NARAIN SWADESHI WEAVING MILLS versus THE COMMISSIONER OF EXCESS PROFITS TAX

952

SUPREME COURT REPORTS

[1955]

NARAIN SW ADESHI WEAVING MILLS

"·

THE COM;MISSIONER OF EXCESS PROFITS TAX.

[MEHR CHAND MAHAJAN C. J., S. R. DAs, GHULAM HASAN, BHAGWATI and VENKATARAMA AYYAR JJ.J Excess Profits Tax Act (XV of 1940), ss. 2(5), 5, JO-A-Condi tion precedent to -applicability of s. 10-A-"Business" if can be defined-What is "business", how determined.

As condition precedent

to the applicability of section 10-A of the Excess Profits Tax Act, 1940, it must be proved that during the chargeable accounting period the assessee was carrying on the kind of business to which the Act applies by virtue of section 5 of the Act.

),- . ..

..

to

It is not possible

Section 2(5) of the Act states what is

included in the word lay down a general definition "business". which would cover all cases of business. Business the fundamental idea of a continuous activity. It connotes some real, substantial and systematic or organised course of activity with a set purpose. Single transaction may also bear the clear indicia of trade or an adventure in the nature of trade which is included in the word "business" mentioned in section 2(5) of the ,,__. Act. Hence whether a particular source of income is business or not must be decided on the facts and circumstances of each case according to our ordinary conception of business.

involves

isolated

the assessee firm. The company purchased 'r'

·company was

Since 1935 the assessee firm carried on the business of manu facturing ribbons and laces and for this purpose owned buildings, leasehold rights, plant, machinery etc. On April 71 1940, a public limited · liability· the object of incorporated with acquiring and taking over the buildings, leasehold rights, plant, machinery etc., from leasehold rights in the lands and buildings where plant, machinery etc. were installed. The assessee firm as such ceased to manu facture ribbons and laces and was left with plant and machinery etc. whichi it did not require and which ceased to be commercial asset in the hands of the firm. The land and the buildings having been sold the assessee firm put it out of its power to use the plant, the company took and the machinery etc. assessee firm granted a lease of the plant, mac~inery etc., at an annual rent of Rs. 40,000.

In these circumstances

•

Held, that this lease of the plant, machinery etc., given by the asscssee firm could not be "business" within the meaning of sec- """ tion 2(5) of the Excess Profits Tax Act, 1940.

r \

-

-

......

-

S.C.R.

SUPREME COURT REPORTS

953

Commissioner of Excess Profits Tax, Bombay City v. Shri

1 954

Lakshmi Silk Mills Ltd. ((1952) S.C.R. I), distinguishe,d.

Inland Revenue Commissioner v. Broadway Car Co., Ltd. ( (1946]

2 A.E.R. 609), relied upon.

Commissioner of Income-tax v. Shaw Wallace & Co., ([1932)

I.LR. 59 Cal. 1348), referred to.

CIVIL

APPELLATE

JURISDICTION :

Civil Appeal

Narain Swaduhi Weaving Milli v. The Commissionw of Excess Pro.fits ta.t

Das].

No. 145 of 1953.

Appeal by Special Leave from the Judgment and Order dated the 8th day of September, 1950, of the High Court of Judicature for the State of Punjab at Simla in Civil Reference No. 3 of 1949.

Achhru Ram (R. S. Narula and Naunit Lal, with

him) for the appellants.

M. C. Setalvad, Attorney-General for India, ( G. N.

Joshi and P. G. Gokhale, with him) for the respondent.

