Full Judgment Text
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PETITIONER:
NARAIN SWADESHI WEAVING MILLS
Vs.
RESPONDENT:
THE COMMISSIONER OF EXCESSPROFITS TAX.
DATE OF JUDGMENT:
23/10/1954
BENCH:
ACT:
Excess Profits Tax Act (XV of 1940), ss. 2(5), 5, 10-A-
Condition precedent to applicability of s. 10-A- "Business"
if can be defined-What is "business", how determined.
HEADNOTE:
As condition precedent to the applicability of section 10-A
of the Excess Profits Tax Act, 1940, it must be proved that
during the chargeable accounting period the assessee was
carrying on the kind of business to which the Act applies by
virtue of section 5 of the Act.
Section 2(5) of the Act states what is included in the word
"business". It is not possible to lay down a general
definition which would cover all cases of business.
Business involves the fundamental idea of a continuous
activity. It connotes some real, substantial and systematic
or organised course of activity with a set purpose. Single
isolated transaction may also bear the clear indicia of
trade or an adventure in the nature of trade which is
included in the word "buisiness" mentioned in section 2(5)
of the Act. Hence whether a particular source of income is
business or not must be decided on the facts and
circumstances of each case according to our ordinary
conception of business.
Since 1935 the assessee firm carried on the business of
manufacturing ribbons and laces and for this purpose owned
buildings, leasehold rights, plant, machinery etc. On April
7, 1940, a public limited liability company was incorporated
with the object of acquiring and taking over the buildings,
leasehold rights, plant, machinery etc., from the assessee
firm. The company purchased leasehold rights in the lands
and buildings where plant, machinery etc. were installed.
The assesses firm as such ceased to manufacture ribbons and
laces and was left with plant and machinery etc. which it
did not require and which ceased to be commercial asset in
the hands of the firm. The land and the buildings having
been sold the assessee firm put it out of its power to use
the plant, machinery etc. In these circumstances the
company took and the assessee firm granted a lease of the
plant, machinery etc., at an annual rent of Rs. 40,000.
Held, that this lease of the plant, machinery etc., given by
the assesses firm could not be "business" within the meaning
of section 2(5) of the Excess Profits Tax Act, 1940.
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Commissioner of Excess Profits Tax, Bombay City v. Shri
Lakshmi Silk Mills Ltd. ([1952] S.C.R. 1), distinguished.
Inland Revenue Commissioner v. Broadway Car Co., Ltd.
([1946] 2 A.E.R. 609), relied upon.
Commissioner of Income-tax v. Shaw Wallace & Co., ([1932]
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I.L.R. 59 Cal. 1348), referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 145 of 1953.
Appeal by Special Leave from the Judgment and Order dated
the 8th day of September, 1950, of the High Court of
Judicature for the State of Punjab at Simla in Civil
Reference No. 3 of 1949.
Achhru Ram (R. S. Narula and Naunit Lal, with him) for the
appellants.
M. C. Setalvad, Attorney-General for India, (G. N. Joshi
and P. G. Gokhale, with him) for the respondent.
1954. October 25. The Judgment of the Court was delivered
by
DAS J.-This appeal by special leave arises out of a
consolidated reference made on the 19th April, 1949, under
section 66(1) of the Indian Income-tax Act read with section
21 of the Excess Profits Tax Act by the Income-tax Appellate
Tribunal, Madras Bench. The reference arose out of four
several proceedings for assessment to excess profits tax of
the appellant, the chargeable accounting periods being
periods ending with 31st March of each of the years 1942,
1943, 1944 and 1945.
The relevant facts appearing from the consolidated statement
of the case are as follows:-
Narain Swadeshi Weaving Mills, the appellant before us
(hereinafter referred to as the assessee firm), is a firm
constituted in 1935 upon terms and conditions set forth in a
deed of partnership dated the 6th November, 1935. The
partners were Narain Singh and two of his sons, Ram Singh
and Gurdayal Singh, their respective shares in the
partnership being 6 annas, 5 annas and 5 annas. The
business of the firm which was carried on
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at Chheharta, Amritsar, in the Punjab, was the manufacture
of ribbons and laces and for this purpose it owned
buildings, plant, machinery , etc.
