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PETITIONER: SOHAN PATHAK AND SONS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, U.P.

DATE OF JUDGMENT: 23/09/1953

BENCH: SASTRI, M. PATANJALI (CJ) BENCH: SASTRI, M. PATANJALI (CJ) MUKHERJEA, B.K. BOSE, VIVIAN HASAN, GHULAM JAGANNADHADAS, B.

CITATION:  1953 AIR  456            1954 SCR  158

ACT:    Excess Profits Tax Act (XV of 1940), ss. 4, 5,  10-A-Hindu  undivided  family-Partial  partition  dividing  assets   and  liabilities  of business among members-Members  carrying  on  business   as  partners-Validity   of   partition-Artificial  transaction for reducing liability to excess profits tax.

HEADNOTE: A Hindu undivided family carried on business in money  lend- ing  and  brocade.   On the 16th July,  1943,  there  was  a partial  partition amongst the members by which the  brocade business  was  divided and its assets and  liabilities  were partitioned  in  equal  shares between the  members  of  the family.   On  the next day the adult members of  the  family formed  two  partnerships admitting minors  to  the  benefit thereof,  and  carried  on the brocade  business  under  two separate firm names though they continued to remain joint in status.  The Income-tax Officer accepted the partial  parti- tion  and  treated  the brocade business of  the  family  as having been discontinued, but the Excess Profits Tax Officer held  that as the main purpose of the partial partition  was avoidance  of  tax, it was an artificial  transaction,  and, treating  the business as -unbroken, made adjustments  under s.  10-A  of the Excess Profits Tax Act, by  adding  to  the profits  made  by the assessees as a joint family  till  the date  of  the partition, the profits made by the  two  firms after partition during the chargeable accounting period : Held,  (i) under ss. 4 and 5 of the Excess Profits Tax  Act, the Act can have no application to a business which did  not make  any profits during the relevant chargeable  accounting period, and, as the old joint family business in brocade was discontinued  and  earned no profit  during  the  chargeable accounting  period  in  question, the  appellants  were  not liable to be taxed as a Hindu undivided family in respect of that business; (ii)that  the  issue  whether the  Excess  Profits  Tax  Act applies  to a particular business must be determined  solely with  reference  to  s. 5 of the Act, and s.  10-A  must  be construed  as applicable only to cases where,  the  business

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being  found  to  be  one  to  which  the  Act  applies,   a transaction of the kind referred to in the section has  been effected;  and  in view of the finding that  the  old  joint family  business in brocade was wound up and was  no  longer carried  on by the joint family as such during the  relevant chargeable  accounting periods, the same business could  not be                            159 legally  treated as having continued unbroken in respect  of such  periods  for  the purpose of s.  10-A  of  the  Excess Profits Tax Act read with ss. 4 and 5 of the same Act.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 47 to 50 of 1952. - Appeals  from  the  Judgment  and  Decree  dated  the   11th May,1950,  of  the  High Court of  Judicature  at  Allahabad (Malik C. J. and Bhargava J.) in Miscellaneous Case No.  134 of 1949 connected with Miscellaneous Case No. 197 of 1948. G.S. Pathak (G.  C. Mathur, with him) for the appellant. M.C.  Setalvad, Attorney-General for India, (G.   N.  Joshi, with him) for the respondent. 1953.   September  23.   The  Judgment  of  the  Court   was delivered by PATANJALI SASTRI C. J.-This batch of appeals arises out of a reference made to the High Court at Allahabad by the Income- tax Appellate Tribunal, Allahabad Bench, under section 26 of the Excess Profits Tax Act, hereinafter referred to as " the Act." The assessments challenged in these appeals relate  to different  chargeable accounting periods but  the  questions raised are the same in all the cases. The   appellants   constitute  a  Hindu   undivided   family consisting  of four branches representing the four  sons  of one  Sohan Pathak deceased.  The family carried on  business at  Banaras in money-lending and Banaras brocade  under  the name  and style of Sohan Pathak & Sons.  In  the  assessment relating  to  the  chargeable accounting  period  ending  on October  8,  1943, the appellants alleged that there  was  a partial  partition among the members of the family  on  July 16,  1943, whereby the Banaras brocade business was  divided in  equal  shares among the four branches and that,  on  the next  day,  the  adult  members of  the  family  formed  two partnerships  admitting the minors to the benefits  thereof, and thereafter carried on business in Banaras                             160 brocade  under  the respective firm names  of  Sohan  Pathak Girdhar Pathak and G. M. Pathak & Co. The appellants claimed that  the  family  as such ceased to carry  on  business  in Banaras  brocade after July 16, 1943, though they  continued to  remain joint in status and that the profits  derived  by the  two partnerships aforesaid after July 17,  1943,  could not  be  assessed as profits of the  original  joint  family business,   as  the  businesses  carried  on  by   the   two partnerships were distinct and newly started businesses  and could neither in law nor in fact be regarded as continuation of  the old brocade business.  In support of this claim  the appellants  strongly  relied on the  circumstance  that  the Income-tax Officer treated the old business as  discontinued by the family after the partial partition and granted relief on that footing under section 25(3) of the Indian Income-tax Act  in the assessment to income-tax of the appellants as  a Hindu  undivided  family.  The Excess Profits  Tax  Officer, however,  rejected the claim as he was of opinion  that  the

