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J.K. Commercial Corporation Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Misc. Case No. 76 of 1953
Judge
Reported inAIR1964All22
ActsExcess Profits Tax Act, 1940 - Sections 8(3) and 8(8); Excess Profits Tax Rules - Rule 12
AppellantJ.K. Commercial Corporation Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateR.S. Pathak, Adv.
Respondent AdvocateGopal Behari, Adv.
Excerpt:
.....of appeal by saying 'after giving the matter our best consideration we are of opinion that the excess profits tax officer was within his rights to effect the modifications in the computation of the profits and capital for the purposes of the e. ). 9. the assessee, simultaneously, filed an appeal to the appellate assistant commissioner against the quantum of the assessment as well as the jurisdiction of the l. schdules i and ii contain elaborate rules far determining with fairness the proms both of the standard period as well as of the c. officer is given very wide powers of making such modifications both in the chargeable accounting period as well as in the computation of profits and capital of the standard period as he may consider to be just. under consideration so as to make it..........that have been referred are-1. whether on the facts and in the circumstances 01 this case the excess profits tax officer was right in holding that the provisions of section 8(8) were applicable in this case? 2. whether an appeal challenging the validity of the application of the provisions of section 8{8) by the excess profits tax officer would lie to the board of referees and not to the appellate assistant commissioner? 3. the facts leading up to this petition are these-4. the assessee is a public limited company which was incorporated on 17-5-1943, the business having commenced on 10-10-1943. the assessee took over three businesses which were hitherto run by partnership firms. the first business taken over was that of the managing agency of j. k. cotton . kanpur from messrs......
Judgment:

Manchanda, J.

1. This is a case stated under Section 21 of the Excess Profits Tax Act 'hereinafter referred to as the Act' read with Section 66(1) of the IT. Act.

2. The questions that have been referred are-

1. Whether on the facts and in the circumstances 01 this case the Excess profits tax officer was right in Holding that the provisions of Section 8(8) were applicable in this case?

2. Whether an appeal challenging the validity of the application of the provisions of Section 8{8) by the excess profits tax officer would lie to the Board of Referees and not to the Appellate Assistant Commissioner?

3. The facts leading up to this petition are these-

4. The assessee is a public limited company which was incorporated on 17-5-1943, the business having commenced on 10-10-1943. The assessee took over three businesses which were hitherto run by partnership firms. The first business taken over was that of the managing agency of J. K. Cotton . Kanpur from Messrs. Juggilal Kamlapat on 1-10-1943. The second business taken over was also of managing agency of J,K. Iron and Steel company limited, Kanpur on 1-11-1943 from another firm known as J.K. Managing Agents. The third business taken over was the selling agency of Messrs. J. K. Cotton Spinning and Weaving Mills Co. Ltd., on 25-3-1944 from a firm carrying on business in the name and style of Hari shanker Gopal Hari. In the partnership firms S. M. Bashir 'and S. D Garg were partners and Shital Prasad was an employee in the firm of Juggilal Kamlapat.

5. A change in the persons carrying on these business having taken place after the 1st of September 1939 tne Excess Profits Tax Officer in making the assessments on the assessee Company applied the provisions of Section 8(3) read with Section 8(8) of the Act and modified the profits of the chargeable accounting periods by disallowing the Directors Fees, half the remuneration paid to Mr. Shital Prasad, who was a Director of the Company upto the 18th April 1945 and the remunerations paid to Messrs. S. M. Bashir ana S. D. Garg. He, however, allowed the banking and collection charges which were paid by the Company to Messrs. Juggdal Kamlapat A separate order under Section 8(8) was passed wherein reasons were given for the modifications so made. The relevant portion is as follows:--

'As none of the expenses of the nature aforesaid appeared in the chosen standard period, it appears to be just to make such modifications in the profits of the CAPS under consideration so as to make it comparable with that of the standard period. Consequently I add back the following amounts to the profits of the C.PA under the provisions of the Section 8(8) of the E.P.T. Act.'

6. As already stated, half of Shital Prasad's remuneration was allowed, banking and collection charges paid to Messrs. Juggilal Kamlapat were also allowed but the Directors fees and remuneration to S. M. Bashir and S. D. Garg, who were partners in the predecessor firms were disallowed. In allowing half the remuneration to Shital Prasad We Excess Profits Tax Officer (hereinafter referred to as the E.P.T.O.) mentioned that he had taken into consideration the volume of the business and the extent of the responsibilities which were more than in the standard period shouldered by Shital Prasad. In respect of the banking and commission charges as these were being allowed in tne hands of the predecessor firm Messrs. Juggilal Kamlapat toe saw no reason to disallow them.

