Parupudi Bapoo Rao vs Commissioner of Excess Profits Tax

Subba Rao, C.J.—The Income Tax Appellate Tribunal, Madras Bench ''A'' referred the following question to this Court u/s 66 (2) of the Income Tax Act:

Whether, on the facts and in the circumstances of the case, the formation of the firms on 1-12-1943 and 25-10-1944 are transactions coming within the purview of Section 10A of the Excess Profits Tax Act?

The Assessee, Parupudi Bapoo Rao, was carrying on business from 1-4-1936 with his father-in-law under the name and style of Sripada Narasimham Bros., (hereinafter referred to as S.N. Bros.) The business consisted of the distribution of manufactured products such as Wilis'' Cigarettes, Lipton''s Tea etc., and Caltex agency. Sripada Narasimham died on 9-12-1940. For the period 1-4-41 to 31-3-1942, the Assessee put forward a case of partnership with his mother-in-law but the Income Tax Officer refused to recognize it.

When similar attempts were made for the assessment years 1943-44 and 1944-45, the Income Tax Officer did not accept his claim of Partnership and his order was upheld by the Superior authorities. In the result, the Assessee carried on the business of S. N. Bros., as a proprietary concern. On 1-12-1943, he started a partnership in the name of K. J. Industries with his divided brother Venkata Rao as his Partner. The said partnership carried on Military contracts for the supply of furniture, bailies, pebbles and excavation of earth.

Venkata Rao had 3/4th share while, the Assessee had l/4th share. On 25-10-1944, after the death of his mother-in-law the Assessee claimed that he carried on the business of S. N. Bros., in partnership with his brother Venkata Rao. In that partnership; he had 3/4 share and his brother 1/4 share

The Excess Profits Tax Officer, Special Circle, Madras purporting to act u/s 10A of the Excess Profits Tax Act, clubbed up the T Snodme from three concerns i.e., S. N. Bros., (pro-Buffeter concern) K.J. Industries and S. N. Bros and assessed the Assessee to excess profits tax on the three accounting periods ending with 31-3-1944, 31-3-1945 and 31-3-1946. The Officer found that the main purpose for which K. J. Industries was created was for the avoidance or reduction of Excess Profits Tax liability and likewise the creation of the partnership of S.N. BrOrs. was a further attempt to divert Excess Profits Tax liability, as in his view, both the partnerships were brought about with the intention of keeping the three units separate and thus avoid Excess Profits Tax.

On appeal, the Appellate Tribunal accepted the finding. They were satisfied that the essessee entered into the partnerships with the main purpose of avoiding Excess Profits Tax liability.

The learned Counsel for the Assessee contends that under the Excess Profits Tax Act, a person cannot escape the tax by taking in a new partner and, therefore, there could not have been an intention to avoid the liability. Further, he argues that the finding was not based upon any relevant material placed before the Tribunal.

Under the Excess Profits Tax Act, the unit of taxation is the business. In respect of any. business t0 which the Act applied, the tax Was levied on the amount by which the profits during any chargeable accounting period exceeded the standard profit in the shape of such percentages of that excess as prescribed. This incidence was admittedly very heavy and naturally devious methods were adopted to evade the tax. To prevent evasion, Section 10A was enacted in the following 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 (2nd 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 counter act the avoidance or reduction of liability to Excess Profits Tax which would otherwise be affected by the transaction or transactions.

Under this section, if the main purpose, for which any transaction was effected, was the avoidance, or reduction of liability under the Act, the Excess Profits Tax Officer was authorised to make such adjustments in respect of liability as he considered proper. The section, therefore, could be invoked only if the main purpose of entering into a particular transaction was to avoid or reduce the liability to Excess Profits Tax. It is, therefore, contended that, in the present case, the taking in of a new partner did not enable the Assessee to evade or reduce the tax and, therefore, the main purpose could not have been to evade the tax. Reliance is Placed upon the following provisions in support of that contention:

8(1). 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 statutory percentage to have been discontinued and a new business to have been commenced.

