1. Under Section 66(2) of the Indian Income-tax Act the following question was referred to this court for decision by the Appellate Tribunal, viz.,
"Whether on' the facts and circumstances of this case the dissolution of the firm of Hajee Mohammed Ibrahim and Co. in 1941 and the formation of two partnerships each consisting of two of the partners of the old firm at Erode and Salem were entered into with the main purpose of avoiding or reducing liability to excess profits tax."
The question referred to us has to be decided with reference to the language of Section 10-A of the Excess Profits Tax Act. It provides that if the Excess Profits Tax officer is of opinion that the main purpose for which any transaction or transactions was or were effected was , the avoidance or reduction of liability to excess profits tax, he may with the previous approval of the Inspecting Assistant Commissioner 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 would otherwise be effected by the transaction or transactions.
2. There was originally a firm which carried on business at Erode and Salem under the name and style of C.S. Hajee Ibrahim & Co. Its business consisted of purchase and sale of clothes and fancy goods. It consisted of six partners, (1) C.S. Hajee Muhammad Ibrahim Kowther, (2) C. S. Hajee Abdul Majeed Rowther, (3) P. K. Mohamad Yusuf Rowther, (4) C.K.E. Mohamed Hanifa Rowther, (5) A.C, K. Shaik Abdul Kadir Rowther, and (6) P.K. Mohamed Habib Rowther. Of the six, Mohamed Habib Rowther (No. 6) retired from the partnership on 22-1-1941. By reason of the dissensions between the partners in December 1951 the firm- which then consisted of five partners was dissolved under a deed of dissolution of partnership dated 15-12-1941. Out of the five partners, Mohamed Yusuf Rowther was paid his share of the capital and profits in the business after debiting his drawings. It amounted to a sum of Rs. 7415-3-0. The remaining four partners formed themselves into two partnerships of two persons each. Hajee Abdul Hajeed Rowther and Muhamad Hanifa Rowther agreed under a deed of partnership D/- 13-12-1941 to carry on business under the name & style of C. S. Hajee Abdul Majeed & Co. at Salem. On the same day there was another partnership between Hajee Mohamed Ibrahim Rowther & A.C.K. Sheik Abdul Kadir Rowther who under another deed of partnership agreed to carry on business at Erode under the name & style of Hajee Hohamed Ibrahim and Co.
In the deed of dissolution it was provided that the partners who entered into the new partnership to carry on business at Erode should take the assets and liabilities as stated in schedule A attached to the deed of dissolution. This schedule A shows the value of the stock on hand at Erode as well as other assets of the partnership, including the outstandings. Similarly, schedule B shows the assets and liabilities allotted to the new partnership which agreed to carry on business at Salem. Under the new deeds of partnership it was agreed that the capital which has been entered in the personal account of each partner should be treated as the capital of the business and if any further capital is required the partners should contribute individually. The shares of the partners in the Salem partnership were 18 shares of which Hajee Abdul Majeed Rowther had ten shares & Mohamed Hariif Rowther had 8 shares. In the Erode partnership firm the shares were: Hajee Mohamed Ibrahim 32 shares out of 49 and Sheik Abdul Kadir Rowther 17 out of 49. These partnerships commenced to carry on business immediately after the partnerships were brought into existence and in the fourth chargeable accounting period the new firms earned profits of Rs. 32289 in respect 6f Erode partnership and Rs. 213817 in respect of the Salem Partnership. Before dissolution the net excess profits of the old firm were only Rs. 803.
The Excess Profits Tax Officer issued a notice under Section 10-A on 22nd July 1946 stating that as there was no break between the dissolution of the old firm and the commencement of the business of the new firms he proposed to treat the business carried by the new firms as merely a continuation of the business of the old firm without any break especially when the capital required by the new business was found from the old business and as the two firms carried on the same kind of business as the old firm. This view was finally upheld by the Appellate Tribunal.
