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

- **Citation:** [1954] 1 S.C.R. 158
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Case number:** Civil Appeals v. Nos. 4 7 to 50 of 1952
- **Bench:** Patanjali Sastri C. J, MuKHERJEA, VIVIAN BosE, Ghulam Hasan, Jagannadhadas
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sohan-pathak-and-sons-v-commissioner-of-income-tax-u-p-261
- **Pages:** 10

## Headnote

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 partition and treated the brocade business of the family as having been
discontinued, but the Excess Profits Tax Officer held that as the
inain purpose of the partial partition was avoidance of tax, it was
an artificial transaction, and, treating the business as unbroken,
made adjustments under s. 10-A of the Excess Profits Tax Act, by
adding to the profits made by the assessees as a joint family till
the date of the partition, the profits made by the two firms after
partition during the chargeable accounting period :
Held, (i) under ss. 4 and 5 of 1the Excess Profits Tax Act, the
Act can have no application to a business which did not make any
profits during the relevant chargeable accounting period, and, as the
old joint family business in brocade was discontinued and earned
no profit during the chargeable accounting period in question, the
appellants were not liable to be taxed as a Hindu undivided family
in respect of that business;
(ii) that the issue whether the Excess Profits Tax Act
applies to a particular business must be determined solely with
reference to s. 5 of the Act, and s. 10-A must be construed as
applicable only to cases where, the business being found to be one
to which the Act applies, a transaction of the kind referred to in
'the section has been effected ; and in view of the finding that the
old joint family business in brocade was wound up and was no
longer carried on by the joint family as such during the relevant
chargeable accounting veriods, the same business Gould not be
'r .
•
.....
•
s.c.:R.
SUPREME COURT REPORTS
'
'
159
legally treated as having continued unbroken in respect of such
1953
periods for the purpose of s. 10-A of the Excess Profits Tax Act
read with ss. 4 and 5 of the same Act.
Sohan Pathak
and Sons
CIVIL APPELLATE
JURISDICTION:
Civil Appeals
v.
Nos. 4 7 to 50 of 1952.
Oommiasioner of
1 f
h
Income-ttw,
Appea s rom t e Judgment and Decree dated the
U.P.
11th May, 1950, of the High Court of Judicature at
Allahabad (Malik C. J. and Bhargava J.) in Miscellaneous Case No. 134 of 1949 connected with Miscellaneous Case No. 197 of 1948.
G. S. Pathak (G. 0. Mathur, with him) for the
appellant.
M. 0. Setalvad, Attorney-General for India, (G. N·
Joshi, with him) for the respondent.
1953. September 23. The Judgment of the Court
was delivered by
PATANJALI SASTRI C. J.-This batch of appeals
arises out of a reference made to the High Court at
Allahabad by the Income-tax Appellate Tribunal,
Allahabad Bench, under section 26 of the Excess Profits
Tax Act, hereinafter referred to as " the Act." The
assessments challenged in these appeals relate to different chargeable accounting periods but the questions
raised are the same in all the cases.
The appellants constitute a Hindu undivided family
consisting of four branches representing the four sons
of one Sohan Pathak deceased. The family carried on
business at Banaras in money-lending and Banaras
brocade under the name and style of Sohan Pathak &
Sons. In the assessment relating to the chargeable
accounting period ending on October 8, 1943, the
appellants alleged that there was a partial partition
among the members of

## Text

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 partition and treated the brocade business of the family as having been
discontinued, but the Excess Profits Tax Officer held that as the
inain purpose of the partial partition was avoidance of tax, it was
an artificial transaction, and, treating the business as unbroken,
made adjustments under s. 10-A of the Excess Profits Tax Act, by
adding to the profits made by the assessees as a joint family till
the date of the partition, the profits made by the two firms after
partition during the chargeable accounting period :
Held, (i) under ss. 4 and 5 of 1the Excess Profits Tax Act, the
Act can have no application to a business which did not make any
profits during the relevant chargeable accounting period, and, as the
old joint family business in brocade was discontinued and earned
no profit during the chargeable accounting period in question, the
appellants were not liable to be taxed as a Hindu undivided family
in respect of that business;
(ii) that the issue whether the Excess Profits Tax Act
applies to a particular business must be determined solely with
reference to s. 5 of the Act, and s. 10-A must be construed as
applicable only to cases where, the business being found to be one
to which the Act applies, a transaction of the kind referred to in
'the section has been effected ; and in view of the finding that the
old joint family business in brocade was wound up and was no
longer carried on by the joint family as such during the relevant
chargeable accounting veriods, the same business Gould not be
'r .
