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Baldeo Prasad Sita Ram Vs. Commissioner of Income-tax and Excess Profits Tax, U. P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Case No. 22 of 1956
Reported in[1963]47ITR729(All)
AppellantBaldeo Prasad Sita Ram
RespondentCommissioner of Income-tax and Excess Profits Tax, U. P.
Excerpt:
- - 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 tax liability the excess profits tax officer is empowered to negative the purpose by making such adjustment in the liability of the family as may be necessary......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 as follows :'(1) whether the partial partition of the assessee family and the formation of a firm is a transaction within the meaning of section 10a 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 assessee family ?'if the answer to question no. 2 is in the affirmative then,'(3) whether, in the.....
Judgment:

BRIJLAL GUPTA J. - 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 as follows :

'(1) Whether the partial partition of the assessee family and the formation of a firm is a transaction within the meaning of section 10A 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 assessee family ?'

If the answer to question No. 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 10A of the Excess Profits Tax Act are applicable to the present case ?'

The facts may be stated as follows :

The assessee is a Hindu undivided family. Its genealogical table is as follows :

Baldeo Prasad (dead)

Raja Ram

Sita Ram

Anant Ram

Purshottam Das

Ram Nath

Narottam Dass

Sheo Nath

It used to carry on business in Banarasi goods. On May 7, 1943, the members of the assessee family withdrew a sum of Rs. 32,000 from the cash balance in the family business. The sum withdrawn was divided between the members of the family in the following manner :

Rs.

1.

Sita Ram

4,000-0-0

2.

Ram Nath

4,000-0-0

3.

Narottam Dass

4,000-0-0

4.

Sheo Nath

4,000-0-0

5.

Raja Ram

5,333-5-4

6.

Anant Ram

5,333-5-4

7.

Purshottam Das

5,333-5-4

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 :

Rs.

1.

Sita Ram (Father)

0-2-0

2.

Ram Nath

0-2-0

3.

Narottam Dass

0-2-0

4.

Sheo Nath

0-2-0

5.

Raja Ram (Father)

0-2-8

6.

Anant Ram

0-2-8

7.

Purshottam Das

0-2-8

It will be noticed that the total share of Sita Rams branch consisting of himself and his three sons was annas eight and the share of the remaining three members consisting of Raja Ram and his two sons was another eight 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 partition had been effected in the Hindu undivided family and no partnership had been formed.

Raja Ram died on August 27, 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 Das, 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.

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.

The question, however, arose in the course of the excess profits tax assessment for the chargeable accounting periods ending October 26, 1944, October 15, 1945, and March 31, 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 10A of the 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 10A 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 May 7, 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 of the 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. It was also held that to begin with the shares of the two 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 1944-45 and 1945-46, corresponding to the chargeable accounting periods. Thus there was ample material for the finding.

On these facts the arguments 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 10A 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 10A. It was also faintly argued on the basis of a decision of the Bombay High Court that in order to be hit by the provisions of section 10A of the Excess Profits Tax Act and in order that a particular transaction may be a transaction within the meaning of section 10A of the 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 26A 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 10A of the Excess Profits Tax Act. We see no force in any of these submissions, for, in three decisions of this court reported as Sohan Pathak & Sons v. Commissioner of Income-tax, Dhaukal Mal Dwarka Prasad v. Commissioner of Income-tax and Kunjlal Nawal Bihari v. Commissioner of Income-tax, 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 10A of the Excess Profits Tax Act. In G. S. Ramaswamier & Sons v. Commissioner of Income-tax also it has been held by a Division Bench of the Madras High Court that 'the word transaction has a very wide meaning. It can be applied to any particular act done in the carrying on of a business; but one of its meanings is the 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 our minds it is not necessary for a transaction to be hit by the provisions of section 10A of the Excess Profits Tax Act that there should be an element of fraud in it. It follows that the first question referred to us must be answered in the affirmative, which we do.

So far as the second question is concerned we have already pointed out above that there was ample material for the Tribunal to form the basis of its finding that the main purpose of the partial partition and the formation of the new firm was the avoidance or reduction of excess profits tax liability. The material relied on by the Tribunal was relevant and capable of yielding the result which the Tribunal has derived from it. It follows that the second question must also be answered in the affirmative and we do so.

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 assessee 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 could be 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 10A 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 tax liability the Excess Profits Tax Officer is empowered to negative the purpose by making such adjustment in the liability of the family as may be necessary. This object can be achieved only be adding to the income of the family the income of the firm even though legally and technically it may not be the income of the firm and then to work out the liability of the family on the total income, the object plainly being to set at nought and to defeat the device adopted by the family. It follows that the answer to the third question must also be in the affirmative, which we do.

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.

Questions answered in the affirmative.


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