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Commissioner of Income and Excess Profits Tax Vs. Coimbatore Pioneer Mills Ltd. - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtChennai
Decided On
Case NumberCase Ref. No. 18 of 1946
Judge
Reported inAIR1950Mad661; [1950]18ITR213(Mad)
ActsExcess Profits Tax Act, 1940 - Sections 10A
AppellantCommissioner of Income and Excess Profits Tax
RespondentCoimbatore Pioneer Mills Ltd.
Appellant AdvocateC.S. Rama Rao Sahib, Adv.
Respondent AdvocateS. Ramachandra Ayyar, Adv.
Cases ReferredRamaswamier & Sons v. Commissioner of Income
Excerpt:
.....of company can said to be transaction with main purpose of avoidance or reduction of liability to excess profits tax within meaning of section 10-a - company decided to alter articles by giving one vote for each share held by share-holder - such transaction resulted into concentration of voting power in hands of directors who held very large number of shares and its effect being to constitute director-controlled company - in case company assessed to excess profits tax as director-controlled-company quantum of its liability less than what it would be if assessed as non-director-controlled company - main object of alteration of articles to make company director-controlled company so as to reduce incidence of excess profits tax - question answered in affirmative. - - it is within the..........be said to be a transaction with the main purpose of avoidance or reduction of the liability to excess profits tax within the meaning of section 10-a, excess profits tax act ?' 2. the assesses in this case is a company incorporated under the companies act and carries on business at coimbatore. during the accounting year from 1st july 1941 to 30th june 1942 the company was assessed to excess profits tax and the resolution of the company amending article 12 of the articles of association was set aside by the excess profits tax officer under section 10-a, excess profits tax act. this decision, however, was reversed by the appellate tribunal who disagreed with the conclusion of the excess profits tax officer. hence this reference.3. the central board of revenue fixed the standard profits.....
Judgment:

Satyanarayana Rao, J.

1. The following question was referred to us by the Appellate Tribunal under Section 66(1), Income-tax Act :

'Whether on the facts and in the circumstances of the case the amendment of Article 12 of the Articles of Association of the Company can be said to be a transaction with the main purpose of avoidance or reduction of the liability to Excess Profits Tax within the meaning of Section 10-A, Excess Profits Tax Act ?'

2. The assesses in this case is a company incorporated under the Companies Act and carries on business at Coimbatore. During the accounting year from 1st July 1941 to 30th June 1942 the company was assessed to Excess Profits Tax and the resolution of the company amending Article 12 of the Articles of Association was set aside by the Excess Profits Tax Officer under Section 10-A, Excess Profits Tax Act. This decision, however, was reversed by the Appellate Tribunal who disagreed with the conclusion of the Excess Profits Tax Officer. Hence this reference.

3. The Central Board of Revenue fixed the standard profits for the assessment years 1938-39 and 1939-40 at Rs. 1,20,000 to which an interest of Rs. 40,201 was added thus making a total of Rs. 1,60,201. The proportionate standard profits for one year was taken as Rs. 80,100. In the accounting year from 1st September 1939 to 80th June 1940 the company was assessed as a non-director controlled company. During the second accounting period beginning from 1st July 1940 and ending with 30th June 1941 the company altered its Article 12 the result of which was to make the company a director-controlled company. Articles 12 of the Articles of Association of the Company before the amendment was in these terms :

'On a show of hands each member present shall have one vote. On a poll, the first ten shares carried each one vote and every five shares over the ten first ten shares carried one vote.'

The amendment which was passed on 2nd April 1941 reads as follows :

'On a show of hands every member shall have one vote for each share held by him.'