•
.....
•
s.c.:R.
SUPREME COURT REPORTS
'
'
159
legally treated as having continued unbroken in respect of such
1953
periods for the purpose of s. 10-A of the Excess Profits Tax Act
read with ss. 4 and 5 of the same Act.
Sohan Pathak
and Sons
CIVIL APPELLATE
JURISDICTION:
Civil Appeals
v.
Nos. 4 7 to 50 of 1952.
Oommiasioner of
1 f
h
Income-ttw,
Appea s rom t e Judgment and Decree dated the
U.P.
11th May, 1950, of the High Court of Judicature at
Allahabad (Malik C. J. and Bhargava J.) in Miscellaneous Case No. 134 of 1949 connected with Miscellaneous Case No. 197 of 1948.
G. S. Pathak (G. 0. Mathur, with him) for the
appellant.
M. 0. Setalvad, Attorney-General for India, (G. N·
Joshi, with him) for the respondent.
1953. September 23. The Judgment of the Court
was delivered by
PATANJALI SASTRI C. J.-This batch of appeals
arises out of a reference made to the High Court at
Allahabad by the Income-tax Appellate Tribunal,
Allahabad Bench, under section 26 of the Excess Profits
Tax Act, hereinafter referred to as " the Act." The
assessments challenged in these appeals relate to different chargeable accounting periods but the questions
raised are the same in all the cases.
The appellants constitute a Hindu undivided family
consisting of four branches representing the four sons
of one Sohan Pathak deceased. The family carried on
business at Banaras in money-lending and Banaras
brocade under the name and style of Sohan Pathak &
Sons. In the assessment relating to the chargeable
accounting period ending on October 8, 1943, the
appellants alleged that there was a partial partition
among the members of the family on July 16, 1943,
whereby the Banaras brocade business was divided in
equal shares among the four branches and that, on the
next day, the adult members of the family formed two
partnerships admitting the minors to the benefits
thereof, and thereafter carried on business in Banaras
' 160
SUPREME COURT REPORTS
(1954]
1953
brocade under the respective firm names of Sohan
Pathak Girdhar Pathak and G. M. Pathak & Co.
The
Bohan Pathak
and Sons
appellants claimed that the family as such ceased to
v.
carry on business in Banaras brocade after July 16,
Commissioner of 1943, though they continued to remain joint in status
Income·'""•
and that the profits derived by the two partnerships
U.P.
aforesaid after July 17, 1943, could not be assessed as
Patanjali
profits of the original joint family business, as the
sastri c. J.
businesses carried on by the two partnerships were
distinct and newly started businesses and could neither
in law nor in fact be regarded as continuation of the
old brocade business. In support of this claim the
appellants strongly relied on the circumstance that
the Income-tax Officer treated the old business as discontinued by the family after the partial partition and
granted relief on that footing under section 25(3) of the
Indian Income-tax Act in the assessment to income-tax
of the appellants as a Hindu undivided family.
The
Excess Profits Tax Officer, however, rejected the claim
as he was of opinion that the main purpose oftbe partial
partition and the creation of the two partnerships was
to avoid or reduce the liability of the appellants to
excess profits tax, and he made adjustments under
section 10-A of the Act by adding to the profits made
by the appellants as a joint Hindu family till the date
of the partition the profits made by the two firms
during the chargeable accounting periods.
The
Appellate Assistant Commissioner and the Appellate
Tribunal confirmed the finding and order of the Excess
Profits Tax Officer, but, at the instance of the appellants,
the Tribunal referred the following questions to the
High Court for its decision :
1. Whether in view of the fact that the partial
partition had been accepted by the Income-tax Officer
and the business was treated as having been discontinued for the purpose of assessment under the
Income-tax Act, the same business could legally be
treated as having continued unbroken in respect of the
same chargeable accounting period for the purpose of
section 10-A of the Excess Profits Tax Act read with
sections 4 and 5 of the same Act ?
