SOHAN PATHAK AND SONS vs. COMMISSIONER OF INCOME-TAX, U.P.

CIVIL APPEAL No. 47/1952Supreme Court[1954] 1 S.C.R. 15823 September 1953Bench: 5 JudgesAuthor: M. PATANJALI SASTRI, BIJAN KUMAR MUKHERJEA, VIVIAN BOSE, GHULAM HASAN, B. JAGANNADHADAS10 pages
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court allowed the appeals, setting aside the High Court's answer to the first question. The Court held that the Excess Profits Tax Act, under Sections 4 and 5, cannot apply to a business that made no profits during the relevant chargeable accounting period. Since the old joint family brocade business was discontinued and earned no profit during the period in question, the HUF was not liable to be taxed as such for that business. The Court clarified that the applicability of the Act to a business must be determined solely by Section 5. Section 10-A is applicable only when the Act applies to the business, and a transaction of the kind referred to in Section 10-A has been effected. The Court found no distinction in principle between the present case and a case where a business was transferred to a Part B State to avoid tax, both being situations where the Act is rendered inapplicable by Section 5. Therefore, the business could not be legally treated as having continued unbroken for the purpose of Section 10-A.

What were the facts?

The assessee, a Hindu undivided family (HUF) named Sohan Pathak and Sons, carried on a brocade business. On July 16, 1943, a partial partition occurred, dividing the brocade business assets and liabilities equally among its members. The next day, adult members formed two partnerships, admitting minors to the benefits, to continue the brocade business under separate firm names, though the HUF remained joint in status. The Income-tax Officer accepted the partition and treated the brocade business as discontinued. However, the Excess Profits Tax Officer (EPTO) deemed the partition an artificial transaction aimed at reducing tax liability. The EPTO applied Section 10-A of the Excess Profits Tax Act, adding profits made by the two new firms after partition to the profits of the original HUF business for the chargeable accounting period.

What were the issues?

1. Whether, given the Income-tax Officer's acceptance of the partial partition and discontinuation of the business for income-tax assessment, the same business could legally be treated as having continued unbroken for the purpose of Section 10-A of the Excess Profits Tax Act, read with Sections 4 and 5, for excess profits tax assessment? 2. Whether the partial partition and formation of two firms constituted a transaction within the meaning of Section 10-A of the Excess Profits Tax Act? 3. Whether the Tribunal was justified in inferring that the main purpose behind the partial partition was the avoidance or reduction of excess profits tax liability? Assessee's arguments: The assessee argued that the Income-tax Officer's acceptance of the partition and discontinuation of the business for income-tax purposes should bind the excess profits tax assessment. They contended that the new partnerships were distinct businesses and not a continuation of the old brocade business. Revenue's arguments: The revenue argued that the partial partition and formation of partnerships were artificial transactions primarily intended to avoid or reduce excess profits tax. They relied on Section 10-A of the Excess Profits Tax Act to treat the business as unbroken and assess the combined profits.

Which sections of the Income-tax Act were involved?

Section 4,Section 5,Section 10-A,Section 25(3),Section 2(5)

AI-generated summary — verify with the full judgment below

1953 Sep. 23. 158 SUPREME COURT REPORTS [1954] SOHAN PATHAK AND SONS v. COMMISSIONER OF INCOME-TAX, U.P. [PATANJALI SASTRI C. J., MuKHERJEA, VIVIAN BosE, GHULAM HASAN and JAGANNADHADAS JJ.] Excess Profits Ta.r Act (XV of 1940), ss. 4, 5, JO.A-Hindu undivided family-Partial partition dividing assets and liabilities of business among mern,bers-Members carrying on bnsiness as partners-Validity of partition-Artificial transaction for reducing liability to excess profits tax. A Hindu undivided family carried on business in money lend· ing and brocade.

On the 16th July, 1943, there was a partial partition amongst the members by which the brocade business was divided and its assets and liabilities were partitioned in equal shares between the members of the family.

On the next day the adult members of the family formed two partnerships admitting minors to the benefit thereof, and carried on the broc.ade business under two separate firm names though they continued to remain joint in status. The Income-tax Officer accepted the partial parti- tion and treated the brocade business of the family as having been discontinued, but the Excess Profits Tax Officer held that

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 4

All 1,145 judgments and leading authorities on Section 4 →

Recent GST High Court judgments

Search GST case law →