TMI Blog1954 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ely :-- " Whether under the facts and circumstances of the case the application of Section 10A with a view to amalgamating the income of the firms Uppal & Co., and Ram Singh & Co., with the income of the appellant firm was correct and valid in law ? " And we answer the question so reframed in the negative. Question No. 2 must be answered in the negative and in favour of the assessee by way of necessary corollary. We also answer question No. 3 in the negative. Appeal allowed. - C.A. 145 OF 1953 - - - Dated:- 25-10-1954 - Judge(s) : GHULAM HASAN., MEHR CHAND MAHAJAN., N. H. BHAGWATI., S. R. DAS., T. L. VENKATARAMA AYYAR JUDGMENT The Judgment of the Court was delivered by DAS, J.--This appeal by special leave arises out of a consolidated reference made on the 19th April, 1949, under Section 66(1) of the Indian Income-tax Act read with Section 21 of the Excess Profits Tax Act by the Income-tax Appellate Tribunal, Madras Bench. The reference arose out of four several proceedings for assessment to excess profits tax of the appellant, the chargeable accounting periods being periods ending with 31st March of each of the years 1942, 1943, 1944 and 1945. The relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides salary and other allowances mentioned therein. On the 25th January, 1941, the company appointed as its selling agent Ram Singh Co., a firm which came into existence on the same day with Ram Singh, Gurdayal Singh and Dr. Surmukh Singh, the three sons of Narain Singh, as partners, each having an one-third share. The terms of this partnership were recorded in writing on the 17th March, 1941. Ram Singh Co. was to get a commission of 3% on the net sales and 6% on the gross income of the company. In the two new firms so constituted Narain Singh had no share and eventually with a view to make up for his loss the shares of the partners in the assessee firm were modified by an agreement made by them on the 21st April, 1941. Under this agreement Narain Singh was to get a 12 annas share and the two sons Ram Singh and Gurdayal Singh 2 annas share each. All the three firms mentioned above, namely, the assessee firm, Uppal Co., and Ram Singh Co. were registered as firms under Section 26-A of the Indian Income-tax Act. On the facts summarised above, the Excess Profits Tax Officer came to the conclusion that the main purpose of the formation of the company and the two firms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other use by letting it out on an annual rent of Rs. 40,000 and that this was certainly an adventure in the nature of trade as contemplated by Section 2(5) of the Excess Profits Tax Act read with rule 4 of Schedule I thereto. Accordingly, it decided issue No. 3 against the assessee firm holding that the assessee firm carried on business in the letting out of the plant, machinery, etc., on hire and the lease money obtained thereby could be legally treated as business profits liable to excess profits tax. On issue No. 1 the Appellate Tribunal agreed with the Excess Profits Tax Officer that it was evident beyond doubt that a definite scheme was adopted creating separate charges in order to avoid excess profits tax by the three firms, namely, the assessee firm, Uppal Co., and Ram Singh Co., taken together. The first step in the scheme was the formation of the company. The second step was the appointment of Uppal Co., as managing agents instead of appointing the assessee firm itself. The third step was the creation of the firm Ram Singh Co., for taking up the selling agency of the company and the final step was to adjust the shares of the partners of the assessee firm so as to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat score. The Appellate Tribunal referred the earlier three questions after reframing the same so as to read as follows :-- " (1) Whether there is any evidence before the Tribunal to support the conclusion that the main purpose of the transactions was the avoidance of excess profits tax ? (2) Whether on the facts admitted or proved the share of income of Dr. Surmukh Singh in the firm of Ram Singh Co., can be legally included along with the share of income of Ram Singh and Gurdayal Singh ? (3) Whether on the facts and circumstances of the case the leasing of machinery, etc., by the assessee firm to the company was a business within the meaning of Section 2(5) of the Excess Profits Tax Act ? " The learned counsel appearing for the assessee firm submitted before the High Court that the third of the referred questions should be discussed and decided first, but the High Court took the view that the decision of the first question was a necessary preliminary to the consideration of the third question. Taking up, then, the first question first the High Court referred to the several facts found by the Appellate Tribunal and described as steps and regarding them as circumstant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess Profits Tax Act refer to the imposition of tax on excess profits arising out of certain businesses. Section 4, which is the charging section, and Section 5 which lays down the application of the Act to certain businesses, clearly postulate the existence of a business carried on by the assessee on the profits of which the excess profits tax can be imposed. Therefore, if there is such a business during the relevant period, then and then alone can arise the question of the applicability of Section 10A. If there is no such business as is contemplated by the Act, then the Act does not apply and Section 10A cannot come into operation at all. Before the Excess Profits Tax Officer can embark upon an enquiry as to whether a transaction was effected for the avoidance or reduction of liability to excess profits tax and to make such adjustments as he considers appropriate there must be proof that the assessee was, during the chargeable accounting period, carrying on any business of the kind referred to in Section 5 of the Act. Logically, therefore, the Appellate Tribunal as well as the High Court should have taken up question No. 3 first, for on a decision of that question would depend th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficult question to answer. On the one hand it has been pointed out by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace Co., that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is. The case of Commissioner of Income-tax v. Shri Lakshmi Silk Mills Ltd., decided by this Court is clearly distinguishable. There, the respondent company which was formed for the purpose of manufacturing silk cloth installed a plant for dyeing silk yarn as a part of its business. During the relevant chargeable accounting period, owing to difficulty in obtaining silk yarn on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all a business operation when its normal business activity had come to a close. It is interesting to note that sub-sections (3) and (4) of Section 12 of the Indian Income-tax Act recognise that letting out of plant, machinery, etc., may be a source of income falling under the head "other sources" within that section and not necessarily under the head "business" dealt within Section 10 of that Act. In the facts and circumstances of this case, therefore, the letting out of the plant, machinery, etc., cannot be held to fall within the body of the definition of "business" under Section 2(5) of the Excess Profits Tax Act. In this view of the matter it is not necessary for us to express an opinion as to the meaning or implication of the proviso to that definition or rule 4(4) of Schedule I to the Act. In our opinion, in the facts and circumstances of this case, question No. 3 should have been answered in the negative. The question of law raised in the third question being answered in favour of the assessee firm, the question of the applicability of Section 10A of the Excess Profits Tax Act could not arise, for the assessee firm having, during the relevant period, no business to which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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