# Profits Tax, Bombay City v. Shri

- **Citation:** [1955] 1 S.C.R. 952
- **Court:** Supreme Court of India
- **Decided:** 1955
- **Case number:** Civil Appeal No. 145 of 1953
- **Bench:** Mehr Chand Mahajan C. J, S. R. DAs, Ghulam Hasan, Bhagwati, Venkatarama Ayyar Jj
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/profits-tax-bombay-city-v-shri-1221
- **Pages:** 13

## Headnote

),- .
Excess Profits Tax Act (XV of 1940), ss. 2(5), 5, JO-A-Condition 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 ,,__.
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.
Since 1935 the assessee firm carried on the business of manufacturing ribbons and laces and for this purpose owned buildings,
leasehold rights, plant, machinery etc.
On April 71 1940, a public
limited · liability· ·company was
incorporated with the
object of
acquiring and taking over the
buildings, leasehold
rights,
plant,
machinery etc., from
the assessee firm.
The company
purchased 'r'
leasehold rights in the lands and buildings where plant, machinery
etc. were installed.
The assessee firm
as such ceased to manufacture 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,
machinery etc. In these circumstances the company took and the
assessee firm granted a lease
of the plant,
mac~inery etc., at an
annual rent of Rs. 40,000.
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.
..
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......
-
S.C.R.
SUPREME COURT REPORTS
953
Commissioner of Excess
Profits Tax, Bombay City v. Shri
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
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

