  October 25.  The Judgment of the Court was  delivered by DAS  J.-This  appeal  by  special  leave  arises  out  of  a consolidated  reference made on the 19th April, 1949,  under section 66(1) of the Indian Income-tax Act read with section 21 of the Excess Profits Tax Act by the Income-tax Appellate Tribunal,  Madras  Bench.  The reference arose out  of  four several proceedings for assessment to excess profits tax  of the  appellant,  the  chargeable  accounting  periods  being periods  ending with 31st March of each of the  years  1942, 1943, 1944 and 1945. The relevant facts appearing from the consolidated statement of the case are as follows:- Narain  Swadeshi  Weaving  Mills, the  appellant  before  us (hereinafter  referred to as the assessee firm), is  a  firm constituted in 1935 upon terms and conditions set forth in a deed  of  partnership  dated the 6th  November,  1935.   The partners  were Narain Singh and two of his sons,  Ram  Singh and   Gurdayal  Singh,  their  respective  shares   in   the partnership  being  6  annas,  5 annas  and  5  annas.   The business of the firm which was carried on 954 at  Chheharta, Amritsar, in the Punjab, was the  manufacture of  ribbons  and  laces  and  for  this  purpose  it   owned buildings, plant, machinery , etc. On  the 7th April, 1940, a public limited liability  company was  incorporated  under the name of  Hindus,tan  Embroidery Mills   Ltd.   The  objects  for  which  the   company   was established were to purchase, acquire and take over from the assessee  firm  the buildings and leasehold  rights,  plant, machinery,  etc.,  on terms and conditions  mentioned  in  a draft  agreement  and  the other objects set  forth  in  the Memorandum  of Association of the said company.  Out of  the total subscribed capital represented by 41,000 shares 23,000 shares were allotted to the assessee firm.  Of these  23,000 shares  so allotted 20,000 shares were not paid for in  cash but  the remaining 3,000 shares were paid for in cash.   The directors  of  the company were Narain Singh and  his  three sons Ram Singh, Gurdayal Singh and Dr. Surmukh Singh and one N.  D.  Nanda,  a brother-in-law  of  Gurdayal  Singh.   Dr. Surmukh  Singh was at all material times residing  in  South Africa.   These 4 directors between themselves  hold  33,340 shares  including the said 23,000 shares.  The company  was, accordingly, a director controlled company. The  funds available to the company were not  sufficient  to enable it to take over all the assets of the assessee  firm. The company, therefore, purchased only the buildings and the leasehold rights therein but took over the plant, machinery, etc. on lease at an annual rent of Rs. 40,000. On  the  28th July, 1940, the company  executed  a  managing agency   agreement  in  favour  of  Uppal  &  Co.,  a   firm



constituted  on  the same day with Ram  Singh  and  Gurdayal Singh,  two  of the sons of Narain Singh, as  partners  with equal shares.  Under the managing agency agreement dated the 28th July, 1940, Uppal & Co., was to be paid 10% of the  net profits  of the company besides salary and other  allowances mentioned therein. On  the  25th January, 1941, the company  appointed  as  its selling agent Ram Singh & Co., a firm which 955 came into existence on the same day with Ram Singh, Gurdayal Singh and Dr. Surmukh Singh, the three sons of Narain Singh, as  partners, each having an one-third share.  The terms  of this partnership were recorded in writing on the 17th March, 1941.  Ram Singh & Co., was to get a commission of 3% on the net sales and 6% on the gross income of the company. In  the  two new firms so constituted Narain  Singh  had  no share and eventually with a view to make up for his loss the shares of the partners in the assessee firm were modified by an  agreement made by them on the 21st April,  1941.   Under this agreement Narain Singh was to get a 12 annas share  and the  two  sons Ram Singh and Gurdayal Singh  2  annas  share each.   All  the three firms mentioned  above,  namely,  the assessee  firm,  Uppal  & Co., and Ram  Singh  &  Co.,  were registered as firms under section 26A of the Indian  Income- tax Act. On  the  facts  summarised above,  the  Excess  Profits  Tax Officer came to the conclusion that the main purpose of  the formation  of the company and the two firms of Uppal &  Co., and  Ram  Singh  & Co., was the avoidance  of  liability  to excess  profits  tax.  Accordingly, on  the  16th  November, 1944,  the Excess Profits Tax Officer issued  notices  under section 10A of the Excess Profits Tax Act to the company and the  three  firms.   Eventually,  however,  the  proceedings against the company were dropped and the Excess Profits  Tax Officer  considered  the case of the three firms  only.   