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Petitioner: V. N. M. ARUNACHALA NADAR VS Respondent: COMMISSIONER OF EXCESS PROFITS TAX, MADRASHonorable Justice Rajagopalan and Rajagopala AyyangarM. Subbaraya Ayyar,C. S. Rama Rao Sahib
1966 P T D 553
1966 P T D 553
[Madras (India)]
Before Rajagopalan and Rajagopala Ayyangar, JJ
V. N. M. ARUNACHALA NADAR
versus
COMMISSIONER OF EXCESS PROFITS TAX, MADRAS
Cases Referred Nos. 58 and 68 of 1953, decided o0 17th September 1956.
Indian Income‑tax Act (XI of 1922), S. 25‑A‑Excess Profits Tax Act (XV of 1940), Ss. 8(1) & 10‑A‑Partition of Hindu undivided family‑Order under S. 25‑A recognising partition Business carried on by members forming smaller joint family among themselves‑Members, whether entitled to deficiencies in profits of old joint family in assessing income for excess profits tax Transaction for avoiding excess profits tax‑Determination of main motive‑Guiding principles.
Even though a Hindu undivided family can continue to exist after the separation of some of its members, if an order under section 25‑A of the Income‑tax Act has been passed, the family as such must be regarded as having ceased to exist. Though the remaining members may constitute among themselves a joint family it will be a different juridical entity.
A Hindu undivided family was being assessed as such until 27th January 1942, when a partition was effected under which the four adult sons of the karta formed one group and the karta and his undivided minor sons formed another group, and on the application of the karta an order under section 25‑A of the Income‑tax Act recognising the disruption of the family was made by the Income‑tax Officer in 1945. After the partition the karta started a new business, and in assessing the income of the karta's group from business to excess profits tax, he claimed that the deficiency in profits of the family during the years prior to 27th January 1942, amounting to Rs. 42,479 must be taken into account.
Held, that, inasmuch as an order under section 25‑A had been passed on the application of the karta himself, the Hindu undivided family which existed before 27th January 1942, must be regarded as having ceased to exist from that date; the new joint family of the karta and his minor sons which came into existence on partition was a separate juridical entity; there was a change in the persons carrying on the business within the meaning of section 8 (1) of the Excess Profits Tax Act, and the business carried on by the karta after 27th January 1942, must therefore be regarded as a new business and the karta was not entitled to claim the deficiencies of the old business which ceased to exist on 27th January 1942.
The question whether a transaction was effected with the main purpose of avoidance or reduction of liability to excess profits tax must be decided in accordance with the following principles:
(i) The mere fact that a new business was started at a time when by such starting there would be a reduction of liability is not by itself proof that it was started with the main object of avoiding the excess profits tax liability within the meaning of section 10‑A. In other words, the point of time when these business are started or a transaction takes places does not by itself furnish a proof that the transaction was effected with a sinister motive.
(ii) The burden is on the Department to prove that this was the main purpose with which the transaction was effected.
(iii) The relationship between the parties to the transaction is not by itself conclusive to prove that the motive of the actors in that transaction was the avoidance of liability.
(iv) It is not sufficient if this was an incidental advantage which might have accrued to an assessee; it must be the main motive to compass which the transaction was brought about.
[Their Lordships held on the facts that the Tribunal was right in coming to the conclusion that the formation of certain partnerships in this case was for avoidance of the excess profits tax.]
STATEMENT OF CASE
In compliance with the requisition of the High Court under section 66 (2) of the Indian Income‑tax Act in C. M. P. No. 6332 of 1952, dated the 19th November 1952, we state the case agreed to by both parties, and refer it to the High Court of Judicature at Madras.
2. The assessee is the family of V. N. M. Arunachalam Nadar and his six minor sons by his second wife.
3. Originally there was a Hindu undivided family, herein after referred to as the old family, consisting of :
V. N. M. Arunachala Nadar (karta), his four major sons by the first wife, V. N. M. A. Aiyamperuma‑1 Nadar, V. N. M. A., Rathnasabapathi Nadar, V. N. M. A. Durairaj Nadar, V. N. M. A. Rajamanickam Nadar, and six minor sons by his second wife.
4. The old family was carrying on business in the following lines
(1) Grocery at Virudhunagar (Head Office).
(2) Grocery at Tuticorin.
(3) Two Oil Mills (Ganesh Vilas Oil Mill and Jawahar Oil Mill) at Virudhunagar.