1954. October 25. The

Judgment

of the Court·

was delivered by

Indian

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 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· assess ment to the ending chargeable accounting periods being periods with 31st March of each of the years 1942, 1943, 1944 and 1945.

excess profits

appellant,

tax of

the

The relevant facts appearing from the consolidated

statement of the case are as follows :-

the assessee

Narain Swadeshi Weaving Mills, the appellant before us (hereinafter referred is a to as .firm constituted in 1935 upon 'terms and conditions set forth in a deed of partnership dated the 6th November, 1935. The partners were Narain Singh and two of his sons, Ram Singh and Gurdayal Singh, their respective shares in the partnership being 6 annas, 5 · annas and 5 annas. The business of the firm which was carried on

firm),

1954

· Narain Swadeshi Weaving MillS v. The Commissioner 'f Excess Profits Tax

Das].

954

SUPREME COURT REPORTS

[19551

at Chheharta, Amritsar, in the Punjab, was the manu facture of ribbons and laces this purpose it and for owned buildings, plant, machinery, etc.

to

terms

limited

purchase,

On the 7th April, 191P, a public

liability company was incorporated under the name of Hindus tan Embroidery Mills Ltd. The objects for which the company was established were acquire and take over from the assessee firm the buildings and leasehold rights, plant, machinery, etc., on and conditions mentioned in a draft agreement and the other objects set forth in the Memorandum of Associa tion of the said company. Out of the total subscribed capital represented by 41,000 shares 23,000 shares were allotted to the assessee firm. Of these, 23,000 shares so allotted 20,000 shares were not paid for in cash but the remaining 3,000 shares were paid in cash. The directors of the company were Narain Singh and his three sons Ram Singh, Gurdayal Singh and Dr. Sur mukh Singh and one N. D. Nanda, a brother-in-law of Gurdayal Singh. Dr. Surmukh Singh was at all mate residing in South Africa. These 4 directors rial times between themselves· hold 33,340 the said 23,000 shares. The accordingly, a director controlled company.

shares· company was,

including

for

to

The funds available to the company were not suffi cient' to enable it the assets of the take over all assessee firm. The company, therefore, purchased only the buildings and the leasehold rights therein but took over the plant, mac)linery, etc. on lease an annual rent of Rs. 40,000.

at

the

On the 28th July, 1940,

company executed a managing agency agreement in favour of Uppal & Co., a firm constituted on the same day with Ram Singh and Gurdayal Singh, two of the sons of Narain Singh, as partners with equal shares. Under the managing agency agreement dated ·the 28th July, 1940, Uppal & Co., was to be paid 10°lo of the net profits of the com pany besides salary and other allowances mentioned therein.

On the 25th January, 1941, the company appointed firm which

as its selling agent Ram Singh & Co., a

-

..

..

S.C.R.

SUPREME COURT REPORTS

955

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 l~th 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.

1 954

Narain Swadeshi Weaving Mills v. The Commissioner of Excess Profits Tax

DasJ.

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 :;hare and the two sons Ram Singh and Gurdayal Singh 2 annas share each. All the three firms mentioned firm, Uppal & Co., and Ram Singh & Co., were registered as Income-tax firms under Act.

above, namely, the

section 26A of the

assessee

Indian

to

excess profits

On the facts summarised above,

formation of the company and

the Excess Profits Tax Officer came to the conclusion that the main pur the two pose of the firms of Uppal & Co., and Ram Singh & Co., was the ;tvoidance of liability tax. Accord ingly, on the 16th November, 1944, the Excess Profits IOA of the Tax Officer issued notices under section Excess Profits Tax Act to the company and the three firms. Eventually, however; proceedings against the company were dropped and the Excess Profits Tax Officer considered the case of the three firms only. He held that the three firms were really one and he, there- fore, amalgamated the income of all three and proceed ed to assess the as~essee firm tax four several chargeable accounting on that basis for the periods mentioned above. Under sub-section

(3) of section IOA

to excess profits

the

company preferred four late Tribunal. considered the four following issues :

assessee several. appeals to the Appel In their order the Appellate Tribunal

the

(1) 'Vhether the incotne of the "Uppal & Co.," and "Ram Singh & Co./' the amalgamated with

income of

firms styled as be could firm

the assessee

--

•

-,,

...,

1 954

Narain Swadeshi ·Weaving Mills v. The Commissioner of Excess Profits Tax

Das].

