P L D 1962 (W (PLP)

A. S. FARUQUI, J.‑The Income-tax Appellate Tribunal Pakistan, Lahore, under section 66 (1) of the Income‑tax Act, read with section 21 of the Excess Profits Tax Act, has referred the following two questions for the opinion of this Court :‑ (1) Whether the formation of the subsidiary firms and the arrangements set out and explained in paragraph 3 of the statement of the case constitute "transactions" within the meaning of section 10‑A (1) of the Excess Profits Tax Act. If the answer be in the affirmative, then. (2) Whether there is any material on which the Excess Profits Tax Officer could properly come to the conclusion that the main purpose for which the transactions were effected was the avoidance or reduction of liability to Excess Profits Tax Act.

2. The facts as set out in the statement of the case are these. The appellant firm, namely, Messrs Mian Muhammad Allah Bakhsh, Lyallpur (hereinafter called tire parent firm) was, at the material time, composed of seven partners, namely, Sheikh Mian Muhammad and his six sons, Allah Bakhah, Hameed Ahmad, Raoof Ahmad, Rashid Ahmad, Zahoor Ahmad and Fazal Ahmad. The firm carried on business in cotton‑ginning and purchase and sale of foodgrains on commission and also ran an ice factory and a flour‑mill. Four firms came into existence after the coming into force of the Excess Profits Tax Act. Three of these firms were constituted on the 1st of September 1942, which was in this case the first day of the fourth chargeable accounting period, i.e., 1st of September 1942 to 30th of August 1943, and the fourth firm was constituted on the 1st of April 1943. These were: (i) Mian Allah Bakhsh‑Hameed Ahmad Cotton Factory, Mian Channun. (ii) Raoof Ahmad‑Rashid Ahmad Cotton Factory, Tandlian wala. (iii) Zahoor Ahmad‑Fazal Ahmad Cotton Factory, Jaranwala. (iv) Mian Muhammad Allah Bakhsh Clearing Agency, Lahore.

3. The constitution of these four firms was as follows :‑ (l) This firm consisted of two partners, namely, Allah Bakhsh and his son Hameed Ahmad. It was constituted on the 1st September 1942, and on this very date the Mian Channun factory which had hitherto been worked by the parent firm and the profits of which up to the accounting period ending the 31st of August 1942, were included In the assessment of the parent firm, was leased to this new firm by the parent firm for a consideration of Its. 8,00, payable annually by the lessee. In the next preceding chargeable accounting period the profits of this business had risen to Rs. 31,6')5 as against the profits of the previous year which was Rs. 5,269. (ii) This firm consisted of two partners, namely, Raoof Ahmad and Rashid Ahmad, both sons of Mian Muhammad. It was constituted on the 1st of September 1942, and on this date the Tandlianwala Cotton Factory which was run by the parent firm was leased out to this new firm for a consideration of Rs. 13,000, payable to It annually by the lessee. This business had also shown an increase of profit so that for the accounting period ending the 31st of August 1942, the profit had gone up to Rs. 41,858 as against Rs. 3,880 in the previous accounting year. (iii) This firm again consisted of two partners, namely, Zahoor Ahmad and Fazal Ahmad, both sons of Sheikh Mian Muhammad, and was constituted on the 1st of September 1942. There was a factory known as the Tandlianwala Factory which was owned by a trust known as "Sheikh Muhammad Ibrahim Trust" of which the aforesaid Mian Muhammad was one of the trustees. On the first of September 1949, the parent firm took a lease of this factory for a consideration of Rs. 5,000 payable annually. On the same day the parent firm sublet this factory to the subsidiary firm of Zahoor Ahmad‑Fazal Ahmad on the same terms. The profits of this business in respect of the accounting period 1st of September 1942 to 31st of August 1943, also showed a substantial sum of Rs. 34,229. (iv) The fourth firm, namely, Mian Muhammad Bakhsh Clearing Agency, Lahore, which was constituted on the 1st of April 1943, consisted of three partners, namely, Sheikh Mian Muhammad and his two sons, Sheikh Allah Bakhsh and Zahoor Ahmad. The object of this partnership was to carry on the business of purchase and sale of foodgrains on commission which was also the business of the parent firm. The profits of the business of this subsidiary firm for the period 1st of April 1943 to 31st of March 1944, was, for the purpose of income‑tax, assessed at Rs. 30,

