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

2. 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 and Sons. In the assessment relating to the chargeable accounting period ending on 8-10-1943, the appellants alleged that there was a partial partition among the members of the family on16-7-1943, 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 brocade under the respective firm names of Sohan Pathak Girdhar Pathak and G. M. Pathak andappellants claimed that the family as such ceased to carry on business in Banaras brocade after 16-7-1943, though they continued to remain joint in status and that the profits derived by the two partnerships aforesaid after 17-7-1943 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 S.25(3), Income-tax Act in the assessment to income-tax of the appellants as a Hindu undividedExcess Profits Tax Officer, however, rejected the claim as he was of opinion that the 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 S.10-A of the Act as 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 itsWhether in view of the fact that the partial partition had 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 S. 10-A of the Excess Profits Tax Act read with Ss. 4 and 5 of the sameWhether in the circumstances of the case the effect of the partial partition of the Hindu undivided family on 16-7-1943, and the formation of two different firms was a transaction within the meaning of S. 10-A of the Excess Profits TaxWhether 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 ProfitsCourt 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 12-11-1953 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 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 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 business 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.

Court's reasoning:
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.