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Messrs. Sohan Pathak And Sons v. Commissioner Of Income-Tax, Lucknow, And Another
Structured Summary of the Opinion
Factual and Procedural Background
This is a writ petition under article 226 of the Constitution of India seeking refund of Rs. 11,175-9-0 paid by the petitioner on 1 September 1946 as excess profits tax for the chargeable accounting period 19 October 1942 to 10 July 1943.
The petitioner is a Hindu undivided family (HUF) that carried on two businesses: money-lending and Banaras brocade. On 16 July 1943 a partial partition occurred with respect to the brocade business: that business was wound up, its assets and liabilities were distributed among the coparceners, and two partnership firms (composed of members of the HUF) were later formed to carry on brocade business similar to the earlier family business.
The Excess Profits Tax authorities treated the partition and the subsequent partnerships as falling within section 10A of the Excess Profits Tax Act (i.e., transactions intended to avoid or reduce excess profits tax) and assessed accordingly. That view was upheld at the reference stage in this court, but the petitioner appealed to the Supreme Court, which on 23 September 1953 reversed this court's decision and held that the brocade business had been wound up, that the partnerships were independent of the HUF, and that the partnership profits could not be included in computing the HUF's excess profits tax liability.
Following the Supreme Court decision, the Income-tax Appellate Tribunal on 6 September 1954 cancelled the order of the Excess Profits Tax Officer under section 66(5) of the Income-tax Act. The petitioner then applied on 23 September 1954 to the Excess Profits Tax Officer, Varanasi, for refund of Rs. 60,761-15-0 which he alleged became payable as a consequence of the Supreme Court decision.
The departmental determination of excess/standard/deficiency profits for successive chargeable accounting periods (1 Sep 1939 to 31 Mar 1946) is set out in a table in the affidavit; it shows aggregate excess profits of Rs. 41,943 and aggregate deficiency of Rs. 1,15,089, with total tax paid aggregating to Rs. 60,761-15-0. The tax authorities refunded the last four items of tax paid but refused to refund the specific item of Rs. 11,175-9-0. The refusal was on two grounds: (1) barred by limitation under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act; and (2) because, according to the Supreme Court's findings, the brocade business had been wound up on 16 July 1943 (a ground which the Excess Profits Tax Officer did not elaborate). This writ petition challenges the refusal to refund Rs. 11,175-9-0.
Legal Issues Presented
- Whether the claim for refund of Rs. 11,175-9-0 is barred by limitation under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act.
- Whether the partial partition and winding up of the brocade business resulted in a change of ownership or a new business such that section 8 of the Excess Profits Tax Act applies and prevents relief (or whether, conversely, section 7(a) applies to grant relief).
- Whether relief by way of refund, following a Supreme Court reversal (and the consequent orders of the Income-tax Appellate Tribunal), must be given in accordance with section 66A(4) read with sub-sections (5) and (7) of section 66 of the Income-tax Act, without being barred by section 50.
- Whether article 226 of the Constitution can be invoked to obtain refund of an amount paid before the commencement of the Constitution, where the right to refund arose only after a later judicial decision and the refusal to refund occurred post-Constitution.
Arguments of the Parties
Petitioner's Arguments (as advanced by Sri R.S. Pathak)
- The refund claim is not governed by section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act, because the petitioner seeks relief under section 66A(4) by reason of the Supreme Court's decision and only asks for effect to be given to that order.
- Section 66A(4) mandates that where a High Court judgment is varied or reversed in appeal, effect shall be given to the Supreme Court's order in the manner provided in sub-sections (5) and (7) of section 66; those provisions empower the Tribunal to pass such orders as necessary and to provide for refund of overpaid amounts with interest as the Commissioner may allow.
- The chapter of the Income-tax Act in which section 50 appears (headed "Refunds") contains limited provisions for refund in specified circumstances; section 50's four-year bar is meant for ordinary refund claims in assessment proceedings and does not apply to claims that arise for implementation of appellate/curial orders such as the Supreme Court's decision under section 66A(4).