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main  purpose of the partial partition and the  creation  of the two partnerships was to avoid or reduce the liability of the   appellants  to  excess  profits  tax,  and   he   made adjustments  under section 10-A of the Act by adding to  the profits made by the appellants as a joint Hindu family  till the date of the partition the profits made by the two  firms during  the  chargeable accounting periods.   The  Appellate Assistant Commissioner and the Appellate Tribunal  confirmed the  finding  and order of the Excess Profits  Tax  Officer, but,  at  the  instance  of  the  appellants,  the  Tribunal referred  the following questions to the High Court for  its decision: 1.Whether in view of the fact that the partial partition bad been accepted by the Income-tax Officer and the business was treated  as  having  been discontinued for  the  purpose  of assessment under the Income-tax Act, the same business could legally  be treated as having continued unbroken in  respect of the same chargeable accounting period for the purpose  of section  10-A  of  the  Excess Profits  Tax  Act  read  with sections 4 and 5 of the same Act ? 161 2.Whether in the circumstances of the case the effect of the partial partition of the Hindu undivided family on July  16, 1943,  and  the  formation  of two  different  firms  was  a transaction within the meaning of section 10-A of the Excess Profits Tax Act ? 3.Whether  on the facts found by the Tribunal as  stated  in para.  7 of the statement of the case, it was  justified  to draw the inference that the main purpose behind the  partial partition  was  the avoidance or reduction of  liability  to excess profits tax ? The  court answered these questions against  the  appellants but granted leave to appeal to this court. At  a  previous hearing of these appeals this court  was  of opinion  that  the material facts relating  to  the  partial partition  and  the  formation of the  partnership  and  the findings  of  the Tribunal in regard thereto  had  not  been clearly stated by the Tribunal in the original statement  of the case.  The court said: "  While  it is true that in one place in the  statement  of case the Tribunal speaks of the old family brocade  business as  continuing without a break after the partial  partition, reference  is  made in another place to the assets  of  that business having been equally divided among the four branches forming  the family.  There is thus no clear finding  as  to how  the  partition  of the brocade  business  was  actually effected-whether  by  a  division  in  shares,  each  branch holding  its  share  in severalty  and  the  business  being carried  on as before on a partnership basis, or whether  by an actual distribution and allotment of specific assets  and liabilities  among the branches resulting in the  disruption of that business." The  court  accordingly by its order of  January  12,  1953, called  for a further and clearer statement of the facts  on the points indicated. The  Tribunal has since submitted a supplementary  statement of  the case fully setting out the details of the  partition arrangement  and  the constitution of the two firms  by  the members  of the family after the partition.   The  statement reveals that the bulk of the 162 capital  as  well as all " the stock in trade, the  cash  in hand, the cash in banks, all outstandings as on that date as also  the sundry liabilities up to that day "  were  divided amongst  each  of  the  14  coparceners  each  branch  being

