1. We consider it desirable to dispose of the questions, which constitute the subject-matter of these two references by a single order, though, of course, each set of questions has to be answered with reference to the circumstances under which they arise. We shall deal first with R.C. No. 68 of 1953.
R. C. No. 68 of 1953.-The question that was referred under Section 66(2) of the Income-tax Act ran:
Whether on the facts and circumstances of the case, there was a change in the persons carrying on the business within the meaning of Section 8(1) of the Excess Profits Tax Act ?
2. Arunachala Nadar was the Kartha of the Hindu undivided family which consisted of himself and his ten sons. Four of these sons, Ayyamperumal, Ratnasa-bhapathi, Dorairaj and Rajamanickam, were Arunachala's sons by his first wife. All of them were adults in 1942. The six sons by the second wife were still minors. It was this Hindu undivided family that was the assessee up to the assessment year 1942-1943. The assessee family had its headquarters at Virudhunagar. It carried on its business at the following places:
1. grocery and two oil mills at Virudhunagar.
2. grocery at Tuticorin;
3. oil mills at Madurai, and
4. commission business in grocery at Bombay.
3. There were three other items with which we need not now concern ourselves.
4. The accounting year of the assessee family ended on 27th January, 1942. The four adult sons of Arunachala separated themselves from the family and they were also divided inter se. Arunachala and his six minor sons by his second wife remained joint in status. A partition was effected with effect from the close of the accounting year on 27th January, 1942. For purposes of that partition, the members of the family were treated as forming two groups; the four adult sons, though divided inter se, formed one group; Arunachala and his undivided minor sons formed the other group. The properties of the family were divided into two halves, each group taking one half. Arunachala's group took over the business at Virudhunagar and at Madurai; the divided adult sons took over the business at Tuticorin and at Bombay. This arrangement was evidenced by a document executed on 10th August, 1942, which was styled a family partition release deed.
5. Three of the adult sons, Ayyamperumal, Ratnasabapathi and Dorairaj, commenced a separate business under the name and style of "V.N.M.A. Ayyamperumal Nadar & Bros. ", on 28th January, 1942. On the same day, the other divided son, Rajamanickam also commenced a separate business of his own. Arunachala Nadar in his turn started with a fresh set of accounts for the accounting year commencing 28 th January, 1942, treating the business that he had done up to that date as having been closed or discontinued.
6. On 14th October, 1942 Arunachala wrote to the Income-tax Officer, Virudhu- nagar, in the following terms:
From the family business carried on at Virudhunagar, Tuticorin, Bombay, Madura and Rangoon in the name of V. N. M. Arunachala Nadar, my four sons (1) V. N.M.A. Ayyamperumal, (2)V.N.M.A. Ratnasabapathi, (3)V.N.M.A. Dorairaj and (4) V.N.M.A. Rajamanickam have gone out after 14th Thai Vishu, and with effect from 15th Thai Vishu (28th January, 1942), (1) V.N.M.A. Ayyamperumal Nadar, (2) V.N.M.A. Ratnasabapathi Nadar and (3) V.N.M.A. Dorairaj Nadar carry on business as partners in the style of " V.N.M.A. Ayyamperumal Nadar and brothers, Virudhunagar, Tuticorin and Bombay, V.N.M.A. Rajamanicka Nadar is carrying on business at Virudhunagar.
I hereby inform you that after 15th Thai Vishu, only the business in the name of V.N.M. Arunachala Nadar at Virudhunagar and Madura belongs to me ".
7. When, in the usual course, Arunachala, as the Kartha of the Hindu undivided family, in which status he had all along been assessed, was asked to submit his return for the assessment year 1943-1944, Arunachala's reply dated 10th August, 1943 was as follows:
I have received a form for preparing and submitting the return of income for assessing me for the year 1943-1944. The form has been sent on the basis of the same family that existed up to 1942-43. The family business was stopped on the 14th Thai Vishu and my sons V.N.M.A. Ayyamperumal Nadar, V.N.M.A. Rathnasabhathi Nadar, V.N.M.A. Dorairaja Nadar and V.N.M.A. Rajamanicka Nadar have gone out of my family and from the 15th Thai Vishu (28th January, 1942) parties 1, 2 and 3 above named have started a business in partnership in the name of " V.N.M.A. Ayyamperumal Nadar and Brothers" and the fourth party V.N.M.A. Rajamanicka Nadar is carrying on business individually. This information has been submitted along with the return for 1942-1943, and I have also separately filed a petition before you on 14th October, 1942. While this is so whereas I should have received a return in my separate capacity, I have received a return in the character of the family. I am, therefore, returning this form. I pray that as per Section 25-A separate forms may be sent to me and my sons individually.