3. The reason given in the deed of dissolution of partnership was that there were dissensions between the partners and therefore the partnership had to be dissolved and new partnerships had to be constituted after one of the five remaining partners agreed to go out of the business by taking the balance of his capital and profits outstanding in the old partnership. In proof of these dissensions and the consequent arbitration by two persons -- one of whom subsequently was appointed as District Judge -- a statement of one of them Hajee Chellakani Rowther was filed before the Excess Profits Tax Officer. He stated in that statement that as the partners in C.S. Hajee Mohamed Ibrahim and Co. were having quarrels and in order to have a peaceful division of the Erode and Salem firms, they had him and the other gentleman who was an Advocate at Trichi as arbitrators and effected division and that the reason for the division was only dissension among; them. The Appellate Tribunal while adverting to this statement thought that that statement by itself did not conclude the matter and that it was duty of the assessees to have exammed the other arbitrator who became a District Judge, or, at any rate, they should have obtained an affidavit from him supporting the statement of Chellikani Rowther. In view of this omission they were not inclined to accept the case of arbitration and consequent dissolution of the firm. They further added as reason for their conclusion that there was no fresh capital for the business of the new partnerships and that there was no break in the business either at Erode or at Salem. On these grounds they confirmed the view taken by the revenue authorities.
4. In our opinion, the Tribunal approached the case from a wrong perspective altogether. As has been decided in this court in 'R. C. No. 64 of 1946' the burden of establishing that the transaction in question is within the mischief of Section 10-A of the Act is undoubtedly on the Department and it is for them to establish by cogent and convincing evidence that there were circumstances which point to the conclusion that the main purpose of the transaction was to avoid or reduce the liability to excess profits tax. This view is also supported by the decision in -- 'Gangha Sahai Umrao Sing v. Commissioner of Excess Profits Tax', 18 ITR 988, and in -- 'Dixon & Count Ltd., James Dare Ltd. v. Commissioner of Inland Revenue', 29 TC 289. The department made no effort to place any circumstance to establish that the main purpose of the transaction was to avoid or reduce the tax. All that is urged and which has also been stressed before us by Mr. Rama Rao Sahib, the learned advocate for the Income-tax Commissioner, was the time-factor and the result, meaning thereby that if a transaction was brought into existence after the Excess Profits Tax Act came into force and when it continued to operate and if the result of the transaction was in fact to avoid or reduce the tax, it must be presumed that the transaction was within the mischief of Section 10-A of the Act. This argument if accepted would practically shift the burden of proof in every case to the assessee for the section can only apply to transactions which were brought into existence either after the Act came into force or even before the Act came into force when it was fairly well known that the Act would be passed. It would be impossible to conceive of any cause, applying that test, which would not fall within the purview of the section.
It is not enough, in our opinion, for the department in order to discharge the onus on them to establish merely that the transaction was one which came into existence after the Act came into force. There should be additional circumstance or circumstances which would point to the conclusion that the object with which the parties entered into the transaction and the main object was to avoid the tax or to get it reduced. In the present case the other circumstances point to the contrary conclusion rather than supporting the view of the department. That there were dissensions was recited in the deed of dissolution of partnership and was also proved by the statement of Chellikani Rowther. It is difficult to understated what the Tribunal meant when it said that this statement of Chellakani Rowther did not by itself conclude the matter. If the department thought that this statement was not credible it was up to them to have examined the other arbitrator who is now in judicial service as a District Judge. No effort was made on that behalf. On the other hand, the blame was thrown on the assessee for not examining him or for not even obtaining an affidavit from him. The fact of dissensions and of consequent arbitration, in our opinion, is amply established by the evidence on record.
5. The objection that there was no fresh capital and that there was no break in the continuity of the business is unfounded. The capital, as stated above, of each of the partnerships was as stated in the deed of dissolution the capital which was credited to the personal account of each of the partners as per the schedules appended to the deed of dissolution-Provision was made for bringing in fresh capital by the individual partners whenever it was needed. As regards the break in the continuity of the business, if an existing partnership is dissolved and one of the partners goes out of the business altogether and the remaining partners split up the business at the two places and constitute two distinct partnerships, though of course to carry on the same kind of business, it would undoubtedly constitute a break in the continuity of the business and it is impossible to agree with the conclusion that there was a continuity of the business of the old partnership by these new partnerships^ It is the right of every individual to enter into a partnership, to get it dissolved and to constitute new partnerships and merely because the partnership happened to be dissolved and the new partnerships were brought into existence at a time when the Excess Profits Tax Act was in force, from that circumstance itself it cannot be inferred that the motive and object of the person so acting was to avoid the liability for excess profits tax.
6. We are therefore of opinion that the question referred to us must be answered in the negative and in favour of the assessee. The assessee has succeeded and is entitled to costs which is fixed at Rs. 250.