956

SUPREME COURT REPORTS

[195'5]

under the provisions of Profits Tax Act ?

section

IOA of the Excess

(2) Whether the share of income of Dr. Surmukh Singh, a partner in the selling agency of Ram Singh & Co., could be included under section lOA in the excess profits tax assessment of the assessee firm ?

( 3) Whether

the lease money obtained by

the assessee firm could be legally treated as business profits liable to excess profits tax ? proper

opportunity under

( 4) Whether

section

lOA had been given to the assessee firm ?"

prov1S1ons

of section IOA of

Before the Appellate Tribunal, as before the Excess firm objected to the Profits Tax Officer, the assessee the application of the that as Excess Profits Tax Act. The contention was charge, relevant the assessee firm did not, during the able accounting periods, carry on any business within the meaning of section 2(5) of the Excess Profits Tax Act, section lOA had no application and, therefore, the profits of Uppal & Co., and Ram Singh & Co., could not be amalgamated with its own income. In other words, the argument was that there must be an exist ing business of an assessee during the relevant period before section lOA could be applied in respect of tran sactions concerning that business. The Appellate Tri, of using the plant; bunal took the view that instead the assessee machinery,. etc., for its own manufacture asset into another firm turned that revenue yielding rent of Rs. 40,000 use by letting it out on an annual and that this was certainly an adventure m 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 4gainst the. assessee firm holding that the assessee firm carried on busine.ss in the letting out of the plant, machinery, etc., on hire thereby could be legally and the lease money obtained 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 to aYoid excess profits ·tax charges in order separate

).::-. ,.

-

-

..

..

'

1954

Narain Swadesh i Weaving Milts v. The CommisJioner of E"cess Profits Tax

Das].

S.C.R.

SUPREME COURT REPORTS

957

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 equalise, as far as possible, the share of Narain Singh with the several firms. The shares which his sons got in the the various steps Appellate noted above need not necessarily have been fictitious transactions so as or artificial but they were certainly to attract the operation of section lOA. The Appel the late Tribunal decided issues Nos. 2 and 4 against assessee. All the four appeals were accordingly dis missed by the Appellate Tribunal.

Tribunal held

that all

The assessee firm

thereupon preferred four several Income-tax Act applications under section 66(1) of the read with section 21 of the Excess Profits Tax Act praying that the following questions arising out of the order of the Appellate Tribunal be referred to the High Court:-'-

(1) Whether, under the facts and circumstances of the case, the application of section lOA with a view to amalgamating the income of the firms "Uppal & Co." and "Ram Singh & Co.", with the income of the appel lant firms was correct and valid in law ?

-

the

the share of

facts admitted

(2) Whether, in view of

on income of Dr. Surmukh Singh, a record, partner in the selling agency and not a partner m the appellant firm, could be legally included along with the share of income of S. Ram Singh and S. Gurdial Singh and is this inclusion at all within the purview of section lOA ?

(3) Whether, in view of the facts,

circumstances lease money obtained and observations on record, by the appellant firm could be legally treated as busi ness profits or profits from an adventure in trade -liable to excess profits tax ?

the

1 954

Narain Swadeshi Weaving Mills v. TM Commissioner

of Exuss·Profits Tax

Das].

958

SUPREME COURT REPORTS

[1955]

( 4) Whether the type of a notice served on the facts and the circumstances of the appellant, under the case, legally amounts under section IOA of the Excess Profits Tax Act, and if not what is the legal effect of such opportunity being not afforded ?

to a proper opportunity

(5) Whether the proceedings under section IOA were not null and void ab initio, for want of necessary Inspecting Assistant Com previous sanction from the fact of such pre missioner of Excess Profits Tax, the · being neither vious sanction having obtained the order nor proved before the Appel mentioned late Tribunal at the time of hearing although expressly . required by the Court.

been

in

The Appellate Tribunal declined to refer questions ( 4) and (5) sought to be rais~d by the assessee firm and that score. no grievance has been made before us on The Appellate Tri_bunal three read as questions after reframing the follows:-

the same so as to

referred

earlier

(1) Whether there is any evidence before the Tri bunal· to ·support the · conclusion · that ·the main purpose of· the transactions was avoidance of excess pro the fits tax ?