..
•
...
-l
•
s.c.:R.
SUPREME COURT REPORTS
HH
2.
Whether in the circumstances of the case the
1953
effect of the partial partition of the Hindu undivided Bohan Pathak
family on July 16, 1943, and the formation of two
and Sons
different firms was a transaction within the meaning
v.
of section 10-A of the Excess Profits Tax Act?
Commissioner of
3.
Whether on the facts found by the Tribunal
Income.tax,
as stated in para. 7 of the statement of the case, it was
u. P .
justified to draw the inference that the main purpose
Patanjali
behind the partial partition was the avoidance or
Sastri o. J.
reduction of liability to excess profits tax ?
The court answered these questions against the appellants but granted leave to appeal t6 this court.
At a previous hearing of these appeals this court
was of opinion that the material facts relating to the
partial partition and the formation of the partnership
and the findings of the Tribunal in regard thereto had
not been clearly stated by the Tribunal in the original
statement of the case. The court said :
"While it is true that in one place in the statement
of case the Tribunal speaks of the old family brocade
business as continuing without a break after the partial partition, reference is made in another place to
the assets of that business having been equally divided among the four branches forming the family. There
is thus no clear finding as to how the partition of the
brocade business was actuaUy effected-whether by
a division in shares, each-branch holding its share in
severalty and the business being carried on as before
on a partnership basis, or whether by an actual distribution and allotment of specific assets and liabilities
among the branches resulting in the disruption of that
business."
The court accordingly by its order of January 12,
1953, called for a further and clearer statement of the
facts on the points indicated.
The Tribunal has since submitted a supplementary
statement of the case fully setting out the details of
the partition arrangement and the constitution of the ·
two firms by the members of the family after the partition. The statement reveals that the hulk of the
162
SUPREME COURT REPORTS
[1954)
1953
capital as well as all "the stock in trade, the cash in
Bohan Pathak hand, the cash in banks, all outstandings as on that
and sons
date as also the sundry liabilities up to that day"
v.
were divided amongst each of the 14 coparceners each
Commissioner of branch being allotted a four-anna share as stated in
Income-tax,
the schedule filed by the assessees and annexed to the
U.P.
statement, showing that the partition was by specific
PatanJali
distribution of the assets and liabilities and not by a
Sa•tri o, J.
division of shares merely. With the assets and liabilities thus distributed, the two partnerships separately
carried on brocade businesses similar to the one carried
on by the joint family before the partial partition.
The names of the partners of the two firms are mentioned and it appears that each firm consisted of members representing all the four branches, some of them
being adults and some minors, the minors in each case
being only admitted to the benefits of the partnerships.
·
On these facts it was contended by Mr. Pathak
on behal(of the appella.nts that the finding of the Excess
Profits Tax Officer that the main purpose of the partial
partition and the formation of the new partnerships
was to avoid or reduce the liability of the appellants
to excess profits tax was not supported by any material on record. Secondly, assuming that there was
material on which the officer could have come to such
a finding, the old family business in Banaras brocade
having been actually closed down, the officer had no
power in assessing the profits of that business to make
adjustments under section 10-A of the Act by adding
the profits made by the two firms after July 17, 1943.
And lastly, and alternatively, there was undoubtedly
a change in the persons carrying on the old business
after July 16, 1943, even if it were regarded as still
continuing, the Hindu undivided family being a
"person" [section 2(17)] distinct from the individuals
composing it, and such business must, under section
8(1), be deemed for all the purposes of the Act (except
for one not material here) to have been discontinued
and a new business to have been commenced, and the
same consequences followed. Mr. Pathak did not argue
~-
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'
•
•
S.C.R.
SUPREME COURT REPORTS
163
that the partial partition and the constitution of the
1953
two partnerships were not "transactions" within the Sohan Pathak
meaning of section 10-A.
Nor did he insist that
andSons
the acceptance of the partition and allowance of
v.
relief by the Income-tax Officer under section 25( 4) of Oommis•ioner of
the Income-tax Act concluded the matter for purposes
Inc~m;-tax,
of section 10-A of the Act, as appears to have been con-
· ·
tended in the earlier stages of these proceedings.