(4) Oil Mills at Madurai.
(5) Commission business in grocery at Bombay.
(6) Commission business in grocery at Rangoon.
(7) Joint business in red‑gram at Tuticorin.
(8) Joint business in red‑gram at Virudhunagar.
5. Up to and inclusive of the assessment year 1942‑43, the old family was assessed as a Hindu undivided family in respect of the aforementioned lines of business, its "previous year" (account ing period) being usually the year ending on an auspicious day in Thai (January) of every year.
6. In respect of 1943‑44 assessment year a notice issued under section 22 (2) of the Income‑tax Act was returned by V. N. M. Arunachala Nadar and it was further claimed by him in a letter, dated 10th August 1943 (annexed hereto as Annexure `A' and forming part of the case) that the family business was stopped on the 14th Thai, Vishu, (27th January 1947) that his four major sons by the first wife had seceded from the family, that three of them started on 28th January 1942 a separate business under the name and style of V. N. M. A. Aiyamperumal. Nadar and Brothers, that V. N. M. A. Rajamanickam Nadar had also started a separate business of his own that this informa tion was furnished along with the return for 1942‑43 assessment year in a letter, dated 14th October 1942, (annexed hereto as Annexure `B' and forming part of the case) filed before the Income tax Officer to that effect and that, therefore, a separate return form was to be sent to him. He further .prayed that according to section 25‑A a separate assessment had to be made on him and separate assessments on the divided sons.
7. An enquiry was held by the Income‑tax Officer under section 25‑A of the Act. It was ascertained that the family got divided into two groups, one consisting of V. N. M. A. Aruna chala Nadar and his six minor sons by the second wife and the other consisting of his four major sons. In support of this position, the assessee produced a registered document (annexed hereto as Annexure `C' and forming part of the case), dated 10th August 1942, which was a release deed executed jointly by the four major sons by the first wife to the father V. M. N. Arunachala Nadar and his six minor sons forming one group. Though styled as a release deed, this was in effect, a partition deed because it was mentioned in the preamble, that it was entered into merely for the purpose of owing and enjoying properties already divided in the partition without any room for any future claim or inter ference; and further because the entire immovable properties which were valued at Rs. 48,000 were divided between the two groups. The major sons got properties worth Rs. 15,000 towards their share and the other group was allotted the remaining properties worth Rs. 33,000. For the extra share of Rs. 9,000 taken by V. N. M. Arunachala Nadar and minor sons an adjustment had already been made in the books of account on 27th January 1942.
8. So far as the entries in the old family account books are concerned, all the assets and liabilities were pooled on 27th January 1942, and divided into two halves. The net assets as on that date amounted to Rs. 2,14,616‑0‑3. Out of these, a sum of Rs. 55,300 was set apart for the marriage expenses of the female members of the family, presents and reserve for bad debts and Income‑tax. The balance of Rs. 1,59,316‑0‑3 was all that was divided between the two groups, each group's share being Rs. 79,658‑0‑1. An adjustment of Rs. 9,000 was also made towards the excess share obtained by Arunachala Nadar and minor sons in the immovable properties. All these entries were passed both through the flay‑book and the ledger. The four major sons were given a sum of Rs. 72,000 cash towards their share on receipt of which they started their separate business. The balance standing to their credit was paid off on later dates. The book balances, both debts and liabilities, were left in the old accounts, which were continued for recording the subsequent collections and disbursements. So far as V. N. M. Arunachala Nadar was concerned, he opened a new set of accounts books in respect of the business of the group of which he was the karta. These accounts were started on 28th January 1942, with capital of Rs. 40,109‑5‑4. The letter dated 14th October 1942, (annexed hereto as Annexure `B' and forming part of the case) signed by V. N. M. Arunachala Nadar which was enclosed along with the return for 1942‑43 assessment, mentions that the four major sons succeeded from the family on the 14th Thai, Vishu (27th January 1942), and from 28th January 1942, onwards, three of them were carrying on a partnership under the name and style of V. N. M. A. Aiyamperumal Nadar & Bros., taking over the business at Tuticorin and Bombay, formerly belonging to the family, that V. N. M. A. Rajamanickam Nadar was doing business at Virudhunagar and that Arunachala Nadar himself took over the business at Virudhunagar and Madhurai and conducting the same from 15th Thai, Vishu (28th January 1942). In the course of the enquiry under section 25‑A, sworn statements were recorded from V. N. M. Arunchala Nardar and his four major sons, V. N. M. A. Aiyamperuinal Nadar, V. N. M. A. Ratnasaba pathi Nadar, V. N. M. A. Durairaj Nadar and V. N. M. A. Rajamanicka Nadar on 18th January 1944), (copies annexed hereto as Annexure `D' and `E' and forming part of the case). In these statements, all these five adult members unequivocally affirmed on oath that there was a family partition on the 14th Thai, Vishu (27th January 1942), in the presence of S. S. Subbiah Nadar of Virudhunagar, that the two divided groups were carrying on business separately from 28th January 1942, and that when it suited them, they drew up the release deed, dated 10th August 1942, and had it registered in due course. In these circumstances, the Income‑tax Officer passed an order under section 25‑A (1), dated 31st October 1945, (annexed hereto as Annexure `F' and forming part of the case) holding that the old family of V. N. M. Arunacbala Nadar became divided into two groups consisting of :‑(1) V. N. M. Arunachala Nadar and his six minor sons, and (2) four major sons of V. N. M. Arunachala Nadar. This order was accepted by both the divided groups and no' appealed against. From 1943‑44 assessment year onwards, the Income‑tax Officer made separate assessments on the two groups.