He held that the three firms were really one and he, therefore, amalgamated the income of all three and proceeded to  assess the  assessee firm to excess profits tax on that  basis  for the  four  several chargeable accounting  periods  mentioned above. Under  sub-section (3) of section 10 A the assessee  company preferred  four several appeals to the  Appellate  Tribunal. In  their order the, Appellate Tribunal considered the  four following issues: (1)Whether the income of the firms styled as "Uppal &  Co.," and "Ram Singh & Co.," could be amalgamated with the  income of the assessee firm 956 under  the provisions of section 10 A of the Excess  Profits Tax Act ? (2)  Whether  the  share of income of Dr. Surmukh  Singh,  a partner in the selling agency of Ram Singh & ,Co., could  be included  under  section  10 A in  the  excess  profits  tax assessment of the assessee firm ? (3)  Whether the lease money obtained by the assessee  firm could be legally treated as business profits liable to excess profits tax ? (4)  Whether proper opportunity under section 10 A had  been given to the assessee firm?" Before the Appellate Tribunal, as before the Excess  Profits Tax  Officer, the assessee firm objected to the  application of the provisions of section 10 A of the Excess Profits  Tax Act.  The contention was. that as the assessee firm did not, during the relevant chargeable accounting periods, carry  on any  business  within  the meaning of section  2(5)  of  the



Excess Profits Tax Act, section 10 A had no application and, therefore, the profits of Uppal & Co., and Ram Singh &  Co., could  not  be amalgamated with its own  income.   In  other words,  the  argument  was that there must  be  an  existing business  of an assesses during the relevant  period  before section  10  A could be applied in respect  of  transactions concerning  that business.  The Appellate Tribunal took  the view  that instead of using the plant, machinery, etc.,  for its  own manufacture the assessee firm turned  that  revenue yielding  asset  into another use by lettinh it  out  on  an annual  rent  of Rs. 40,000 and that this was  certainly  an adventure in the nature of trade as contemplated by  section 2(5)  of  the  Excess Profits Tax Act read with  rule  4  of Schedule  I  thereto.  Accordingly, it decided issue  No.  3 against  the  assessee firm holding that the  assessee  firm carried  on  business  in  the letting  out  of  the  plant, machinery,  etc.,  on  hire and  the  lease  money  obtained thereby could be legally treated as business profits  liable to  excess  profits  tax.   On issue  No.  I  the  Appellate Tribunal agreed with the Excess Profits Tax Officer that  it was evident beyond doubt that a definite scheme was  adopted creating  separate charges in order to avoid excess  profits tax 957 by the three firms, namely, the assessee firm, Uppal &  Co., and  Ram Singh & Co., taken together.  Thefirst step in  the scheme  was the formation of the company.  The  second  step was  the  appointment  of Uppal & Co.,  as  managing  agents instead of appointing the assessee Tfirm itself.  The  third step  was  the  creation of the firm Ram Singh  &  Co.,  for taking  up the selling agency of the company and  the  final step  was  to  adjust  the shares of  the  partners  of  the assessee  firm  so as to equalise, as far as  possible,  the share of Narain Singh with the shares which  his sons got in the several firms.  The Appellate Tribunal held that all the various  steps  noted above need not necessarily  have  been fictitious   or   artificial   but   they   were   certainly transactions so as to attract the operation of section 10 A. The  Appellate Tribunal decided issues Nos. 2 and 4  against the  assessee.  All the four appeals were  accordingly  dis- missed by the Appellate Tribunal. The   assessee   firm  thereupon  preferred   four   several applications under section 66(1) of the Income-tax Act  read with  section 21 of the Excess Profits Tax Act praying  that the  following  questions arising out of the  order  of  the Appellate Tribunal be referred to the High Court : - (1)  Whether, under the facts and circumstances of the case, the application of section 10 A with a view to  amalgamating the income of the firms "Uppal & Co." and "Ram Singh & Co.", with the income of the appellant firms was correct and valid in law ? (2)  Whether,  in view of the facts admitted on record,  the share  of  income  of Dr. Surmukh Singh, a  partner  in  the selling  agency  and not a partner in  the  appellant  firm, could be legally included along with the share of income  of S.  Ram Singh and S. Gurdial Singh and is this inclusion  at all within the purview of section 10 A ? (3)  Whether,  in  view  of  the  facts,  circumstances  and observations  on  record, the lease money  obtained  by  the appellant firm could be legally treated as business  profits or  profits  from  an adventure in trade  liable  to  excess profits tax ? 122 958 (4)  Whether  the type of a notice served on the  appellant,



