1953 (9) TMI 1 - SC - Income Tax

Whether 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 Section 10A of the Excess Profits Tax Act read with Sections 4 and 5 of the same Act ? Held that - We allow the appeals, set aside the answer made by the High Court to Question No. 1 and answer it as follows In view of the finding of fact that the old joint family business in Banaras brocade was wound up and was no longer carried on by the joint family as such during the relevant chargeable accounting periods, the same business could not legally be treated as having continued unbroken in respect of such periods for the purpose of Section 10A of the Excess Profits Tax Act read with Sections 4 and 5 of the same Act.

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

Detailed Analysis:

Issue 1: Legality of Treating the Business as Continued
The appellants, a Hindu undivided family, claimed a partial partition on 16th July 1943, dividing the Banaras brocade business among the family branches. They argued that the family ceased to carry on the business after this date, and the newly formed partnerships were distinct and new businesses. The Excess Profits Tax Officer rejected this claim, holding that the partition and creation of partnerships aimed to avoid or reduce tax liability, and added the profits of the new firms to the family's profits under Section 10A of the Act. The High Court upheld this view, but the Supreme Court disagreed, stating that the Act applies only to businesses making profits during the chargeable accounting period. Since the old family business was wound up and no longer carried on, it could not be taxed under the Act. The Court concluded that Section 10A could not apply to a business to which the Act itself did not apply, thus answering the first question in favor of the appellants.

Issue 2: Transaction under Section 10A
The appellants did not contest that the partial partition and the formation of new partnerships were transactions within the meaning of Section 10A. The Supreme Court noted that the Excess Profits Tax Officer found the main purpose of these transactions was to avoid or reduce tax liability. The Tribunal confirmed this finding, citing the upward trend in profits and the appellants' failure to provide a satisfactory alternative explanation. The Court agreed with the High Court that sufficient material supported the inference that the main purpose was tax avoidance or reduction.

Issue 3: Inference of Main Purpose
The Tribunal and the High Court inferred that the main purpose behind the partial partition and formation of partnerships was to avoid or reduce excess profits tax liability. The appellants argued that they aimed to protect minor members' interests, but this explanation was deemed unsatisfactory. The Court found that the timing of the transactions, coinciding with increased profits, and the disproportionate liability among branches, supported the inference of tax avoidance. Thus, the Court upheld the High Court's finding on this issue.

Conclusion:
The Supreme Court allowed the appeals, setting aside the High Court's answer to Question No. 1. It ruled that the old family business, having been wound up and not carried on during the relevant periods, could not be treated as continued for tax purposes under Section 10A. The judgment of the High Court stood in other respects, and the appellants were awarded costs of the appeals. The Court emphasized the need for clear factual statements from the Tribunal to facilitate judicial determination.

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