8. This letter dated 10th August, 1943 was apparently treated by the Income-tax Officer as an application under Section 25-A of the Act; and in October, 1945, the Income-tax Officer passed the required order under Section 25-A of the Act recognising the partition that had been effected on 27th January, 1942.
9. One other event may be recorded at this stage. After the partition in January, 1942, Arunachala started a new line of business in paddy and rice at Kumbakonam, with one Sadagopa Pillai as his employee in charge of that business at Kumbakonam.
10. For the chargeable accounting period from 28th January, 1942 to 7th February, 1943, the Excess Profits Tax Officer assessed Arunachala's business income at Rs. 62,568. He deducted therefrom Rs. 37,179 as the standard profit proportionate to the period of 12 1/2 1/8 months and determined the quantum of excess profits at Rs. 25,329. If there had been no partition on 27th January, 1942, and the Hindu undivided family of Arunachala and his ten sons had continued to be the assessee, it would have been entitled to take into account the deficiency in profits to the extent of Rs. 42,479 during the period 1st September, 1939 to 27th January, 1942. Arunachala claimed that despite the arrangement in the family on 27th January, 1942, evidenced by the document 108 of 1942, Arunachala was entitled to claim that this deficiency should be taken into account in assessing his liability to excess profits tax for the chargeable accounting period 28th January, 1942 to 7th February, 1943. That claim was disallowed. The Excess Profits Tax Officer recorded:.I reject the asscssce's contention that the old family of V.N.M. Arunachala Nadar which existed prior to 27th January, 1942 continued to exist and therefore the deficiency of profits relating to that family should be brought forward and set off against the profits of the business of the new family of V.N.M. Arunachala Nadar which came into existence on 27th January, 1942. Since there has been a change in the persons carrying on the business, the business started on 28th January, 1942 will be regarded as a new business which is not entitled to claim the deficiencies of the old business which came to an end on 27th January, 1942.
That view was upheld by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal.
11. The question of law that was referred to this Court under Section 66(2) raises the issue, whether there was a change in the persons carrying on the business, within the meaning of Section 8(1) of the Excess Profits Tax Act.
12. The contention of the learned Counsel for the assessee was that the Hindu undivided family, which had been the assessee down to the assessment year 1942-1943 continued in existence despite the partition arrangements of 27th January, 1942. The result of these arrangements, the learned Counsel contended, was that four of the coparceners divided themselves from the family leaving the rest of the family to continue as a Hindu undivided family. The learned Counsel referred to Rangaswami Naidu v. Sundararajulu Naidu (1916) 31 M.L.J. 472. The learned Judges laid down two propositions : (1) it was not the law that the separation of one member is necessarily a separation of the remaining members, and that if the later desired to remain or become a joint Hindu family, they can only do so by an agreement to re-unite, subject to the limitation of a Hindu regarding that status; (2) under the Hindu Law, the father has power to separate one or more of his sons from himself, in which case there is no presumption of division between the father and his other sons. The second proposition will not apply to the facts of this case. It was not a case of the father Arunachala exercising his right to separate one or more of his sons from the family. It was a case of an adult coparcener exercising his right to become divided in status from the other members of his.family. It was on the first proposition the learned Counsel for the assessee relied in support of his contention that the Hindu undivided family, of which Arunachala was the kartha, continued to exist even after 27th January, 1942 when four of his sons separated themselves. Learned Counsel also relied on Palani Ammal v. Muthuvenkatachala Moniagar (1924) 48 M.L.J. 83 : L.R. 52 I.A. 83 : I.L.R. 48 Mad. 254 (P.C.) , and Martand v. Radkabai (1930) I.L.R. 54 Bom. 616 : A.I.R. 1931 Bom. 97.