- The petitioner sought only to have the Supreme Court's order implemented by the taxing authorities; no separate limiting period should preclude giving effect to that judgment.
Respondent / Department's Arguments (as recorded)
- The Excess Profits Tax Officer gave two stated reasons for refusing the refund: (a) the claim was barred by limitation under section 50 read with section 21 of the Excess Profits Tax Act; and (b) that the brocade business had been wound up on 16 July 1943 (this second reason was not elucidated in the officer's order).
- Learned counsel for the income-tax department, Sri Gopal Behari, relied on later Madras High Court decisions — Govindarajulu Chettiar v. Commissioner of Excess Profits Tax ([1958] 34 I.T.R. 594) and Veerappa Chettiar v. Commissioner of Excess Profits Tax ([1960] 39 I.T.R. 29) — to support the contention that where there has been a transfer or change of ownership the provisions of section 8 apply; those cases were said to be distinguishable from the Ramaswami Raja decision.
- Two further departmental points (articulated in submissions): (i) that the partial partition caused a disruption in HUF status and therefore a change in the person carrying on the business, and (ii) that since Rs. 11,175-9-0 was paid on 1 September 1946 (prior to the coming into force of the Constitution), relief by way of refund under article 226 could not be granted. The court addressed both points in its reasoning.
Administrative Decision (Excess Profits Tax Officer)
- Refused the refund of Rs. 11,175-9-0 by an order dated 28 May 1956 on two grounds: limitation under section 50 read with section 21, and because, relying on the Supreme Court findings, the brocade business had been wound up on 16 July 1943. The officer did not elaborate the second ground.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ramaswami Raja v. Commissioner of Excess Profits Tax [1954] 25 I.T.R. 9 (Madras High Court) | Holds that section 8(1) does not treat a continued business (diminished or expanded) as a new business so long as ownership remains unchanged; dropping one business out of several does not amount to transfer creating a new business for section 8 purposes. | The court relied on this authority to conclude that section 8 did not apply where the brocade business was wound up but the ownership of the remaining business (money-lending) remained with the same HUF; therefore s7(a) relief remained available. |
| Govindarajulu Chettiar v. Commissioner of Excess Profits Tax [1958] 34 I.T.R. 594 (Madras High Court) | Applied section 8 where there was a transfer of business resulting in change of ownership; distinguished Ramaswami Raja on the ground that that case did not involve transfer. | The court considered and distinguished this decision as factually inapposite: in Govindarajulu the key element was a transfer/change of ownership, which is absent in the present case. |
| Veerappa Chettiar v. Commissioner of Excess Profits Tax [1960] 39 I.T.R. 29 (Madras High Court) | Similar principle to Govindarajulu — section 8 applies where there has been transfer/change in ownership of the business. | The court treated this decision as distinguishable for the same reason: it involved transfer and change of ownership, unlike the present facts. |
Court's Reasoning and Analysis
The court proceeded in a stepwise manner addressing the two reasons given by the Excess Profits Tax Officer and the subsidiary points raised by the parties.
On limitation (section 50 Income-tax Act read with section 21 Excess Profits Tax Act):
- The petitioner's counsel argued that the refund claim arises under section 66A(4) as a result of the Supreme Court's decision and therefore the normal limitation provision in section 50 (contained in the chapter headed "Refunds") was not applicable to a claim seeking implementation of a superior court's order.
- The court examined the structure of the "Refunds" chapter (sections beginning with section 48) and accepted the petitioner's argument that the ordinary operation of section 50 governs ordinary refund claims in assessment proceedings and does not embrace claims that must be given effect to because of appellate or curial orders under section 66A(4) and the related sub-sections of section 66.
- Accordingly, the court held the Excess Profits Tax Officer was wrong to refuse the refund on the ground of limitation under section 50 read with section 21.
