Commissioner
of Excess Profit Tax, Kanpur Vs. Kalyan Mal Phool Chand, Nagar Ganj,
Kanpur [1987] INSC 77 (13 March 1987)
Mukharji,
Sabyasachi (J) Mukharji, Sabyasachi (J) Natrajan, S. (J)
CITATION:
1987 AIR 2140 1987 SCR (2) 601 1987 SCC (2) 458 JT 1987 (1) 691 1987 SCALE
(1)563
ACT:
Excess
Profit Tax Act, 1940---Sections 2, 5-7--'Accounting period'--'Chargeable
account period'--'Standard profits'--What are-Deficiency in profits--Setting
off--Basis of determination.
HEAD NOTE:
The assessee
was an unregistered firm carrying on business of manufacture and sale of Katechu.
The firm carried on the work of extraction of Katechu in Nepal and sales were affected in Kanpur. It had first taken a jungle on
lease and Katechu were extracted from October 1940 to September, 1941.
Sales
were effected from 30th
May, 1941 to 29th September, 1941. Thereafter, another jungle was
taken on lease and Katechu were extracted from 23rd November, 1942 to 6th November, 1944. The sales were effected between 26th July, 1943 to 4th April, 1944.
The assessee
claimed set off of deficiency of profit for the periods 20th October, 1940 to 17th October, 1941 and 23rd
November, 1942 to 31st March, 1943 on the ground that the business
carried on during the chargeable accounting period 1-4-1943 to 31-3-1944 was not separate to and distinct
from the business carried on in 1940-41.
The
Excess Profit Tax Officer did not set off the deficiency of profits that
accrued in respect of the period 1940-41 out of the profits for the chargeable
accounting period from 1-4-1943 to 31-3-1944, and held that the business
carried on during October, 1940 to October, 1941 was completely different from
the business carried on during the aforesaid chargeable accounting period.
So far
as the deficiency pertaining to the period November, 1942 to 31st March, 1943 was concerned, the manufacturing
operations started on or about 23rd November, 1942 and the sales started on 26th July, 1943. Katechu produced from 23rd November, 1942 to 31st March, 1943 remained in stock till the last date of the chargeable
accounting period.
namely,
31st March, 1943. As the assessee did not, maintain
any books of account, the provisions of s. 13 of the Income Tax 602 Act, 1922
were applicable. The Revenue, therefore, valued the stock-intrade at cost and
held that there could be no profit or loss during the chargeable accounting
period.
In
appeal, the assessee urge that deficiency in profits pertaining to the
chargeable accounting periods from October, 1940 to 31st March, 1941, and 23rd
November, 1942 to 31st March, 1943 should be allowed a set off in computing the
excess profits and as there were no profits during the said chargeable
accounting period, the standard profits became the deficiency of the said two
years which should have been allowed set off and that as manufacturing
operations were carried on during the said periods, it could not be said that
the assessee did not carry on any business.
The
Appellate Assistant Commissioner found that the constitution of the firm during
the chargeable accounting period was the same as in 1940-41, that the accounts
were maintained in the same fashion and the same business was carried on, that
the assessee had effected sales only during 30th May, 1941 to 29th September,
1941 and held that the assessee was entitled to set off in respect of the
deficiency of profits. He, therefore, confirmed that there were no profits and
losses during the chargeable accounting period ending on 31st March, 1941 and as such there could be no
deficiency of profits. The assessee was, therefore, held to be entitled to a
set off of the deficiency only for the chargeable accounting period ending on 31st March, 1942 which consisted of the period 1st
April. 1941 to 29th September. 1941.
The
Tribunal, however, held that no profits accrued unless sale was effected and
accepting the contention of the Revenue that no part of profits, which accrued
during the said two chargeable accounting periods could be charged and were in
fact not so charged to income-tax, as no sales were effected, the Act itself
did not apply and confirmed the order of the Appellate Assistant Commissioner.