13. The undivided family in the case before us consisted of a father and his sons with the father as the kartha. That was the position down to 27th January, 1942. We are not, however, concerned in this case with the legal possibility of Arunachala and his undivided minor sons continuing as members of a Hindu undivided family after 27th January, 1942, when four of his adult sons became divided in status from the rest of the family and also inter se. Factually, did the Hindu undivided family continue its existence after 27th January, 1942 for purpose of assessment to income-tax is the real question for determination.
14. Learned Counsel for the respondent urged that, though it was open to Arunachala, as the kartha of the family, to continue the old family after 27th January, 1942, minus the four sons who had separated, or to terminate the existence of the old family on 27th January, 1942, the evidence based on Arunachala's conduct itself clearly established that he chose to terminate the existence of the Hindu undivided family, which as a juristic entity recognised by the Indian Income-tax Act for purposes of assessment, was the assessee. That termination was on 27th January, 1942. The juristic entity that Arunachala offered for assessment subsequent to 28th January, 1942 was not the old family minus its divided members, but a new Hindu undivided family which consisted of Arunachala and his minor sons. It was that new juristic entity which the income-tax authorities recognised for assessment after the order passed under Section 25-A of the Act. That was the assessee after 28th January, 1942, and it was the income from the business of that assessee that had to be assessed to excess profits tax. As a person includes a Hindu undivided family within the meaning of the Income-tax Act and the Excess Profits Tax Act, there was a change in the persons carrying on the business on 28th January, 1942, within the meaning of Section 8(1) of the Excess Profits Tax Act. Such was the contention of the learned Counsel for the respondent.
15. In this case, it was Arunachala himself that invoked the provisions of Section 25-A of the Income-tax Act by his letter dated 10th August, 1943. He specifically claimed that he was entitled to be assessed in a separate capacity, which could only mean a capacity separate from that, on the basis of which he had been assessed down to the assessment year 1942-1943. That Arunachala discontinued the business that he had carried on up to 27th January, 1942 and started a fresh one from 28th January, 1942 he himself made clear. Of course, discontinuance of the business and starting a business afresh may not affect the jural position of the assessee, or whether the family as such that had continued down to 27th January, 1942 continued, even after that date. By invoking Section 25-A and by successfully invoking it, Arunachala gave a clear indication of his intention to terminate the existence of the old juristic entity, the Hindu undivided family of which he had been the kartha, the juristic entity for purposes of income-tax assessment. Factually, Arunachala himself sought the termination of the existence of that juristic entity, and he achieved it. If that be the position, taken in conjunction with the fact it was a new business that he commenced on 28th January, 1942, though it was the same line of business, the Departmental Authorities were fully justified in holding that there was a change in the persons carrying on the business within the meaning of Section 8(1) of the Excess Profits Tax Act.
16. It seems clear to us that before there can be an order under Section 25-A of the Income-tax Act a joint family as such must have ceased to exist. That another and differently constituted joint family, whatever be the legal basis for the subsequent joint family, came into existence immediately afterwards, would not alter the fact, that the old joint family as such ceased, and that was what had to be recognised under Section 25-A of the Income-tax Act. In Sunder Singh Majithia v. Commissioner of Income-tax (1942) 2 M.L.J. 761 : (1942) 10 I.T.R. 457 at p. 464 (P.C.) , in discussing the scope of Section 25-A of the Income-tax Act, their Lordships of the Privy Council observed:
It (Section 25-A) has no reference at all to any case in which the Hindu undivided family remains in existence at the time of the assessment.
Their Lordships observed further:
No difficulty whatever in the assessment of a Hindu undivided family is caused--or was ever thought to be caused by the fact that in one year it has certain assets and certain income therefrom and that in the next year it is found to have parted with one asset and to be no longer in receipt of the same income. The same assessee has a different income in each year--that is all...Section 25-A is directed to the difficulty which arises when an undivided family had received income in the year of account, but is no longer in existence as such at the time of assessment....
Their Lordships further observed at page 465:
If, however, though the joint Hindu family has come to an end, it be found that the property had not been partitioned in definite portions, then the family is deemed to continue--i.e., to be an existent Hindu family upon which assessment can be made on its gains of the previous year.
