MALIK, J. - (1.) THIS is a reference under S. 66(1), Income -tax Act, read with S. 21, Excess Profits Tax Act. The question referred to us is in these terms : "Whether in the circumstances of this case, there is material to justify the opinion that the main purpose, for which the transaction in question was effected, was the avoidance or reduction of Excess Profits Tax Liability."
(2.) THE facts of this case are that one Ganga Sahai had four sons, viz., Umrao Singh, Shimbhumal, Raghubir Saran and Ram Sarup. Shimbhumal had a son, Radhey Lal. Umrao Singh had three sons, namely Shib Charan Das, Tirloki Nath and Ram Richhpal. Parbhu Dayal is the son of Shib Charan Das. The family remained a joint Hindu family up to some date in the year 1920 and it used to carry on business of whole -sale cloth dealers, retail cloth dealers and of commission agents. The business was carried on in the names and styles of Firm Gangasahai Umraosingh, Firm Shimbhumal Baghubirsaran and Firm Gangasahai Ramsarup. In 1920 there was a partition in the family but the business continued to be carried on as before. In 1935 these four brothers entered into a partnership probably after the death of Ganga Sahai and the business mentioned above was carried on after 1935 by this partnership, in which Umrao Singh got an eight annas share and his two brothers. Bam Sarup and Raghubir Saran, got two annas eight pies share each. The share of Shimbhumal, the fourth brother, was entered in the name of his son, Radhey Lal, and it was two annas and eight pies. Firm Gangasahai Umraosingh was a registered partnership and the income from the three shops continued to be assessed up to the income -tax assessment year 1941 -42. In the year 1940, there was a partition between Umrao Singh and his sons and grandsons. The reason for this partition is said to be that Parbhu Dayal, the grandson of Umrao Singh, had made a profit of about Rs. 20,000 which he wanted to keep to himself and he was not willing to hand it over to be included in the funds of the joint family. Ram Gopal son -in -law of Umrao Singh was appointed an arbitrator and his divided the family properties under a registered award. There is some difference about the date of the award. In the order of the Appellate Tribunal and in the statement of the case the date is given as 10th August 1940, while in some of the applications filed by the assessee and in the two partnership deeds it is given as 11th August 1940. On 11th August 1940, the parties entered into two partnerships relating to the family business and under these two documents the family business was split up into two parts -Firm Gangasahai Umraosingh and Firm Shimbhumal Raghubirsaran. In the wholesale cloth business, which was being carried on by Firm Gangasahai Umraosingh, Umrao Singh was given one anna share though, under the law, he would have been entitled to two annas, Shib Charan Das got a three annas share instead of two annas and the other two sons of Umrao Singh got two annas share each and this business was placed in the charge of Umrao Singhs sons. The other two firms, Shimbhumal Raghubirsaran and Gangasahai Ramsarup, were combined into one firm under the business name of Firm Shimbhumal Raghubirsaran and in this firm Umrao Singh was not given any share. His three sons got the following shares : Rs. As. P. Shib Charan Das ... ... 0 3 6 Tirloki Nath ... ... 0 2 3 Ram Richhpal ... ... 0 2 3 This firm was to be managed exclusively by the old partners, viz., Ram Sarup. Raghubir Saran and Radhey Lal. The new partnership deeds were registered under S. 26A, Income tax Act. It is not suggested that this partition was bogus, nor is it suggested that Umrao Singh continued to have his old share of two annas in firm Gangasahai Umrao Singh or that he continued to have his two annas share in firm Shimbhumal Raghubirsaran. What was, however, suggested on behalf of the Department was that the main purpose behind the splitting up of one business into two separate businesses was to evade payment of the Excess Profits Tax. The assesses firm produced Ram Gopal as their witness whose evidence was neither relied upon by the Income -tax Commissioner nor by the Appellate Tribunal. The evidence of Ram Gopal having been rejected, the question arose before the Appellate Tribunal whether on the facts and circumstances placed before it, it could come to the conclusion that the splitting up of one business into separate business was effected with the main purpose of evading payment of the Excess Profits Tax. The members of the Appellate Tribunal mentioned three circumstances which, according to them, entitled them to come to the conclusion that this alteration was made with the main purpose of evading payment of the Excess Profits Tax. The circumstances are as follows : (1) That no satisfactory reason was furnished as to why Umrao Singh was not given any share in Firm Shimbhumal Raghubirsaran; (2) that no satisfactory reason was given as to why the parent partnership was split up into two units; and (3) that the assessee firm knew that they would have to pay the Excess Profits Tax if the amount of profits was in excess of Rs. 36,000.
(3.) SO far as the first two circumstances are concerned, they only go to show that the assessee firm had failed to explain the reason for the Splitting up of the parent partnership and for non -allotment of a share to Umrao Singh in the second partnership. It is not disputed that Umrao Singh was not given a share in the second partnership and that his share in the first partnership was reduced. After the partition in the family of Umrao Singh, it was necessary to split up the partnership into two units if the partners of the two units were not the same or their shares were not identical. For the purpose of evading payment of the Excess Profits Tax, it was, however, not necessary to exclude Umrao Singh from his legal share in the business. From the mere fact that the assessee firm knew that the Excess Profits Tax would be payable on an income in excess of Rs. 36,000 and from the fact that an explanation to the satisfaction of the members of the Appellate Tribunal was not furnished, it does not necessarily follow that the main object of the assesses firm was to evade the payment of the excess profits tax.;