The
High Court divided the entire period of manufacture and sales to determine the
question whether there was manufacturing activity and sale;
(1) October 28, 1940 to March 31, 1941, failing in the financial year ending March 31, 1941, Katechu was manufactured but there
was no sale;
(2) April 1, 1941 to September 29, 1941, failing in the financial year ending March 31, 1942; sales took place from May 30, 1941 to September 29, 1941;
(3)
November 23, 1942 to March 31, 1943 failing in the financial year ending March
31, 1943; Katechu was manufactured but there was no sale;
(4) April 1, 1943 to March 31, 603 1944, failing in the financial year ending March 31,. 1944;
sale took place from July
26, 1943 to March 31, 1944;
(5) April 1, 1944 to April 4, 1944, failing in the financial year ending March 31, 1945; sales were effected from April 1, 1944 to April 4, 1944 when the business was discontinued.
It
held that while there was manufacturing activity there was no sale during the
financial years ending March 31, 1941 to March 31, 1943, that the profits
earned upon sales effected during the chargeable accounting period ending 31st
March, 1944 must be apportioned between the manufacturing activity during the
chargeable accounting period ending 31st March, 1943 and the sales during the
chargeable accounting period ending 31st March, 1944 and that the deficiency of
profits must be set off in computing the excess profits for the chargeable
accounting period ending 31st March, 1944.
The
High Court, therefore, did not accept the opinion of the Tribunal and held that
the assessee was entitled to a set off of deficiency of profits relating to the
periods 28-101940 to 31-3-1941 and 23-11-1942 to 31-3-1943 from the profits of the chargeable
accounting period 1-4-1943 to 31-3-1944.
Allowing
the Appeal,
HELD:
1. The
scheme contained in the Excess Profits Tax Act is a legislation intended to tax
the profits of certain business in excess of a certain limit as provided in
that Act. It is, therefore, complementary to the Income Tax Act by its very
nature. [610D] Commissioner of Income Tax, Bombay v. Raipur Manufacturing Co., Ltd., 14 ITR 725 at 733, followed.
2. In
order to work out the scheme of the Act, there must be proper dovetailing of
the concept of 'accounting period'. 'chargeable accounting period' and basic
scheme of the Income-Tax Act bearing in mind that excess profits are excess of
profits which were intended to be mopped up during the war period, to be taxed
separately and differently. [612H; 613A-B]
3. If
the right to receive those profits had accrued or arisen subsequently then even
though they had accrued or arisen by reason of work done during the chargeable
accounting period, these were not liable to be treated as the profits of that
chargeable accounting period. [613C] 4.Whether the profits in the one case
could be identified with the profits in the other would be determined by
reference to the period in which those accrued or arose. The profits during the
chargeable 604 accounting period must be computed under the Excess Profits Tax
on the same basis as are profits for an income-tax assessment. [613D-E] Haji Rahmat
Ullah and Co. v. Commissioner of Income-tax, U.P., 59 I.T.R. 109, relied upon.
5. It
has to be clearly borne in mind that the Act is not an entirely different Act
in the sense that it proceeds upon the concept completely different from the
notions of Income Tax and has its source in an entirely different tax concept.
More profits which were likely to have been earned due to profits, these were
made subject to excess profits. [613E-F]
6.
Though profit in a composite transaction could be apportioned as between
manufacture and sale in the same accounting year, such an apportionment is not
permissible when one part of the transaction, i.e. manufacture, falls in one
chargeable accounting period and falls in another part of the accounting period
i.e. the trading operations i.e. falls in another accounting period, then set
off deficiency in profits under section 7 of the Act is permitted but a
necessary precondition was that profit must be made in the accounting period to
which the deficiency relates. [613G-H; 614A]
7. The
excess profit under the Act is profit determined under the Income Tax Act
subject to prescribed adjustments.
If the
income tax assessment discloses nil profits, no separate profit can be
determined independently under the Act. [614A-B]
8. It
is a general principle, in the computation of the manual profits of a trade or
business under the Income Tax Acts, that those elements of profits or gain, and
those only, enter into the computation which are earned or ascertained in the
year to which the enquiry refers; and in like manner, only those elements of
loss or expense enter into the computation which are suffered or incurred
during that year. [614C-D] Edward Collins & Sons Ltd. v. The Commissioners
of Inland Revenue, 12 T.C. 773 at 780, followed and Commissioner of Incometax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18
I.T.R. 472, distinguished.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 1375 of 1974 605 From the Judgment and
Order dated 21.2. 1971 of the Allahabad High Court in Excise Profit Tax
Reference No. 55 of 1968.