Learned Counsel for the Department was thus well-founded in his contention, that after the disruption of the Hindu undivided family, by whatever means that disruption was brought about, unless the requirements of Section 25-A were satisfied, the members of his family, though divided in status under their personal law, are deemed for purposes of income-tax under the Income-tax Act to continue to retain a fictional undivided status with the resulting jurisdic personality as a Hindu undivided family. That legal fiction is retained only for purposes of the income-tax. If the Hindu undivided family, as such a fictional legal entity, disappears, and that disappearance is caused by a positive act of that family itself--and that can be the only basis on which recognition of the cesser of the legal existence of the legal entity can be achieved under Section 25-A--it will no longer be permissible to invoke the principle of the personal law applicable to the assessee and claim that, for purposes of income-tax, the undivided family continued to exist even after the order passed under Section 25-A of the Act.
17. There is one other factor to be noticed. Section 8(1) of the Excess Profits Tax Act enacts a legal fiction, that the business carried on, after the date of any change in the persons carrying on that business, shall be deemed to be a new business. As a fact, in this case, Arunachala, as we have already pointed out above, made it clear that it was a new business that he commenced as the kartha of the Hindu undivided family as it stood on 28th January, 1942 from and after 28th January, 1942.
18. As we said, what had primarily to be decided in this case by the Departmental Authorities was, whether the assessee, the Hindu undivided family that had been assessed in that status down to 1042-1943, continued in existence for purposes of an assessment in the assessment year 1943-1944. The view taken by the Tribunal on that question is, in our opinion, correct.
19. The question referred to us in R.G. No. 68 of 1953 has to be answered in the affirmative and against the assessce. The assessce will pay the costs of this reference. Counsel's fee Rs. 250.
R.C. No. 58 of 1953.-
20. We have set out earlier, in discussing the question that arose for determination in R.C No. 68 of 1953, the circumstances under which a partition was effected in the family of Arunachala Nadar with effect from 27th January, 1942. After that arrangement, Arunachala and his six undivided sons by his second wife constituted a Hindu undivided family. It carried on business at Virudhunagar and at Madurai. After 28th January, 1942, Arunachala commenced a fresh line of business in rice and paddy at Kumbakonam with Sadagopa Pillai, a paid employee, in charge of that business. The business at Madurai Oil Mills was in charge of Ratnaswami, a nephew of Arunachala, even before 27th January, 1942, and Ratnaswami continued to be in charge of that business on and after 28th January, 1942. The head office of these lines of business was at Virudhunagar. For the accounting year 28th January, 1942 to 8th February, 1943, Arunachala was assessed to tax on the income of the business carried on at all these places, Virudhunagar, Madurai and Kumbakonam.
21. The claim of the assessee was that in the next year of account which commenced on 8th February, 1943, separate partnerships were formed, one to carry on the business at Madurai and another to carry on the business at Kumbakonam, Ratnaswami was taken in as a partner to carry on the business at Madurai, and Sadagopa Pillai was taken in as a partner to carry on the business at Kumbakonam. The partnership deeds were drawn up on 10th January, 1944. The year of account which commenced on 8th February, 1943 came to an end on 6th February, 1944. The deeds, however, recited that the partnerships had been formed on 8th February, 1943 itself. The deeds were virtually in identical terms. Ratnaswami and Sadagopa Pillai each contributed Rs. 1500 as a fourth share of the capital, and each of them was entitled under the terms of the deeds of the partnership to a fourth share in the profits.
22. The Departmental authorities applied the provisions of Section 10-A(1) of the Excess Profits Act and held that these two partnerships were brought about for the main purpose of avoidance or reduction of liability to excess profits tax. A further appeal to the Tribunal failed, and the Tribunal agreed with the findings of the Departmental authorities.
23. The question referred to this Court under Section 66(2) of the Income-tax Act ran:
Whether on the facts and in the circumstances of the case there is any material to justify the finding of the Tribunal that the main purpose in constituting the two firms was the avoidance of reduction of liability to excess profits within the meaning of Section 10-A of the Excess Profits Tax Act.
24. If there is material to sustain the conclusion of the Tribunal, that should suffice to answer the question in the affirmative and against the assessee. The quantum or sufficiency of that evidence may not be a matter for investigation in proceedings under Section 66 of the Act.
25. No doubt, the Tribunal observed that the circumstances which it noticed and the terms of the partnership "clearly indicated that the partnerships were only nominal and that the assessee was in full control as before". But that cannot really be considered to mean that the Tribunal was of the view, that the partnerships themselves were fictitious. If the partnerships were fictitious, there was no need to resort to the provisions of Section 10-A of the Excess Profits Tax Act.
