JUDGMENT R. S. PATHAK J. - The assessee, Messrs. Goverdhandas Radhey Lal, is a partnership firm consisting of two partners, Babu Ram and Lallu Mal, holding shares in the proportion of 12 annas and 4 annas respectively. The assessee carried on wholesale and retail cloth business at three different places, under the name of Goverdhandas Radhey Lal at Colonelganj, Ram Lakhan Rewati Raman at Baharaich and Babu Ram Goverdhandas at Bharwari. For the chargeable accounting periods ending July 6, 1940, June 25, 1941, and July 14, 1942, the income from all these three businesses was assessed in the hands of the assessee under the Excess Profit Tax Act. In passing, it might be mentioned that in the course of the assessment proceedings for the chargeable accounting period ending June 25, 1941, the assessee claimed that the business carried on under the name of Ram Lakhan Rewati Raman at Bahraich did not belong to the assessee but was owned by a separate firm consisting of Babu Ram, Lallu Mal and one Raghubir Prasad. Upon investigation, the Excess Profits Tax Officer found that Raghubir Prasad was in fact not a partner of the firm and that the business belonged solely to the assessee. Accordingly, he made an order under section 10 of the Act and included the profits of the business in the assessment of the assessees. An order imposing penalty was also made under section 10(2).
In the assessment proceedings for the chargeable accounting period of July 15, 1942, to July 3, 1943, the assessee claimed that the business carried on under the name of Babu Ram Goverdhandas at Bharwari had been transferred on January 12, 1943, to another partnership, which consisted of Babu Ram Lallu Mal and Srichand and that the profits from this business could not be assessed in the hands of the assessee. In the corresponding assessment proceedings under the Indian Income-tax Act, the Income-tax Officer treated this partnership firm as a separate entity from the assessee and also registered it under section 26A of that Act. The Excess Profits Tax Officer, however, was of the opinion that the main purpose behind the transfer of the Bharwari business to the new firm was to avoid excess profits tax and, therefore, served notice upon the assessee to show cause why an order under section 10A should not be made. The assessee submitted his explanation, stating that the Bharwari business had been looked after by Mewa Lal, that Mewa Lal having died in October, 1942, the business began to deteriorate and, therefore, it became necessary for the partners to cast about for some one who would manage the business even as Mewa Lal had done, that they came upon Srichand who enjoyed considerable experience in cloth business but he was unwilling to serve as a mere manager and, therefore, a partnership firm was constituted including him as one of the partners. Certain affidavits were also filed in support of the explanations. The Excess Profits Tax Officer did not find the explanation sufficiently convincing. On the contrary upon the material before him, he came to the conclusion that as high profits were expected, on account of the prevailing market conditions, Srichand was taken in as a partner and given a small share of the profits so that the heavy burden of excess profits tax liability would be reduced. He, accordingly, made an order under section 10A for the chargeable accounting period ending July 3, 1943. Similar orders were passed for the chargeable accounting periods ending June 21, 1944, and July 10, 1945.
The assessee appealed against these orders under section 10A to the Income-tax Appellate Tribunal, contending that the main purpose of admitting Srichand as a partner was not the avoidance or reduction of the excess profits tax liability. This contention was rejected by the Tribunal which took into regard the enormous advantage derived by the assessee by the reduction of the excess profits tax liability upon payment of a small part of the profits of the Bharwari business to Srichand, and found that it was not as a result of the introduction of Srichand in the business that the volume of turnover had been greatly increased. From a comparison of the figures in respect of all the three businesses it was clear that each one of them had enjoyed an appreciable increase in the volume of business and this was due to prevailing market conditions. The Tribunal observed that the two partners of the assessee were aware of the flourishing conditions of the cloth business during this period, and held that it was not necessary to introduce Srichand as partner in the Bharwari business in order to enjoy larger profits. It also had regard to the earlier attempt on the part of the assessee to exclude the profits of the Bahraich business from its assessment. From all these circumstances it came to the conclusion that the main purpose for introducing Srichand as a partner was the avoidance or reduction of the excess profits tax liability. It, therefore, dismissed the appeals.
The assessee applied unsuccessfully to the Tribunal for a reference to this court and thereafter moved this court for a direction to the Tribunal to submit a reference. This court took the view that questions of law did arise and accordingly issued the requisite direction to the Tribunal. In the statement of the case, the following three questions have been referred :
"1. Whether the provisions of section 10A of the Excess Profits Tax Act have been rightly applied in the present case ?
2. Whether there was evidence to support the finding that the main purpose for the formation of the firm at Bharwari with Sri Gopichand as a partner was the avoidance or reduction of liability to excess profits tax ?
3. Whether the formation of the firm at Bharwari was a transaction within the meaning of section 10A of the Excess Profits Tax Act, 1940 ?"
It would be advantageous, before proceeding further, to set out the material provisions of section 10A :
"10A (1) Where the Excess Profits Tax Officer is of opinion that the main purposes 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."
