Change in business ownership and tax avoidance purpose supported excess profits tax liability under the statutory scheme.

Partition followed by the assessee's request for separate assessment and his own statement that the earlier family business had ended supported the view that a fresh business had commenced; section 8(1) of the Excess Profits Tax Act therefore treated the post-partition activity as a new business carried on by different persons. The timing of the partnership deeds, the assessee's continuing control, financing of the ventures, routing of transactions through the head office, and branch-like arrangement of the businesses supplied material to infer that the two partnerships were constituted mainly to avoid or reduce excess profits tax. Both conclusions were upheld against the assessee.

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Issues: (i) Whether, on the partition and subsequent conduct of the assessee, there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act. (ii) Whether there was material to support the finding that the main purpose in constituting the two partnerships was the avoidance or reduction of liability to excess profits tax within the meaning of section 10A(1) of the Excess Profits Tax Act.

Issue (i): Whether, on the partition and subsequent conduct of the assessee, there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act.

Analysis: The partition was followed by the assessee's own request under section 25A of the Income-tax Act, 1922, for separate assessment, and by his clear statement that the earlier family business had been stopped and a fresh business had been commenced. The order under section 25A recognised that the old Hindu undivided family had ceased to exist as such for tax purposes. Section 8(1) of the Excess Profits Tax Act treats a business carried on after a change in the persons carrying it on as a new business. On the facts, the original assessable unit had ended and a new juristic entity had taken its place.

Conclusion: There was a change in the persons carrying on the business, and the answer was against the assessee.

Issue (ii): Whether there was material to support the finding that the main purpose in constituting the two partnerships was the avoidance or reduction of liability to excess profits tax within the meaning of section 10A(1) of the Excess Profits Tax Act.

Analysis: The timing of the partnership deeds, the assessee's continuing control of the business, the provision of the finance by him, the routing of transactions through the head office, and the arrangement of the businesses as branches all provided material for the inference that the partnerships were formed primarily to reduce tax liability. The legal test required the Department to show that avoidance or reduction of liability was the main purpose, not merely an incidental result, and the Tribunal's conclusion was supported by the materials on record.

Conclusion: There was material to justify the finding that the main purpose was avoidance or reduction of liability to excess profits tax, and the answer was against the assessee.

Final Conclusion: The references were answered in favour of the Revenue, with the Department's view upheld on both the change-of-persons question and the tax-avoidance purpose question.

Ratio Decidendi: Where the original assessable Hindu undivided family has ceased to exist for tax purposes and the assessee's own conduct shows a fresh business structure, a new assessable unit is formed; and a partnership will attract section 10A if the dominant object of its creation is tax avoidance or reduction, as supported by material on record.

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