7. A similar order was passed under Section 8(8) in respect of all the three relevant chargeable accounting periods which were 1-104943 to 30-6-1944; 1-7-44 to 30-6-45 and 1-7-1945 to 31-3-1946. The assessee appealed to tne Board of Referees under the proviso to Section 8(8) of the Act. One of the grounds, apart from some additional grounds taken as to the adequacy of the modifications made by the learned E.P.T.O. are ultra vires of his powers under Section 8(3) of the E. P. T. Act inasmuch as the expenses disallowed by him did not arise out of the transfer of any of the businesses to the appellant.

8. The Board of Referees in deciding the appeal disposed of the aforesaid ground of appeal by saying 'After giving the matter our best consideration we are of opinion that the Excess Profits tax officer was within his rights to effect the modifications in the computation of the profits and capital for the purposes of the E.P.T. Act in respect of the chargeable accounting periods under Section 8(8) of the Act'. They then went on to further modify to the advantage of the assessee the modifications made by the E.P.T.O. They allowed a sum of Rs. 25,250/- for ail the three chargeable accounting periods as remuneration to Messrs. S. M. Bashir and S. D. Garg also. The order of the Board of Referees was passed on the 25th February 1950 for all the chargeable accounting periods (hereinafter referred to as C.A.Ps.).

9. The assessee, simultaneously, filed an appeal to the Appellate Assistant Commissioner against the quantum of the assessment as well as the jurisdiction of the L.P.T.O. to make the aforesaid modification under the provisions of Section 8(8) of the Act. In respect of the latter the Appellate Assistant Commissioner held that no appeal lay to him in view of the provisions of Section 17 of the Act, and the appeal had rightly been preferred to the Board of Referees.

10. On further appeal to the Tribunal it was contended that the E.P.T.O. had misinterpreted and misapplied the provisions of Section 8(8) read with Section 8(3) of the Act and it was argued that the Tribunal should ignore the award of the Board of Referees and consider the question de novo.

This contention was negatived holding that the appeal lay only to the Board of Referees and not to the Tribunal and the award was final and binding on the assessee.

11. A reference having been asked for, the present reference has accordingly been made.

12. The question raised in this reference are res Integra and have therefore to be decided on firsf. impressions. In this connection it may be useful to see what the scheme of the E.P.T. Act was This Act was a war measure and the primary object, as has been said before was to prevent businessmen from deriving undue profits from what was after all national emergency and Government was determined to skim the cream of such profits, for its war effort. The charging section is section 4 and the E.P. Tax is payable on the excess of the profits over the standard profits during the particular CRP Standard profit is defined in Section 2(20) as profits to be computed under Section 6 of the Act. The excess profits tax was charged at 50% between 1-9-1939 and 31-3-1941 and thereafter at 66 2/3%. The charge is on the business itself and not on the persons carrying on the business. If more businesses than one are being carried on by the same person under the provision of Section 2(5) of the Act all those businesses are to be treated as one business, profits are defined in Section 2(19) as profits to be computed under Schdule 1 of the Act. The average amount of capital employed in the business is defined in Section 2 Sub-clause (3) and is required to be computed under the provisions as contained in schedule 11 OT the Act. If more capital is employed during the chargeable accounting period than during the standing period it is provided, and rightly so, that the necessary adjustments in the standard profits which are taken for comparison should also be made.

The adjustment is made by working out a proportion as provided in Section 6 and the standard profits are increased or decreased as the capital employed is increased or decreased by applying the statutory percentage. Schdules I and II contain elaborate rules far determining with fairness the proms both of the standard period as well as of the C. A. P. keeping in mind the primary objective that no excess profits should be allowed to escape unreasonably. This is a thread which runs right through the E.P.T. Act and even transactions which are genuine, but the dominant object of which is to evade excess profits tax are by a fiction of law sought to be hit by the provisions of Section 10(A) of the Act.

13. With this background, we may now turn to the relevant provisions of Section 8, the scope and interpretation whereof is called for in the questions referred to this Court. The main question in substance is whether the modifications aforesaid were such modifications as were contemplated under Section 8(8) of the Act

14. Section 8 deals with a special class of cases and that is succession to a business or amalgamation of business. Sub-section (1) lays down the general law that as from the date of any change in the persons carrying on the business such business shall be deemed to be discontinued for alt purposes and a new business commenced except for the purposes of determining the amount of the statutory percentage. One effect of this would be that by fiction of law which is engrafted in this section the succeeding business would not be entitled to the deficiencies of the predecessor business. Sub-sections (2) to (6) which immediately follow are exceptions to the general rule set out in Sub-section (1) and in some cases a choice is given to the successor to claim that the business has not discontinued whereas in other cases no such choice has been left and the business is deemed to have been continued in the hands of the successor.