Dr. V.
Gauri Shankar and Miss A. Subhashini for the Appellant.
S.T.
Desai, Harish Salve, Mrs. A.K. Verma and D.N. Mishra for the Respondent.
The
Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. This appeal is
directed against the judgment and order of the High Court of Allahabad dated
21st February 1971. It relates to the assessment under the Excess Profits Tax
Act, 1940 (hereinafter called the 'Act').
The assessee
was an unregistered firm carrying on business of manufacture and sale of katechu.
The chargeable accounting period was 1-4-1943 to 31.3. 1944. There were two
partners of the assessee firm, namely, L. Phoolchand and M/s Biharilal Balkishan
each having profits in proportion of 11 annas and 5 annas respectively. The
work in connection with the extraction of Katechu was carried on in Nepal by 1..
Phoolchand
and the sale of Katechu were effected by M/s Biharilal Balkishan at their shops
in Kanpur. The assessee firm did not maintain any books of account and the
entire record of the business transaction was maintained in the books of M/s Biharilal
Balkishan in the account styled "Kalyanmal Phoolchand".
The assessee
firm had taken a jungle on lease for this purpose and had extracted Katechu
from October, 1940 to September, 1941. The sales of katechu extracted were effected
from 30th May, 1941 to 29th September, 1941. Thereafter another jungle was taken on lease in
November, 1942 and Katechu were extracted from 23rd November, 1942 to 6th
November, 1944. The sales in this case were effected between 26th July, 1943 to
4th April, 1944. The High Court divided the entire period of manufacture and
sale as follows:
1.
October 28, 1940 to March 31, 1941, failing in the financial year ending March
31,1941. Katechu was manufactured but there was no sale.
2. April
1, 1941 to September 29, 1941, failing in the financial year ending March 31,
1942. Sales took place from May 30, 1941 to September 29, 1941.
606
3.
November 23, 1942 to March 31, 1943, falling in the financial year ending March
31, 1943. Katechu was manufactured but there was no sale.
4. April 1, 1943 to March 31, 1944, falling in the financial year ending March 31, 1944, sales took place from July 26, 1943 to March 31, 1944.
5. April 1, 1944 to April 4, 1944, falling in the financial year ending March 31. 1945, sales
were effected from April
1, 1944 to April 4, 1944, when the business was
discontinued.
Therefore,
while there was manufacturing activity there was no sale during the financial
years ending 31st March, 1941 and 31st March, 1943. The dispute in this case is
with regard to the set off of deficiency of profit relating to the periods 20th
October, 1940 to 17th October, 1941 and 23rd November, 1942 to 31st March,
1943.
The
Excess Profit Tax Officer did not set off the said deficiency of profits that
accrued in respect of the period 1940-41 out of the profits for the chargeable
accounting period from 1.4.1943 to 31.3. 1944. The submission of the assessee
was that the business carried on during the chargeable accounting period under
consideration was not separate to and distinct from the business carried on in
1940-41. The Excess Profit Tax Officer held that business carried on during
October, 1940 to October, 2941 was completely different from the business
carried on during the chargeable accounting period under consideration.
The
Appellate Assistant Commissioner on appeal found that the constitution of the
firm during the chargeable accounting period was the same as in 1940-41 and the
accounts were maintained in the same fashion; and that the same business of
manufacturing Katechu in Nepal and selling the finished products
at kanpur was carried on. The Appellate
Assistant Commissioner, therefore, held that the assessee was entitled to set
off in respect of the deficiency of profits accruing in the year 1940-41. The
Appellate Assistant Commissioner further found that the assessee had effected
sales only during 30th
May, 1941 to 29th September, 1941.
