Brijlal Gupta, J.
1. This reference comes to us on a requisition made by this Court on an application under Section 66(2) of the Income-tax Act read with Section 21 of the Excess Profits Tax Act. Three questions have been raised in the reference for the opinion of this Court. These questions are asfollows :
1. Whether the partial partition of the assesses family and the formation of a firm is a transaction within the meaning of Section 10-A of the Excess Profits Tax Act.
If the answer to the above is in the affirmative,
2. Whether there was any material for the finding of the Tribunal that the main purpose of the partial partition of the family and the formation of the new firm of Rama Silk House was the avoidance of the excess profits tax liability of the assesses family?
If the answer to question (2) is in the affirmative then,
3. Whether in the circumstances of the present case and having regard to the provisions of Sections 4 and 6 of the Excess Profits Tax Act, the provisions of Section 10-A of the Excess Profits Tax Act are applicable to the present case?
2. The facts may be stated as follows: The assessee is a Hindu undivided family. Its genealogical table is as follows:
Raja Ram Sita Ram
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Anant Ram parshottam |
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Ram Nath Narottam Sheo Nath
It used to carry on business in Banarasi goods. On7-5-1943 the members of the assessee family withdrew asum of Rs. 32,000/- from the cash balance to the family.business. The sum withdrawn was divided between themembers of the family in the following manner:
With the moneys so obtained on a partial partition In regard to this amount a partnership business in the name and style of Rama Silk House was started by the following persons with the shares noted against each one of them;
Sita Ram (Father)
Raja Ram (Father)
3. It will be noticed that the total share of Sita Ram's branch consisting of himself and his three sons was annas 8 and the share of the remaining three members consisting of Raja Ram and his two sons was another 8 annas share. Thus the shares of the various partners in the partnership business forming the two groups were exactly the same as they should have been if a partitionhad been effected In the Hindu undivided family and no partnership had been formed.
4. Raja Ram died on 27-8-1943. On the death of Raja Ram Gokul Das, an outsider was also taken as a partner in the firm. The shares of the partners of the second group were reshuffled and redistributed. Anant Ram and Purshottam Dass the two sons of Raja Ram had their shares augmented and the shares now became three annas six pies each totalling to seven annas. The remaining one anna share of their group was given to Gokul Das.
5. In income-tax proceedings the firm was granted registration and its income was assessed separately from the income of the Hindu undivided family which in spite of the formation of the partnership continued to carry on the ancestral silk business as before and continued to be assessed on the income of that business.
6. The question, however, arose in the course of excess profits tax assessment of the chargeable accounting periods ending 26-10-1944, 15-10-1945 and 31-3-1946. In the assessment proceedings of the Hindu undivided family a notice was issued to the family by the Excess Profits Tax Officer under Section 10-A of Excess Profits Tax Act, that the main purpose of the partial partition and the formation of the firm was the avoidance and reduction of the excess profits tax liability of the family. The authorities below came to the conclusion that the partial partition and the formation of the firm amounted to a transaction within the meaning of Section 10-A of the Excess Profits Tax Act. It was further held that there were numerous circumstances to show that the main purpose of the transaction was the reduction or avoidance of excess profits tax liability.
These circumstances were that the partial partition and the formation of the partnership on 7-5-1943 which fell in the accounting period relevant to the assessment year 1944-45 was during a period of the rising income and prosperity of the family business. Accordingly the case of the assessee that the partial partition and the formation of the firm were to prevent the disruption ofthe family and the discontinuance of the family business was not acceptable. The other facts relied on were that the family business and the partnership business had the same customers and dealt with in the same commodity ft was also held that to begin with the shares of thetwo groups formed by the branches of Raja Ram and Sita Ram were equal. It was only after the death of Raja Ram that Gokul Das an outsider was given a nominal share of one anna in the firm. Lastly, it was held that by this arrangement the family avoided payment of about Rs. 48,000/- as excess profits tax in the two years 194445 and 1945-46 corresponding to the chargeable accounting periods. Thus there was ample material for the finding.