## Text

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-Condition 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 ,,__.
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.
Since 1935 the assessee firm carried on the business of manufacturing ribbons and laces and for this purpose owned buildings,
leasehold rights, plant, machinery etc.
On April 71 1940, a public
limited · liability· ·company was
incorporated with the
object of
acquiring and taking over the
buildings, leasehold
rights,
plant,
machinery etc., from
the assessee firm.
The company
purchased 'r'
leasehold rights in the lands and buildings where plant, machinery
etc. were installed.
The assessee firm
as such ceased to manufacture 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,
machinery etc. In these circumstances the company took and the
assessee firm granted a lease
of the plant,
mac~inery etc., at an
annual rent of Rs. 40,000.
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.
..
•
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r
\
-
-
......
-
S.C.R.
SUPREME COURT REPORTS
953
Commissioner of Excess
Profits Tax, Bombay City v. Shri
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
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
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 relevant facts appearing from the consolidated
statement of the case are as follows :-
Narain Swadeshi Weaving Mills, the appellant before
us (hereinafter referred to as the assessee firm), is a
.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
1954
Narain Swaduhi
Weaving Milli
v.
The Commissionw
of
Excess Pro.fits ta.t
Das].
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 manufacture of ribbons and laces
and for this purpose it
owned buildings, plant, machinery, etc.
On the 7th
April, 191P, a public
limited
liability
company was incorporated under the name of Hindustan Embroidery Mills Ltd.
The objects for which the
company was established were to
purchase,
acquire
and take over from the assessee firm the buildings and
leasehold rights, plant, machinery, etc., on terms
and
conditions
mentioned
in a draft agreement and the
other objects set forth in the
Memorandum of Association 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 for
in cash.
The
directors of the company were
Narain Singh and his
three sons Ram Singh, Gurdayal Singh
and
Dr. Surmukh
Singh and one N. D. Nanda, a brother-in-law of
Gurdayal Singh.
Dr. Surmukh Singh was at all material times
residing in South Africa.
These 4 directors
between themselves· hold 33,340
shares·
including
the
said 23,000 shares.
The
company was,
accordingly, a
director controlled company.
The funds available to the company were not sufficient' to enable it to take over all the assets of the
assessee firm.
The company, therefore,
purchased only
the buildings and the leasehold rights therein
but took
over the plant, mac)linery, etc. on lease
at
an annual
rent of Rs. 40,000.
On the 28th July, 1940, the
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 company besides salary and other
allowances
mentioned
therein.
On the 25th January, 1941, the company appointed
as its selling agent
Ram Singh & Co., a
firm which
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•
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.
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
above,
namely, the
assessee
firm,
Uppal & Co., and Ram Singh & Co., were registered as
firms under
section 26A 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 of Uppal & Co., and Ram Singh
& Co., was the
;tvoidance of liability to
excess profits
tax.
Accordingly, on the 16th November, 1944, the
Excess
Profits
Tax Officer issued notices
under section
IOA of the
Excess Profits Tax Act to the company and the three
firms.
Eventually, however;
the
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 proceeded to
assess the
as~essee firm to excess
profits tax
on that basis for the four several chargeable accounting
periods mentioned above.
Under sub-section
(3) of section IOA the
assessee
company preferred four
several. appeals to the
Appellate Tribunal.
In their order the
Appellate
Tribunal
considered the four following issues :
(1) 'Vhether the incotne of the
firms styled as
"Uppal & Co.," and "Ram Singh & Co./'
could
be
amalgamated with
the income of the assessee
firm
1954
Narain Swadeshi
Weaving Mills
v.
The Commissioner
of
Excess Profits Tax
DasJ.
1954
Narain Swadeshi
·Weaving Mills
v.
The Commissioner
of
Excess Profits Tax
Das].
956
SUPREME COURT REPORTS
[195'5]
under the
provisions of
section
IOA of the
Excess
Profits Tax Act ?
(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 ?
( 4) Whether
proper
opportunity
under
section
lOA had been given to the assessee firm ?"
Before the Appellate
Tribunal, as before the Excess
Profits Tax Officer, the assessee
firm objected to the
application of the
prov1S1ons
of section IOA of the
Excess Profits Tax Act.
The contention was that as
the assessee firm did not, during the
relevant
charge,
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 existing business of an assessee during the relevant
period
before section lOA could be applied in respect of transactions concerning that business.
The Appellate
Tri,
bunal took the view that instead
of using the plant;
machinery,. etc., for its own manufacture
the assessee
firm turned that revenue yielding
asset into another
use by letting it out on an annual
rent of
Rs. 40,000
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
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 aYoid
excess profits ·tax
' ..
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-
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
shares which his sons got in the
several firms.
The
Appellate
Tribunal held
that all the various steps
noted above need not necessarily
have
been
fictitious
or artificial but they were certainly transactions so as
to attract the
operation of section lOA.
The
Appellate Tribunal decided issues Nos. 2 and 4 against
the
assessee.
All the four appeals
were accordingly
dismissed by the Appellate Tribunal.
The assessee firm thereupon preferred four several
applications under section 66(1) of the
Income-tax Act
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 appellant firms was correct and valid in law ?
(2) Whether, in view
of the
facts admitted
on
record, the share of income of Dr. Surmukh Singh, a
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
and observations on record, the lease money obtained
by the appellant firm could be legally treated as business profits or profits from an adventure in trade -liable
to excess profits tax ?
1954
Narain Swadesh i
Weaving Milts
v.
The CommisJioner
of
E"cess Profits Tax
Das].
1954
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
appellant, under the facts and the circumstances of the
case, legally amounts to a proper opportunity
under
section IOA of the Excess Profits Tax Act, and if not
what is the legal effect of such
opportunity being not
afforded ?
(5) Whether the
proceedings under section
IOA
were not null and void ab initio, for want of necessary
previous sanction from the
Inspecting
Assistant Commissioner of Excess Profits Tax, the
fact of such previous sanction having
been
obtained · being neither
mentioned in the order nor proved before the Appellate Tribunal at the time of hearing although expressly
. required by the Court.
The Appellate Tribunal declined to refer questions
( 4) and (5) sought to be rais~d by the assessee firm and
no grievance has been made before us on that score.
The Appellate
Tri_bunal
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 c;if
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 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
to · the
wnsideration 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
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-
S.C.R.
SUPREME COURT REPORTS
959
-described as steps and regarding them
as circumstantial evidence came to the conclusion that it could not
be said that there was no evidence upon which the
Tribunal was justified in coming to the conclusion that
the formation of the firms, U ppal & Co., and Ram Singh
& Co., was mainly for the purpose of avoidance or
reduction of liability
to excess
profits tax.
In
the
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 :-
"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
