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TMI Blog1954 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership dated the 6th November, 1935. The partners were Narain Singh and two of his sons, Ram Singh and Gurdayal Singh, their respective shares in the partnership being 6 annas, 5 annas and 5 annas. The business of the firm which was carried on at Chheharta, Amritsar, in the Punjab, was the manufacture of ribbons and laces and for this purpose it owned buildings, plant, machinery, etc. On the 7th April, 1940, a public limited liability company was incorporated under the name of Hindustan Embroidery Mills Ltd. The objects for which the company was established were to purchase, acquire and take over from the assessee firm the buildings and leasehold rights, plant, machinery, etc., on terms and conditions mentioned in a draft agreement and the other objects set forth in the memorandum of association of the said company. Out of the total subscribed capital represented by 41,000 shares, 23,000 shares were allotted to the assessee firm. Of these 23,000 shares so allotted 20,000 shares were not paid for in cash but the remaining 3,000 shares were paid for in cash. The directors of the company were Narain Singh and his three sons, Ram Singh, Gurdayal Singh and Dr. Surmukh Singh and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, the proceedings against the company were dropped and the Excess Profits Tax Officer considered the case of the three firms only. He held that the three firms were really one and he, therefore, amalgamated the income of all three and proceeded to assess the assessee firm to excess profits tax on that basis for the four several chargeable accounting periods mentioned above. Under sub-section (3) of Section 10A the assessee company preferred four several appeals to the Appellate Tribunal. In their order the Appellate Tribunal considered the four following issues :-- " (1) Whether the income of the firms styled as 'Uppal & Co.' and 'Ram Singh & Co.', could be amalgamated with the income of the assessee firm under the provisions of Section 10A of the Excess Profits Tax Act ? (2) Whether the share of income of Dr. Surmukh Singh, a partner in the selling agency of Ram Singh & Co., could be included under Section 10A in the excess profits tax assessment of the assessee firm ? (3) Whether the lease money obtained by the assessee firm could be legally treated as business profits liable to excess profits tax ? (4) Whether proper opportunity under Section 10A had been given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attract the operation of Section 10A. The Appellate Tribunal decided issues Nos. 2 and 4 against the assessee. All the four appeals were accordingly dismissed by the Appellate Tribunal. The assessee firm thereupon preferred four several applications under Section 66(1) of the Income-tax Act read with Section 21 of the Excess Profits Tax Act praying that the following questions arising out of the order of the Appellate Tribunal be referred to the High Court :-- " (1) 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 firms was correct and valid in law ? (2) Whether, in view of the facts admitted on record, the share of income of Dr. Surmukh Singh, a partner in the selling agency and not a partner in the appellant firm, could be legally included along with the share of income of S. Ram Singh and S. Gurdayal Singh and is this inclusion at all within the purview of Section 10A ? (3) Whether, in view of the facts, circumstances and observations on record, the lease money obtained by the appellant firm could be legally tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess profits tax. In the result, the High Court held that the three firms, the assessee firm, Uppal & Co., and Ram Singh & Co., were in fact one and the same and on that basis proceeded next to take up the third question. After referring to Section 2(5) and certain judicial decisions, the High Court concluded as follows : " The argument of Mr. Pathak when applied to the present case would have force were it a fact that the sole concern of the assessee firm was the receipt of hire of machinery from a company or firm, in which the assessee firm had no interest. But this is not the state of affairs. On the finding under the first question referred, the assessee firm, the firm of managing agents and the firm of selling agents are really one and the same firm. This firm and its partners held the majority of shares in the company. The agreement for payment of Rs. 40,000 as rent of machinery is an agreement between the assessee firm and the company which the assessee firm controls. The business of the assessee firm was, and in effect still is, the manufacture of ribbons and laces, and the receipt of Rs. 40,000 is a profit from that business diverted into the pockets of the assessee fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are the facts found by the Appellate Tribunal apart from its findings under Section 10A ? The findings are that after the formation of the company the assessee firm was left with no business at all. The company purchased the leasehold rights in the lands and buildings where the plant, machinery, etc., were installed. The firm as such ceased to manufacture any ribbons and laces. It was left with the plant, machinery, etc., which it did not require and which ceased to be a commercial asset in its hands, for it had no longer any manufacturing business at all. Further the assessee firm had put it out of its power to use the plant, machinery, etc., for it had no right in the lands and buildings where the plant, machinery, etc., had been installed. In these circumstances, the assessee firm let out the plant, machinery, etc., to the company. It was thenceforth the company which was carrying on the business of manufacturing ribbons and laces and for that purpose hired the plant, machinery, etc., from the assessee firm. Prima facie it was the company which appointed the managing agents and the selling agents. Ex facie and apart from the alleged result of any enquiry under Section 10 or Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was income from business and assessable to excess profits tax. It should be noted that in that case the respondent company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. In such a situation, this Court held that that part of the assets did not cease to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the company. This Court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles. In the case before us the assessee firm's business had entirely closed. It no longer manufactured any ribbons and laces. It had accordingly no further trading or commercial activity. It could not in fact use the plant, machinery, etc., after the land and the buildings where they were installed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal consequent upon the aforesaid answer to question No. 3 would be 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 assessee firm was correct and valid in law and that was precisely the first question which the assessee firm sought to raise by its application. In our view the High Court should not only have answered question No. 3 in the negative but should also have raised, as a corollary to that answer to question No. 3, the further question of law on the lines indicated in question No. 1 of the assessee's petition. In other words, 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 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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