1. The question that arises on this reference is whether the provisions of section 10A of the Excess Profits Tax Act have been correctly applied. That section confers upon the Excess Profits Tax Officer a power to make such adjustments as respects liability to excess profits tax as he considers appropriate so as to counteract the avoidance or reduction of liability to excess profits tax which has been brought about by a transaction or transactions, and this power can be exercised provided the Officer is of the opinion that the main purpose for which the transaction or transactions were effected was the avoidance or reduction of excess profits tax.
2. Now, the facts which led up to the exercise of the power under this section of the Excess Profits Tax Act may be briefly stated. Before the Excess Profits Tax Act came into force there were two registered partnerships and we will call them for convenience partnership A and partnership B. Partnership A consisted of 3 partners and partnership B consisted of 4 partners. These two partnerships used to have joint ventures from time to time and therefore for the purpose of those joint ventures there was thus a third partnership which we will call partnership C consisting of 7 partners, and with regard to these joint ventures it was agreed between partnership A and Partnership B that partnership A will have 6 1/2 annas share and partnership B 9 1/2 annas share. After the Excess Profits Tax Act came into force the 7 partners of partnership C executed a partnership deed, and the view taken by the Excess Profits Tax Officer was that the execution of this deed was a transaction, the purpose of which was to avoid or reduce the liability to excess profits tax, and this is the view that is being challenged on this reference.
3. The Tribunal has found that the partnership deed that was executed was a genuine deed. It has also found that partnership C was functioning before the Excess Profits Tax Act came into force. It is therefore difficult to understand how the liability of partnership C was in any way affected by the execution of the partnership deed. The position would have been entirely different if partnership A and partnership B had started partnership C after the Excess Profits Tax Act came into force. Then it might have been said that this third business had been started in order to avoid or reduce the liability to excess profits tax of partnership A and partnership B. But once it is admitted, as indeed it is admitted on the record, that partnership C was already functioning and it was a genuine partnership, then the mere act on the part of the partners of partnership C to clothe that partnership with a legal formality cannot possibly constitute a transaction contemplated by section 10A the purpose of which was to avoid or reduce the liability to excess profits tax. It is pointed out by the Tribunal that prior to the Excess Profits Tax Act only partnership A and partnership B were registered with the Income-tax Department and the assessments were only made of partnership A and partnership B and not of partnership C. The reason for this is obvious, because as far as the Income-tax Act was concerned it made no difference whether only partnership A and partnership B were assessed and they were assessed also with regard to the business done by partnership C, or whether partnership A, partnership B and partnership C were treated as separate business and were assessed separately for the purposes of income-tax, because the profits made by partnership C were allocated to the partners of partnership A and the partners of partnership B. But the position is entirely different under the Excess Profits Tax Act, because the entity of taxation under the Excess Profits Tax Act unlike the Income-tax Act is a business, and where partnership A, partnership B and partnership C constitute three different businesses, under the Excess Profits Tax Act. The excess profits tax must be levied in respect of these three separate business upon the partners of those three business and threrfore the question whether partnership C should be separately assessed or not to excess profits tax only arose after the Excess Profits Tax Act came into force came into force. But, As we said before, there is no suggestion that the partners of partnership A and the partners of partnership B in order to avoid or reduce their liability under the Excess Profits Tax Act deliberately started a new partnership constituted by partnership C. If that partnership already existed, then the only question we have got to consider is whether the execution of the mere formal partnership deed can be considered a transaction within the meaning of section 10A. On the facts of this case it is impossible to say that the view taken by the Excess Profits Tax Officer was the proper view. In our opinion the Tribunal was in error in upholding the view taken by the Excess Profits Tax Officer of his power under section 10A.
4. The question submitted to us in this reference is under section 14(3). In our opinion 14(3) has nothing to do with the question. The question that we have to consider is with regard to the application of section 10A. We must, therefore, reframe the question as 'whether on the facts and circumstances of the case the Tribunal was justified in holding that section 10A of the Act applied to the facts of the case ?' and answer it in the negative. The Commissioner to pay costs.
5. Reference answered in the negative.