Patanjali
The first contention can be disposed of in a few
Sastri a. J.
words. It appears from the facts found by the tax
authorities as well as by the Appellate Tribunal that
the partial partition and the formation of the partnerships were brought about at a time when the profits of
the Banaras brocade business showed a definitely upward trend. If the main purpose of these transactions
was not to evade liability to excess profits tax, the
appellants were asked to explain what the purpose was,
and they said that they wanted to protect the interests
of the minor members whose shares in the partnership
assets would not be liable for the losses, if any, of the
firms, while the entire family properties would be liable
for any loss incurred in the family business. This
explanation was not acceptable because such protection
was not thought of when the family business was earning smaller profits and also because, according to the
constitution of the partnerships, while each branch was
given the same 4as. interest, the responsibility for
losses falling on the branch which had no minor members would be heavier than what would be borne by the
branch which had no adult members, a disparity which
the purpose put forward by the appellants failed to
explain. In these circumstances we agree with the
High Court in holding that there was sufficient material
to support the inference drawn by the Appellate Tribunal that the main purpose behind the partial partition
and the formation of the partnerships was the avoidance
or reduction ofliability of the family business to excess
profits tax.
The real and substantial question in the appeals is
whether in view of the finding of fact that the old
family business was wound up, its assets and liabi.}itie1:1
164
SUPREME COURT REPORTS
[1954]
1953
having been actually distributed among the coparSohan Pathak ceners, and was no longer carried on by tho joint
and Sons
family as such during the relevant chargeable accountv.
ing periods, section 10-A has any application to the
Oommfasioner of case. Question No. 1, which is supposed to have raised
Income-tax,
this point, was not happily framed. As already stated,
u. P.
Mr. Pathak did not argue that the Income-tax Officer's
Patanjali
finding as to the discontinuance of the old family
sastri o J.
business precluded the Excess Profits Tax Officer from
considering the issue. It is now well settled that, for
the purposes of the Act, a business is a unit of assessment, and the charging section 4 provides for the tax
being levied in respect of the profits of " any business
to which this Act applies."
Section 5 specifies the
businesses to which the Act applies, and they are businesses "of which any part of the profits made during
the chargeable accounting period is chargeable to income-tax " by virtue of certain specified provisions of
the Indian Income-tax Act, 1922. There are some
provisos to this section, one of which excludes the
application of the Act to " any business the whole of
the profits of which accrue or arise in a Part B State."
It is thus manifest that the Act can have no application to a business which did not make any profits
during the relevant chargeable accounting period. In
·other words, if a business, having been discontinued,
earned no profit during the chargeable accounting
period in question, no excess profits tax can be charged
in respect of such business, and that being the position
here as respects the old joint family business in Banaras brocade, the appellants are not liable to be taxed
as a Hindu undivided family in respect of that business.
But, argues the learned Attorney-General, that
result cannot follow by reason of section 10-A of the
Act which runs as follows :
10-A.
Transactions designed to avoid or reduce liability to excess profits tax.-( I) Where the Excess Profits
Tax Officer is of the opinion that the main purpose for
which any transaction or transactions was or were
effected (whether before or after the passing of the
-
S.C.R.
SUPREME COURT REPORTS
165
Excess Profits Tax (Second Amendment) Act, 1941)
1953
was the avoidance or reduction of liability to excess Sohan Pathalc
profits tax, he may, with the previous approval
and Sons
of the Inspecting Assistant Commissioner, make such
v.
adjustments as respects liability. to excess profits tax Oommissioner of
as he considers appropriate so as to counteract the
lncome·taz,
avoidance or reduction of liability to excess profits tax
u.P.
which would otherwise be effected by the transaction
p~1~",.jali
or transactions.
Sa•tri o. J.
*
*
This provision, it is claimed, empowers the Excess
Profits Tax Officer to ignore any transaction (s) the
ma.in purpose of which was the avoidance or reduction
of liability to excess profits tax and to proceed on the
footing that such transaction(s) had not been effected,
and, in the present case, the partial partition as well as
the subsequent formation of the partnerships having
been found to be transactions the main purpose of
which was the avoidance or reduction of liability to
excess profits tax, the officer had authority to assess
the appellants' old family business in Banaras brocade
on the basis of its continued existence during the
relevant chargeable accounting periods.
We are
unable to accept this contention.