On the 7th April, 1940, a public limited liability company
was incorporated under the name of Hindus,tan Embroidery
Mills Ltd. The objects for which the company was
established were to purchase, acquire and take over from the
assessee firm the buildings and leasehold rights, plant,
machinery, etc., on terms and conditions mentioned in a
draft agreement and the other objects set forth in the
Memorandum of Association of the said company. Out of the
total subscribed capital represented by 41,000 shares 23,000
shares were allotted to the assessee firm. Of these 23,000
shares so allotted 20,000 shares were not paid for in cash
but the remaining 3,000 shares were paid for in cash. The
directors of the company were Narain Singh and his three
sons Ram Singh, Gurdayal Singh and Dr. Surmukh Singh and one
N. D. Nanda, a brother-in-law of Gurdayal Singh. Dr.
Surmukh Singh was at all material times residing in South
Africa. These 4 directors between themselves hold 33,340
shares including the said 23,000 shares. The company was,
accordingly, a director controlled company.
The funds available to the company were not sufficient to
enable it to take over all the assets of the assessee firm.
The company, therefore, purchased only the buildings and the
leasehold rights therein but took over the plant, machinery,
etc. on lease at an annual rent of Rs. 40,000.
On the 28th July, 1940, the company executed a managing
agency agreement in favour of Uppal & Co., a firm
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constituted on the same day with Ram Singh and Gurdayal
Singh, two of the sons of Narain Singh, as partners with
equal shares. Under the managing agency agreement dated the
28th July, 1940, Uppal & Co., was to be paid 10% of the net
profits of the company besides salary and other allowances
mentioned therein.
On the 25th January, 1941, the company appointed as its
selling agent Ram Singh & Co., a firm which
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came into existence on the same day with Ram Singh, Gurdayal
Singh and Dr. Surmukh Singh, the three sons of Narain Singh,
as partners, each having an one-third share. The terms of
this partnership were recorded in writing on the 17th March,
1941. Ram Singh & Co., was to get a commission of 3% on the
net sales and 6% on the gross income of the company.
In the two new firms so constituted Narain Singh had no
share and eventually with a view to make up for his loss the
shares of the partners in the assessee firm were modified by
an agreement made by them on the 21st April, 1941. Under
this agreement Narain Singh was to get a 12 annas share and
the two sons Ram Singh and Gurdayal Singh 2 annas share
each. All the three firms mentioned above, namely, the
assessee firm, Uppal & Co., and Ram Singh & Co., were
registered as firms under section 26A of the Indian Income-
tax Act.
On the facts summarised above, the Excess Profits Tax
Officer came to the conclusion that the main purpose of the
formation of the company and the two firms of Uppal & Co.,
and Ram Singh & Co., was the avoidance of liability to
excess profits tax. Accordingly, on the 16th November,
1944, the Excess Profits Tax Officer issued notices under
section 10A of the Excess Profits Tax Act to the company and
the three firms. Eventually, however, the proceedings
against the company were dropped and the Excess Profits Tax
Officer considered the case of the three firms only. He
held that the three firms were really one and he, therefore,
amalgamated the income of all three and proceeded to assess
the assessee firm to excess profits tax on that basis for
the four several chargeable accounting periods mentioned
above.
Under sub-section (3) of section 10 A the assessee company
preferred four several appeals to the Appellate Tribunal.
In their order the, Appellate Tribunal considered the four
following issues:
(1)Whether the income of the firms styled as "Uppal & Co.,"
and "Ram Singh & Co.," could be amalgamated with the income
of the assessee firm
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under the provisions of section 10 A of the Excess Profits
Tax Act ?
