Excess profits tax anti-avoidance cannot create liability for a business that had already been wound up.

A Supreme Court note on excess profits tax explains that a finding of tax avoidance could be sustained on the record where a partial partition and new partnerships were formed when profits were rising and the explanation did not account for the timing or terms of the arrangement. It also states that Section 10A could not be used to assess a business that had been wound up and was no longer carried on during the relevant chargeable accounting periods, because the charging provisions applied only to an existing business. The anti-avoidance provision could not deem a discontinued business to continue for tax liability purposes.

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Issues: (i) Whether the finding that the partial partition and formation of the new partnerships were effected mainly to avoid or reduce liability to excess profits tax was supportable on the materials on record. (ii) Whether Section 10A of the Excess Profits Tax Act could be applied to a business which had been wound up and was no longer carried on during the relevant chargeable accounting periods.

Issue (i): Whether the finding that the partial partition and formation of the new partnerships were effected mainly to avoid or reduce liability to excess profits tax was supportable on the materials on record.

Analysis: The relevant facts showed that the partition and the constitution of the partnerships occurred when the business profits were rising. The explanation offered for the arrangement did not satisfactorily account for the timing or the terms on which the new firms were constituted. The record therefore contained sufficient material to support the inference drawn by the tax authorities.

Conclusion: The finding of avoidance or reduction of liability to excess profits tax was upheld and was against the assessee on this issue.

Issue (ii): Whether Section 10A of the Excess Profits Tax Act could be applied to a business which had been wound up and was no longer carried on during the relevant chargeable accounting periods.

Analysis: The charging scheme treated a business as the unit of assessment and operated only in relation to a business to which the Act applied. Where the old joint family business had been actually discontinued and no profits accrued to it during the relevant period, it was outside the scope of the Act under Sections 4 and 5. Section 10A, being an anti-avoidance provision within the Act, could not be used to deem a non-existent or discontinued business as still continuing so as to create a liability that the charging provisions themselves did not impose.

Conclusion: Section 10A could not be invoked to assess the discontinued business as if it had continued unbroken, and this issue was decided in favour of the assessee.

Final Conclusion: The appeals succeeded because the discontinued brocade business was not taxable under the anti-avoidance provision on the footing that it continued to operate, though the avoidance finding itself was sustained.

Ratio Decidendi: An anti-avoidance provision cannot be applied to create excess profits tax liability in respect of a business that, on the facts found, had been wound up and was no longer a business to which the charging provisions of the Act applied.

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