(Judgment of the Court was delivered by the Honourable the Chief Justice)
The assessee in this case is the firm of G. S. Ramaswamier and Sons. The partners are four brothers. Until 1929 they constituted a joint Hindu family, but in that year a separation took place. It is not necessary to set out the course of events between 1929 and 1936 because this case turns on what happened after the 13th January 1936 when the brothers formed the firm of G. S. Ramaswamier and Sons. The business of this firm was the manufacture of dhupattas at Madura and dhavanies at Paramakudi. The goods manufactured were sold by branches of the firm at Bombay, Nagpur and Poona. On the 13th April 1940 two new firms were started, one under the style of G. R. Narasimha Ayyar and Company and other under the style of G. R. Ramachari and Company. Two of the brothers were the partners in G. R. Narasimha Ayyar and company and the other two were the partners in G. R. Ramachari and Company. The new firms commenced the manufacture of the same goods which were sold during the year of account (14th January 1940 to 13th January 1941) by the branches of G. S. Ramaswamier and Sons at Bombay, Nagpur and Poona. The Excess Profits Tax Officer regarded the formation of the two new firms as a transaction within the meaning of Section 10-A and accordingly assessed G. S. Ramaswamier and Sons to the excess profits tax on the basis that it had made all the profits for this period. The assessee appealed to the Income-tax Appellate Tribunal which agreed that the formation of the two new firms was a transaction within the meaning of the section and consequently confirmed the assessment. The assessee then asked the Tribunal to make a reference to this Court under Section 66 of the Income-tax Act. The Tribunal considered that a point of law did arise and has referred the following question :-
'Whether in the circumstances of the case the splitting up of a firm into two firms can be said to be a transaction within the meaning of Section 10-A of the Excess Profits Tax Act.'
The question was framed on the statement of facts set out in paragraph 4 of the order of reference. In that paragraph the Tribunal stated that the firm of G. S. Ramaswamier and Sons had been split up into two firms, which was not in fact the case. This was discovered before the reference was actually made to this Court and a correction was made in the statement of facts in paragraph 4. The correction reads as follows :-
'The application is a firm of 4 partners. They were manufacturing cloth at Madura and Paramakudi, and selling that cloth at Bombay, Nagpur and Poona. On the 13th April 1940, two new firms were started by the same four partners, two of them were partners in one firm and the other two in the other firm. The applicant ceased to manufacture cloth from that day and the new firm carried on the manufacture, one at Paramakudi and the other at Madura. They sold such cloth only to applicant firm and the applicant firm restricted their sales to the goods manufactured by these two firms only.'
On the fresh statement of facts it is necessary to amend the question referred, and we amend it to read as follows :-
'Whether in the circumstances of the case the formation of the two new firms G. R. Narasimha Ayyar and Company and G. R. Ramachary and Company can be said to be a transaction within the meaning of Section 10-A of the Excess Profits Tax Act.'
The finding of the Tribunal that the two new firms were formed in order to evade the payment of excess profits tax is a finding of fact and cannot be questioned here. We may, however, add that there can be no doubt about the correctness of the finding.
Section 10 of the Excess Profits Tax Act, which received the assent of the Governor-General on the 6th April 1940, as amended by Act XXIV of 1941, reads as follows :-
'(1) In computing profits for the purposes of this Act no deduction shall be made in respect of any transaction or operation of any nature if and so far as it appears that the transaction or operation has artificially reduced or would artificially reduce the profits.
(2) If the Excess Profits Tax Officer is satisfied that any person has entered into or carried out any transaction or operation by which the profits have been or would be artificially reduced, he may, with the previous approval of the Inspecting Assistant Commissioner, direct that such person shall pay, in addition to the excess profits tax for which he is or, but for such transaction or operation, would be liable, a penalty not exceeding the tax evaded or sought to be evaded.'
Section 10-A was inserted by the Amending Act of 1941 and is in these terms :
'(1) Where the Excess Profits Tax Officer is of opinion that the main purpose for which any transaction or transactions was or were effected whether before or after the passing of the Excess Profits Tax (Second Amendment) Act, 1941, 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) Without prejudice to the generality of the powers conferred by the sub-section (1), the powers conferred thereby extend -
(a) to the charging with excess profits tax of persons who but for the adjustments would not be chargeable with any tax or would not be chargeable to the same extent;
(b) to the charging of a greater amount of tax than would be chargeable but for the adjustments.
(3) Any person aggrieved by a decision of the Excess Profits Tax Officer under this section may appeal in the prescribed time and manner to the Appellate Tribunal.'
Sir Alladi Krishnaswami Ayyar on behalf of the applicant says that the word 'transaction' within the meaning of Section 10-A must be confined to a transaction in the course of the business of the assessee and not to the formation of a new partnership for the carrying on of the same business. 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 -see the Oxford Dictionary - is the carrying on or completion of an action or a course of action. Therefore the formation of these firms constituted a 'transaction' and the object of the transaction was the evasion of the excess profits tax. Section 10-A was inserted in the statute in order to allow the Excess Profits Tax Officer to go behind any transaction the object of which was the evasion of tax and to assess the assessee as if it had not taken place. If Sir Alladi Krishnaswami Ayyars definition of the word 'transaction' were to be accepted, there would have been no necessity for the insertion of Section 10-A at all. Transactions of the nature referred to by him would come under sub-section (1) of Section 10.
There is no ambiguity in the provisions of Section 10-A and as the formation of these firms was a transaction devised to evade the tax, the answer to the reference must be that it is a transaction within the meaning of Section 10-A.
The assessee will pay the costs of this reference Rs. 250.
Reference answered accordingly.