(2) Whether the share of income of Dr. Surmukh Singh, a
partner in the selling agency of Ram Singh & ,Co., could be
included under section 10 A in the excess profits tax
assessment of the assessee firm ?
(3) Whether the lease money obtained by the assessee firm
could be legally treated as business profits liable to excess
profits tax ?
(4) Whether proper opportunity under section 10 A had been
given to the assessee firm?"
Before the Appellate Tribunal, as before the Excess Profits
Tax Officer, the assessee firm objected to the application
of the provisions of section 10 A of the Excess Profits Tax
Act. The contention was. that as the assessee firm did not,
during the relevant chargeable accounting periods, carry on
any business within the meaning of section 2(5) of the
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Excess Profits Tax Act, section 10 A had no application and,
therefore, the profits of Uppal & Co., and Ram Singh & Co.,
could not be amalgamated with its own income. In other
words, the argument was that there must be an existing
business of an assesses during the relevant period before
section 10 A could be applied in respect of transactions
concerning that business. The Appellate Tribunal took the
view that instead of using the plant, machinery, etc., for
its own manufacture the assessee firm turned that revenue
yielding asset into another use by lettinh it out on an
annual rent of Rs. 40,000 and that this was certainly an
adventure in the nature of trade as contemplated by section
2(5) of the Excess Profits Tax Act read with rule 4 of
Schedule I thereto. Accordingly, it decided issue No. 3
against the assessee firm holding that the assessee firm
carried on business in the letting out of the plant,
machinery, etc., on hire and the lease money obtained
thereby could be legally treated as business profits liable
to excess profits tax. On issue No. I the Appellate
Tribunal agreed with the Excess Profits Tax Officer that it
was evident beyond doubt that a definite scheme was adopted
creating separate charges in order to avoid excess profits
tax
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by the three firms, namely, the assessee firm, Uppal & Co.,
and Ram Singh & Co., taken together. Thefirst step in the
scheme was the formation of the company. The second step
was the appointment of Uppal & Co., as managing agents
instead of appointing the assessee Tfirm itself. The third
step was the creation of the firm Ram Singh & Co., for
taking up the selling agency of the company and the final
step was to adjust the shares of the partners of the
assessee firm so as to equalise, as far as possible, the
share of Narain Singh with the shares which his sons got in
the several firms. The Appellate Tribunal held that all the
various steps noted above need not necessarily have been
fictitious or artificial but they were certainly
transactions so as to attract the operation of section 10 A.
The Appellate Tribunal decided issues Nos. 2 and 4 against
the assessee. All the four appeals were accordingly dis-
missed by the Appellate Tribunal.
The assessee firm thereupon preferred four several
applications under section 66(1) of the Income-tax Act read
with section 21 of the Excess Profits Tax Act praying that
the following questions arising out of the order of the
Appellate Tribunal be referred to the High Court : -
(1) Whether, under the facts and circumstances of the case,
the application of section 10 A with a view to amalgamating
the income of the firms "Uppal & Co." and "Ram Singh & Co.",
with the income of the appellant firms was correct and valid
in law ?
(2) Whether, in view of the facts admitted on record, the
share of income of Dr. Surmukh Singh, a partner in the
selling agency and not a partner in the appellant firm,
could be legally included along with the share of income of
S. Ram Singh and S. Gurdial Singh and is this inclusion at
all within the purview of section 10 A ?
(3) Whether, in view of the facts, circumstances and
observations on record, the lease money obtained by the
appellant firm could be legally treated as business profits
or profits from an adventure in trade liable to excess
profits tax ?
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(4) Whether the type of a notice served on the appellant,
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under the facts and the circumstances of the case, legally
amounts to a proper opportunity under section 10 A of the
Excess Profits Tax Act, and if not ,what is the legal effect
of such opportunity being not afforded ?
