Satyanarayana Rao, J. -
(1.) THIS reference under Section 66 (1), Income-tax Act raises a nice and interesting question of law under the Excess Profits Tax Act. The questions as framed by the Appellate Tribunal do not bring out the contentions raised by the parties on the facts as stated by the Appellate Tribunal. We have therefore, with the consent of the counsel, modified question No. 2. The questions as modified are:
"1. Whether the Tribunal is right in law in holding that Section 8(5) of the Excess Profits Tax Act applied to the facts and circumstances of this case?
2. Whether the Tribunal was right in directing that the deficiency in the assessee's business for the chargeable accounting period ended 31st March 1944, viz., Rs. 28621 could be set off against the earlier profits only by apportioning the profits or money lending and managing agency business?"
Prior to 1st April 1943, the assesses was carrying on two businesses, one, money lending, and the other, managing agency business of Rajapalayam Mills Ltd. He was assessed to excess profits tax in respect of his two businesses. On 31-3-1943, however, a private limited company called Ramco Agencies Ltd., was appointed as managing agents of the Rajapalayam Mills Ltd., by a resolution of that company in the place of the assessee. The assesses before that, had resigned or relinquished his office. The excess profits of the two businesses till 31-3-1943 amounted to Rs. 1,90 lakhs, and tax, was levied on that amount. The chargeable accounting period with which we are now concerned, is the period commencing from 1-4-1943 and ending with 31-3-1944. The assessee continued his money-lending business, which showed a deficiency of Rs. 28261 during this chargeable accounting period. The assessee claimed to set oft this deficiency against the profits on which tax was paid prior to 31-3-1943 under Section 7 of the Excess Profits Tax Act, and also claimed a refund on account of the deficiency.
THIS claim was rejected by the Excess Profits Tax Officer and the Appellate Assistant Commissioner on the ground, that there was a change in the persons carrying on the business within the meaning of Section 8(1) Excess Profits Tax Act, and that therefore the money lending business continued by him was a new business on and from 1-4-1943; the deficiency, therefore, in respect of this new business could not be set off against the discontinued business carried on prior to 31-3-1943. On appeal to the Tribunal, it was held that the business which was continued, namely, the money lending business, could not be treated as a new business under Section 8(1) of the Act. The Tribunal, however, was of the opinion, that the provisions of Section 8(5) of the Act and the proviso thereto applied to the case, and therefore directed the determination of the profits for the transferred managing agency business and the non-transferred money-lending business, and allowed a set-off of the deficiency of the non-transferred money-lending business for the chargeable accounting period against the excess profits, if any, of the same business prior to 31st March 1943. At the instance of the assessee this reference was made to this court for opinion.
(2.) IN dealing with the questions raised and the arguments advanced by the counsel on both sides, it may not be out of place to consider the background or the setting in which the provisions of the Act relied on before us have to be construed. The charge under the Excess Profits Tax Act is not on an absolute amount of the profits of the business, but is on the excess profits in a chargeable accounting period over the standard profits. The standard profits of a business have to be ascertained, for purposes of comparison with the profits of the chargeable accounting period, in accordance with the provisions of the Act. Section 6(4) of the Act fixes the minimum amount of the standard profits at rupees thirty six thousand in any case in which the standard profits computed in accordance with Sub-section (1) are less than this sum. One peculiarity of the Act is, "business" includes all businesses carried on by the same person, and they are all treated as one business or one unit for the purpose of the Act. (Vide second proviso to Section 2(5), definition of "business"). Section 7 provides for relief in favour of the assessee on occurrence of deficiency of profits, and Section 8 deals with succession and amalgamation of business as well as transfer.
The underlying principle of Section 8(1) is that the business remains the same, although the person or persons by whom it is carried on may have changed. It may not be accurate to say, as contended by Mr. Rama Rao Sahib, that the taxes are levied on the business alone irrespective of the person who carried on the business. It will be difficult to accept such an extreme proposition, for the reason that it is somewhat inconceivable that profits could be earned by the business alone irrespective of the fact that it is the person carrying on the business that earns the profits of the business and not the business in the abstract. This court had occasion to consider this point in -- 'Commr. of Excess Profits tax, Madras v. Jivaraj Topun and Sons, Madras', (A), where it was pointed out that even under the Excess Profits Tax Act the assessment of the tax is on the person carrying on the business, in the same manner as under the INdian INcome-tax Act.
The first question referred to us does not require serious consideration. Section 8(1) enacts the general principle, that if there is a change in the person carrying on the business, notionally it involves as from the date of such change a discontinuance of the business and the commencement of a new business. The effect of it is that a new chargeable accounting period should be automatically started for the business, and the standard profits must also be determined afresh. It is as if the business started for the first time, though notionally as on the date of the change. The other sub-clauses of Section 8 contain exceptions to the general rule, and provide the method of computation of standard profits under different circumstances.