498. All these four subsidiary firms were registered under section 26‑A of the Income‑tax Act.

4. The Excess Profits Tax Officer was of the opinion that the formation of these four firms and the subsequent arrange ments constituted "transactions" within the meaning of section 10‑A (1) of the Excess Profits Tax Act, the main purpose of which was the avoidance or reduction of liability to excess profit tax. He, therefore, made the necessary adjustments and treated the Income of the subsidiary firms and the parent firm together so as to counteract the attempt of these concerns to avoid liability to excess profit tax He made an order under the aforesaid section in respect of the chargeable accounting periods, ending (i) 31st of August 1942, (ii) 31st of August 1943, (iii) 31st of August 1944, (iv) 31st of August 1945 and (v) 31st of August 1946. Against all these orders the parent firm preferred five separate appeals under section 10‑A (3) to the Tribunal. The appeal relating to the chargeable accounting period ending the 31st of August 1942, was admitted to be miscon ceived and was accordingly dismissed. This reference is, therefore, concerned with the orders relating to the other four chargeable accounting periods.

5. The Excess Profits Tax Act was enacted on the 6th of April 1940, and the preamble of it reads as follows: ‑‑ "Whereas It Is expedient to impose a tax on excess profits arising out of certain businesses in the conditions prevailing during the present hostilities." In order to appreciate the questions Involved in the reference before us, it would be useful to reproduce sections 10 and 10‑A of the Act. They read as follows: ‑ "10 (1) In computing profits for the purposes of this Act no deduction shall be made in respect of any transaction or operation of any nature if and so far as it appears that the transaction or operation has artificially reduced or would artifi cially reduce the profits. (2) If the Excess Profits Tax Officer is satisfied that any person has entered Into or carried out any transaction or operation by which the profits have been or would be artificially reduced, he may, with the previous approval of the Inspecting Assis tant Commissioner, direct that such person shall pay, in addition to any excess profits tax for which he is or, but for such transaction or operation, would be liable, a penalty not exceeding the tax evaded or sought to be evaded." "10‑A (1) Where the Excess Profits Tax Officer Is of opinion that the main purpose for which any transaction or transactions was or were effected whether before or after the passing of the Excess Profits Tax (Second Amendment) Act, 1941, was the avoidance or reduction of liability to excess profits tax, he may, with the previous approval of the Inspect ing Assistant Commissioner, make such adjustments as respects liability to excess profits tax as he considers appropriate so as to counteract the avoidance or reduction of liability to excess profits tax which would otherwise be effected by the transac tion or transactions. (2) Without prejudice to the generality of the powers conferred by subsection (1), the powers conferred thereby extend‑ (a) to the charging with excess profits tax of persons who but for the adjustments would not be chargeable with any tax or would not be chargeable to the same extent ; (b) to the charging of a greater amount of tax than would be chargeable but for the adjustments. (3) Any person aggrieved by a decision of the Excess Profits Tax Officer under this section may appeal in the prescribed time and manner to the Appellate Tribunal." The latter section was introduced by the Excess Profits Tax (Second Amendment) Act, 1941. The first question which has been referred to us relates to the meaning of the word "transac tion" as contemplated by section 10‑A, sub-clause ((1870) L R 5 Ex. 289) of the Act. The word "transaction" has not been defined In the Act and has, therefore, to be construed In accordance with its dictionary meaning and with reference to the purpose of the Act. The dictionary meaning as given by Webster to this word is "doing or performing business ; that which is done ; an affair". This meaning was accepted in Krehl v. Great Central Gas Co. (1). The question for consideration in that case was whether an agreement and an entry in pursuance of the agree ment and the seizure of the goods of an insolvent amounted to a transaction within the meaning of the Bankruptcy Act. It was held that the word "transaction" is a general word and accepting the dictionary meaning, the agreement, the entry and the seizure of the goods was treated as a transaction. According to Murray's Oxford Dictionary, the meanings given to the word "transaction" are : "To carry through, perform, to manage, to carry on, conduct, do business ; the action of transacting or fact of being transacted ; the carrying on or completion of an action or a course of action ; the accomplishment of a result." It would thus appear that the word "transaction" bears a very wide meaning, and it is not correct to say that it applies merely to transactions between persons in the nature of sale or exchange or similar other deal. Reading section 10 and section 10‑A of the Excess Profits Tax Act and having regard to the object of the Act, the conclusion becomes irresistible that an act or a series of acts which are calculated for the main purpose of avoidance or reduction of liability to excess profits tax would amount to "transaction", even though they are not in the nature 't of a sale or purchase