9. The present section 66 (2) application relates to the excess profits tax assessment of the smaller family of V. N. M. Arunachala Nadar and his six minor sons. After the partition on 27th January 1942, for the chargeable accounting period 28th January 1942, to 7th February 1943, the Excess Profits Tax Officer fixed the assessee's business income at Rs. 62,568 and deducting there from the minimum standard profits of Rs. 37,179 for the proportionate period of 12 and 11/28 months, determined the excess profits at Rs. 25,329. The assessee objected to this procedure on the ground that the previous deficiency of the erstwhile joint family of V. N. M. Arunachala Nadar, amounting to Rs. 42,479, i.e., (in respect of the business conducted by the larger family of V. N. M. Arunachala Nadar during the period 1st September 1939, to 27th January 1942), should be set off against the chargeable profits presently determined by the Excess Profits Tax Officer. The Excess Profits Tax Officer held that the old family became divided with effect from 27th January 1942, and that the present family, i.e., the assessee, was a new family, that there was a change in the persons carrying on the business and that, therefore, the assessee's business which was started on 28th January 1942, should be registered as a new business not entitled to claim the deficiency of the old business which had come to an end on 27th January 1942. On appeal, the Appellate Assistant Commissioner finding that before the partition; the assessee was carrying on business in four places, i.e. at Virdu hungar (Head Office) and branches at Tuticorin, Bombay and Madurai but after the partition, the business at Virudhunagar and Madurai were taken over by the major sons of V. N. M. Aruna chala Nadar, held that the taking over of various business by the two groups itself constituted discontinuance of businesses carried on by the quondam family and the businesses started by the two groups after the partition were new businesses and as such, this was a case of a partition in the family and not one of secession, that there was change in the persons carrying on the business of the quondam family and that, therefore, the Excess Profits Tax Officer was right in relying on section 8 (1) of the Excess Profits Tax Act and denying the assessee the benefit of prior deficiency. He, therefore, confirmed the Excess Profits Tax Officer's order.
10. Before the Tribunal, the only point that was taken on appeal was that the assessee was entitled to the deficiency relief of Rs. 42,479. It was contended by the learned counsel for the assessee that there was really no partition or disruption of the original family of V. N. M. Arunachala Nadar, there was no discontinuance of its business and that what took place was only that one group of members seceded from the family leaving the rest intact. Reliance for this position was placed on the deed executed on 10th August 1942, by the second group in favour of the first group styled as "partition release deed." The Tribunal negatived the assessee's contention for reasons stated in its order (annexed hereto as Annexure `G,' and forming part of the case) and held that the assessee was not entitled to set off the deficiency arising before 27th January 1942.
11. The question as directed is:
"Whether, on the facts and circumstances of the case, there was a change in the persons carrying on the business within the meaning of section 8 (1) of the Excess Profits Tax Act?"
M. Subbaraya Ayyar, V. Sethuraman and S. Padmanabhan for the Assessee.
C. S. Rama Rao Sahib for the Commissioner.
ORDER
We consider it desirable to dispose of the questions, which constitute the subject‑matter of these two references by a single order, though, of course, each set of questions has to be answered with reference to the circumstances under which they arise. We shall deal first with R. C. 68 of 1953.