under  the facts and the circumstances of the case,  legally amounts  to a proper opportunity under section 10 A  of  the Excess Profits Tax Act, and if not ,what is the legal effect of such opportunity being not afforded ?  (5)  Whether  the proceedings under section 1O A  were  not null  and  void ab initio, for want  of  necessary  previous sanction  from  the  Inspecting  Assistant  Commissioner  of Excess  Profits  Tax,  the fact of  such  previous  sanction having  been obtained being neither mentioned in  the  order nor  proved  before the Appellate Tribunal at  the  time  of hearing although expressly required by the Court. The  Appellate Tribunal declined to refer questions (4)  and (5)  sought  to  be  raised by  the  assessee  firm  and  no grievance  has  been  made before us  on  that  score.   The Appellate  Tribunal  referred the  earlier  three  questions after reframing the same so as to read as follows :- (1)  Whether  there is any evidence before the  Tribunal  to support  the  conclusion  that  the  main  purpose  of   the transactions was the avoidance of excess profits tax ? (2)  Whether  on the facts admitted or proved the  share  of income of Dr. Surmukh Singh in the firm of Ram Singh &  Co., can  be legally included along with the share of  income  of Ram Singh and Gurdayal Singh ? (3)  Whether on the facts and circumstances of the case  the leasing  of  machinery, etc., by the assessee  firm  to  the company was a business within the meaning of section 2(5) of the Excess Profits Tax Act ? The   learned  counsel  appearing  for  the  assessee   firm submitted  before  the  High Court that  the  third  of  the referred  questions should be discussed and  decided  first, but  the High Court took the view that the decision  of  the first   question   was  a  necessary  preliminary   to   the consideration  of the third question.  Taking up, then,  the first question first the High Court referred to the ,several facts found by the Appellate Tribunal and 959 described  as  steps and regarding  them  as  circumstantial evidence  came to the conclusion that it could not  be  said that  there  was  no evidence upon which  the  Tribunal  was justified in coming to the conclusion that the formation  of the firms, Uppal & Co., and Ram Singh & Co., was mainly  for the purpose of avoidance or reduction of liability to excess profits  tax.  In the result, the High Court held  that  the three firms, the assessee firm, Uppal & Co., and Ram Singh & Co.,  were  in  fact  one and the same  and  on  that  basis proceeded  next  to  take  up  the  third  question.   After referring  to section 2(5) and certain  judicial  decisions, the High Court concluded as follows:- "  The  argument of Mr. Pathak when applied to  the  present case  would have force were it a fact that the sole  concern of  the assessee firm was the receipt of hire  of  machinery from  a company or firm, in which the assessee firm  had  Do interest.   But  this is not the state of affairs.   On  the finding  under  the first question  referred,  the  assessee firm,  the firm of managing agents and the firm  of  selling agents are really one and the same firm.  This firm and  its partners  held the majority of shares in the  company.   The agreement for payment of Rs. 40,000 as rent of machinery  is an agreement between the assessee firm and the company which the  assessee firm controls.  The business of  the  assessee firm was, and in effect still is, the manufacture of ribbons and  laces, and the receipt of Rs. 40,000 is a  profit  from that  business  diverted into the pockets  of  the  assessee firm." The  High Court accordingly answered the third  question  in



the   affirmative  and  against  the  assessee  firm.    The necessary  certificate of fitness for appeal to  this  Court having  been  refused by the High Court, the  assessee  firm obtained  special leave of this Court to prefer the  present appeal. The  learned  counsel appearing for the  assessee  firm  has submitted  before us-and we think rightly-that the  approach of  the  High Court was erroneous in that they took  up  the discussion  of  question  No. I first.   That  question,  as framed, proceeded on the assumption 960 that  section 1O A applied to the case and only  raised  the question  as to whether there was any evidence  to   support the finding of the Appellate Tribunal arrived at as a result of  the enquiry -under that section, namely, that  the  main purpose  of  the  transaction was the  avoidance  of  excess profits tax.  The long title and the preamble of the  Excess Profits  Tax  Act refer to the imposition of tax  on  excess profits arising out of certain businesses.  Section 4, which is  the charging section and section 5 which lays  down  the application   of  the  Act  to  certain  business,   clearly postulate  the  existence of a business carried  on  by  the assessee on the profits of which the excess profits tax  can be  imposed.  Therefore, if there is such a business  during the  relevant  period,  then and then alone  can  arise  the question of the applicability of section 10 A.  If there  is no such business as is contemplated by the Act, then the Act does  not apply and section 10 A cannot come into  operation at  all.  