Case: Chandra Prakash Vs. Commissioner of Income Tax, Uttar Pradesh

the High Court, the questions having been answered against the assessee, the matter was brought to this court. The conclusion of the High Court that the main purpose behind the partial partition and formation of the partnerships was the avoidance or reduction of the liability of the family business to excess profits tax was accepted by this court. It was held that, if a business had been discontinued and had earned no profit during the chargeable accounting period, no excess profits tax could be charged in respect of such business and that, under section 4 read with section 5, the business could not be regarded as one to which the Act applied. It was further laid down that section 10A could have no application to such a business. The issue whether the Act applied or not to a particular business had to be determined solely with reference to section 5 and section 10A must be construed as applicable only to cases where, the business being found to be one to which the Act applied, a transaction of the kind referred to in the section had been effected. The following observations at pages 401 and 402 may be reproduced with advantage" 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 10A 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 wag 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 v. Moholal Maganlal) Bat 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 10A, would equally apply to the present case and must lead to the same result. "4. There can be no manner of doubt that in this decision this court approved of the view expressed in the Bombay case which can be most appositely applied to the present case. There the assessee was the selling agent of the Victoria and jubilee Mills. He was also the selling agent of two mills working in the Baroda State. The assessee then floated a private limited company in the name of M. M. Shah Ltd. in Baroda State in which all the shares were held by him and his wife. He resigned his office of selling agents of the two mills in Baroda State and on the same date those two mills appointed M. M. Shah Ltd. to be the selling agents of the mills. The Excess Profits Tax Officer added to the assessees profits the profit derived from the selling agency business of the Baroda State mills. The finding of the department and of the Tribunal was that the assessee had transferred the selling agency to M. M. Shah Ltd., with the main purpose of avoiding or reducing the liability of his business to pay in British India the excess profits tax. Chagla C.J., delivering the judgment of the court, observed that the charging section is section 4, which speaks of charge of excess profits tax to any business to which the Act applies, and, in order to find out to which business the Act applies, the third proviso to section 5 has to be read, and, since exemption from the operation of the Act is given to a business the whole of the profits of which accrue or arise in a Part B State, the business in Baroda State was exempted from tax under the Excess Profits Tax Act; in other words, the business was not a business to which the Act applied. The learned Chief Justice refuted the contention of Sri Nusserwanji P. Engineer based on section 10A by saying " it is impossible to hold that by section 10A the legislature intended to confer upon the Excess Profits Tax Officer the power in effect to repel the third proviso to section 5, to rewrite section 4, and to make a business, the profits of which accrued or arose in a Part B State, liable to payment of excess profits tax ". The argument that the assessee having adopted a device for the purpose of avoiding excess profits tax was also repelled on the reasoning that, if section 10A could not override the third proviso to section 5, the particular facts which led the Excess Profits Tax Officer to put section 10A into operation were irrelevantIn the present case the High Court dissented from the Bombay decision in Commissioner of Excess Profits Tax v. Moholal Maganlal, without appreciating that the view expressed therein had been approved by this court in the case of Sohan Pathak & Sons, even though the latter case was cited before the High Court and is referred to in its judgment5. We are clearly of the view that in the presence of the third proviso to section 5 of the Act, section 10A could not be applied to the present case. The second question which was referred must, therefore, be answerd in the affirmative, namely, in favour of the assessee and against the revenue. It is unnecessary to return any answer to the first question

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In Commissioner ofv. Ahmedbhai Umarbhai & Co. the assessee, a firm resident in British India (Bombay), carried on the business of manufacturing and selling groundnut oil. The firm owned three mills at Bombay and one at Raichur which was in Hyderabad State. In all these oil was manufactured. The oil that was manufactured at Raichur was sold partly there and partly in Bombay. The position of thewas that in respect of such oil which was manufactured at Raichur it could not be assessed to tax under the Act. The taxing authorities rejected that contention and the Appellate Tribunal agreed with them. The High Court disagreed with the view of the Tribunal and upheld the assessees contention. On appeal to this court the relevant provisions of the Act were examined including the third proviso to section 5. It was held that the activity which thecarried on at Raichur was a part of its business within the meaning of the third proviso to section 5 and that the profits of a part of the business, namely, the manufacture of oil in the mill at Raichur, accrued or arose at Raichur and that such profits were not assessable to excess profits tax under the third proviso to section 5. It is true that the provisions of section 10A did not come up for consideration in that case and for that reason it may be distinguishable. But the importance of