On the first question Sri Gopal Behari, learned counsel for the assessee, has referred us to the provisions of section 8(1) of the Excess Profits Tax Act, which declares :
"As from the date of any change in the persons carrying on a business, the business shall, subject to the provisions of this section, be deemed for all the purposes of this Act except for the purposes of determining the amount of the statutory percentage to have been discontinued, and a new business to have been commenced."
He contends that by virtue of section 8(1) it must be deemed that the Bharwari business had been discontinued by the assessee, and that, therefore, the provisions of section 10A, which contemplate a continuing business, are not attracted. This contention does not appear to have been raised before the Tribunal in the appeals filed before it and the Tribunal has not expressed any opinion upon the point. It cannot, therefore, be said to arise out of the appellate order of the Tribunal. Sri Gopal Behari urges that the contention merely relates to another aspect of the question which has been referred to this court and that he is entitled to raise it in view of the law laid down by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. We find difficulty in accepting this contention.
Even if we were to permit the assessee to raise this contention before us, we are of the view that the provisions of section 8(1) are of no assistance to him. In the instant case the assessee carried on business activities at three places. All that he did was to transfer the business carried on at Bharwari to another firm. He continued to carry on business at Colonelganj and Bahraich. Now the second proviso to section 2(5) declares that all business activities to which the Excess Profits Tax Act applies which are carried on by the same person shall be treated as one business for the purposes of that Act. Therefore, the three business activities carried on at the three places were to be treated as one business, and the transfer of one of the business activities merely amounted to a curtailment of the business carried on by the assessee. Section 8(1) requires for its application that there should be a change in the persons carrying on a business, i.e., a change in the persons carrying on all the business activities. There can be a change where all the business activities, which are treated as one business for the purpose of the Excess Profits Tax Act, are transferred by the assessee or where only some of the business activities are transferred while the remaining are discontinued. Section 8(1) cannot apply where only part of a business, i.e., only some of the business activities, are transferred and the assessee continues to carry on the remaining business. That is also the view taken by the Madras High Court in Ramaswami Raja v. Commissioner of Excess Profits Tax, where it was held that so long as there was no change in the ownership of the business and the business continued, whether in a dwindled or expanded form, section 8(1) had no application. In our judgment, there was no change in the ownership of the business carried on by the assessee as the term "business" is defined under the Excess Profits Tax Act and, therefore, we must hold that section 8(1) cannot be invoked. Sri Gopal Behari Behari v. Commissioner of Income-tax. In that case, however, the assessee carried on two business, a sarrafa business and a business in silk yarn and Banaras silk goods. The latter business was transferred by the assessee to another firm while the sarrafa business was discontinued by it resulting in the division of the gold and sovereigns among the partners. The assessee, thereafter, did not continue either business.
Sri Gopal Behari next urges that there was no material before the Tribunal to support the finding that the main purpose behind the constitution of the firm at Bharwari with Srichand a partner was the avoidance or reduction of liability to excess profits tax. We are unable to accept this contention. The only explanation given by the assessee was found to be unreliable. The Tribunal found that the conditions in the cloth market during the relevant period promised enormous profits, that the assessee could have availed of the services of any person as manager in place of Mewa Lal who had died, that in view of the flourishing conditions in the market, it was not necessary to have brought in Srichand particularly, and, therefore, the explanation that Srichand insisted upon being a member of the firm as a condition to helping in the business and that therefore the partnership was expanded to include him could not be accepted. The Tribunal found that the true reason for constituting the new partnership was to reduce the assessees liability to excess profits tax, and support to this conclusion was lent by the assessees earlier conduct in attempting to get the profits of the Bahraich business separately assessed. It cannot be said, in view of all these facts and circumstances, that there was no material before the Tribunal upon which it could have come to the conclusion to which it did.
It is true, as Sri Gopal Behari contends, that the burden lay upon the department to prove that the conditions necessary for the application of section 10A did exist, but we cannot say that that burden has not been discharged. In any event, it has not been shown to us that the finding of the Tribunal justifying the application of section 10A is based upon a misunderstanding of the law relating to burden of proof in such cases. Moreover, whether or not the main purpose behind a transaction is the avoidance or reduction of the liability to excess profits tax was held by the Supreme Court in Arunachala Nadar v. Commissioner of Excess Profits Tax to be more a question of fact than a mixed question of fact and law.
The first and second question referred by the Income-tax Appellate Tribunal must, therefore, be answered in the affirmative.
As regards the third question, it is concerned by Sri Gopal Behari that the formation of the firm at Bharwari was a transaction within the meaning of section 10A. We are of opinion that the formation of the firm was such transaction and accordingly answer the third question in the affirmative.
All the three question referred by the Tribunal are answered in the affirmative.
A copy of our judgment under the seal of the court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal.
The Commissioner shall be entitled to his costs which we assess at Rs. 200. Counsels fee is also assessed at Rs. 200.
Questions answered in the affirmative.