On the second ground (effect of winding up / applicability of section 8):
- The court noted the proviso to section 2(5) of the Excess Profits Tax Act which treats all businesses carried on by the same person as one business for the Act's purposes. On the facts, the HUF carried on two businesses which, for the purposes of the Act, were treated as one business.
- After the brocade business was wound up, the money-lending business continued; the same persons (the HUF) remained the owners of the remaining business. Thus the "business" continued, albeit in a deflated form. Because ownership did not change, the court concluded section 8 did not apply.
- The court relied on the Madras High Court decision in Ramaswami Raja (1954) to support the proposition that section 8(1) does not apply where a person carrying on several businesses drops one and continues the rest without a change in ownership.
- The court distinguished the subsequent Madras decisions relied upon by the department (Govindarajulu Chettiar and Veerappa Chettiar) on the ground that those cases involved transfers that produced a change in ownership — the critical fact which activates section 8 — and are therefore inapposite to the facts of the present case.
On entitlement to relief under section 7(a) of the Excess Profits Tax Act:
- Having found that section 8 did not apply, the court turned to section 7(a) which provides for reduction of tax liability where total deficiencies exceed any excess profits for the chargeable accounting periods.
- The numerical table before the court showed aggregate deficiency of Rs. 1,15,089 against aggregate excess profits of Rs. 41,943. Because the deficiency exceeded the excess, the petitioner was entitled to relief under section 7(a), and therefore the particular item of Rs. 11,175-9-0 should also be refunded.
On two additional departmental contentions:
- Partial partition: The court observed that under elementary Hindu law a partial partition as regards a business does not disrupt or sever the joint family status; hence there was no change in the persons carrying on the business for the purposes of applying section 8.
- Article 226 and pre-Constitution payment: Although the tax in question was paid on 1 September 1946 (before the Constitution came into force), the right to refund arose only upon the Supreme Court's decision on 23 September 1953 and the refusal to give effect to that decision occurred by the officer's order dated 28 May 1956. The petitioner therefore sought relief under article 226 to give effect to a post-judgment entitlement; the court found this argument well-founded and rejected the department's contention that article 226 could not be invoked.
Conclusion of reasoning: On the totality of the statutory provisions, judicial authorities cited, and the factual findings accepted by the Supreme Court and the Tribunal, the court concluded that the petitioner was entitled to the refund of Rs. 11,175-9-0 and to costs.
Holding and Implications
Holding: The writ petition is allowed; a writ of mandamus is issued requiring the respondents to refund Rs. 11,175-9-0 to the petitioner, and the petitioner is entitled to costs.
Implications / Consequences:
- Direct effect: The respondents are directed to refund the sum of Rs. 11,175-9-0 to the petitioner and the petitioner is awarded costs of the petition.
- Statutory interpretation: The court's decision clarifies that (i) a claim to give effect to a superior court's judgment under section 66A(4) (read with section 66(5) and (7)) is not to be defeated by the ordinary limitation provision in section 50 where that provision is inapposite to the nature of the appellate/implementation remedy, and (ii) section 8 of the Excess Profits Tax Act does not apply where a business is dropped but ownership of the remaining business remains unchanged (so that relief under section 7(a) may be available when aggregate deficiencies exceed aggregate excesses).
- Broader precedent: The opinion applies and relies on existing Madras High Court authority (Ramaswami Raja) and distinguishes other Madras decisions. The judgment's reasoning is confined to the facts and statutory provisions it addresses; the opinion does not purport to establish a novel general principle beyond its application to the facts presented.
Result: Petition allowed. Writ of mandamus to issue for refund of Rs. 11,175-9-0 together with costs.
1. This is a writ petition under article 226 of the Constitution of India.
2. The relief sought by this writ petition is for the refund of a sum of Rs. 11,175-9-0 paid by the petitioner on September 1, 1946, as excess profits tax for the chargeable accounting period, October 19, 1942, to July 10, 1943. The relevant facts for the decision of the point involved in the case are as follows.