Before the Excess Profits Tax Officer  can  embark upon an enquiry as to whether a transaction was effected for the  avoidance or reduction of liability to  excess  profits tax   and   to  make  such  adjustments  as   he   considers appropriate_  there  must be proof that  the  assessee  was, during  the  chargeable accounting period, carrying  on  any business  of the kind referred to in section 5 of  the  Act. Logically, therefore, the Appellate Tribunal as well as  the High Court should have taken up question No. 3 first, for on a  decision of that question would depend the  applicability of section 1O A and if that question were answered in favour of  the assessee firm the further question of law as  raised in  question  No. I would not, in such  event,  arise.   The approach  of  the  High  Court  was,  therefore,   logically misconceived on the facts of this case. What  then  are the facts found by  the  Appellate  Tribunal apart  from its findings under section 10 A ?  The  findings are  that  after the formation of the company  the  assessee firm  was  left  with  no  business  at  all.   The  company purchased  the leasehold rights in the lands  and  buildings where the plant, machinery, etc., were installed.  The  firm as such ceased to manufacture any ribbons and laces.  It was left with the plant, 961 machinery,  etc., which it did not require and which  ceased to be a commercial asset in its hands, for it had no  longer any  manufacturing business at all.  Further,  the  assessee firm  had  put  it  out  of its  power  to  use  the  plant, machinery,  etc.,  for  it had no right  in  the  lands  and buildings  where  the  plant,  machinery,  etc.,  had   been installed.   In these circumstances, the assessee  firm  let out  the  plant, machinery, etc., to the  company.   It  was thenceforth  the company which was carrying on the  business of  manufacturing  ribbons and laces and  for  that  purpose hired  the  plant, machinery, etc., from the  assesee  firm. Prima facie it was the company which appointed the  managing agents and the selling agents.  Ex facie and apart from  the



alleged result of any enquiry under section 10 or section 1O A of the Excess Profits Tax Act those were not  transactions of  the  assessee firm.  The assessee firm  was,  therefore, left  only  with  some  property which at  one  time  was  a commercial asset but had ceased to be so.  The assessee firm thereupon  let out that property on rent.  The  question  is whether  such letting out in such circumstances amounted  to carrying on of a business. "Business" as defined in section 2(5) of the Excess  Profits Tax  Act  includes amongst others, any  trade,  commerce  or manufacture  or  any  adventure  in  the  nature  of  trade, commerce or manufacture.  The first part of this  definition of "a business" in the Excess Profits Tax Act is the same as the  definition of a business in section 2(4) of the  Indian Income-tax Act.  Whether a particular activity amount to any trade,  commerce  or  manufacture or any  adventure  in  the nature  of  trade,  commerce  or  manufacture  is  always  a difficult  question to answer.  On the one hand it has  been pointed  out  by the Judicial Committee in  Commissioner  of Income-tax v. Shaw Wallace & Co.(1), that the words used  in that  definition  are no doubt wide but underlying  each  of them  is the fundamental idea of the continuous exercise  of an  activity.   The  word  "business"  connotes  some  real, substantial  and systematic or organised course of  activity or conduct with a set purpose.  On the other hand, a  single and (1)  (1932) I.L. R. 59 Cal. 1343. 962 isolated transaction has been held to be conceivably capable of  falling within the definition of business as -’being  an adventure  in the nature of trade provided  the  transaction bears  clear  indicia of trade.   The  question   therefore, whether  a  particular source of income is business  or  not must be decided according to our am     ordinary notions  as to  what a business is.  The case of Commissioner of  Excess Profits Tax, Bombay City v.Shri Lakshmi Silk Mills  Ltd.(1), decided  by this Court is clearly  distinguishable.   There, the  respondent company which was formed for the purpose  of manufacturing  silk cloth installed a plant for  dying  silk yarn  as  a  part  of its  business.   During  the  relevant chargeable   accounting  period,  owing  to  difficulty   in obtaining silk yarn on account of the war, it could not make any use of this plant and it remained idle for some time. In August, 1943, the plant was let out to another company on  a monthly  rent.   The  question  arose  whether  the   income received  by,  the  respondent  company  in  the  chargeable accounting  period by way of rent was income  from  business and  assessable to excess profits tax.  It should  be  noted that in that case the respondent company was continuing  its business  of manufacturing silk cloth.  Only a part  of  its business,  namely,  that  of  dying  silk  yarn  had  to  be temporarily  stopped  owing to the difficulty  in  obtaining silk yarn on account of the war.  In such a situation,  this Court  held  that  part of the assets did not  cease  to  be commercial assets of that business since it was  temporarily put  to different use or let out to another and  accordingly the income from the assets would be profits of the  business irrespective of the manner in which that asset was exploited by  the  company.   This Court  clearly  indicated  that  no general  principle  could  be  laid  down  which  would   be applicable  to all cases and that each case must be  decided on its own circumstances according to ordinary common  sense principles.   In  the  case before us  the  assessee  firm’s business  had entirely closed.  It no  longer  ’manufactured any  ribbons  and  laces.  It  had  accordingly  no  further