As
such there were no sales either during or until 30th May, 1941 land subsequent
to 29th September, 1941. As such he held that there was no profit arising
during the accounting period ending on 31st March, 1941. He, therefore,
confirmed that there were no profits and losses during the chargeable
accounting 607 period ending on 31st March, 1941 and as such there could be no
deficiency of profits. In the premises, according to the Appellate Assistant
Commissioner, the assessee was entitled to a set off of the deficiency only for
the chargeable accounting period ending on 31st March, 1942 which consisted of
the period 1st April, 1941 to 29th September. 1941. He allowed such deficiency
of Rs.5,600 only. So far as the deficiency pertaining to the period November,
1942 to 3 Ist March, 1943 was concerned, the facts were that the manufacturing
operations started in Nepal on or about 23rd November, 1942 and the sales of Katechu
started at Kanpur on 26th July, 1943 Katechu produced in Nepal from 23rd
November, 1942 to 31st March, 1943 remained in stock till the last date of the
chargeable accounting period namely 31st March, 1943 and no part of it was
sold. As the assessee did not maintain any books of account, the provisions of
section 13 of the Income Tax Act, 1922 as applied to the Act vide section 21 of
the Act were applicable. The revenue, therefore, valued the stock-in-trade at
cost and held that there could be no profit or loss during the chargeable
accounting period. In appeal, the assessee had urged that deficiency in profits
pertaining to the chargeable accounting periods from October, 1940 to 31st
March, 1941 and 23rd November, 1942 to 31st March, 1943 should be allowed a set
off in computing the excess profits for the year under consideration. It was
submitted that there was no profits pertaining to the said chargeable
accounting period, and therefore, the standard profits as provided in the Act
became the deficiency of the said two chargeable accounting periods which
should have been allowed set off. It was further urged on behalf of the assessee
that the manufacturing operations were carried on during the said periods and
as such it could not be said that the assessee did not carry on any business.
The
Tribunal, however, held that no profits accrued unless sale was effected and,
therefore, there was no merit in the submission made on behalf of the assessee
that during the said two chargeable accounting periods, although there were no
sales effected, yet profits accrued to the assessee.
It was
urged on behalf of the revenue that as provided in the Act, the provisions of
the Act would apply to every business of which any part of profits was made
during the chargeable accounting period, is chargeable to income-tax.
It was
further urged that no part of profits, if any, which accrued during the said
two chargeable accounting periods could be charged and were in fact not so
charged, to income-tax, as no sales were effected and, therefore, the Act
itself did not apply to the said two chargeable accounting periods. The
Tribunal accepted this contention on behalf of the revenue and as 608 such
confirmed the order of the Appellate Assistant Commissioner.
On the
said facts, the following question of law was referred to the High Court at the
instance of the assessee:
"Whether,
on the facts and in the circumstances of the case, the assessee was entitled to
a set off of deficiency of profits relating to the period 28.10.1940 to
31.3.1941 and 23.11. 1942 to 31.3.1943 from the profits of the chargeable
accounting period 1.4.1943 to 31.3.1944 in accordance with the provisions of
the E.P.T. Act, 1940?" The High Court held that it was not disputed before
them that the assessee was carrying on the same business from 28th October,
1940 to 4th April, 1944 for the purpose of the Act. The only question was
whether the assessee could be said to have suffered any deficiency of profits
during the period 28th October, 1940 to 31st March, 1941 and 23rd November,
1942 to 31st March, 1943 and was whether entitled to be given the benefit of
such deficiency. of profit.
The
High Court referred to certain definitions and recognised and in our opinion
rightly that there were several stages in business activities before profits
could be realised. The High Court observed that profits realised were not of
the sale alone. The profits were attributable to the manufacturing operations
as well. The High Court referred to certain decisions to which our attention
was also drawn where under the Act as to the place where the profits arose, the
courts had enquired into the place where the manufacturing took place and where
the sales took place. This contention is no longer relevant for the controversy
before us. It was accepted before us that a manufacturing process may begin in
one year and result in sale in another year and also that manufacturing process
may take at one place and sale at another place. For the purpose of computing
the profit of certain operation, it is true as the High Court noted, that
manufacture and sale might take place in two different years.