After the amendment more than 50 per cent. of the voting power vested in the hands of the directors as a result of which it became a director-controlled company. Notwithstanding this alteration for some reason, the company was assessed to excess profits tax during the accounting year beginning with 1st July 1940 and ending with 30th June 1341 on the footing that it was a director-controlled company. During that year there was also an increase of the capital of the company amounting to RS. 2,87,333. In the third year of account the Excess Profits Tax Offices treated the resolution of the company amending the articles as within the mischief of Section 10 A, Excess Profits Tax Act and therefore assessed the company as a non-director-controlled company. During this period, there was a further increase of the capital of the company and the total increase for the two years was Rs. 7,06,533 so that taking the standard profits as fixed by the Central Board at RS. 80,100 by reason of the increase of the capital during the accounting period the standard profit was increased by adding RS. 56,523 representing 8 per cent. of the increased capital of Rs. 7,06,533. If it was treated as a director-controlled company the percentage would have been ten per cent. in which case the standard profits would further increase reducing the excess profits by over Rs. 15,000 and the tax by about Rs. 10,000. The difference, therefore, of a company being a director-controlled company or a non-director controlled company is in the calculation of the standard profits. If the company is a director-controlled company ten per cent. of the increase of the capital would be treated as an addition to the standard profits while in the case of a non-director-controlled company it will be only eight per cent. The result of increase in the standard profits is obviously to decrease the excess profits available for assessment. There is also a further difference that in the case of directors-controlled company the directors' remuneration is not a permissible deduction while in the case of non-director controlled company it is allowed as a deduction. It is not definitely known what exactly was the director's remuneration allowed by this company but from the assessment relating to the previous accounting period it was somewhere near Rs. 1200.

4. The question for consideration on these facts is whether at the time the alteration of the article was effected by the resolution of 2nd April 1941 the main purpose of the company and of the shareholders was or was not to reduce the excess profits tax. There is also the question whether the alteration of the article is or is not a transaction within the meaning of the section. In view of the fact that the alteration of the article was effected at a time when the company contemplated increase on the capital and when there was the certainty of excess profits tax being increased the Excess Profits Tax Officer came to the conclusion that the alteration was within the purview of the section and therefore it should not be given effect to and should be treated as a non-director-controlled company. The Appellate Tribunal, however, fell into an error in assuming 'at the commencement of the year of account,' i. e., before Article 12 was amended, and at the close of the year of account, i. e., after the amendment there has been no change in the company as regards the voting power of the directors.

5. This assumption is obviously wrong as the alteration was made at the close of the second accounting year long before the commencement of the third accounting year with which we are now concerned. It is on the basis of this erroneous assumption the Tribunal drew the inference that the main purpose of the amendment could not have been to avoid their liability to pay the excess profits tax. Further they seem to be under the impression that if the alteration or the amendment was not effected during the period of accounting with which the present assessment is concerned it would not offend the provision in Section 10A of the Act. We think that this reasoning is fallacious. It may be, as in the present case, that at a time when the company was attempting to increase their capital they wanted to safeguard themselves by adopting a device by which the standard profits could be increased by converting the company from a non-director-controlled company into a director-controlled company. The fact that this was not done during the period of account would not, in our opinion, affect the inference to be drawn if from the facts and circumstances it is obvious that the main purpose of the amendment was to evade or get reduced the excess profits tax. It was argued on behalf of the assessee firstly that there are no facts or at any rate the facts are wholly inadequate to justify an inference that the object of introducing the amendment was to evade payment of the excess profits tax. We do not, however, agree with this contention. The intention or the purpose with which the amendment was introduced is a matter which can be inferred only from the circumstances attending the transaction. It is not a matter which is capable of direct proof. From the facts and circumstances, the Excess Profits Tax Officer drew the legitimate inference that the object was to evade payment of the excess profits tax. It is also urged that the fact that the department accepted without objection the position that it is a director controlled company during the second year of account is a proof positive that the alteration or the amendment of the article was not such as is calculated or was intended mainly to defeat the provisions of the Act. We do not, however, think that there is any force in any of the contentions. There are circumstances which justify the conclusion of the Excess Profits Tax Officer but that conclusion was reversed by the Appellate Tribunal on erroneous assumptions for which there is no warrant in the facts established in the case. It may be that in the second year of account the Excess Profits Tax Officer was mistaken or was not fully alive to the device that was adopted by the company to increase the standard profits and it may be that he was not fully appraised of the circumstances under which the amendment wag carried. That would not, however, preclude the department from invoking the provisions of Section 10A, Excess Profits Tax Act, in order to get rid of the effect of the amendment and deal with the question in its true perspective. We are, therefore, of opinion that so far as the conclusion of the Appellate Tribunal is concerned, it is not warranted by the facts and circumstances found by them which, as pointed out already, proceeded on an erroneous assumption.