3. The petitioner is a Hindu undivided family and it used to carry on two businesses, namely, money-lending business and Banaras brocade business. On July 16, 1943, a partial partition took place in the family so far as the brocade business was concerned. The brocade business of the Hindu undivided family was wound up. Its assets and liabilities were distributed amongst the coparceners and the business was no longer carried on by the family as such. Subsequent to the winding up and the distribution of the assets and liabilities between the coparceners, two partnerships were started and carried on brocade business similar to the one carried on by the family. It may be stated that the partners of the two firms were members of the Hindu undivided family. The partition and the setting up of the two partnership firms was treated by the excess profits tax authorities as being hit by the provisions of section 10A of the Excess Profits Tax Act and it was held that the partial partition in respect of the brocade business and the subsequent formation of the two partnerships and the carrying on of brocade business was for the avoidance and reduction of liability to excess profits tax. This view was upheld up to the reference stage in this court.
4. The petitioner went up in appeal to the Supreme Court and the Supreme Court reversed the decision of this court on September 23, 1953. The findings of the Supreme Court were that there was in fact a partial partition, that the brocade business of the Hindu undivided family was wound up and the assets and liabilities distributed between the members constituting the Hindu undivided family, that subsequently two partnerships were formed for carrying on brocade business, that the partnerships which carried on the brocade business had nothing to do with the Hindu undivided family, that the profits of the partnership businesses were not the profits of the Hindu undivided family, and that these profits could not be taken into consideration in computing the liability of the Hindu undivided family for payment of excess profits tax.
5. Consequent upon the decision of the Supreme Court, the Income-tax Appellate Tribunal on September 6, 1954, made an order under section 66(5) of the Income-tax Act cancelling the order of the Excess Profits Tax Officer under section 10A. The necessary consequence of the cancellation of the order under section 10A was that the petitioner became entitled to the refund of the excess profits tax paid by him. Accordingly, on September 23, 1954, the petitioner made an application to the Excess Profits Tax Officer, Varanasi, asking him to refund a sum of Rs. 60,761-15-0 to which the petitioner alleged himself to have become entitled as a consequence of the decision of the Supreme Court.
6. In order to appreciate the stand of the petitioner it is necessary to consider the excess profits tax liability of the petitioner as determined by the department in respect of the chargeable accounting periods commencing from the 1st September, 1939, and ending on the 31st March, 1946. This may be illustrated best by the following table, which is incorporated in paragraph 11 of the affidavit filed in support of the writ petition:
Business profits Standard profits Excess profits Deficiency Tax paid Rs. Rs. Rs. Rs. Rs. A.P 1-9-39 to 21-10-39 3.923 5,387 … 1,464 … 22-10-39 to 9-10-40 29,128 34,742 … 5,614 … 10-10-40 to 29-10-41 27,137 35, ooo … 7,863 … 30-9-41 to 18-10-42 37,658 37,839 … 10,239 … 19-10-42 to 16-7-43 68,652 26,709 41,943 11,175-9-0 17-7-43 to 8-10-43 nil 8,129 … 8,129 11,902-11-0 9-10-43 to 26-9-44 3,138 34,800 … 31,662 25,515-50 27-9-44 to 13-10-45 2,082 37,838 … 34,756 4.673-5-0 16-10-45 to 31-3-46 1,186 16,548 … 15,362 7,495-5-0 41,943 1,15,089 60,761-15.0
7. The excess profits tax paid is shown in the last column of the table. The excess profits tax authorities have allowed a refund of the last four sums of money paid as tax in respect of the last four chargeable accounting periods. That is as it should be, but the excess profits tax authorities have not allowed refund of the sum of Rs. 11,175-9-0 for the refund of which this writ petition has been filed. The last four items of excess profits tax became payable on the basis that the profits of the partnership businesses in brocade were the profits of the Hindu undivided family. It having been held that the brocade business after partial partition was no longer the business of the Hindu undivided family, the excess profits of that business could not be taken into consideration at all in computing the excess profits tax liability of the Hindu undivided family, and so the last four items of tax paid had in any case to be refunded.