(5) Whether the proceedings under section 1O A were not
null and void ab initio, for want of necessary previous
sanction from the Inspecting Assistant Commissioner of
Excess Profits Tax, the fact of such previous sanction
having been obtained being neither mentioned in the order
nor proved before the Appellate Tribunal at the time of
hearing although expressly required by the Court.
The Appellate Tribunal declined to refer questions (4) and
(5) sought to be raised by the assessee firm and no
grievance has been made before us on that score. The
Appellate Tribunal referred the earlier three questions
after reframing the same so as to read as follows :-
(1) Whether there is any evidence before the Tribunal to
support the conclusion that the main purpose of the
transactions was the avoidance of excess profits tax ?
(2) Whether on the facts admitted or proved the share of
income of Dr. Surmukh Singh in the firm of Ram Singh & Co.,
can be legally included along with the share of income of
Ram Singh and Gurdayal Singh ?
(3) Whether on the facts and circumstances of the case the
leasing of machinery, etc., by the assessee firm to the
company was a business within the meaning of section 2(5) of
the Excess Profits Tax Act ?
The learned counsel appearing for the assessee firm
submitted before the High Court that the third of the
referred questions should be discussed and decided first,
but the High Court took the view that the decision of the
first question was a necessary preliminary to the
consideration of the third question. Taking up, then, the
first question first the High Court referred to the ,several
facts found by the Appellate Tribunal and
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described as steps and regarding them as circumstantial
evidence came to the conclusion that it could not be said
that there was no evidence upon which the Tribunal was
justified in coming to the conclusion that the formation of
the firms, Uppal & Co., and Ram Singh & Co., was mainly for
the purpose of avoidance or reduction of liability to excess
profits tax. In the result, the High Court held that the
three firms, the assessee firm, Uppal & Co., and Ram Singh &
Co., were in fact one and the same and on that basis
proceeded next to take up the third question. After
referring to section 2(5) and certain judicial decisions,
the High Court concluded as follows:-
" The argument of Mr. Pathak when applied to the present
case would have force were it a fact that the sole concern
of the assessee firm was the receipt of hire of machinery
from a company or firm, in which the assessee firm had Do
interest. But this is not the state of affairs. On the
finding under the first question referred, the assessee
firm, the firm of managing agents and the firm of selling
agents are really one and the same firm. This firm and its
partners held the majority of shares in the company. The
agreement for payment of Rs. 40,000 as rent of machinery is
an agreement between the assessee firm and the company which
the assessee firm controls. The business of the assessee
firm was, and in effect still is, the manufacture of ribbons
and laces, and the receipt of Rs. 40,000 is a profit from
that business diverted into the pockets of the assessee
firm."
The High Court accordingly answered the third question in
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the affirmative and against the assessee firm. The
necessary certificate of fitness for appeal to this Court
having been refused by the High Court, the assessee firm
obtained special leave of this Court to prefer the present
appeal.
The learned counsel appearing for the assessee firm has
submitted before us-and we think rightly-that the approach
of the High Court was erroneous in that they took up the
discussion of question No. I first. That question, as
framed, proceeded on the assumption
960
that section 1O A applied to the case and only raised the
question as to whether there was any evidence to support
the finding of the Appellate Tribunal arrived at as a result
of the enquiry -under that section, namely, that the main
purpose of the transaction was the avoidance of excess
profits tax. The long title and the preamble of the Excess
Profits Tax Act refer to the imposition of tax on excess
profits arising out of certain businesses. Section 4, which
is the charging section and section 5 which lays down the
application of the Act to certain business, clearly
postulate the existence of a business carried on by the
assessee on the profits of which the excess profits tax can
be imposed. Therefore, if there is such a business during
the relevant period, then and then alone can arise the
question of the applicability of section 10 A. If there is
no such business as is contemplated by the Act, then the Act
does not apply and section 10 A cannot come into operation
at all. Before the Excess Profits Tax Officer can embark
upon an enquiry as to whether a transaction was effected for
the avoidance or reduction of liability to excess profits
tax and to make such adjustments as he considers
appropriate_ there must be proof that the assessee was,
during the chargeable accounting period, carrying on any
business of the kind referred to in section 5 of the Act.