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allotted  a four-anna share as stated in the schedule  filed by the assessees and annexed to the statement, showing  that the partition was by specific distribution of the assets and liabilities  and not by a division of shares  merely.   With the  assets  and  liabilities  thus  distributed,  the   two partnerships   separately  carried  on  brocade   businesses similar to the one carried on by the joint family before the partial  partition.   The names of the partners of  the  two firms are mentioned and it appears that each firm  consisted of members representing all the four branches, some of  them being adults and some minors, the minors in each case  being only admitted to the benefits of -the partnerships. On  these facts it was contended by Mr. Pathak on behalf  of the  appellants that the finding of the Excess  Profits  Tax Officer  that the main purpose of the partial partition  and the formation of the new partnerships was to avoid or reduce the  liability of the appellants to excess profits  tax  was not supported by any material on record.  Secondly, assuming that there was material on which the officer could have come to  such  a  finding, the old  family  business  in  Banaras brocade having been actually closed down, the officer had no power  in  assessing the profits of that  business  to  make adjustments  under  section 10-A of the Act  by  adding  the profits  made  by the two firms after July  17,  1943.   And lastly, and alternatively, there was undoubtedly a change in the  persons  carrying on the old business  after  July  16, 1943,  even  if it were regarded as  still  continuing,  the Hindu  undivided  family being a  "person"  [section  2(17)] distinct  from  the  individuals  Composing  it,  and   such business’  must, under section 8(1), be deemed for  all  the purposes  of the Act (except for one not material  here)  to have  been  discontinued  and a new business  to  have  been commenced,  and the same consequences followed.  Mr.  Patbak did not argue                             163 that  the partial partition and the constitution of the  two partnerships  were not "transactions" within the meaning  of section 10-A.  Nor did he insist that the acceptance of  the partition and allowance of relief by the Income-tax  Officer under  section  25(4) of the Income-tax  Act  concluded  the matter  for purposes of section 10-A of the Act, as  appears to  have  been  contended in the  earlier  stages  of  these proceedings. The first contention can be disposed of in a few words.   It appears from the facts found by the tax authorities as  well as by the Appellate Tribunal that the partial partition  and the  formation of the partnerships were brought about  at  a time when the profits of the Banaras brocade business showed a  definitely  upward trend.  If the main purpose  of  these transactions  was not to evade liability to  excess  profits tax,  the appellants were asked to explain what the  purpose was, and they said that they wanted to protect the interests of the minor members whose shares in the partnership  assets would  not be liable for the losses, if any, of  the  firms, while  the entire family properties would be liable for  any loss incurred in the family business.  This explanation  was not  acceptable because such protection was not  thought  of when  the  family business was earning smaller  profits  and also   because,  according  to  the  constitution   of   the partnerships,  while  each branch was given  the  same  4as. interest,  the  responsibility  for losses  falling  on  the branch which had no minor members would be heavier than what would  be borne by the branch which had no adult members,  a disparity  which the purpose put forward by  the  appellants failed to explain.  In these circumstances we agree with the

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High Court -in holding that there was sufficient material to support  the inference drawn by the Appellate Tribunal  that the  main  purpose  behind the  partial  partition  and  the formation of the partnerships was the avoidance or reduction of liability of the family business to excess profits tax. The real and substantial question in the appeals is  whether in view of the finding of fact that the old family  business was wound up, its assets and liabilities 164 having been actually distributed among the coparceners,  and was no longer carried on by the joint family as such  during the  relevant chargeable accounting periods,’  section  10-A has  any application to the case.  Question No. 1, which  is supposed to have raised this point, was not happily  framed. As already stated, Mr. Pathak did not argue that the Income- tax  Officer’s finding as to the discontinuance of  the  old family  business  precluded the Excess Profits  Tax  Officer from  considering the issue.  It is now well  settled  that, for the purposes of the Act, a business is a unit of assess- ment, and the charging section 4 provides for the tax  being levied in respect of the profits of " any business to  which this  Act  applies." Section 5 specifies the  businesses  to which  the Act applies, and they are businesses "  of  which any   part  of  the  profits  made  during  the   chargeable accounting period is chargeable to income-tax " by virtue of certain  specified provisions of the Indian Income-tax  Act, 1922.  There are some provisos to this section, one of which excludes  the application of the Act to " any  business  the whole  of the profits of which accrue or arise in a  Part  B State."  It  is  thus  manifest that the  Act  can  have  no application  to  a business which did not make  any  profits during the relevant chargeable accounting period.  In  other words,  if a business, having been discontinued,  earned  no profit during the chargeable accounting period in  question, no  excess  profits tax can be charged in  respect  of  such business,  and that being the position here as respects  the old joint family business in Banaras brocade, the appellants are  not liable to be taxed as a Hindu undivided  family  in respect of that business. But, argues the learned Attorney-General, that result cannot follow  by reason of section 10-A of the Act which  runs  as follows: 10-A.  Transactions designed to avoid or reduce liability to exces profits tax.-(1) Where the Excess Profits Tax  Officer is  of  the  opinion that the main  purpose  for  which  any transaction or transactions was or were effected -  (whether before or after the passing of the                             165 Excess  Profits  Tax (Second Amendment) Act, 1941)  was  the avoidance  or reduction of liability to excess profits  tax, he  may,  with  the  previous  approval  of  the  Inspecting Assistant  Commissioner, make such adjustments  as  respects liability to excess profits tax as he considers  appropriate so as to counteract the avoidance or reduction of  liability to  excess profits tax which would otherwise be effected  by the transaction or transactions. This  provision, it is claimed, empowers the Excess  Profits Tax  Officer to ignore any transaction (s) the main  purpose of  which  was the avoidance or reduction  of  liability  to excess  profits tax and to proceed on the footing that  such transactions)  had  not been effected, and, in  the  present case,  the  partial  partition as  well  as  the  subsequent formation  of  the  partnerships having  been  found  to  be transactions the main purpose of which was the avoidance  or reduction  of liability to excess profits tax,  the  officer