15. A distinction is drawn between changes that took place before the Ist September 1939 i.e. before the war broke out and changes taking place thereafter. Sub-section (2) gives the succession business, where the change had taken place before the 1st September, 1939 and consisted only in the death or retirement of a partner or the taking in ef a partner, the choice whether for purposes relating to the computation of standard profits the business shall or shall not be deemed to have been discontinued. Sub-section (3) is the one with which we are specifically concerned in this reference and the relevant provisions thereof may be usefully set out.

'A business shall not for the purposes of this Act, relating to computation of standard profits be deemed to be discontinued by reason of any change occurring on or after Ist day of September 1939 in the persons carrying it on and the standard profits of the business in relation to any chargeable accounting period shall be computer accordingly and in particular in computing the capital employed in the business after the change (and in considering for the purposes of computing the profits of and the capital employed during any chargeable accounting period whether any, and if so, what deductions are to be made, in respect of depreciation of buildings, plant and machinery) no regard shall be had to any consideration given in respect of the transfer of the business or any of the assets thereof on the occasion of the change.'

16. It may be noticed that the words in brackets were inserted by Section 4 of the LP.T. (Amendment) Act 1940. A similar amendment was carried out in Section 8(8) of the Act also. In the original Act only the provisions relating to the computation of standard profits were involved, whereas by the amendment not only the computation of standard profits was to be considered when a change or amalgamation took place but also the computation of standard profits and the capital employed .n the business in respect of the chargeable accounting period also. The last few words 'on the occasion of the change' in Sub-section (3) may also be noticed, and they will be adverted to again hereafter.

17. Sub-section (4) deals with amalgamation on or alter 1-9-1939 and the principles under Sub-section (3) are made applicable thereto. Sub-section (5) is the reverse of Sub-section (4) and extends the principles of Sub-section (4) to the splitting up of a single business into various units. Sub-section (6) provides for the transfer after 1-4-1936 but before 1-9-1939 where the mam part of the business so carried on before 1-4-1936 was the Same as the one transferred, and in such circumstances the new owner or the successor is deemed to be treated as if he had carried on the business from its inception.

18. Sub-sections (2) to (6) are all specifically made subject to the provisions of Section 8(8) the relevant portion whereof reads:--

'Where a business is by virtue of Sub-section (2) or Sub-Section (3) deemed not to have been discontinued the provision of this Act relating to computation of profits and capital for the purposes of excess profits shall both as respect the standard period and in chargeable accounting period have effect subject to such modifications if any as the Excess Profits Tax Officer may think just and the Excess Profits Tax Officer may make such alterations in the period which would otherwise be chargeable accounting periods ot the business as he thinks proper,'

'Provided that if the Excess profits Tax Officer manes any such modification and the person carrying on the business is dissatisfied with the modifications so maoe or it the person carrying on the business is dissatisfied with the refusal of the Excess Profits Tax Officer to make any such modifications he may at any time before the expiry of 45 days from the date on which the order of the Excess. fits Tax Officer is communicated to him, appeal to the Board of Referees through the Excess Profits Tax Officer.'

19. The important words in this Sub-section are 'both as respects standard period and in chargeable accounting period.' and 'such modifications, if any, as the excess profits Tax Officer may think just'. Prima facie, on the happening of the contingencies mentioned in Sub-section (2) to (6) of Section 8 the E.P.T. Officer is given very wide powers of making such modifications both in the chargeable accounting period as well as in the computation of profits and capital of the standard period as he may consider to be just.