25. The Tribunal accepted the findings of the Excess Profits Tax Officer. The assessee pleaded that because his adult sons had left him and because he was himself old, over 6o, he had to take in his former employees, Ratnaswami and Sadagopa Pillai, as partners, to give them an incentive to improve the business. Arunachala's claim was that he could not himself go over to Madurai or Kumbakonam. It should be remembered that Arunachala commenced the business at Kumbakonam after the partition in the family on 27th January, 1942. Obviously the prospect of what he called old age did not deter him from embarking on a new line of business. That the Departmental authorities and the Tribunal declined to attach any importance to the age factor does not vitiate their conclusion, even were it permissible to examine the soundness of the conclusion.
27. The contention of the learned Counsel for the assessee was that the Tribunal was wrong in attaching the importance it did to the possibility of the assessee having to pay heavy excess profits tax. The Tribunal recorded:
When the partnerships were created, heavy Excess Profits Tax liability was staring the assessee in its face. It is idle to contend that there was some deficiency of the old Hindu undivided family, prior to partition, which was available to him. He could not bona fide have had any such idea as the assessee himself had claimed partition and proceedings under Section 25-A were taken at his instance and it was held that the original family had completely disrupted.
Learned Counsel for the assessee urged that the very fact, that the legal effect of the division in the old family constituted the subject-matter of the reference in R.C. No. 68 of 1953, which we have disposed of, would show that the assessee all along bona fide believed that in the relevant accounting period, 1943-1944, he would be entitled to set off the deficiency in the business which the assessee had carried on as the kartha of the joint family of himself and of his ten sons. Even ignoring this factor, there was certainly ample material on which the authorities and the Tribunal could come to the conclusion, that the main purpose of forming the partnerships was the avoidance or reduction of liability to Excess Profits tax even with reference to year of account itself.
28. The E.P.T. Officer pointed out that the deeds of partnership were drawn up towards the end of the year of account on 10th January, 1944 at a time when the profits of the business were fairly ascertainable. The entire finance required for the business in Madurai and Kumbakonam was contributed only by the assessee. Arunachala was in complete control of the business at Madurai and at Kumbakonam. In fact, both were looked uppn as branches of the business that Arunachala carried on, with the head quarters at Virudhunagar. All the transactions between Madurai and Kumbakonam were passed only through the accounts of the Virudhunagar Office. The books in Madurai had no folio for the Kumbakonam business and all the transactions between Madurai and Kumbakonam were recorded in the folio for Virudhunagar in the Madurai books. The assessee submitted to the assessment of income-tax of the income from all the three business only at Virudhunagar. These were the factors taken into account by the Departmental Authorities and by the Tribunal; and one cannot say that on this material the Tribunal could not have reached the conclusion, that the main purpose in forming the partnerships was avoidance or reduction of liability to excess profits tax.
29. Since the question at issue depends for its determination really on the facts found in this case, it may not be necessary to embark upon a discussion of the case law on the subject. After discussing some of the cases, we recorded in our unreported judgment in R.C. No. 57 of 1952 that the following propositions may be taken as clearly established:
(1) The mere fact that a new business was started at a time when by such starting there would be a reduction of liability is not by itself proof that it was started with the main object of avoiding the excess profits liability within the meaning of Section 10-A. In other words, the point of time when these businesses are started or a transaction takes place does not by itself furnish a proof that the transaction was effected with a sinister motive.
(2) The burden is on the department to prove that this was the main purpose with which the transaction was effected.
(3) The relationship between the parties to the transaction is not by itself conclusive to prove that the motive of the actors in that transaction was the avoidance of liability.
(4) It is not sufficient if this was an incidental advantage which might have accrued to an asspssec; it must be the main motive to compass which the transaction was brought about.
30. None of those principles was violated by the conclusion reached by the Tribunal on the material placed before it, that the main purpose of the assessee in forming the partnership in the year of account 1943-1944 was the avoidance or reduction of the liability to excess profits tax even with reference to that very year. There was, of course, also the future years to be taken into account in gathering what was the motive, the main purpose, of the assessee in bringing about the transactions in question, the two partnerships.
31. We answer the question in the affirmative and against the assessee. As the assessee had failed, he will pay the costs of this reference. Counsel's fee : Rs. 50.