Logically, therefore, the Appellate Tribunal as well as the
High Court should have taken up question No. 3 first, for on
a decision of that question would depend the applicability
of section 1O A and if that question were answered in favour
of the assessee firm the further question of law as raised
in question No. I would not, in such event, arise. The
approach of the High Court was, therefore, logically
misconceived on the facts of this case.
What then are the facts found by the Appellate Tribunal
apart from its findings under section 10 A ? The findings
are that after the formation of the company the assessee
firm was left with no business at all. The company
purchased the leasehold rights in the lands and buildings
where the plant, machinery, etc., were installed. The firm
as such ceased to manufacture any ribbons and laces. It was
left with the plant,
961
machinery, etc., which it did not require and which ceased
to be a commercial asset in its hands, for it had no longer
any manufacturing business at all. Further, the assessee
firm had put it out of its power to use the plant,
machinery, etc., for it had no right in the lands and
buildings where the plant, machinery, etc., had been
installed. In these circumstances, the assessee firm let
out the plant, machinery, etc., to the company. It was
thenceforth the company which was carrying on the business
of manufacturing ribbons and laces and for that purpose
hired the plant, machinery, etc., from the assesee firm.
Prima facie it was the company which appointed the managing
agents and the selling agents. Ex facie and apart from the
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alleged result of any enquiry under section 10 or section 1O
A of the Excess Profits Tax Act those were not transactions
of the assessee firm. The assessee firm was, therefore,
left only with some property which at one time was a
commercial asset but had ceased to be so. The assessee firm
thereupon let out that property on rent. The question is
whether such letting out in such circumstances amounted to
carrying on of a business.
"Business" as defined in section 2(5) of the Excess Profits
Tax Act includes amongst others, any trade, commerce or
manufacture or any adventure in the nature of trade,
commerce or manufacture. The first part of this definition
of "a business" in the Excess Profits Tax Act is the same as
the definition of a business in section 2(4) of the Indian
Income-tax Act. Whether a particular activity amount to any
trade, commerce or manufacture or any adventure in the
nature of trade, commerce or manufacture is always a
difficult question to answer. On the one hand it has been
pointed out by the Judicial Committee in Commissioner of
Income-tax v. Shaw Wallace & Co.(1), that the words used in
that definition are no doubt wide but underlying each of
them is the fundamental idea of the continuous exercise of
an activity. The word "business" connotes some real,
substantial and systematic or organised course of activity
or conduct with a set purpose. On the other hand, a single
and
(1) (1932) I.L. R. 59 Cal. 1343.
962
isolated transaction has been held to be conceivably capable
of falling within the definition of business as -’being an
adventure in the nature of trade provided the transaction
bears clear indicia of trade. The question therefore,
whether a particular source of income is business or not
must be decided according to our am ordinary notions as
to what a business is. The case of Commissioner of Excess
Profits Tax, Bombay City v.Shri Lakshmi Silk Mills Ltd.(1),
decided by this Court is clearly distinguishable. There,
the respondent company which was formed for the purpose of
manufacturing silk cloth installed a plant for dying silk
yarn as a part of its business. During the relevant
chargeable accounting period, owing to difficulty in
obtaining silk yarn on account of the war, it could not make
any use of this plant and it remained idle for some time. In
August, 1943, the plant was let out to another company on a
monthly rent. The question arose whether the income
received by, the respondent company in the chargeable
accounting period by way of rent was income from business
and assessable to excess profits tax. It should be noted
that in that case the respondent company was continuing its
business of manufacturing silk cloth. Only a part of its
business, namely, that of dying silk yarn had to be
temporarily stopped owing to the difficulty in obtaining
silk yarn on account of the war. In such a situation, this
Court held that part of the assets did not cease to be
commercial assets of that business since it was temporarily
put to different use or let out to another and accordingly
the income from the assets would be profits of the business
irrespective of the manner in which that asset was exploited
by the company. This Court clearly indicated that no
general principle could be laid down which would be
applicable to all cases and that each case must be decided
on its own circumstances according to ordinary common sense
principles. In the case before us the assessee firm’s
business had entirely closed. It no longer ’manufactured
any ribbons and laces. It had accordingly no further
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trading or commercial activity.It could not in fact use the
plant, machinery, etc.,
(1) [1952] S.C.R. 1.
