1954 (10) TMI 11 - SC - Income Tax

Whether there is any evidence before the Tribunal to support the conclusion that the main purpose of the transactions was the avoidance of excess profits tax ? Whether on the facts admitted or proved the share of income of Dr. Surmukh Singh in the firm of Ram Singh & Co., can be legally included along with the share of income of Ram Singh and Gurdayal Singh ? Whether on the facts and circumstances of the case the leasing of machinery, etc., by the assessee firm to the company was a business within the meaning of Section 2(5) of the Excess Profits Tax Act ? Held that - The High Court should have, after answering question No. 3 in the negative, reframed the referred question No. 1 by restoring question No. 1 as suggested by the assessee firm in its petition and should have answered the question so restored in the negative and in favour of the assessee. For the reasons stated above, we allow this appeal, reframe question No. 1 by restoring the first question suggested by the assessee firm, namely -- Whether under the facts and circumstances of the case the application of Section 10A with a view to amalgamating the income of the firms Uppal & Co., and Ram Singh & Co., with the income of the appellant firm was correct and valid in law ? And we answer the question so reframed in the negative. Question No. 2 must be answered in the negative and in favour of the assessee by way of necessary corollary. We also answer question No. 3 in the negative. Appeal allowed.

Issues Involved:
1. Amalgamation of income under Section 10A of the Excess Profits Tax Act.
2. Inclusion of Dr. Surmukh Singh's income under Section 10A.
3. Classification of lease money as business profits.
4. Proper opportunity under Section 10A.
5. Validity of proceedings for lack of sanction.

Detailed Analysis:

1. Amalgamation of Income under Section 10A:
The primary issue was whether the income of the firms "Uppal & Co." and "Ram Singh & Co." could be amalgamated with the income of the assessee firm under Section 10A of the Excess Profits Tax Act. The Excess Profits Tax Officer concluded that the main purpose of forming the company and the two firms was to avoid liability to excess profits tax. The Appellate Tribunal agreed, noting a definite scheme to create separate charges to avoid excess profits tax. The High Court upheld this view, stating that the formation of the firms was mainly for the purpose of avoiding or reducing liability to excess profits tax. However, the Supreme Court found that the High Court's approach was erroneous as it should have first determined whether the assessee firm was carrying on any business during the relevant period. The Supreme Court concluded that the assessee firm had ceased its business activities and merely let out its plant and machinery, which did not amount to carrying on a business. Therefore, Section 10A was not applicable, and the amalgamation of income was not valid in law.

2. Inclusion of Dr. Surmukh Singh's Income:
The second issue was whether the share of income of Dr. Surmukh Singh, a partner in the selling agency "Ram Singh & Co." but not in the assessee firm, could be included under Section 10A. The Appellate Tribunal and the High Court included his income, assuming the firms were essentially one entity. The Supreme Court, however, ruled that since the assessee firm was not carrying on any business, Section 10A could not be invoked, and thus Dr. Surmukh Singh's income could not be included.

3. Classification of Lease Money as Business Profits:
The third issue was whether the lease money obtained by the assessee firm could be legally treated as business profits liable to excess profits tax. The Appellate Tribunal and the High Court held that the lease money was business profits, considering the leasing of the plant and machinery as an adventure in the nature of trade. The Supreme Court disagreed, stating that the assessee firm's business had entirely closed, and the plant and machinery were no longer commercial assets. The letting out of these assets did not constitute a business operation. Thus, the lease money could not be treated as business profits.

4. Proper Opportunity under Section 10A:
The fourth issue concerned whether the assessee firm was given a proper opportunity under Section 10A. The Appellate Tribunal decided against the assessee firm, and the High Court did not address this issue as it was not referred to it. The Supreme Court did not find it necessary to address this issue explicitly, given its findings on the other issues.

5. Validity of Proceedings for Lack of Sanction:
The fifth issue was whether the proceedings under Section 10A were null and void for lack of necessary previous sanction from the Inspecting Assistant Commissioner of Excess Profits Tax. The Appellate Tribunal declined to refer this question to the High Court, and no grievance was made before the Supreme Court on this issue. The Supreme Court did not address this issue explicitly, focusing instead on the applicability of Section 10A.

Conclusion:
The Supreme Court allowed the appeal, reframed the first question, and answered it in the negative, concluding that Section 10A was not applicable as the assessee firm was not carrying on any business during the relevant period. Consequently, the inclusion of Dr. Surmukh Singh's income and the classification of lease money as business profits were also ruled against. The appellant was entitled to the costs of the appeal.

← Previous Next →