6. The next question that was raised is whether the amendment of the article by the resolution of the company amounts to a transaction within the meaning of Section 10A of the Act. The word 'transaction', has been interpreted in a very wide sense and was applied to varying circumstances and facts. The dictionary meaning as given by Webster is 'Doing or performing business: that which is done : an affair' and this was accepted in Krehl v. Great Central Gas Co., (1870) 5 Ex. 289 : 39 L. J. Ex. 197. The only question for consideration in that case was whether an agreement and an entry in pursuance of the agreement 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. Murray's Oxford Dictionary also interprets the word in a very wide sense and gives as many as six meanings. The meanings given 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;' That which is or has been transacted; an affairs in course of settlement or already settled ; a piece of business ; in (plural) doings, proceedings, dealings.'

The last of the meanings includes 'the record of proceedings published by a learned society.' These illustrate the variety of meanings in which the word is used and its connotation is general. In Ramaswamier & Sons v. Commissioner of Income tax, Madras, I.L.R. (1945) Mad, 618: A. I. R. 1945 Mad.131, this Court held that the stopping of business by a firm and bringing into existence new firms in which some of the partners of the previous firm became also the partners was a transaction within the meaning of Section 10-A. It was argued in that case that the word 'transaction' should be interpreted in a restricted sense so as to confine its meaning to a transaction in the course of the business of the assessee and not to the formation of a new partnership for the carrying on of the same business. It was held that the word could be applied to any particular act done in the carrying on of a business and that the constitution of the new firms was a transaction within the meaning of Section 10-A of the Act. Issue of debentures in Whitmore v. The Commissioners of Inland Revenue, 10 I. T. C. 645, issue of shares in lieu of bonus in Commissioners of Inland Revenue v. B. I. Greenwood, (1920) 8 Tax. Cas. 101 : 19520-2 K. B. 657 and the constitution of a copartnership in Ayrshire Pullman Motor Services and D. M Ritchie v. Commissioners of Inland Revenue, (1929) 14 Tax. Cas. 754 were all treated as transactions though there was no elaborate discussion of the meaning of the word. These cases, however, illustrate that the word is of a very wide import and could be applied not merely to transactions between persons in the nature of sale or exchange or other bilateral contracts but it can be applied even to proceedings of a company in which the resolution amending the Articles of Association is carried out. There can, therefore, be no doubt that the amendment of the articles in the present case is a 'transaction' within the meaning of Section 10-A. The answer in our opinion to the question which has been referred to should be in the affirmative, and in favour of the Commissioner of Income-tax. As the Commissioner has succeeded he is entitled to his costs from the assessee which we fix at Rs. 250.

