NARAIN SWADESHI WEAVING MILLS vs. THE COMMISSIONER OF EXCESS PROFITS TAX

CIVIL APPEAL No. 145/1953Supreme Court[1955] 1 S.C.R. 95225 October 1954Bench: 5 JudgesAuthor: MEHR CHAND MAHAJAN, SUDHI RANJAN DAS, GHULAM HASAN, NATWARLAL HARILAL BHAGWATI, T.L. VENKATARAMA AIYYAR13 pages
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What were the facts?

The assessee, Narain Swadeshi Weaving Mills, a firm established in 1935, manufactured ribbons and laces and owned associated assets. In 1940, a public limited company, Hindustan Embroidery Mills Ltd., was incorporated to acquire these assets. The company purchased the land and leasehold rights but leased the plant and machinery back from the assessee firm for Rs. 40,000 annually. The assessee firm ceased its manufacturing business. The revenue, the Commissioner of Excess Profits Tax, sought to assess the assessee firm for excess profits tax for the periods ending March 31, 1942, 1943, 1944, and 1945, invoking Section 10A of the Excess Profits Tax Act, 1940, on the grounds that the formation of the company and related firms was to avoid tax. The Income-tax Appellate Tribunal referred questions of law to the High Court.

What did the Supreme Court hold?

The Tribunal held that the lease of the plant and machinery by the assessee firm to the company did not constitute "business" within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940. The reasoning was that the assessee firm had entirely ceased its normal manufacturing business, and the land and buildings where the machinery was installed had been sold. Therefore, the letting out of the plant and machinery was a transaction separate from its ordinary business activities, akin to dealing with redundant property to produce income, as observed in Inland Revenue Commissioners v. Broadway Car Co., Ltd. The Tribunal applied common sense principles, noting that under the Indian Income-tax Act, such letting could fall under "other sources" rather than "business." Consequently, since the primary activity was not business, Section 10A of the Excess Profits Tax Act could not be invoked by the revenue. The Tribunal reframed Question 1 and answered it in the negative, in favour of the assessee. Question 2 was answered in the negative as a corollary, and Question 3 was also answered in the negative.

What were the issues?

The Tribunal considered four issues, but the judgment focuses on three main questions of law: 1. Whether, under the facts and circumstances of the case, the application of Section 10A of the Excess Profits Tax Act, 1940, 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? 2. Whether the income of the firms styled as "Uppal & Co." and "Ram Singh & Co." could be amalgamated with the income of the assessee firm under Section 10A of the Excess Profits Tax Act, 1940? 3. Whether the lease of the plant, machinery, etc., by the assessee firm to the company constituted "business" within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940? Assessee's Contentions: The assessee argued that the lease of plant and machinery was not "business" as their original manufacturing activity had ceased, and the lease was a separate income-generating activity. They also contended that Section 10A was not applicable if the primary activity was not business. Revenue's Contentions: The revenue contended that the formation of the company and associated firms was primarily for tax avoidance, justifying the invocation of Section 10A to amalgamate incomes.

Which sections of the Income-tax Act were involved?

Section 10A,Section 2(5),Section 5,Section 66(1),Section 21,Section 12,Section 10,Section 26A

AI-generated summary — verify with the full judgment below

952 SUPREME COURT REPORTS NARAIN SW ADESHI WEAVING MILLS "· THE COM;MISSIONER OF EXCESS PROFITS TAX. [1955] [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.

Section 2(5) of the Act states what is included in the word "business".

It is not possible to lay down a general definition which would cover all cases of business.

Business involves the fundamental idea of a continuous activity.

It connotes some real, substantial and systematic or organised course of activity with a set purpose.

Single isolated 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 ,,__.

The order continues below.

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