(2) Whether on the facts ·admitted or proved the share of income of Dr. Surmukh Singh in the firm c;if Ram Singh & Co., can be legally included along with and Gurdayal the share of income of Ram Singh 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 1earned counsel appearing for the

assessee firm submitted befo• : 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 · the wnsideration of the third question. Taking up, then, the first question first · the High Court referred to the the Appellate Tribunal· and several facts

found

by

to

•

'

~ ..

1 954

Narain Swadeshi Weaving Mills v. The Commissioner of Exce.is Pr'!fits Tax

Das] .

S.C.R.

SUPREME COURT REPORTS

959

that

regarding them

as circumstan -described as steps and to the conclusion that it could not tial evidence came the be said there was no evidence upon which Tribunal was justified in coming to the conclusion that the formation of the firms, U ppal & Co., and Ram Singh the purpose of avoidance or & Co., was mainly reduction of liability In the profits tax. result, the High Court held that the three firms, the assessee firm, Uppal & Co., and Ram Singh & Co., were in fact one and the same and on that basis proceeded next to take up the third question. After referring to section 2(5) and certain judicial decisions, the High ·Court concluded as follows :-

to excess

for

"The argument of Mr. Pathak when applied to the present case would have force were it a fact that the sole concern of the assessee firm was the receipt of hire of machinery from a company or firm, in which the assessee firm had no interest. But this is not the state of affairs. On the finding under the first question referred, the assessee firm, the firm of managing agents really one and the :and the firm of selling agents are same firm. This firm and its partners held the majo rity of shares in the company. The agreement for pay ment of Rs. 40,000 as rent of machinery is an agree" ment between the assessee firm and the company which the a~sessee firm controls. The business of the assessee of firm was, and in effect still ribbons and laces, and the is a into the pockets of profit from the assessee firm."

that business diverted

is, the manufacture

receipt of Rs. 40,000

•

-

-

The High Court accordingly answered

third -question in the affirmative and assessee firm. The necessary certificate of fitness for appeal to this Court having b.een refused by the High Court, the :assessee firm obtained special leave of this Court to prefer the present appeal.

against

the

the

for the assessee firm The learned counsel appearing ·has submitted before us-and we think rightly-that the approach of the High Court was erroneous in that the discussion of question No. 1 first . they took up . That question, as framed, proceeded on the assumption

1954

Narain Swadeshi" Weaving Mills v. The Commiuione1 of &:cess Profits Tax

DaJ].

960

SUPREME COURT REPORTS

[1955}

during

that section lOA applied to the case and only raised the question as to whether there was any evidence to support the finding of the Appellate Tribunal arrived at as a result of the enquiry under that section, namely, that the main purpose of the transaction was the avoid ance of excess profits tax. The long title and the preamble of the Excess 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 business, clearly postulate the existence of a business carried on by the assessee on the profits of tax can be imposed. There which the excess profits fore, if there is such a business the relevant the question of period, then and then alone can arise is no such the applicability of section lOA. business as is contemplated by the Act, then the Act does not apply and section lOA cannot come into ope ration at all. Before the Excess Profits Tax Officer call'. embark upon an enquiry as to whether a transaction the avoidance or reduction of liability was effected for to make such adjustments. to excess profits tax and as he considers appropriate that .the assessee was, during the accounting period, carrying on any business of the kind referred to in section 5 of the Act. Logically, therefore, the Appel late Tribunal as well as the High Court should have taken up question No. 3 first, for on a decision of that question would depend the applicability of section lOA and if that question were answered in favour of the as raised in assessee firm the further question of law question No. 1 would not, in such event, arise. The approach of the High Court was, therefore, logically misconceived on the facts of this case.

there must be proof

chargeable

If there

the facts found· by

findings under section

the Appellate What then are Tribunal apart from its lOA ?• The findings are that after the formation of the com pany the assessee firm was left with no business at all. The company purchased the rights in the lands and buildings where the plant, machinery, etc., ·were installed. The firm as such ceased to manufacture It was left with the plant, ·any ribbons and

leasehold

laces.