8. The reasons for the refusal of the refund of the fifth item of Rs. 11,175-9-0 given by the Excess Profits Tax Officer are two-fold: firstly, that the claim in regard to that amount was barred by limitation under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act, and secondly, that according to the findings of the Supreme Court, the brocade business of the Hindu undivided family had been wound up on July 16, 1943. The order by which the refund of this amount was refused is a very short order and no attempt whatsoever has been made by the Excess Profits Tax Officer to elucidate the second ground upon which relief had been refused to the petitioner.
9. Sri R.S Pathak, learned counsel for the petitioner, has urged before me in regard to the first point that the matter of refund in the circumstances of this case does not come under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act. His contention is that he is claiming relief under section 66A (4) by reason of the decision of the Supreme Court and only asks for effect being given to the order of the Supreme Court. Section 66A (4) runs as follows:
“Where the judgment of the High Court is varied or reversed in appeal under this section, effect shall be given to the order of the Supreme Court in the manner provided in sub-sections (5) and (7) of section 66 in the case of a judgment of the High Court.”
10. Sri R.S Pathak says that the Supreme Court gave its decision only on September 23, 1953, and it was not even necessary for him to have made any application as it was the duty of the taxing authorities themselves to give effect to the decision of the Supreme Court and in such a situation no question of the bar of limitation under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act can arise. Section 66A (4) further refers to sub-sections (5) and (7) of section 66. Those provisions lay down that the Income-tax Appellate Tribunal shall pass such orders as are necessary to dispose of the case conformably to the judgment of the High Court and further under the proviso to sub-section (7) of section 66, any amount overpaid shall be liable to be refunded with such interest as the Commissioner may allow.
11. Sri R.S Pathak further contends that, so far as section 50 of the Income-tax Act is concerned, it lays down that no claim to refund of income-tax or super-tax under this Chapter shall be allowed unless it is made within four years from the last day of the financial year commencing next after the expiry of the previous year in which the income arose, accrued or was received or was deemed to have arisen, etc., etc. The chapter in which the section occurs is headed “Refunds” and begins with section 48. Sri R.S Pathak took me through the various sections of this chapter and argued that only three sections in this chapter relate to refunds strictly speaking, and the other sections deal with special cases providing for relief which may not necessarily amount to refund. Strictly speaking, section 48 appears to make provision for refund by the Income-tax Officer in assessment proceedings before him and further for refund by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal in appeals before those authorities. The other two provisions, the one in section 49E makes provision for refund to which the assessee may be entitled by way of set-off against tax, interest or penalty remaining payable by the assessee, while the other in section 49F makes provision for refund upon death, incapacity, bankruptcy or liquidation of the person entitled to claim refund by his legal representative, trustee or receiver. There is force in this contention of Sri R.S Pathak. Nothing has been urged to the contrary by the learned counsel for the income-tax department and I am of the view that the Excess Profits Tax Officer was not right in holding that the claim for refund of the sum of Rs. 11,175-9-0 was barred by limitation under section 50 of the Income-tax Act read with section 21 of the Excess Profits Tax Act.
12. So far as the second ground on which the claim for refund has been refused I have already observed that the Excess Profits Tax Officer has made no attempt to elucidate the ground of refusal. The position appears to be as follows:
The petitioner in this case was carrying on two businesses, one of money-lending and the other in Benaras brocade. The second proviso to section 2(5) of the Excess Profits Tax Act is as follows:
“Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act.”