The
High Court held that though chargeable levy was an annual charge and generally
for the purpose of the levy of the annual charge the profits of the year
preceding the year of charge are taken into consideration if the manufacturing
activity leading to the production of finished article which was subsequently
sold contributed to the profits realised, according to the High Court, it
mattered little whether or not the manufacturing activity of the sale related
to the same period of 609 twelve months. Some part of the profits realised
would be attributable to the manufacturing activities and, therefore, could be
said to arise during the period when manufacturing was carried on even though
sales were effected in the next year. The High Court, therefore, was of the
view that it was necessary to ,determine what part of the profits realised upon
the sales from 30th May, 1941 to 29th September, 1941 could be attributed to
the manufacturing activity between 28th OCtober, 1940 to March, 1941 and then
to compute the deficiency of profits for the chargeable accounting period
ending 31st March, 1941. That might require, according to the High Court, a
fresh determination of the profits earned during the period 1st April, 1941 to 29th September, 1941 and, consequently, of the deficiency of profits
during the chargeable accounting period ending 31st March, 1942.
The
High Court was of the view that the deficiency of profits for the chargeable
accounting periods ending 31st March, 1941
and 31st March, 1942 would have to be set off when
computing the excess profits for the relevant chargeable accounting period ending
31st March, 1944. The High Court expressed the view
that under section 2(5) of the Act the job of the assessee in the extraction
and sale of Katechu under the two jungle leases must be considered as a single
business for the purpose of the Act. The High Court, therefore, came to the
conclusion that upon the principle of apportionment of profits to which it had
adverted to, the profits earned upon sales effected during the chargeable
accounting period ending 31st March, 1944 must similarly be apportioned between
the manufacturing activity during the chargeable accounting period ending 31st
March, 1943 and the sales during the chargeable accounting period ending 31st
March, 1944 and the deficiency of profits worked out on that basis in respect
of the chargeable accounting period ending 3 Ist March, 1943 must be set off in
computing the excess profits for the chargeable accounting period ending 31st
March, 1944. The High Court, therefore, did not accept the opinion of the
Tribunal that because the chargeable accounting periods ending 31st March, 1941
and 31st March, 1943 were occupied with manufacturing activity alone and there
were no sales, therefore, no part of the profits realised upon the sales could
be apportioned to those chargeable accounting periods and consequently that it
could not be said that there was any deficiency of profits during those
periods. The question referred to the High Court was answered in affirmative.
In
order to appreciate the real controversy in this matter, it is appropriate to
refer to the observations of Kania, J., as the Chief Justice then was, in the
decision in the case of Commissioner of Income 610 Tax, Bombay v. Raipur
Manufacturing Co., Ltd.; 14 ITR 725 at 733. It was observed as follows:
"The
Excess Profits Tax Act as shown by the preamble itself is a legislation to
impose tax on excess profits arising out of certain business. The Income-tax
Act is the principal legislation which imposes a tax on the income of a person.
Section 6 divides the income under five heads which are chargeable to tax.
The
fourth head is profits and gains of business, profession or vocation. Out of
that a certain portion is carved out by the Legislature for the purpose of
imposing the excess profits tax. I am unable to accept the contention of the
Commissioner that the Excess Profits Tax Act is an entirety independent
legislation, which is connected with the Income-tax. Act only to the extent it
is expressly so stated in the Excess Profits Tax' Act. The scheme that the
Excess Profits Tax Act is a legislation intended to tax the profits of certain
business in excess of a certain limit as provided in that Act. It is therefore
complementary to the Income-tax Act by its very nature." As the Statement
of Objects of the Act stated that the outbreak of war, while it has
necessitated greatly increased expenditure by the Government on defence and
other services, has simultaneously created opportunities for the earning by
companies and persons engaged in business of abnormally large profits. The
object of the Bill (which later became the Act was to secure for the Government
a considerable portion of the additional business profits which accrued as a
result of the conditions prevailing during the war. To begin with the right to
impose a tax of 50% of the excess of the profit made in any accounting period
after the 1st day of April, 1939 was given. It had subsequently been increased
to 66-2/3 %.
Section
2(1) of the Act defines the 'accounting period'.
Section
2(6) defines 'chargeable accounting period as (a) any accounting period falling
wholly within the term beginning on the 1st day of September, 1939, and ending
on the 31st day of March, 1946 and (b) where any accounting period falls partly
within and partly without the said term, such part of that accounting period as
fails within the said term. The 'standard profits' is defined under section
2(2) which was required to be computed in accordance with the provisions of
section 6 of the Act. It is not necessary in view of the controversy before us
to refer to other definitions except that section 2(3) deals with 'average 611
amount of capital' which is relevant for computation of the excess profits.