R. C. No. 68 of 1953
The question that was referred under section 66 (2) of the income‑tax Act ran:
Whether on the facts and circumstances of the case, there was a change in the persons carrying on the business within the meaning of section 8 (1) of the Excess Profits Tax Act?"
Arunachala Nadar was the karta of the Hindu undivided family which consisted, of himself and his ten sons.. Four of these sons, Ayyamperumal, Ratnasabhapathi, Durairaj and Rajamanickam, were Arunachala's sons by his first wife. All of them were adults in 1942. The six sons by the second wife were still minors. It was this Hindu undivided family that was the assessee up to the assessment year 1942‑43. The assessee family had its head‑quarters at Virudhunagar. It carried on its business at the following places.
1. Grocery and two oil mills at Virudhunagar.
2. Grocery at Tuticorin,
3. Oil mills at Madurai, and
4: Commission business in grocery at Bombay.
There were three other items with which we need not now concern ourselves.
The accounting year of the assessee family ended on 27th January 1942. The four adult sons of Arunachala separated themselves from the family and they were also divided inter se. Arunachala and his six minor sons by his second wife remained joint in status. A partition was affected with effect from the close of the accounting year on 27th January 1942. For purposes of that partition, the members of the family were treated as forming two group; the four adult sons, though divided inter se, formed one groups; Arunachala and 'his undivided minor sons formed the other group. The properties of the family were divided into two halves, each group taking one half. Arunachala's group took over the business at Virudhunagar and at Madurai; the divided adult sons took over the businesses at Tuticorin and at Bombay. This arrangement was evidenced by a document executed on 10th August 1942, which was styled a family partition release deed.
Three of the adult sons, Ayyamperumal, Ratnasabapathi, and Durairaj, commenced a separate business under the name and style of "V. N. M. A. Ayyamperumal Nadar & Bros.," on 28th January 1942. On the same day, the other divided son, Rajamanickam, also commenced a separate business of his own. Arunachala Nadar in his turn started with a fresh set of accounts for the accounting year commencing 28th January 1942, treating the business that he had done up to that date as having been closed or discontinued.
On 14th October 1942, Arunachala wrote to the Income‑tax Officer, Virudhunagar, in the following terms
"From the family business carried on at Virudhunagar, Tuticorin, Bombay, Madurai and Rangoon in the name of V. N. M. Arunachala Nadar, my four sons (1) V. N. M. A. Ayyamperumal, (2) V. N. M. A. Ratnasabapathi, (3) V. N. M. A. Durairaj and (4) V. N. M. A. Rajamanickam have gone out after 14th Thai Vishu, and with effect from 15th Thai Vishu (28th January 1942), (1) V. N. M. A. Ayyamperumal Nadar, (2) V. N. M. A. Ratnasabapathi Nadar and (3) V. N. M. A. Durairaj Nadar carry on business as partners in the style of "V. N., M. Ayyamperumal Nadar & Brothers," Virudhunagar, Tuticorin and Bombay, V. N. M. A. Raja tnanickam Nadar is carrying on business at Virudhunagar, I hereby inform you that after 15th Thai Vishu, only the business in the name of V. N. M. Arunachala Nadar at Virudhunagar and Madura belongs to me."
When in the usual course, Arunachala, as the karta of the Hindu undivided family, in which status he had all along been assessed, was asked to submit his return for the assessment year 1943‑44, Arunachala's reply dated 10th August 1943, was as follows:
"I have received a form for preparing and submitting the return of income for assessing me for the year 1943‑44. The form has been sent on the basis of the same family that existed up to 1942‑43. The family business was stopped on the 14th Thai Vishu and my sons V. N. M. A. Ayyamperumal Nadar, V. N. M. A. Ratnasabapathi Nadar, V. N. M. A. Durairaj Nadar and V. N. M. A. Rajamanickam Nadar 1 have gone out of my family and from the 15th Thai Vishu (28th January 1942) parties 1, 2 and 3 above named have started a business in partnership in the name of "V. N. M. A. Ayyamperumal Nadar and Brothers" and the fourth party V. N. M. A. Rajamanickam Nadar is caring on business individually. This information has been submitted along with the return for 1942‑43 and I have also separately filed a petition before you on 14th October 1942. While this is so, whereas I should have received a return in my separate capacity I have received a return in the character of the family: I am, therefore, returning this form.