7. On these facts the argument which has been addressed to us on the first question which has been referred to us for opinion was that a transaction within the meaning of Section 10-A of the Excess Profits Tax Act had to be a transaction by the assessee itself. It was urged that as the partial partition and the formation of the firm was not the act of the Hindu undivided family as such but of the coparceners constituting the family this requirement was not fulfilled.
It was further argued that a transaction within the meaning of that section had to be during the course of the business of the assessee. In this particular case the assessee was the Hindu undivided family. It was argued that the partial partition and the formation of the firm was not in the course of the business of the Hindu undivided family but independently of that business. For these reasons it was urged that the partial partition and the formation of the firm were not transactions within the meaning of Section 10-A.
It was also faintly argued on the basis of a decision of the Bombay High Court that in order to fae hit by the provisions of Section 10-A of the Excess Profits Tax Act and in order that a particular transaction may be a transaction within the meaning of Section 10-A of Excess Profits Tax Act there had to be an element of fraud in the transaction. It was urged that in this case, the partial partition in respect of the sum of Rs. 32,000/- having been upheld and the' genuineness of the firm recognised by registration under Section 26-A of the Income-tax Act, the element of fraud was lacking and for this reason also the transaction was not a transaction within the meaning of Section 10-A of the Excess Profits Tax Act.
We see no force in any of these submissions for in three decisions of this Court reported in Sohan Pathak and Sons v. Commr. of Income-tax : 19ITR199(All) ; Dhaukal Mal Dwarka Prasad v. Commr. of Income-tax, : 19ITR212(All) and Kunjilal Nawal Bihari v. Commr. of Income-tax : AIR1955All333 , it has been held that in similar circumstances where part of the business of a Hindu undivided family has been handed over to a firm the arrangement amounts to a transaction and is hit by the provisions of Section 10-A of the Excess Profits Tax Act. in G.S. Ramaswamier and sons v. Commr. of Income-tax : 13ITR24(Mad) , also it has been held by a Division 3ench of the Madras High Court that
'the word 'transaction' has a very wide meaning. It can be applied to any particular act done in carrying on of a business; but one of its meanings is carrying on or completion of an action or a course of action.'
We are in respectful agreement with the law laid down in these cases. To out minds it is not necessary for a transaction to be hit by the provisions of Section 10-A of the Excess Profits Tax Act that there should be an element of fraud in it. It follows that the first questionreferred to us must be answered in the affirmative which we do.
8. So far as the second question Is concerned wehave already pointed out above that there was amplematerial for, the Tribunal to form the basis of its findingthat the main purpose of the partial partition and theformation of the new firm was the avoidance or reductionof excess profits tax liability. The material relied on bythe Tribunal was relevant and capable of yielding theresult which the Tribunal has derived from it. It followsthat the second question must also be answered in theaffirmative and we do so.
9. So far as the third question is concerned, the argument addressed to us was that excess profits tax liability accrues only on income. If the income was not of the Hindu undivided family but of the firm which was a different entity, there could be no accrual of excess profits tax liability so far as the assesses was concerned, on the income of the family itself; in other words, even though the Income-tax Appellate Tribunal reached the finding that the main purpose of the partial partition and the formation of the new firm was the reduction or avoidance of excess profits tax liability no adjustment couldbe made in the excess profits tax liability of the family as the adjustment sought to be made by adding the income of the firm to the income of the Hindu undivided family and working out the excess profits tax liability on that total income would be making the income of the firm the Income of the family which in fact or in law it was not
To our minds this argument is based on a fallacy and a complete misunderstanding of the object and purpose of Section 10-A of the Excess Profits Tax Act. Clearly the object and the purpose of that provision is that where the transaction is for the purpose of reduction or avoidance of excess profits liability the Excess Profits Tax Officer is empowered to negative the purpose by making such adjustment in the liability of the firm family as may be necessary. This object can be achieved only by adding to the income of the family the income of the (sic) even though legally and technically it may not be the income of the firm and then to work out the liability of thefamily on the total income, the object plainly being to set at bought and to defeat the device adopted by the family. It follows that the answer to the third questionmust also be in the affirmative, which we do.
10. We answer the reference accordingly. The assessee shall be liable to pay the costs of the Income Tax Department which we assess at Rs. 200/-.