this decision is that the direct point for consideration was whether, on the facts of that case, the third proviso to section 5 could be invoked by theand it was open to it to claim that the work of manufacture of oil carried on at Raichur should be treated as a separate business within the meaning of the proviso. The decision went in favour of the the assessee on that point, it being held that the profits of the manufacturing part of the assessees business had accrued and arose at Raichur and were thus covered by the proviso and could not be subjected to excess profits taxIn Sohan Pathak & Sons v. Commissioner ofthe assessee claimed, in the matter of assessment relating to the chargeable accounting period ending October 8, 1943, that there had been a partial partition among the members of the Hindu undivided family. The family as such had ceased to carry on the business after that date though they continued to remain joint in status. After the partial partition the adult members of the family had formed two partnerships admitting the minors to the benefits thereof and carried on the same business which was being carried on by the Hindu undivided family. The Excess Profits Tax Officer was of the opinion that the main purpose of the creation of two partnerships was to avoid or reduce the tax liability of the assessees to excess profits tax and he made adjustment under section 10A by adding to the profits made by the family till the date of the partition the profits made by the two firms during the chargeable accounting period. Having failed before the Appellate Assistant Commissioner and the Appellate Tribunal and on a reference to the High Court, the questions having been answered against the assessee, the matter was brought to this court. The conclusion of the High Court that the main purpose behind the partial partition and formation of the partnerships was the avoidance or reduction of the liability of the family business to excess profits tax was accepted by this court. It was held that, if a business had been discontinued and had earned no profit during the chargeable accounting period, no excess profits tax could be charged in respect of such business and that, under section 4 read with section 5, the business could not be regarded as one to which the Act applied. It was further laid down that section 10A could have no application to such a business. The issue whether the Act applied or not to a particular business had to be determined solely with reference to section 5 and section 10A must be construed as applicable only to cases where, the business being found to be one to which the Act applied, a transaction of the kind referred to in the section had beenthat case, theadmitted, 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 v. Moholal Maganlal) Bat 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 10A, would equally apply to the present case and must lead to the same result. "4. There can be no manner of doubt that in this decision this court approved of the view expressed in the Bombay case which can be most appositely applied to the present case. There the assessee was the selling agent of the Victoria and jubilee Mills. He was also the selling agent of two mills working in the Baroda State. The assessee then floated a private limited company in the name of M. M. Shah Ltd. in Baroda State in which all the shares were held by him and his wife. He resigned his office of selling agents of the two mills in Baroda State and on the same date those two mills appointed M. M. Shah Ltd. to be the selling agents of the mills. The Excess Profits Tax Officer added to the assessees profits the profit derived from the selling agency business of the Baroda State mills. The finding of the department and of the Tribunal was that the assessee had transferred the selling agency to M. M. Shah Ltd., with the main purpose of avoiding or reducing the liability of his business to pay in British India the excess profits tax. Chagla C.J., delivering the judgment of the court, observed that the charging section is section 4, which speaks of charge of excess profits tax to any business to which the Act applies, and, in order to find out to which business the Act applies, the third proviso to section 5 has to be read, and, since exemption from the operation of the Act is given to a business the whole of the profits of which accrue or arise in a Part B State, the business in Baroda State was exempted from tax under the Excess Profits Tax Act; in other words, the business was not a business to which the Act applied. The learned Chief Justice refuted the contention of Sri Nusserwanji P. Engineer based on section 10A by saying " it is impossible to hold that by section 10A the legislature intended to confer upon the Excess Profits Tax Officer the power in effect to repel the third proviso to section 5, to rewrite section 4, and to make a business, the profits of which accrued or arose in a Part B State, liable to payment of excess profits tax ". The argument that the assessee having adopted a device for the purpose of avoiding excess profits tax was also repelled on the reasoning that, if section 10A could not override the third proviso to section 5, the particular facts which led the Excess Profits Tax Officer to put section 10A into operation were irrelevantIn the present case the High Court dissented from the Bombay decision in Commissioner of Excess Profits Tax v. Moholal Maganlal, without appreciating that the view expressed therein had been approved by this court in the case of Sohan Pathak & Sons, even though the latter case was cited before the High Court and is referred to in its judgment5. We are clearly of the view that in the presence of the third proviso to section 5 of the Act, section 10A could not be applied to the present case. The second question which was referred must, therefore, be answerd in the affirmative, namely, in favour of the assessee and against the revenue. It is unnecessary to return any answer to the first question