If, under section 4 of the Act read with section 5,
the old joint family business cannot be regarded as one
"to which this Act applies," section 10-A, one of the
provisions of the Act, can have no application to such
business.
The learned Attorney-General's argument
that sections 4 and 5 must be read along with section
10-A in determining whether the Act applies to any
particular business or not involves the fallacy that, in
determining the initial issue whether the Act does or
doesnotapplytoagiven business, you have to look not
merely at the provision which defines the scope and
application of the Act but other provisions also which
presuppose its application. We -are of opinion that
the issue whether the Act applies or not to a particular business must be determined solely with reference
to section 5, and section 10-A must be construed as
23
166
SUPREME COURT REPORTS
[1954]
1953
applicable only to cases where, the business being
Sohan Pathak found to be one to which the Act applies, a transacand Sons
tion of the kind referred to in the section has been
v.
effected.
The
learned Attorney-General conceded
Commissioner of that, if a person who had been paying excess profits
Income-tax,
tax transferred the business to a Part B State, it would
U.P.
not be competent for the Excess Profits Tax Officer
to take action under section 10-A to make adJ
0ustments
Patanjali
sastri a. J.
on the footing that the assessee continued to carry on
his
business in the same place as before such
transfer, even if it was found that the transfer
was effected for the main purpose of avoiding or reducing his liability to excess profits tax. In that case,
the Attorney-General admitted, the Officer would be
running counter to the express prohibition contained
in the proviso to section 5 to which reference has been
made and he did not challenge the correctness of a
decision to that effect by the Bombay High Court,
(Commissioner of Excess Profits Tax, Bombay City v.
Moho/,al Maganlal) ('). But we fail to appreciate the
distinction in principle between that case and the present, for, to both alike the Act is made inapplicable by
section 5.
The reasoning of the learned Judges in the
Bombay case, namely, that if the Act is inapplicable
to a particular business and there would thus be no
liability to excess profits tax in respect of that business, no ·question could arise of a voiding or reducing
any liability to excess profits tax under section 10-A,
would equally apply to the present case and must lead
to the same result.
Reference was made by the Attorney-General in the
course of his argument to the proviso to section 2(5)
which says that "all businesses to which this Act
applies carried on by the same person shall be treated
as one business for the purposes of this Act." We find
it difficult to appreciate the bearing of this section on
the point at issue. It is clear that the proviso can
operate in respect of businessess to which the Act
applies and not otherwise, and it carries the matter
no further.
(1) [1953] 23 I. T. R, 45,
•
s.c.:R.
SUPREME COURT REPORTS
167
In the view we have expressed above, it is unnecessary to deal with the alternative contention based on
section 8(1) of the Act.
We allow the appeals, set aside the answer made by the
High Court to question No. 1 and answer it as follows:
In view of the finding of fact that the old joint family
business in Banaras brocade was wound up and was
no longer carried on by the joint family as such during
the relevant chargeable accounting periods, the same
business could not legally be treated as having continued unbroken in respect of such periods for the
purpose of section 10-A of the Excess Profits Tax Act
read with sections 4 and 5 of the same Act. The
judgment of the High Court will stand in other respects. The appellants will have their costs of the
appeals. Advocates' fee one set.
Appeals atlowed.
Agent for the appellants: Naunit Lal.
Agent for the respondent: G. H. Rajadhyaksha.
SARDAR INDRA SINGH AND SONS LTD.
v.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL.
[PATANJALI SASTRI C.J., S. R. DAs, VrvrAN Bos:m,
GHULAM HASAN and BHAGWATI JJ.]
Incomdax Act (XI of 1922), s. IO-Income-Sale of shares
and sec1irities-Company carrying on business as financiers and
promoters of cornpanies-1 ncorne frorn sale of securities-Whether
assessable-Tests.
·
The question whether surplus arising from the sale of shares
and securities is assessable as profits or gains or is only an appreciation of capital arising from a change of investment depends on
whether the sales which produced the surplus were so connected
with the carrying on of the assssses's business that it could be
fairly said that the surplus is the profits and gains of the business .
1953
Soh"1n Pathak
and Sons
v.
Commissioner of
Income-tax,
U.P.
Patanjali
Sastri G. J.
19$8
Sep. 23.