13. Accordingly for the purposes of the Excess Profits Tax Act, the two businesses, which the Hindu undivided family carried on, lost their identity and became one business. Subsequently, on the findings recorded by the Tribunal on remand and accepted by the Supreme Court, the Benaras brocade business was wound up. The business of money-lending, however, continued. Having regard to the language of the proviso to section 2(5) quoted above, this may be described in another way, viz., that the “business” of the Hindu undivided family did continue, but in a deflated form. It must also be noticed that the persons who were the owners of the deflated “business” continued to be the same, namely, the Hindu undivided family. In other words, there was no change in the persons carrying on the “business”. It follows that the provisions of section 8 of the Excess Profits Tax Act did not apply to the case. I am supported in this view by the decision of the Madras High Court in Ramaswami Raja v. Commissioner of Excess Profits Tax [1954] 25 I.T.R 9.. The second paragraph of the headnote of the said report is to the following effect:
“Section 8(1) does not provide that if a person carrying on more than one business drops one business and continues to carry on the remaining business, the business so continued should be treated as a new business. So long as there is no change in the ownership of the business, and the business continues whether in a dwindled or expanded form, the section has no application.”
14. I respectfully agree with this decision. Sri Gopal Behari, learned counsel for the income-tax department, relied on two subsequent decisions of the Madras High Court in Govindarajulu Chettiar v. Commissioner of Excess Profits Tax [1958] 34 I.T.R 594. and Veerappa Chettiar v. Commissioner of Excess Profits Tax [1960] 39 I.T.R 29.. Both these cases are clearly distinguishable for the reason that in both the cases there was a transfer of the business. By reason of that transfer the view taken was that there was a change in the ownership of the business. Change in the ownership being the crucial point in section 8, clearly in these two cases the provisions of section 8 applied. In the earlier of these cases, namely, Govindarajulu Chettiar v. Commissioner of Excess Profits Tax the decision in Ramaswami Raja v. Commissioner of Excess Profits Tax was considered and it was distinguished on the ground that there the question was not one of the transfer of business, but one of the businesses out of the several businesses had been dropped.
15. If section 8 does not apply, then clearly relief under section 7(a) of the Excess Profits Tax Act is admissible to the petitioner. The petitioner would be entitled to reduction of tax liability if the deficiency for all the chargeable accounting periods is larger than any excess profits during any one or more of the chargeable accounting periods. Referring again to the table which has been incorporated in this judgment, it will be found that the total deficiency for all the chargeable accounting periods commencing from the 1st September, 1939, and ending on the 31st March, 1946, was Rs. 1,15,089 and the excess was only Rs. 41,943. It follows that there were no such excess profits as to attract the excess profits tax liability and clearly the petitioner was entitled to relief in respect of the sum of Rs. 11,175-9-0 also.
16. Two other points raised by learned counsel for the department may now be noticed. One of the points was that by reason of the partial partition of the Banaras brocade business, there was a disruption in the status of the Hindu undivided family and hence a change in the person carrying on the business. It is elementary Hindu law that partial partition as regards its business does not cause a disruption or severance of the joint family status.
17. The other point was that in this case Rs. 11,175-9-0 was paid as excess profits tax on September 1, 1946, i.e, prior to the coming into force of the Constitution; so no relief by way of refund can be allowed under article 226 of the Constitution under which relief only in respect of post-Constitution matters can be granted. This argument is misconceived. It is true that the amount was paid on the 1st September, 1946. But it became refundable only by reason of the fact that the petitioners' appeal was allowed by the Supreme Court on the 23rd September, 1953. Clearly what the petitioner wants by this petition under article 226 of the Constitution is that effect be given to the order of the Supreme Court dated September 23, 1953. This was refused by the Excess Profits Tax Officer by his order dated May 28, 1956. There is therefore no question of the petitioner desiring relief in respect of a pre-Constitution matter. There is no force in this point also. In the result, the writ petition is allowed. A writ of mandamus will issue requiring the respondents to refund the amount of Rs. 11,175-9-0 to the petitioner. The petitioner shall be entitled to his costs of this petition.
18. Petition allowed.
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