--

-

•

-

-

1954

Narain Swadeshi· W1aving Mills v. Thi Commissioner· . of Excess Profits Tax:

Das].

S.C.R.

SUPREME COURT REPORTS

961

the

machinery, etc., which it did not require and which ceased to be a commercial asset in its hands, for it had no longer any manufacturing business at all. Further, the assessee firm had put it out of its power to use the plant, machinery, etc., for it had no right in the lands the plant, machinery, etc., had and buildings where In these circumstances, been installed. assessee firm let out the plant, machinery, etc., to the company. It was thenceforth the company which was carrying on the business of manufacturing and for that purpose hired the plant, machinery, etc., from the asses see the company firm. Prima and the selling which appointed the managing agents agents. Ex f acie and apart result of lOA of the any Excess Profits Tax Act those were not transactions of therefore. the assessee left only with some property which at one time was a commercial asset but had ceased to be so. The assessee rent. The firm thereupon let out that property on circum question is whether such letting out in such stances amounted to carrying on of a business.

enquiry under section 10 or

firm. The assessee

from the alleged

ribbons and laces

firm was,

it was

section

f acie

any

Indian

or any adventure in

this definition of "a business"

"Business" as defined in section 2(5) of the Excess Profits Tax Act includes amongst others, trade, the commerce or manufacture nature of trade, commerce or manufacture. The first in the Excess part of Profits Tax Act is the same as the definition of a busi Income-tax Act. ness in section 2 ( 4) of the trade,· Whether a particular activity amounts to any commerce or manufacture or in the is _always a nature of trade, commerce or manufacture difficult question to an&wer. On the one hand it has been pointed out by in· Commissioner of Income-tax v. Shaw Wallace & Co. (1), used in that definition are no doubt that the words fundamental wide but underlying each of them is the idea of the continuous exercise of an activity. The word "business" connotes and· systematic or organised course of activity or conduct· with a set purpose. On the other hand, a single and

any adventure

Committee

substantial

some real,

Judicial

the

(1) (1932) I.L.R. 59 Cal. 1343.

.

1954

Narain Swadeshi Weaving Mills v. The Commissioner of Excess Pro.fits Tax

D.asJ.

962

SUPREME COURT REPORTS

[1955]

the

time.

source

by the

relevant

according

respondent company

transaction has been held to

isolated 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, of income is therefore, whether a particular business or not must be decided to our ordinary notions as to what a business is. The case of Commissioner of Excess Profits Tax; Bombay City v. Shri Lakshmi Silk Mills Ltd.('), decided by this Court is clearly distinguishable. There, the respondent com pany which was formed for the purpose of manufactur ing silk cloth installed a plant for dying silk yarn as a chargeable part of its business. During accounting period, owing to difficulty in obtaining silk yarn on account of the war, it could not make any use In of this plant and it remained idle for some August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the in the income received chargeable accounting period by way of rent was income It from business and assessable to excess profits should be noted that in that case the respondent com pany was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of owing dying silk yarn had to be temporarily stopped to the difficulty in obtaining silk yarn on account of In such a situation, this Court held that that the war. part of the assets did not cease to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly income from the assets would be profits of the business irrespec that asset was exploited tive of the manner in which that no by the company. This Court clearly indicated general principle could be laid down which would be applicable to all that each case must be decided on its own circumstances according to ordinary common sense principles. the us It no assessee firm's business longer manufactured any ribbons and laces. It had act1V1ty. accordingly no further trading or commercial etc., It could not in fact use the plant, machinery,

In the case had entirely

before closed.

cases and

tax.

the

(1) [1952] S.C.R. I.