The change in the persons carrying on the business, which, of course, entails the change of ownership may be brought about by various causes, such as death or retirement as in the case of a partnership or by succession or by amalgamation of two or more businesses. In such contingencies the other sub-clauses of Section 8 provide for the method of computation of standard profits and also fix the point of time at which the standard profits should be ascertained. Section 8(5) deals with a case where part of a business is transferred as a going concern on or after 1st September 1939. In such an event, the part of the business transferred and the part of the business not transferred are each treated, for the purpose of computation of standard profits, as a continuation of the original business. Sub-section (7) of Section 8 provides for the method of adjusting the deficiencies of profits in respect of a chargeable accounting period, in a case where a partner of a firm carrying on business dies.
In our opinion, the Appellate Tribunal did not pay sufficient attention to the language of Section 8(5), and fell into an error in assuming that that sub-clause provided for relief on occurrence of deficiency of profits. The only object of the provision is to lay down the method of computation of standard profits in a case of transfer of part of a business, of the part transferred and the part not transferred. Further, the Appellate Tribunal failed to appreciate that on the facts no question of transfer of the managing agency business by the assessee to Ramco Agencies was involved, as is obvious even from the statement of the facts by the Appellate Tribunal. The rights under the agreement appointing the assessee as a managing agent could not be transferred, and were, in fact, not transferred. All that happened was that the assessee resigned or relinquished his agency, and thereafter the Rajapalayam Mills appointed on 31st March 1943 Ramco Agencies Ltd., as their managing agents.
These facts make it abundantly clear that there was no transfer of the business of managing agency by the assesses to Ramco Agencies Ltd. The authority to act as managing agents was derived by Ramco Agencies Ltd., under the order of appointment of 31-3-1943, which was made in pursuance of the resolution of the company. It is therefore an Independent business which the Ramco Agencies Ltd., acquired after the termination of agency of the assessee. There is no continuance of the business of the assessee by the Ramco Agencies, and the Ramco Agencies never derived any right or authority under any transfer made by the assessee. The business carried on by Ramco Agencies Ltd., may be a similar business but not the same business of the assessee. It is therefore impossible to accept the view of the Appellate Tribunal, that the case falls under Section 8(5) of the Act. Indeed, Mr. Ramarao Sahib, learned counsel for the Commissioner, could not seriously support the view of the Appellate Tribunal. It follows therefore that the answer to question No. 1 must be in the negative and in favour of the assessee.
If Section 8(5) is ruled out, what is the position with reference to the relief claimed by the assessee in respect of the deficiency? Mr. Ramarao Sahib relied strongly on Section 8(1) and contended that there was a discontinuance of the business and the commencement of a new business on and after 1-4-1943, as the assessee's managing agency business came to an end. If Section 8(1) has no application, it cannot be doubted that the assessee would be entitled to relief under Section 7 of the Act. The question therefore seriously debated and strenuously argued on behalf of the Department was that, though there was no change in the persons carrying on the business, as the assessee's managing agency business terminated, the business continued by him thereafter, viz., the money lending business, could not be treated as the same business, and therefore he was not entitled to relief under Section 7, but that the business continued by him after 1-4-19-13, namely, the money lending business, must be treated as a new business which commenced as and from 1-4-1943.
In our opinion, the argument advanced over-looks the clear language of the section. The consequences for which Section 8(1) provides namely, the discontinuance of the business and the commencement of a new business are dependent upon a change in the persons carrying on a business. A person may carry on more than one business, but all the businesses carried on by him are treated as one unit for the purpose of assessment under the Act. The section does not provide chat if a part of his business is cut out or is dropped, and he continues to carry on the remaining business, the business so continued should be treated as a hew business. During the chargeable accounting period there is no alteration of the "business"; but even that apart, there is no change in the persons carrying on the business.
The same person, the assessee, continued the money lending business, though he was deprived of the managing agency business. Change in the persons implies that there is a change in the ownership, which may be brought about either by death or by amalgamation, or it may be by transfer or any other mode known to law. So long as there is no change in the persons who carry on the business, the consequences envisaged in the section would not follow. There must be a continuity of the ''business'', whether that business comprised of more than one business or was a single business. A person need not continue to carry on all the businesses. It may be that he may find during the chargeable accounting period that a particular business is not lucrative, and may therefore close that business and continue the remaining business. As the tax is on the "business" carried on by a person, it does not matter whether that business was restricted in its scope by cutting out parts of the business or was enlarged in its scope by additions.
The totality of the profits earned during the chargeable accounting period in respect of all the businesses whether they be less or more than in the previous period should be taken Into account in arriving at the profits for the purpose of assessment under the Excess Profits Tax Act. The idea underlying the section, it seems to us, is that so long as there is no change in the ownership of the business, and the business continues whether in a dwindled or expanded form, the section has no application. The argument of the learned counsel assumes that in respect of the managing agency business which was owned by the assessee till 31-3-1943, such business was continued by the new managing agent, and therefore there was commencement of a new business. As pointed out already, it is not the assessee's managing agency business that devolved upon the new managing agent. The new managing agent obtained his business, and derived his authority by the appointment made by the company on 31st March 1943. We think therefore that the Tribunal, was right in holding that Section 8(1) had no application.
If Ss. 8(1) and 8(5) are excluded, it logically follows that Section 7 of the Act should be applied, and the assessee must be given relief in accordance with that section. Our answer therefore for the second question is in the negative and in favour of the assessee. As the assessee has succeeded, he is entitled to his costs, which we fix at Rs. 250.