Brijlal Gupta, J. - (1.) THIS reference comes to us on a requisition made by this Court on an application under Section 66 (2) of the Income-tax Act read with Section 21 of the Excess Profits Tax Act. Three questions have been raised in the reference for the opinion of this Court. These questions are as follows : 1. Whether the partial partition of the assesses family and the formation of a firm is a transaction within the meaning of Section 10-A of the Excess Profits Tax Act. If the answer to the above is in the affirmative, 2. Whether there was any material for the finding of the Tribunal that the main purpose of the partial partition of the family and the formation of the new firm of Rama Silk House was the avoidance of the excess profits tax liability of the assesses family? If the answer to question (2) is in the affirmative then, 3. Whether in the circumstances of the present case and having regard to the provisions of Sections 4 and 6 of the Excess Profits Tax Act, the provisions of Section 10-A of the Excess Profits Tax Act are applicable to the present case?
(2.) THE facts may be stated as follows: THE assessee is a Hindu undivided family. Its genealogical table is as follows: JUDGEMENT_729_ITR47_1963Html1.htm It used to carry on business in Banarasi goods. On 7-5-1943 the members of the assessee family withdrew a sum of Rs. 32,000/- from the cash balance to the family. business. THE sum withdrawn was divided between the members of the family in the following manner: JUDGEMENT_729_ITR47_1963Html2.htm With the moneys so obtained on a partial partition In regard to this amount a partnership business in the name and style of Rama Silk House was started by the following persons with the shares noted against each one of them; JUDGEMENT_729_ITR47_1963Html3.htm It will be noticed that the total share of Sita Ram's branch consisting of himself and his three sons was annas 8 and the share of the remaining three members consisting of Raja Ram and his two sons was another 8 annas share. Thus the shares of the various partners in the partnership business forming the two groups were exactly the same as they should have been if a partition had been effected In the Hindu undivided family and no partnership had been formed. Raja Ram died on 27-8-1943. On the death of Raja Ram Gokul Das, an outsider was also taken as a partner in the firm. The shares of the partners of the second group were reshuffled and redistributed. Anant Ram and Purshottam Dass the two sons of Raja Ram had their shares augmented and the shares now became three annas six pies each totalling to seven annas. The remaining one anna share of their group was given to Gokul Das.
(3.) IN income-tax proceedings the firm was granted registration and its income was assessed separately from the income of the Hindu undivided family which in spite of the formation of the partnership continued to carry on the ancestral silk business as before and continued to be assessed on the income of that business. The question, however, arose in the course of excess profits tax assessment of the chargeable accounting periods ending 26-10-1944, 15-10-1945 and 31-3-1946. In the assessment proceedings of the Hindu undivided family a notice was issued to the family by the Excess Profits Tax Officer under Section 10-A of Excess Profits Tax Act, that the main purpose of the partial partition and the formation of the firm was the avoidance and reduction of the excess profits tax liability of the family. The authorities below came to the conclusion that the partial partition and the formation of the firm amounted to a transaction within the meaning of Section 10-A of the Excess Profits Tax Act. It was further held that there were numerous circumstances to show that the main purpose of the transaction was the reduction or avoidance of excess profits tax liability. These circumstances were that the partial partition and the formation of the partnership on 7-5-1943 which fell in the accounting period relevant to the assessment year 1944-45 was during a period of the rising income and prosperity of the family business. Accordingly the case of the assessee that the partial partition and the formation of the firm were to prevent the disruption of the family and the discontinuance of the family business was not acceptable. The other facts relied on were that the family business and the partnership business had the same customers and dealt with in the same commodity ft was also held that to begin with the shares of the two groups formed by the branches of Raja Ram and Sita Ram were equal. It was only after the death of Raja Ram that Gokul Das an outsider was given a nominal share of one anna in the firm. Lastly, it was held that by this arrangement the family avoided payment of about Rs. 48,000/- as excess profits tax in the two years 194445 and 1945-46 corresponding to the chargeable accounting periods. Thus there was ample material for the finding. ;