I pray that as per section 25‑A, separate forms may be sent to me and my sons individually."
This letter dated 10th August 1943, was apparently treated by the Income‑tax Officer as an application under section 25‑A of the Act; and in October 1945, the Income‑tax Officer passed the required order under section 25‑A of the Act recognising the partition that had been affected on 27th January 1942.
One other event may be recorded at this stage. After the partition in January 1942, Arunachala started a new line of business in paddy and rice at Kumbakonam, with one Sadagopa Pillai as his employee in charge of that business at Kumbakonam. For the chargeable accounting period from 28th January 1942, to 7th February 1943, the Excess Profits Tax Officer assessed Arunachala's business income at Rs. 62,568. He deducted there from Rs. 37,179 as the standard profits proportionate to the period of 12 11/28 and determined the quantum of excess profits at Rs. 25,329. If there had been no partition on 27th January 1942, and the Hindu undivided family of Arunachala and his ten sons had continued to be the assessee, it would have been entitled to take into account the deficiency in profits to the extent of. Rs. 42,479 during the period 1st September 1939, to 27th January 1942. Arunachala claimed that despite the arrangement in the family on 27th January 1942, evidenced by the document of 10th August 1942, Arunachala was entitled to claim that this deficiency should be taken into account in assessing his liability to excess profits tax for the chargeable accounting period 28th January 1942, to 7th February 1943. That claim was disallowed. The Excess Profits Tax Officer recorded.
" ......I reject the assessee's contention that the old family of V. N. M. Arunachala Nadar which existed prior to 27th January 1942, continued to exist and therefore toe deficiency of profits relating to that family should be brought forward and set off against the, profits of the business of the new family of V. N. M. Arunachala Nadar which came into existence on 27th January 1942. Since there' has been a change in the persons carrying on the business, the business started on 28th January 1942, will be regarded as a new business which is not entitled to claim the deficiencies of the old business which came to an end on 27th January 1942."
That view was upheld by the Appellate Assistant Commis sioner and on further appeal by the Appellate Tribunal.
The question of law that was referred to this Court under section 66 (2) raises the issue, whether there was a change in the persons carrying on the business, within the meaning of section 8 (l,) of the Excess Profits Tax Act.
The contention of the learned counsel for the assessee was that the Hindu undivided family, which bad been the assessee down to the assessment year 1932‑43, continued in existence despite the partition arrangements of 27th January 1942. The result of these arrangements, the learned counsel contended, was that four of the coparceners divided themselves from the family; leaving the rest of the family to continue as a Hindu undivided family. 'The learned counsel referred to Rangaswami Naidu v. Sundarajulu Naidu ((1916) 31 M L J 472). The learned Judges laid down two propositions: (1) it was not the law that the separation of one member is necessarily a separation of the remaining members, and that if the latter desired to remain or become a joint Hindu family, they can only do so by an agreement to re‑unite, subject to the limitations of a Hindu regarding that status; (2) under the Hindu law, the father has power two separate one or more of his sons from himself, in which case there is no presumption of division between the father and his other sons. The second proposition will not apply to the facts of this case. It was not a case of the father, Arunachala, exercising his right to separate one or more of his sons from the family. It was a case of an adult coparcener exercising his right to become divided in status from the other members of his family. It was on the first proposition the learned counsel for the assessee relied in support of his contention that the Hindu undivided family, of which Arunacbala was the karta, continued to exist even after 27th January 1942, when four of his sons separated themselves. Learned counsel also relied on Palni Ammal v. AIuthuvenkatachala Moniagar ((2) I L R (1925) 48 Mad. 254) and Martand v. Radhabai (A I R 1931 Bom. 97).
The undivided family in the case before us consisted of a father and his sons with the father as the karta. That was the to position down to 27th January 1942. We are not, however, concerned in this case with the legal possibility of Arunachala and his undivided minor sons continuing as members of a Hindu undivided family after 27th January 1942, when four of his adult sons became divided in status from the rest of the family and also inter se. Factually, did the Hindu undivided family continue its existence after 27th January 1942, for purpose of assessment to income‑tax is the real question for determination.
Learned counsel for the respondent urged that though it was open to Arunachala, as the karta of the family, to continue the old family, after 27th January 1942, minus the four sons who…
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