:and the firm of selling agents are really
one and the
same firm.
This firm and its partners held the
majority of shares in the company.
The agreement for payment 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
firm was, and in effect still is, the
manufacture
of
ribbons and laces, and the
receipt of Rs. 40,000
is a
profit from that business diverted into the pockets of
the assessee firm."
The High Court accordingly answered the third
-question in the affirmative and
against
the
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.
The learned counsel appearing
for the assessee firm
·has submitted
before us-and we think rightly-that
the approach of the High Court was erroneous in that
they took up
the discussion of question No. 1 first .
. That question, as framed, proceeded on the assumption
1954
Narain Swadeshi
Weaving Mills
v.
The Commissioner
of
Exce.is Pr'!fits Tax
Das] .
1954
Narain Swadeshi"
Weaving Mills
v.
The Commiuione1
of
&:cess Profits Tax
DaJ].
960
SUPREME COURT REPORTS
[1955}
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 avoidance 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
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 lOA.
If there is no such
business as is contemplated by the
Act, then the Act
does not apply and section lOA cannot come into operation at all.
Before the Excess Profits Tax Officer call'.
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 the applicability of section lOA
and if that question were answered in favour
of the
assessee firm the further question
of law
as raised in
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.
What then are the facts found· by the
Appellate
Tribunal apart from its findings under section lOA ?•
The findings are that after the formation of the company the assessee firm was left with no business at all.
The company purchased the leasehold
rights in the
lands and buildings where the plant, machinery, etc.,
·were installed.
The firm as such ceased to manufacture
·any ribbons and laces.
It was left
with the
plant,
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•
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-
S.C.R.
SUPREME COURT REPORTS
961
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
and buildings where the plant,
machinery, etc., had
been installed.
In these circumstances,
the
assessee
firm let out the plant, machinery, etc., to the company.
It was thenceforth the company which was carrying on
the business of manufacturing
ribbons and laces
and
for that purpose hired the plant, machinery, etc., from
the asses see firm. Prima f acie it was the company
which appointed the managing agents
and the selling
agents. Ex f acie and apart from the alleged result of
any
enquiry under section 10 or
section
lOA of the
Excess Profits Tax Act those were not transactions of
the assessee firm. The assessee
firm was,
therefore.
left only with some property which at one time was a
commercial asset but had ceased to be so. The assessee
firm thereupon let out that
property on
rent.
The
question is whether such letting out in such
circumstances amounted to carrying on of a business.
"Business" as defined in section 2(5) of the
Excess
Profits Tax
Act includes amongst others,
any
trade,
commerce or manufacture
or any
adventure in the
nature
of trade, commerce or manufacture.
The first
part of this definition of "a business" in the
Excess
Profits Tax Act is the same as the definition of a business in section 2 ( 4) of the
Indian
Income-tax
Act.
Whether a particular activity amounts to any
trade,·
commerce or manufacture or
any adventure
in the
nature of trade, commerce or manufacture
is _always a
difficult question to an&wer.
On the
one hand it
has
been pointed
out
by the
Judicial
Committee
in·
Commissioner of Income-tax v. Shaw Wallace & Co. (1),
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
(1) (1932) I.L.R. 59 Cal. 1343.
.
1954
Narain Swadeshi·
W1aving Mills
v.
Thi Commissioner·
of
.
Excess Profits Tax:
Das].
1954
Narain Swadeshi
Weaving Mills
v.
The Commissioner
of
Excess Pro.fits Tax
D.asJ.
962
SUPREME COURT REPORTS
[1955]
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
Excess
Profits Tax; Bombay City 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 dying silk yarn as a
part of its business.
During
the
relevant
chargeable
accounting period, owing to difficulty in obtaining silk
yarn on account of the war, it could not make any use
of this plant and it remained idle for some time.
In
August, 1943, the plant was let out to another company
on a monthly rent.
The
question arose
whether the
income received
by the
respondent company
in the
chargeable accounting period by way of rent was income
from business and assessable to excess
profits
tax.
It
should be noted that in that case the respondent company was continuing its business of manufacturing silk
cloth.
Only a part of its
business,
namely, that
of
dying silk yarn had to be temporarily stopped
owing
to the difficulty in obtaining silk yarn on account
of
the war. In such a situation, this Court held that that
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
the
income
from the assets would be profits of the business irrespective of the manner in which
that asset
was exploited
by the company.
This Court clearly indicated
that no
general principle could be laid down which
would be
applicable to all
cases and that each case must be
decided on its own circumstances according to ordinary
common sense principles.
In the case
before
us the
assessee firm's
business
had entirely
closed.
It no
longer manufactured
any ribbons and laces.
It had
accordingly no further trading or
commercial
act1V1ty.
It could not in fact
use the plant,
machinery,
etc.,
(1) [1952] S.C.R. I.
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S.C.R.
SUPREME COURT REPORTS
963
after the land and the buildings
where
they
were
installed had been sold to
the
company.
In these
circumstances
the
assessee
firm let out the
plant,
machinery, etc., on an annual rent of Rs. 40,000. These
facts are very similar to those found in Inland Revenue
Commissioners v. Broadway Car Co., Ltd.(1). There the
w;u conditions had reduced the company's
business to
very
small proportions.
In that
situati_on
it
was
observed that
in that case
the company
dealt
with
part of its property
which
had
become
redundant
and was sublet
purely to
produce
income--a transaction 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
case
apart
from the findings
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
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 with in 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 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 Swadeshi
Weaving Mills
v.
The CommiJsioner
of
Excess Prefits Tax
DasJ.
1954
Narain Swaddslai
Weaving Mills
v.
·The Omzm/Jrioan
of
E:teus Profits T""
Das].
964
SUPREME COURT REPORTS
[1955]
Act applied section IOA could not be invoked
by the
revenue and, therefore, the question whether there was
evidence to support the finding of the Tribunal under
that. section could not arise. On the contrary, the
further question of law which would really arise out of
the order of the
Appellate
Tribunal consequent
upon
the aforesaid answer to question No. 3 would be whether under the facts and circumstances of the case
the
application
of section IOA
with a view to
amalgamating 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
question which the assessee firm sought to raise
by its
application. In our view the High
Court should not
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
lines indicated in question
No. I of
the
assessee's
petition. In other words, the High Court should have,
after answering question No. 3 in the negative reframed
the referred question No. I by restoring question No. I
as suggested by the assessee firm in its petition
and
should have answered the question so restored in the
negative and in favour of the assessee.
For the reasons stated above, we allow this
appeal,
reframe question No. I by restoring the first question
suggested by the assessee firm, namely-
"Whether under
the
facts and circumstances of
the case the application of section IOA with a view to
amalgamating the income of the
firms U ppal & 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.
The appellant will be entitled to the costs
of this appeal and we order accordingly.
Appeal allowed.
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