•

·-

-

.. '

'

1954

.Narain Swadeshi Weaving Mills v. The CommiJsioner of Excess Prefits Tax

DasJ.

-

S.C.R.

SUPREME COURT REPORTS

963

In

case

become

In that

the findings

in that case

small proportions.

company. let out

the buildings where the firm

they were after the land and these installed had been sold to the plant, the assessee circumstances machinery, etc., on an annual rent of Rs. 40,000. These those found in Inland Revenue facts are very similar to Commissioners v. Broadway Car Co., Ltd.(1). There the the company's business to w;u conditions had reduced very it was situati_on the company dealt with observed that redundant part of its property which had income--a transac and was sublet purely to produce tion quite apart from the ordinary business act1V1t1es of the company. The ratio decidendi in that case which was noticed in the judgment of this Court appears to us to apply to the facts found in the present apart from under section lOA. Applying also the common sense principle to the fact so found it is impossible to hold that the letting out of the plant, machinery, etc., was at all a business operation when its normal business activity had come to a close. It is and ( 4) of interesting to note that section 12 of the Indian Income-tax Act recognise that letting out of plant, machinery, etc., may be a source of income falling under sources" the within that section and not necessarily under the head "business" dealt with in section 10 of that Act. In the the facts and circumstances of letting out of the plant, machinery, etc., cannot be of held to fall within the "business" under section 2(5) of the Excess Profits Tax for In this view of the matter it is not necessary Act. us to express an opinion as to the meaning or impli cation of the proviso to that definition or rule 4 ( 4) of In our opinion, in the facts and Schedule I to the Act. circumstances of this case, question No. 3 should have been answered in the negative.

sub-sections ( 3)

head "other

body of the

this case,

definition

therefore,

The question of law raised in the third question being answered in favour of the assessee firm, the question of the npplicability of section lOA of the Excess Profits Tax Act could not arise, for the assessee firm having, during the relevant period, no business to which that

(1) [1946) 2 A. E. R. 609.

1954

Narain Swaddslai Weaving Mills v. ·The Omzm/Jrioan of E:teus Profits T""

Das].

964

SUPREME COURT REPORTS

[1955]

to

by

the contrary,

IOA could not be invoked

the Act applied section revenue and, therefore, the question whether there was evidence to support the finding of the Tribunal under the that. section could not arise. On further question of law which would really arise out of the order of the Appellate Tribunal consequent upon to question No. 3 would be whe the aforesaid answer ther under the facts and circumstances of the case the amalga application of section IOA with a view mating the income of the firms Uppal & Co., and Ram Singh & Co., with the income of the assessee firm was correct and valid in law and that was precisely the first by its question which the assessee firm sought to raise In our view the High Court should not application. only have answered question No. 3 in the negative but should also have raised, as a corollary to that answer to question No. 3, the further question of law on the the assessee's lines In other words, the High Court should have, petition. after answering question No. 3 in the negative reframed the referred question No. I by restoring question No. I as suggested by and should have answered the question so restored in the negative and in favour of the assessee.

the assessee firm in its petition

indicated in question No. I of

For the reasons stated above, we allow this appeal, reframe question No. I by restoring the first question suggested by the assessee firm, namely-

the

"Whether under

facts and circumstances of the case the application of section IOA with a view to amalgamating the firms U ppal & Co., income of the and Ram Singh & Co., with the income of the appellant firm was correct and valid in law ?" in the and we answer the question so negative. Question No. 2 must be the negative and in favour of the assessee by way of neces sary corollary. We also answer question No. 3 in the negative. The appellant will be entitled to the costs of this appeal and we order accordingly.

reframed answered in

Appeal allowed.

•

• -

~.·-"'

-

•