NARAIN SWADESHI WEAVING MILLS CHHEHARTA AMRITSAR Vs. COMMR OF EXCESS PROFITS TAX EAST PUNJAB AND DELHI

JUDGEMENT

(1.) This is a reference or rather four references consolidated into one made under Section 66 (1), Income-tax Act, by the Income-tax Appellate Tribunal, Madras Bench. There were four applications for reference referring each to one accounting year, but the questions raised by each application were identical.

(2.) The reference relates to a liability under the Excess Profits Tax Act of 1940. The assessee firm, known as Narain Swadeshi Weaving Mills, Chheharta, was constituted in the year 1935, having three partners Narain Singh and his two sons Gurudayal Singh and Ram Singh, their shares in the partnership being six annas, five annas and five annas respectively. There is no doubt that this partnership was a business partnership. A factory with plant and machinery, at Chheharta was owned by the firm which carried on the business of manufacture of ribbons and "laces. On 7-4-1940 a public limited liability company was incorporated under the name of Hindusthan Embroidery Mills, Ltd., the object of which was to take over from the assessee firm the buildings on lease-holder rights, plant and machinery and all other assets in the factory. About 41,000 shares were subscribed to the company each of Rs. 10/- of which Rs. 5/- were to be paid up. Of these 23,000 shares were allotted to the assessee firm and the partners of the assessee firm also held shares on their individual accounts. In all of the 41,000 shares 33,340 were held by the assessee firm and its partners. As the capital subscribed was not sufficient to cover the price of both the factory and machinery the arrangement arrived at was that the Company "purchased the factory but the machinery was taken on hire from the assessee firm at an annual rental of Rs. 40,000/-. The Directors of the Company were the partners of the assessee firm, one Dr. Surmukh Singh, another son of Narain Singh who, however, lives in South Africa, and N. D. Nanda, a brotherin- law of Gurudayal Singh.

(3.) On 28-7-1940 an agreement was entered into by the Company by which they purported to appoint a firm Uppal and Company as managing agents, and this firm Uppal and Company is said to have consisted of two partners Ram Singh and Gurudayal Singh, the two sons of Narain Singh, the partners haying equal shares. The partnership deed of this firm was not executed until 21-41941. Under the terms of the managing agency agreement Uppal and Company were to receive 10 per cent, of the net profits of the Company and also salary and allowances. On 25-1-1941 the Company entered into another agreement with a firm styled Ram Singh and Company, which is said to have been constituted on' that day having partners Ram Singh, Gurudayal Singh and Surmukh Singh, the three sons of Narain Singh, each having one-third share in that firm. By this agreement Ram Singh and Company were appointed selling agents and were to receive a certain commission on sales and a certain percentage of the gross income of the Company. The partnership deed of this firm was not executed until 17-3-1941. On 21-4-1941, the same day as the partnership deed of UppaL and Company was executed, a new partnership deed of the assessee firm was executed modifying the shares of the partners therein. The lengthy agreement sets out the partnership deed of 24-11-1935, the sale to Hindustan Embroidery Mills Ltd. of the buildings, and states that the income of the firm has been reduced to the hire of the machinery, and dividends on shares held in the Hindustan Embroidery Mills Ltd. The agreement then recites the appointment of Uppal and Company as managing agents, of Ram Singh and Company as selling agents, and states that Narain Singh has no interest either in Uppal & Company or Ram Singh & Company & as such has disadvantages both financial and others arising out of these contracts of Managing and Selling Agency, and proceeds to revoke the partnership deed of 24-11-1935, and constitute another agreement providing that the shares of each partner in the profit and loss of the firm as on and after 1-4-1941 shall be three-fourth in the case of Narain Singh and one-eighth in the case of Gurudayal Singh and Ram Singh. Then follow a number of provisions for division of profits, maintenance of books, place of business of the firm and so on.