Section 6 defines the 'standard profits' and how it is to be computed. As there
was no controversy on this aspect before us, it is not necessary to deal with
it.
Section
2(9) defines 'deficiency of profits' as follows:
(9)
"deficiency of profits" means-"(i) where profits have been made
in any chargeable accounting period, the amount by which such profits fall
short of the standard profits;
(ii) where
a loss has been made in any chargeable accounting period, the amount of the
loss added to the amount of the standard profits;" Section 4 defines
'charge of tax' as follows:
"Charge
of tax"--( 1 ) Subject to the provisions of this Act, there shall in
respect of any business to which this Act applies, be charged, levied and paid
on the amount by which the profits during any chargeable accounting period
exceed the standard profits a tax (in this Act referred to as "excess profits
tax") which shall, in respect of any chargeable accounting period ending
on or before the 31st day of March, 1941, be equal to fifty per cent, of that
excess and shall, in respect of any chargeable accounting period beginning
after that date, be equal to such percentage of that excess as may be fixed by
the annual Finance Act;
Provided
that any profits which are, under the provisions of sub-section (3) of section
4 of the Indian Incometax Act, 1922, exempt from income-tax, and all profits
from any business of life insurance shall be totally exempt from excess profits
tax under this Act.
Provided
further that in the. case of any business which includes the mining of any
mineral, any bonus paid by or through the Central Government in. respect of
increased out-put of the mineral shall be totally exempt from excess profits
tax under this Act.
(2)Where
a chargeable accounting period falls partly 612 before and partly after the end
of March, 1941, the foregoing provisions of this section shall apply as if so
much of that chargeable accounting period as falls before, and so much of that
chargeable accounting period as falls after, the said end of March were each a
separate chargeable accounting period, and as if the excess of profits of that
separate chargeable accounting period were an apportioned part of the excess of
profits arising in the whole period determined in accordance with the
provisions of section 7A." Section 7 deals with the relief on occurrence
of deficiency of profits and provides in substance that where a deficiency of
profits occurs in any chargeable accounting period in any business, the profits
of the business chargeable with excess profits tax shall be deemed to be
reduced and relief shall be granted according to the provisions laid down
therein.
The
main question in this case is to keep the distinction between 'accounting
period' and 'chargeable accounting period'. The accounting period, it has to be
borne in mind, is the twelve months' proceeding just on the basis of the
income-tax year and the assessment must be made on the same basis. The
'chargeable accounting period' is the period beginning from 1st September, 1939
ending after amendment on 31st March, 1946. So if there is any deficiency of
profits in any of the accounting period which has not been absolved in the
assessment for that year may be carried forward but the assessment must be made
on the basis of the accounting period. This has to be emphasised and it must be
borne in mind that though it is wholly immaterial whether the manufacture and
sale took place in the same year or in two different years, the division of
time into periods for its assessment must be made in a real sense as in the
income-tax one, and then make appropriate adjustments. Therefore the profits
and losses of each year must be computed on yearly basis in terms of the
definition of 'accounting period' under section 2(1) of the Act. But if any
deficiency of profits remains unabsolved, it may be carried forward against any
excess profits made and set off during the next accounting period. The
chargeable accounting period is the period from 1st September, 1939 to 31st
March, 1946. But each year's excess profit & loss must be computed in the
manner contemplated in section 2(1) of the Act. So if there was any deficiency
of profits in any particular period, it must be determined on that basis. In
order to work out the scheme of the Act, there must be proper devetailing of
the concept of "accounting period", 613 "chargeable accounting
period" and basic scheme of the Income-Tax Act bearing in mind that excess
profits are excess of profits which were intended to be mopped up during the
war period intended to be taxed separately and differently. This view finds
support in the decision of the Allahabad High Court.