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had authority to assess the appellants’ old family  business in  Banaras brocade on the basis of its continued  existence during  the relevant chargeable accounting periods.  We  are unable to accept this contention. If, under section 4 of the Act read with section 5, the  old joint  family business cannot be regarded as one " to  which this  Act applies," section 10-A, one of the  provisions  of the  Act,  can have no application to  such  business.   The learned  Attorney-General’s argument that sections 4  and  5 must be read along with section 10-A in determining  whether the  Act applies to any particular business or not  involves the  fallacy that, in determining the initial issue  whether the Act does or does not apply to a given business, you have to look not merely at the provision which defines the  scope and  application of the Act but other provisions also  which presuppose  its  application.  We are of  opinion  that  the issue  whether  the  Act  applies or  not  to  a  particular business must be determined solely with reference to section 5, and section 10-A must be construed as 23 166 applicable only to cases where, the business being found  to be  one to which the Act applies, a transaction of the  kind referred  to in the section has been effected.  The  learned Attorney-General  conceded  that, if a person who  had  been paying excess profits tax transferred the business to a Part B  State, it would not be competent for the  Excess  Profits Tax  Officer  to  take action under  section  10-A  to  make adjustments  on the footing that the assessee  continued  to carry  on  his  business in the same place  as  before  such transfer,  even  if  it  was found  that  the  transfer  was effected  for the main purpose of avoiding or  reducing  his liability  to  excess  profits  tax.   In  that  case,   the Attorney-General  admitted,  the Officer  would  be  running counter to the express prohibition contained in the  proviso to section 5 to which reference has been made and he did not challenge  the correctness of a decision to that  effect  by the Bombay High Court, (Commissioner of Excess Profits  Tax, Bombay  City  v.  Moholal Maganlal) (1).   But  we  fail  to appreciate  the distinction in principle between  that  case and  the  present,  for,  to both  alike  the  Act  is  made inapplicable  by  section 5. The reasoning  of  the  learned Judges  in  the  Bombay case, namely, that  if  the  Act  is inapplicable  to a particular business and there would  thus be  no  liability to excess profits tax in respect  of  that business,  no question could arise of avoiding  or  reducing any  liability  to excess profits tax  under  section  10-A, would equally apply to the present case and must lead to the same result. Reference was made by the Attorney-General in the course  of his argument to the proviso to section 2(5) which says  that " all businesses to which this Act applies carried on by the same  person  shall  be  treated as  one  business  for  the purposes  of this Act." We find it difficult  to  appreciate the  bearing of this section on the point at issue.   It  is clear that the proviso can operate in respect of businessess to  which the Act applies and not otherwise, and it  carries the, matter no further. (1)  [1953] 23 1. T. R, 45.                             167 In  the view we have expressed above, it is  unnecessary  to deal  with the alternative contention based on section  8(1) of the Act. We allow the appeals, set aside the answer made by the  High Court to question No. 1 and answer it as follows: In view of

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the  finding of fact that the old joint family  business  in Banaras brocade was wound up and was no longer carried on by the  joint  family as such during  the  relevant  chargeable accounting  periods, the same business could not legally  be treated  as  having continued unbroken in  respect  of  such periods  for  the  purpose of section  10-A  of  the  Excess Profits Tax Act read with sections 4 and 5 of the same  Act. The judgment of the High Court will stand in other respects. The  appellants  will  have  their  costs  of  the  appeals. Advocates’ fee one set. Appeals allowed. Agent for the appellants: Naunit Lal. Agent for the respondent: G. H. Rajadhyaksha.