etc., as mentioned above. If the meaning of the word "transaction" was to be restricted to transactions in the course of the business of the assessee, then there would have been no necessity of bringing in the new section 10‑A because those cases would be clearly covered by section 10 of the Act which talks of transaction or operation which would artificially reduce the profits. In the case of G. S. Ramaswamier & Sons v. Commissioner of Income‑tax, Madras ((1945) 13 I T R 24) a Bench of the Madras High Court, consisting of the Chief Justice Sir Lionel Leach and Patanjali Sastri, J., considered the meaning of the word "transac tion" with reference to section 10‑A of the Act. The facts of that case were somewhat similar to the case before us. In that case the assessee was a firm of four partners carrying on the business of manufacturing and selling of cloth. On the 13th of April 1940, the four partners started two new firms. Two of them were partners in one firm and the other two were partners in the other firm. The assessee ceased to manufacture cloth from that day and the new firms carried on the manufacture. These new firms sold such cloth only to the assessee and the assessee restricted its sales to the goods manufactured by them. Upon these facts the Excess Profits Tax Officer regarded the formation of the two new firms as a transaction within the meaning of section 10‑A of the Excess Profits Tax Act and assessed the firm on the basis that it had made all the profits during the accounting period. The finding of the Tribunal was teat the two firms were formed in order to evade the payment of excess profit tax. Their Lordships while dealing with this part of the case said that the finding that the two new firms were formed in order to evade the payment of excess profit tax was a finding of fact and could not be questioned but they went on to add that there was no doubt about the correctness of that finding. With regard to the meaning of the word "transaction" with reference to section 10‑A, they repelled the contention of Sir Alladi Krishnaswami Ayyar that the meaning of the word should be limited to transactions in the course of ' business. They observed that section 10‑A was inserted in the statute in order to allow the Excess Profits Tax Officer to go behind ashy transac tion, the object of which was the evasion of tax and they held that as the formation of the two new firms was a transaction devised to evade the tax, it came within the mischief of section 10‑A of the Act. We are In respectful agreement with this view. Having regard to the scheme of the Act and the ordinary dictionary meaning of the word "transaction", it must be held that any act, dealing or arrangement performed by the assessee which is calculated to avoid or reduce the incident of taxation under the Excess Profits Tax Act, would amount to a "transaction" within the meaning of section 10‑A of the Act, notwithstanding the fact that such an act, dealing or arrange ment was not a matter within the ordinary course of the business of the assessee. The object of these sections is to deal with contrivances either in the course of business or otherwise, the main purpose of which is to avoid or reduce the incidence of taxation. That being so, the meaning of the word "transaction" cannot properly be restricted to only such acts which are done in the normal course of business. Our answer to the first question is, therefore, in the affirmative.

6. The second point is of greater importance. The question whether the main purpose of the "transaction" was the avoid ance or reduction of liability to excess profit tax cannot be answered upon the mere finding that in a given case tax has in fact either been reduced or avoided because of a certain arrange ment. In order to reach the conclusion necessary for the imposition of excess profit tax, as contemplated by section 10‑A of the Act, it has to be affirmatively found by the Department that the transaction as a result of which tax has been avoided or reduced was contrived for the main purpose of avoiding or reducing the tax. In other words, 1t has to be found that an artificial means has been employed for the purpose of avoiding tax. It is the right of a person doing business to dissolve a partnership, to enter into a new partnership, to discontinue a business or to start a business afresh. These acts by them selves would not necessarily attract the provisions of section 10‑A of the Act, It has to be established, and the burden of it is on the Department, that the main purpose of such act or acts referred to above was to evade the liability to excess profit tax. If it is established that the change or innovation is merely in form, the inference would naturally be that It had been resorted, to for the purpose of evading liability to tax. In the vast majority of cases the determination of the question must largely depend upon the circumstances of the particular case, and the intention of the assessee would have to be inferred from such circumstances as would point to the conclusion which would attract the application of the provisions of section 10‑A. It is, therefore, not quite correct to say that the question whether a particular transaction was effected for the main purpose of evading the liability to tax is one purely of fact because, as we have indicated above, such a finding would generally result from an inference to be drawn from established facts. Whether such an inference can be drawn from the facts found, would be a question of law.