In the
case of Haji Rahmat Ullah and Co. v. Commissioner of Income-tax, U.P., 59
I.T.R. 109 the High Court of Allahabad held that a payment received in any year
subsequently to a chargeable accounting period is not liable to be treated as
the profits of that period, merely because the work which occasioned that
payment was done during that period. The "profits during the chargeable
accounting period" are those profits respecting which a right to receive
had accrued or arisen during that period. If the right to receive those profits
had accrued or arisen subsequently, then even though they had accrued or arisen
by reason of work done during the chargeable accounting period, these were not
liable to be treated as the profits of that chargeable accounting period. The High
Court observed that it would seem ex facie that if the profits earned during a
certain period are taxable under the Income-tax Act, it is a part of those very
profits which is liable to excess profits tax. Whether the profits in the one
case could be identified with the profits in the other would be determined by
reference to the period in which those accrued or arose. It was emphasised that
the profits during the chargeable accounting period must be computed under the
Excess Profits Tax on the same basis as are profits for an income-tax
assessment. It is clear that excess profits tax is attracted in respect of a
business to which the Act applied when the profits during the chargeable
accounting period exceed the standard profit.
It has
to be clearly borne in mind that the Act is not an entirely different Act in
the sense that it proceeds upon the concept completely different from the
notions of Income tax and has its source in an entirely different tax concept.
More
profits which were likely to have been earned during those years, these were
made subject to excess profits.
It
appears to us that the period of assessment in the Act is an "accounting
period" in the same way as the 'previous year' is the period of assessment
for the purpose of Income-Tax. Though profit in a composite transaction could
be apportioned as between manufacture and sale in the same accounting year,
such an apportionment is not permissible when one part of the transaction, i.e.
manufacture, fails in one chargeable accounting period and falls in another
part of the accounting period i.e. the trading operations, i.e. falls in
another accounting period, then set off of deficiency in profits under section
7 of the Act is permitted but a necessary precondition was that profit 614 must
be made in the accounting period to which the deficiency relates. The profits
attributed on apportionment was outside the scope of section 7 of the Act. It
must be remembered that the 'excess profit' under the Act is profit determined
under the Income Tax Act subject to prescribed adjustments.. If the income tax
assessment discloses nil profits, no separate profit can be determined
independently under the Act.
The
position of the Excess Profits Tax Act was explained by Lord President Clyde in
Edward Collins & Sons. Ltd. v. The Commissioner of Inland Revenue, 12 T.C.
773 at 780 where the Lord President emphasised that subject to certain
modification those profits had to be determined in the same way and on the same
principle as a trader's profits and gains have to be computed for the purposes
of the Incometax Act.
It is
a general principle, in the computation of the annual profits of a trade or
business under the Income Tax Acts, that those elements of profit or gain, and
those only, enter into the computation which are earned or ascertained in the
year to which the enquiry refers; and in like manner, only those elements of
loss or expense enter into the computation which are suffered or incurred
during that year. The same principle, in our opinion, would be applicable to
the facts of this case.
The
decision of this Court in Commissioner of Incometax, Bombay v. Ahmedbhai Umarbhai & Co.,
Bombay, 18 I.T.R. 472 related entirely to a different context where certain
part of the activities occurred at Raichur and the sales took place in Bombay,
the question was whether the activity which the assessee carried on at Raichur
was part of their business within the meaning of the third proviso to section 5
of the Act, that the profits of a part of the business, the manufacturing of
oil in their mills at Raichur, accused or arose at Raichur and that such
profits were not assessable to excess profits tax under the third proviso to
Section 5 of the Act. That is not the controversy here. controversy is not so
much where the profits arose nor is the controversy whether the profits arose
during the chargeable accounting period but where the profits arose during the
'accounting period' and as such whether the deficiency of the profits not
arising during 'counting period' but during the 'chargeable accounting period'
could be set off without computation. The method of computation under section 7
of the Act must be on the basis of 'accounting period' and after that the
deficiency in profits for that period should be computed on that basis and
after set off carried forward to be set off during the chargeable accounting
period. It is thus an harmonious construction of 615 the different provisions
of the Act is possible and the true excess profits, if any, as contemplated by
the Act be determined. The concept of 'accounting period' in the background of
the 'chargeable accounting period' can thus be harmonised. The accounting
period was 1st April,
1943 to 31st March, 1944. In the facts of the case we are of
the opinion that the question must be answered in the negative and in favour of
the revenue. The appeal is allowed and the judgment and order of the High Court
are set aside.
In the
facts and circumstances of the case, parties will pay and bear their own costs.
A.P.J.
Appeal allowed.
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