1956 (9) TMI 72 - HC - Income Tax

Summary

Issues Involved:
1. Whether there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act.
2. Whether the main purpose in constituting the two firms was the avoidance or reduction of liability to excess profits tax within the meaning of section 10A of the Excess Profits Tax Act.

Issue-Wise Detailed Analysis:

1. Change in Persons Carrying on the Business (Section 8(1) of the Excess Profits Tax Act):
The primary question was whether there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act. The Hindu undivided family (HUF) led by Arunachala Nadar was the assessee until the assessment year 1942-43. The family business spanned multiple locations and industries. On 27th January 1942, a partition occurred, dividing the family into two groups: Arunachala and his six minor sons remained joint, while his four adult sons separated.

The partition was formalized by a document on 10th August 1942, and new businesses were commenced by the separated sons. Arunachala started a fresh set of accounts from 28th January 1942, treating the previous business as closed. He informed the Income-tax Officer about the partition and requested separate assessments under section 25A of the Income-tax Act. The Excess Profits Tax Officer and subsequent appellate authorities disallowed the claim for carrying forward the deficiency in profits from the old family business, stating that there was a change in the persons carrying on the business.

The court upheld this view, emphasizing that Arunachala himself sought the recognition of the partition under section 25A, thereby terminating the old HUF's existence for tax purposes. The new business commenced by Arunachala was considered a separate entity, and thus, there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act.

2. Main Purpose of Constituting Two Firms (Section 10A of the Excess Profits Tax Act):
The second issue was whether the main purpose of forming two partnerships was to avoid or reduce liability to excess profits tax. After the partition, Arunachala formed two partnerships in the subsequent accounting year, one for the business at Madurai and another for the business at Kumbakonam. The Departmental authorities and the Tribunal found that these partnerships were created primarily to avoid or reduce excess profits tax liability.

The Tribunal noted that the partnerships were formed when the excess profits tax liability was apparent, and the deeds were drawn up towards the end of the accounting year. The entire finance for the businesses was provided by Arunachala, and he retained control over the operations. The businesses were managed as branches of the main business at Virudhunagar, and all transactions were recorded centrally.

The court found sufficient material to justify the Tribunal's conclusion that the main purpose of forming the partnerships was tax avoidance. It emphasized that the burden of proof was on the Department to show that tax avoidance was the main motive, which was successfully demonstrated in this case. The court upheld the Tribunal's findings, stating that the partnerships were indeed formed with the primary objective of reducing excess profits tax liability.

Conclusion:
The court answered both questions in the affirmative and against the assessee, confirming that there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act, and that the main purpose of forming the partnerships was to avoid or reduce excess profits tax liability within the meaning of section 10A of the Excess Profits Tax Act.