963
after the land and the buildings where they were installed
had been sold to the company. In these circumstances the
assessee firm let out the plant, machinery, etc., on an
annual rent of Rs. 40,000. These facts are very similar to
those found in Inland. Revenue , Commissioners v. Broadway
Car Co., Ltd.(1). There the war conditions bad reduced the
company’s business to very small proportions. In that
situation it was observed that in that case the company
dealt with part of its property which bad become redundant
and was sublet purely to produce incomes transaction quite
apart from the ordinary business activities of the company.
The ratio decides in that case which was noticed in the
judgment of this Court appears to us to apply to the facts
found in the present case apart from the findings Under
section 10 A. Applying also the common sense principle to
the fact so found it is impossible to hold that the letting
out of the plant, machinery, etc., was at all a business
operation when its normal business activity had come to a
close. It is interesting to note that sub-sections (3) and
(4) of section 12 of the Indian Income-tax Act recognise
that letting out of plant, machinery, etc., may be a source
of income falling under the head "other sources" within that
section and not necessarily under the head "business" dealt
with in section 10 of that Act. In the facts and
circumstances of this case, therefore, the letting out of
the plant, machinery, etc.,cannot be held to fall within the
body of the definition of "business" under section 2(5) of
the Excess Profits Tax Act. In this view of the matter it
is not necessary for us to express an opinion as to the
meaning or implication of the proviso to that definition or
rule 4(4) of Schedule I to the Act. In our opinion, in the
facts and circumstances of this case, question No. 3 should
have been answered in the negative.
The question of law raised in the third question being
answered in favour of the assessee firm, the question of the
applicability of section 1O A of the Excess Profits Tax Act
could not arise, for the assessee firm having, during the
relevant period, no business to which that
(1) [1946] 2 A.E.R. 609.
964
Act applied section 1O A could not be invoked by the revenue
and, therefore, the question whether there was "evidence to
support the finding of the Tribunal under that section could
not arise. On the contrary, the further question of law
which would really arise out of the order of the Appellate
Tribunal consequent upon the aforesaid answer to question
No. 3 would be whether under the facts and circumstances of
the case the application of section 1O A with a view to
amalgamating the income of the firms Uppal & Co., and Ram
Singh & Co., with the income of the assessee firm was
correct and valid in law and that was precisely the first
question which the assessee firm sought to raise by its
application. In our view the High Court should not only
have answered question No. 3 in the negative but should also
have raised, as a corollary to that answer to question No.
3, the further question of law on the lines indicated in
question No. I of the assessee’s petition. In other words,
the High Court should have, after answering question No. 3
in the negative reframed the referred question No. I by
restoring question No. 1 as suggested by the assessee firm
in its petition and should have answered the question so
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restored in the negative and in favour of the assessee.
For the reasons stated above, we allow this appeal, reframe
question No. I by restoring the first question suggested by
the assessee firm, namely-
" Whether under the facts and circumstances of the case -the
application of section 1O A with a view to amalgamating the
income of the firms Uppal & Co., and Ram Singh & Co., with
the income of the appellant firm was correct and valid in
law?"
and we answer the question so reframed in the negative.
Question No. 2 must be answered in the negative and in
favour of the assessee by way of necessary corollary. We
also answer question No. 3 in the negative. The appellant
will be entitled to the costs of this appeal and we order
accordingly.
Appeal allowed,
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