(3) A business shall not, for the purposes of the provisions of this Act relating to the computation of standard profits, be deemed to be discontinued by reason of any change occurring on or after the 1st day of September 1939 in the persons carrying it on, and the standard profits of the business in relation to any chargeable accounting period shall be computed accordingly.

It is'' no doubt true that a change in the persons carrying on a business after 1st September 1939 would not affect the incidence of Excess Profits Tax in regard to a business. This legal effect of taking in a new partner, though it may have a bearing in coming to a conclusion whether the main purpose of taking in a new partner was to evade Excess Profits Tax, in itself cannot exclude the possibility of such a device, if the other circumstances Point to that direction. In the present case the facts are not so simple and innocuous as learned Counsel assumes on behalf of his client.

Bapoo Rao was carrying on business after the death of his father-in-law under the name and style of Sripada Naraslmham Bros. After making'' some in fructuous attempts to get it recognised as a partnership with his mother-in-law, he acquiesced in the orders of the Income Tax authorities and accepted the position that it was only his proprietary concern. Then, he entered into a partnership with his brother on. 1-12-1943 and carried on the business of war contracts for the supply of furniture, excavation of earth etc., under the name of K. J. Industries. Tribunal found the following facts:

(1) Venkata Rao was the manager of S N. BrOrs. .

(2) He had no special qualification for this new undertaking.

(3) Even after the partnership was entered into, the contracts were all taken in the name of the Assessee''s proprietary concern, S.N. BrOrs. .

(4) The guarantee bond was given to the; Military authorities by the Assessee.

(5) The entire finance was Provided by the Assessee.

(6) The assessor''s business turned profits even for the year ending with 31-3-1943 which made it liable for Excess Profits Tax of Rs. 2807/-.

(7) There was around boom in the business and large profits were expected.

(8) Bapoo Rao took 1/4 share and gave 3/4 share to his brother.

(9) The expenditure and receipts were entered in the books of S.N. Bros., and directly in the books of K. J, Industries. On the above facts, the Tribunal held that K.J. industries was really the business of the Assessee and that that partnership was constituted only with the main object of avoiding or reducing his liability to Excess Profits Tax Act. We cannot say there was no sufficient material on which that finding could not be arrived at or that no reasonable man would have come to that conclusion on the facts found.

Coming to the partnership business of S. N. BrOrs. constituted on 25-10-1944, it may be that, if it stood alone, the Assessee, by taking in a partner, would not have avoided his liability to Excess Profits Tax. But in the context of the formation of K. J. Industries, the constitution of the new partnership takes a different colour altogether. A transaction entered into with the object of evading tax may not achieve that purpose, but nonetheless the intention to achieve the purpose is riot negative by the frustration of the purpose sought to be achieved.

In this case, what was the position on 25-10-1944 when the Assessee''s proprietary concern of S. N. BrOrs. was converted into a partnership business with his brother Venkata Rao? There was the Assessee''s proprietary business and there was the partnership business of K. J. Industries. The Tribunal, in our view, rightly held that K. J. Industries was constituted with the main purpose of avoiding Excess Profits Tax. The Assessee''s object was to accentuate the distinction between himself and K. J. Industries, so that the Excess Profits Tax authorities might not treat the said business as his own.

This he presumably attempted to achieve by constituting a new partnership with his brother. In the circumstances, the main purpose of converting the proprietary concern of S.N. BrOrs. into a partnership was clearly to avoid Excess Profits Tax. There was material for the Tribunal to come, to that conclusion and we cannot say, having regard to the aforesaid circumstances that the finding was such that no reasonable man could arrive at.

The whole thing appears to us to be an well-knit scheme to evade Excess Profits Tax. The finance, the personnel and the premises were supplied by the assessed and the two partnerships were entered into with his brother only with the main purpose of evading tax.

We answer the question in the affirmative. The applicant will pay the costs of the Respondent. Advocate''s fee Rs. 250/.