7. Viswanatha Sastri J. -- I agree with the answer proposed by my learned brother. It was contended by Mr. Ramchandra Aiyar, the learned advocate for the assessee, that the question referred to us really raised two points (a) whether the alteration of Article 12 of the Articles of Association of the Coimbatore Pioneer Mills Ltd., amounted to a transaction within the meaning of Section 10-A, Excess Profits Tax Act, and (b) whether the main purpose of the transaction, if it amounted to one, was the avoidance or reduction of the liability of the assessee to excess profits tax. If the revenue authorities establish that there has been a transaction as contemplated by Section 10-A and that it comes within the mischief of the section, they can proceed to make the adjustments which they think are necessary for the purpose of neutralising the transaction in so far as it affects the liability of the assessee to excess profits tax. The contention of Mr. Ramachandra Aiyar is that the alteration of Article 12 of the Company's Articles by a resolution of the company cannot be regarded as a transaction in the sense in which it is understood in law. He maintains that the transaction referred to in the section is a transaction made in the course of carrying on the business of the company with persons who are outside the company and an alteration in the mode of the indoor management of the company or of the voting rights of the shareholders of the company, cannot be said to be a transaction of the company. For this proposition he relied upon a judgment of the Court of Appeal in Bendir v. Anson, (1936) 3 ALL E. R. 326 : 80 S. J. 873 where Lord Wright observed that a transaction meant an act the effect of which extended beyond the agent to other persons. This decision was given in connection with the interpretation of Order 16, Rule 1 of the Rules of the Supreme Court corresponding to Order 1, Rule 1, Civil P. C. But, in my opinion, the passage relied upon by the learned advocate is itself an authority against his contention, for Lord Wright observed that though the action might be that of an individual by himself, still its effects might be prejudicial or injurious to other persons and all those persons who are so injuriously affected by the action of one could be said to be persons to whom a right to relief arises by the transaction. The word 'transaction' has many shades of meaning in the English language and its connotation in the present case must depend upon the context in which it occurs. 'Transaction' has been defined is an act, doing, performing, business. It is also defined as an accomplishment of a result or the carrying on or completion of an action or course of action. There is no need, therefore, to limit the meaning of the expression transaction to a bilateral transactions between the company or its share-holders on the one hand and strangers on the other. Acts, resolutions or proceedings of learned, philosophical, scientific or academic bodies are referred to as 'transactions' even though there is no question of bilateral arrangements being put through. In my opinion the word transaction as used in Section 10-A has a very wide connotation and is not confined: to transactions made by a firm or a company in the course of its business or trading operations and with outsiders. The decision in Ramaswamier & Sons v. Commissioner of Income-tax, Madras, I. L R. 1948 Mad. 618 : A. I. R. 1945 Mad 131 is an authority in point. I therefore hold that the amendment off Article 12 in this case amounted to a transaction.

8. The second-branch of the argument deals with the main purpose of this transaction. It is within the powers of a company to alter its articles in accordance with the procedure permitted by the company's Act and its action in the present case was perfectly legal. But the question is what was the main purpose of the, alteration of the articles at the time when it was altered. The reason put forward by the assesses was that Article 12, as it originally stood before its amendment in February 1941, was capable of being construed as being in conflict with Section 79, Clause (1), Sub-clause (e), Companies Act, or was at any rate ambiguous. We have read the article as it stood before its amendment and we agree with the Appellate Tribunal that there was no ambiguity in the article and there was no conflict between the article as it stood and Section 79, Companies Act. Article 12 before its amendment was a well-known and common form occurring in articles of limited companies, the object of the article as it originally stood, being to secure, a distribution of voting power amongst as many share-holders as possible without allowing the concentration of voting strength in the hands of a few share-holders who might happen to possess a large block of shares. For reasons of its own the company decided to alter the articles by reversing this position and giving one vote for each share held by a share-holder. The result of this transaction was to concentrate the voting power in the hands of the directors who held a very large number of shares and its effect, in income-tax law, was to constitute the company a director-controlled company. The motive or the reason for the change suggested by the assessee failing we have to look in other directions for the real object and purpose of this transaction. It is in this connection that the time at which this alteration in the articles was made becomes significant. The capital of the company had been substantially increased in the year 1940-41 and 1941-42 and if the company was to be assessed to excess profits tax as a director-controlled-company, the quantum of its liability would be appreciably less than what it would have been if it were a non- director-controlled company. The Excess Profits Tax Act bad been passed in 1940 sometime before the date of the amendment of the Articles. The capital of the company had been substantially increased due to war conditions and the demand for textiles was improving. The time factor to use the language of the learned advocate for the Commissioner, assumes importance in this context. The assessee has failed to prove that the purpose of this alteration was the one suggested by it and it is a legitimate and proper inference in the circumstances of this case to hold that the main object or purpose of the alteration of the articles was to make the company a director-controlled company so as to reduce the incidence of the excess profits tax. I cannot agree with the argument of the learned advocate for the assesses that the revenue in cases of this type is in the position of a prosecutor in a criminal case and that the assessee has no duty to explain his acts and conduct but is entitled to observe a strict silence and practise a rigorous economy of information. If the assessee wants to repel the prima facie inference which can be drawn from the facts relied upon by the revenue it has to prove that there were other reasons or objects with which the alteration in the article was effected. This has not been done. I therefore agree with my learned brother in the order which he has proposed and in the direction for costs.


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