20. Mr. Pathak, the learned counsel for the assessee has strenuously contended that the powers of the L.P.1. Officer cannot be plenary and must have some limitations. The limitation that he suggests is that the modification which the Excess Profits Tax Officer can carry out under Sub-section (8) is only such modification as directly flows from the transfer or amalgamation of the business. According to him there must be a causa causans and not merely remote connection between the change and the moditieation effected. The modification must be such which flows, out of the transfer. For this purpose he relied on the words used in Section 8(3) 'on the occasion of the change.' Now these words are very general and are not words such as are to be found for example in the second proviso to Section 34(3) of the Income-tax Act. There the words used by the legislature are, 'In consequence of or to give effect to any finding or direction.' Sub-section (3) of the Act, In order to fit in with Mr, Pathaks contention, would require much to be written into it which is not there, would complicate its operation and would lead to practical difficulties. There can be no warrant for giving the words 'on the occasion of the change' the same meaning as 'in consequence of or to give effect to.' The legislature has chosen to use words of very wide import and there can be no justification for placing a restricted interpretation on those words. Considering the complexities of the Excess Profits Tax Act it is not wonder that the legislature did not consider it necessary in the matter of making modifications to lit the hands of the Excess Profits Tax Officer. At the same time it cannot be doubted that the modifications must be such as are at least incidental or have some connection with the transfer or change made, There must be some connection, Ifowever, remote, between the change and the necessity for making the modification by the Excess Profits Tax officer, remembering always that the Excess profits Tax, Officer's power will be used, as provided, in the section as he may think just. 'The power under Section 8(8) certainly cannot be exercised arbitrarily, capriciously or vindictively'.

21. Let us now turn to the facts of the present case and see whether the impugned modifications would satisfy these tests. There were as already observed three partnership firms which were taken over by the assessee, a public limited company. The partnership firms under the-provisions of the Income-tax Act are debarred from paying any remuneration to its partners. As a result of the change and the transfer to public limited company two of the erstwhile partners now became entitled to receive remuneration, The third person Shital Prasad who was only an employee in one of the partnership firms became a director of the assessee company and remuneration was paid to him. There are circumstances which cannot be said to have no connection whatsoever with the occasion of the change.' They may not be circumstances or facts which directly flow from the change but they are certainly connected with the change. If the persons employed by the assesses company after the change had no connection whatsoever with the predecessor firms, it might have been possible to argue that the remuneration paid to such persons could not nave been modified under the provisions of Section 8(8) but when two of such persons were holding large shares in the partnership firms and one of them was an employee thereof it is impossible to say that the remuneration paid to such persons, which only became possible because of the change was not on the occasion of the change.

22. It was next contended by Mr. Pathak, the learned counsel for the assessee, that the modifications contemplated under Section 8 were something different from those provided under Schdule 1 rule 12 of the Act. It is no doubt true that under Rule 12 there is a general provision that in com puting the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess 'Profits Tax Officer considers necessary having regard to the requirements of the business, and in the case of directors fees or other payments for services to the actual services rendered by the persons concerned, and is further hedged in with the requirement that the prior authority of the Commissioner of Excess Profits Tax should be obtained and an appeal lies directly to the Tribunal in respect of any such deductions made. This rule, however, would apply to the normal run of cases where the increased expenditure is incurred in one year over what was claimed in the preceding year. Section 8(8) on the other hand provides for specific cases of successions and amalgamations. Different considerations would come into play in making 'modifications under Section 8(8) and 'deductions' under Rule 12 of Sechdule 1. These two provisions though, in this particular case, may appear to be overlapping are in fact not so, as they provide for difterent situation altogether.

23. Lastly it was contended fay Mr. Pathak that tne Excess profits tax officer in his order under Section 8(8) had not proceeded on the basis that the erstwhile partners of the predecessor firms had now been given salaries and an employee had now been made a director of the successor Company. It is again true that the Excess profits Tax Officer has not said so in so many words but these facts undoubtedly were within his knowledge, in making the modification he has stated that as none of the expenses of the nature aforesaid appeared in the chosen standard period it appeared to him to be just to make such modifications in the profits of the C.A.C. under consideration so as to make it comparable with that of the standard period, for the purpose of comparing like with like. This could only mean that as two of the persons whose salary payments called for modification in the C.A.P. were partners in the predecessor firm and no remuneration could have been, paid to them, and the third one an employee in the predecessor firm having been made a director in the successor firm the modification in the remuneration claimed for him was restricted only to half the salary. This contention therefore is without force.

24. For the reasons aforesaid question No. 1 is answered in the affirmative in favour of the department and against the assessee. From the answer to question No. 1 it follows that question No. 2 does not now arise and it need not be answered. In any event the answer to question No. 2 also is self evident in view of the answergiven in respect of question No. 1 and it must be answeredin the affirmative and against the assessee. As regardscosts Mr. Pathak has submitted that the case beingone of first impressions no costs be awarded. The submission is reasonable and we direct that the parties will,bear their own costs. We, however, assess the fee oflearned counsel for the department at Rs. 500/-


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