Tax avoidance motive must be proved by material facts; family partition and reconstitution did not establish dominant tax evasion purpose.

In tax-avoidance disputes, the revenue must prove by material and reasonable inference that the dominant purpose of a transaction was to evade tax. Mere failure by the assessee to offer a satisfactory explanation does not, by itself, establish the requisite avoidance motive. Applying that principle, the court treated the family partition and subsequent reconstitution of the business as arising from an actual family arrangement and differing proprietary interests, not as proof of a main object to reduce excess profits tax liability. On the facts found, there was no material supporting a finding of tax avoidance, and the reference was answered in favour of the assessee.

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Issues: Whether there was material to justify the opinion that the main purpose of the transaction was the avoidance or reduction of excess profits tax liability.

Analysis: The reconstitution of the family business followed an actual partition and a subsequent rearrangement of the partnership interests. The department relied chiefly on the absence of a satisfactory explanation and on the fact that the assessee knew excess profits tax would be payable if profits exceeded the relevant limit. Mere failure to persuade the revenue authority on the explanation, however, did not by itself establish the requisite tax-avoidance purpose. The burden remained on the department to prove, from surrounding facts and circumstances, that the main object of the transaction was to evade tax. On the facts found, the partition and the splitting up of the business into two units were treated as arising from the family arrangement and the differing proprietary interests of the partners, not as proof of a dominant tax-avoidance motive.

Conclusion: There was no material to support the finding that the transaction was effected ly to avoid excess profits tax. The reference was answered in favour of the assessee.

Ratio Decidendi: In tax-avoidance cases, the revenue must prove by material and reasonable inference that the dominant purpose of the transaction was to evade tax; a mere unsatisfactory explanation by the assessee is insufficient.

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