1950 (5) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Legality of treating the same business as continued for Excess Profits Tax purposes despite partial partition accepted by the Income-tax Officer.
2. Whether the partial partition and formation of two firms constituted a transaction under Section 10A of the Excess Profits Tax Act.
3. Justification of the inference that the main purpose behind the partial partition was to avoid or reduce liability to excess profits tax.

Detailed Analysis:

Issue 1: Continuity of Business for Excess Profits Tax Purposes
The court addressed whether the same business could legally be treated as having continued unbroken for the purpose of Section 10A of the Excess Profits Tax Act, despite the Income-tax Officer accepting the partial partition and treating the business as discontinued for income tax purposes. The court referred to its earlier decision in Ganga Sahai Umrao Singh v. Commissioner of Excess Profits Tax, U.P., stating, "the Excess Profits Tax Officer is not bound by the findings arrived at by the Income-tax Officer." The Excess Profits Tax Officer could proceed under Section 10A if he concluded that the main purpose behind the transaction was the avoidance of excess profits tax. Therefore, the court concluded that the Excess Profits Tax Officer was not bound by the Income-tax Officer's decision and could treat the business as continued for excess profits tax purposes.

Issue 2: Nature of Partial Partition and Formation of Firms as Transactions
The court examined whether the partial partition of the Hindu undivided family and the formation of two firms were transactions within the meaning of Section 10A of the Excess Profits Tax Act. The court noted that the Excess Profits Tax Act aimed to capture profits exceeding normal business profits during wartime. It stated, "if excess profits tax would be payable but for a certain transaction or transactions and the main purpose behind that transaction or those transactions is the avoidance or reduction of liability then the Excess Profits Tax Officer may ignore such transaction or transactions for the purposes of assessment." The court found that the partial partition and formation of partnerships were indeed acts and thus constituted "transactions" under Section 10A. Therefore, the court held that these actions were transactions within the meaning of Section 10A.

Issue 3: Purpose of Partial Partition
The court considered whether the Tribunal was justified in inferring that the main purpose behind the partial partition was to avoid or reduce liability to excess profits tax. The Tribunal's findings included that the assets of the brocade business were equally divided among four groups on 16th July 1943, and the same business continued under two new partnerships formed the next day. The court noted, "if the main purpose of the partial partition of the business was to safeguard the interests of the minors, the family should have divided the shares in earlier chargeable accounting periods when a slump had set in." The court found that the Tribunal was justified in drawing the inference that the main purpose was to avoid or reduce excess profits tax liability based on these facts.

Conclusion:
The court answered the questions as follows:
1. The Excess Profits Tax Officer was not bound by the decision of the Income-tax Officer and could treat the business as continued for excess profits tax purposes.
2. The partial partition of the Hindu undivided family and the formation of two different firms were transactions within the meaning of Section 10A of the Excess Profits Tax Act.
3. The Tribunal was justified in inferring that the main purpose behind the partial partition was the avoidance or reduction of liability to excess profits tax.

The reference was answered accordingly, and the assessee was ordered to pay costs of Rs. 500.