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Issues Involved:
1. Interpretation of Rule 2 under Section 43(2)(e) of the Indian Income-tax Act. 2. Deductibility of Income-tax and Excess Profits Duty payable in England and other stations outside British India from the assessable profits. Issue-wise Detailed Analysis: 1. Interpretation of Rule 2 under Section 43(2)(e) of the Indian Income-tax Act: The primary issue revolves around the interpretation of a rule made by the Government of Madras under Section 43(2)(e) of the Indian Income-tax Act. This rule prescribes the manner and mode by which the taxable income of persons not resident in British India or persons deemed to be assessees in respect thereof shall be arrived at. Specifically, Rule 2 states that in cases where the method of assessment on a percentage of turnover is inapplicable, such as for an Indian Branch of a Foreign Insurance Company, the profits of the Indian Branch may be assumed to bear the same proportion to the total profits of the company as its receipts bear to the total receipts. In this context, the court had to determine whether "total profits" for the purposes of the rule should be calculated by deducting Income-tax and Excess Profits Duty payable in England and other stations outside British India. The court concluded that the deductions claimed are not allowable. It was emphasized that the Indian assessable profits are to be ascertained without deduction of the local income tax, implying that the total assessable profits of the business should also be calculated without deducting local income taxes and excess profits taxes. 2. Deductibility of Income-tax and Excess Profits Duty payable in England and other stations outside British India from the assessable profits: The question was whether the Eastern Extension Australasia and China Telegraph Company Limited, incorporated in England with branches in India and elsewhere, is entitled under Section 33 of the Income-tax Act and the rules framed thereunder to deduct from the assessable profits the Excess Profits Duty payable in England and Income-tax payable in England and other stations outside British India. The court referred to Section 33 of the Income-tax Act, which renders persons residing outside British India taxable in respect of profits or gains accruing or arising to them through any business connection in British India. Given the difficulty in accurately ascertaining the profits made in British India by such firms, rules were framed under the statutory power conferred by Section 43(2)(c) to prescribe the manner and procedure for arriving at the taxable income of such persons. The court noted that the total profits of the company include profits made both in British India and outside. It was clear that income tax paid during the previous year or likely to be assessed during the current year cannot be deducted to estimate the profits on which income tax is to be assessed. The court cited Ashton Gas Company v. Attorney General, where it was observed that income tax is a charge on the profits, and you must ascertain what the profit is before deducting the tax. The court also considered arguments by Mr. Aiyangar for the company, who contended that "profit" for income-tax purposes should be the same as commercial profit, and that foreign income tax paid should be treated as necessary expenses for carrying on the business. However, the court rejected these arguments, noting that while income tax paid is considered an expense in accountancy and book-keeping, it cannot be deducted for the purposes of levying income tax. The court concluded that the rule in question provides a formula for ascertaining the income arising from business in British India, which is mixed with income from outside British India. The rule is artificial and provides a rough method of arriving at taxable income. Therefore, the word "profit" cannot be used in two different senses within the same rule. In summary, the court held that the deductions for Income-tax and Excess Profits Duty payable in England and other stations outside British India are not allowable when calculating assessable profits for the purposes of the Indian Income-tax Act. The answer to the reference was that the deductions claimed are inadmissible, and costs of Rs. 250 were to be paid by the assessee to the Government.
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