7. Now let us examine the circumstances in the case before us. The first thing which immediately attracts attention is that all these four subsidiary firms are composed of the different partners of the parent firm. The parent firm itself consists of the father and his six sons. Three of these subsidiary firms were constituted on the 1st of September 1941, soon after the coming into farce of the Excess Profits Tax Act. No new capital was brought in by the partners who constituted these four firms. The object of all these firms was in fact to carry on various businesses of the parent firm which the latter had been doing before this bifurcation and in all of which the profits had very substantially increased in the accounting periods preceding the formation of these new firms. The profits of the business of the parent firm in the preceding year in respect of the Mian Channun factory bad risen to Rs. 31,675 as against Rs. 5,269 in the next previous year. This factory was allotted, to use a common expression, to the first firm, namely, Mian Allah Bakhsh Hameed Ahmad Cotton Factory, Mian Channun. In respect of the Tandlianwala factory, the profits had short up to Rs. 41,858 in the chargeable accounting period ending the 31st of August 1942, as against the profits of the previous year which only amounted to Rs. 3,

880. This factory was allotted to the second subsidiary firm, namely, Raoof Ahmad‑Rashid Ahmad Cotton Factory. In respect of the third firm, the Jaranwala Factory belonged to a trust in which the father, Mian Muhammad, was a trustee and this was obtained by the parent firm on a lease for a considera tion of Rs. 5,000 and on the same day it was sublet to this subsidiary firm. The profits from this business in respect of the accounting period the 1st of September 1942 to the 31st of August 1943, amounted to Rs. 34,

229. With regard to the fourth firm, the business which it undertook was the same which was previously carried on by the parent firm namely, purchase and sale of foodgrains on commission. The profits of this business as was ascertain in respect of the accounting period the 1st of April 1943, to the 31st of March 1944 was Rs. 30,498.

8. There is no doubt that the profits referred to above of the several businesses when put together would have been liable to very substantial excess profit tax. The question then to examine is, was it a genuine arrangement occasioned by any cause other than the desire to evade the liability to tax ? It has to be noted that there was no allegation of any dissension in the family or amongst the father and the six sons who were all partners of the parent firm. On the contrary, these arrangements were said to have been made on account of "love and affection". But the six sons had substantial share in the parent firm itself. What difference then would it make whether they drew certain benefits from their membership of the parent firm or by the creation of subsi diary firm ? The inference is irresistible that this method was resorted to as a contrivance for the purpose of evading tax liability. The arrangement clearly smacks of artificiality. The change or the bifurcation was merely in form and not in substance. There can be little doubt in the face of these compelling circum stances that the main purpose of the setting up of these four subsidiary firms was the avoidance or reduction of the liability to pay excess profit tax. The material which was before the Excess Profits Tax Officer, which we have recounted above, was sufficient upon which he could properly come to the conclusion as he did.

9. The contention that the subsidiary firms having been registered under section 26‑A of the Income‑tax Act, there was no scope for applying the provisions of the Excess Profits Tax Act; is completely devoid of any force. The Excess Profits Tax Act was a special legislation and was enacted to meet a particular situation. The objection of section 10‑A was to enable the Excess Profits Tax Officer to get behind the transaction for the purpose of finding out whether the main purpose of it was to avoid or reduce the liability to tax. He could not be ousted of this jurisdiction by reason of section 26‑A of the Income‑tax Act.

10. For the reasons given above, our answer to the second question is also in the affirmative. The Department will have its costs of this reference from the applicant. M. N./A. H. Reference answered in affirmative.