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 section 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
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 661 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 Hindustan 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 41000 shares 23000 shares were allotted to the assessee firm
Of these 23000 shares so allotted 20000 shares were not paid for in cash but the remaining 3000 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 33340 shares including the said 23000 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 40000
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 1Whether 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 25 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 40000 and that this was certainly an adventure in the nature of trade as contemplated by section 25 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 661 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 section Ram Singh and section 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 25 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 25 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 40000 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 40000 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 25 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 24 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 vs Shaw Wallace  Co1 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 Cal
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 vs
Shri Lakshmi Silk Mills Ltd1 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  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 40000
These facts are very similar to those found in Inland
Revenue  Commissioners vs Broadway Car Co Ltd1
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 25 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 44 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 1 964 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


Summary:
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 25 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 25 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 40000
Held that this lease of the plant machinery etc given by the assesses firm could not be business within the meaning of section 25 of the Excess Profits Tax Act 1940
953 Commissioner of Excess Profits Tax Bombay City vs Shri Lakshmi Silk Mills Ltd 1952 SCR 1 distinguished
Inland Revenue Commissioner vs Broadway Car Co Ltd 1946 2 AER 609 relied upon
Commissioner of Income tax vs Shaw Wallace  Co 1932 ILR  referred to