trading or commercial activity.It could not in fact use  the plant, machinery, etc., (1)  [1952] S.C.R. 1. 963 after  the land and the buildings where they were  installed had  been sold to the company.  In these  circumstances  the assessee  firm  let out the plant, machinery,  etc.,  on  an annual rent of Rs. 40,000.  These facts are very similar  to those found in Inland.  Revenue , Commissioners v.  Broadway Car  Co., Ltd.(1). There the war conditions bad reduced  the company’s  business  to  very small  proportions.   In  that situation  it  was observed that in that  case  the  company dealt  with part of its property which bad become  redundant and  was sublet purely to produce incomes transaction  quite apart from the ordinary business activities of the  company. The  ratio  decides in that case which was  noticed  in  the judgment  of this Court appears to us to apply to the  facts found  in  the present case apart from  the  findings  Under section  10 A. Applying also the common sense  principle  to the fact so found it is impossible to hold that the  letting out  of  the plant, machinery, etc., was at all  a  business operation  when its normal business activity had come  to  a close.  It is interesting to note that sub-sections (3)  and (4)  of  section 12 of the Indian Income-tax  Act  recognise that letting out of plant, machinery, etc., may be a  source of income falling under the head "other sources" within that section and not necessarily under the head "business"  dealt with  in  section  10  of  that  Act.   In  the  facts   and circumstances  of this case, therefore, the letting  out  of the plant, machinery, etc.,cannot be held to fall within the body  of the definition of "business" under section 2(5)  of the  Excess Profits Tax Act.  In this view of the matter  it is  not  necessary for us to express an opinion  as  to  the meaning or implication of the proviso to that definition  or rule 4(4) of Schedule I to the Act.  In our opinion, in  the facts and circumstances of this case, question No. 3  should have been answered in the negative. The  question  of  law raised in the  third  question  being answered in favour of the assessee firm, the question of the applicability of section 1O A of the Excess Profits Tax  Act could  not arise, for the assessee firm having,  during  the relevant period, no business to which that (1)  [1946] 2 A.E.R. 609. 964 Act applied section 1O A could not be invoked by the revenue and, therefore, the question whether there was "evidence  to support the finding of the Tribunal under that section could not  arise.   On the contrary, the further question  of  law which  would really arise out of the order of the  Appellate Tribunal  consequent upon the aforesaid answer  to  question No. 3 would be whether under the facts and circumstances  of the  case  the application of section 1O A with  a  view  to amalgamating  the income of the firms Uppal & Co.,  and  Ram Singh  &  Co.,  with the income of  the  assessee  firm  was correct  and valid in law and that was precisely  the  first question  which  the assessee firm sought to  raise  by  its application.   In  our view the High Court should  not  only have answered question No. 3 in the negative but should also have  raised, as a corollary to that answer to question  No. 3,  the  further question of law on the lines  indicated  in question No. I of the assessee’s petition.  In other  words, the  High Court should have, after answering question No.  3 in  the  negative reframed the referred question  No.  I  by restoring  question No. 1 as suggested by the assessee  firm in  its  petition and should have answered the  question  so



restored in the negative and in favour of the assessee. For the reasons stated above, we allow this appeal,  reframe question No. I by restoring the first question suggested  by the assessee firm, namely- " Whether under the facts and circumstances of the case -the application of section 1O A with a view to amalgamating  the income  of the firms Uppal & Co., and Ram Singh & Co.,  with the  income of the appellant firm was correct and  valid  in law?" and  we  answer the question so reframed  in  the  negative. Question  No.  2  must be answered in the  negative  and  in favour  of the assessee by way of necessary  corollary.   We also  answer question No. 3 in the negative.  The  appellant will  be entitled to the costs of this appeal and  we  order accordingly. Appeal allowed, 965