Case: Sohan Pathak Vs. Commissioner OfIncome Tax, U.P

Tax Officer from considering the issue.It is now well settled that, for the purposes of the Act, a business is a unit of assessment, and the charging S. 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.8. But, argues the learned Attorney-General, that that result cannot follow by reason of S.10-A of the Act which runs as follows:10 A. Transactions designed to avoid or reduce liability to excess 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 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 transaction(s) 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 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.9. If, under S. 4 of the Act read with S. 5, the old joint family business cannot be regarded as one "to which this Act applies, S. 10-A, one of the provisions of the Act can have no application to such business. The learned Attorney-Generals argument that Ss. 4 and 5 must be read along with S. 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 S. 5, and S. 10-A must be construed as 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 S. 19-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 S. 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 Manganlal, AIR 1953 Bom 230 (A) ).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 S. 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 "ability to excess profits tax under S. 10-A, would equally apply to the present case and must lead to the same result.10. Reference was made by the Attorney-General in the course of his argument to the proviso to S. 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 businesses to which the Act applies and not otherwise, and it carries the matter no further.11. In the view we have expressed above, it is unnecessary to deal with the alternative contention based on S. 8 (1) of the Act.

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

Explanation:
1[ds]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 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.9. If, under S. 4 of the Act read with S. 5, the old joint family business cannot be regarded as one "to which this Act applies, S. 10-A, one of the provisions of the Act can have no application to such business. The learned Attorney-Generals argument that Ss. 4 and 5 must be read along with S. 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 S. 5, and S. 10-A must be construed as 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 S. 19-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 S. 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 Manganlal, AIR 1953 Bom 230  (A) ).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 S. 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 "ability to excess profits tax under S. 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 S. 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 businesses to which the Act applies and not otherwise, and it carries the matter no further.11. In the view we have expressed above, it is unnecessary to deal with the alternative contention based on S. 8 (1) of the Act.