TMI Blog1946 (3) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Rule 1 in Schedule II and sub-rule (1)(a) and (2) which are in the following terms were considered:- '1. (1) Subject to the provisions of this Schedule, the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken to be- (a) so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those assets were acquired, subject to the deductions hereafter specified; (2) The price or value of any assets other than a debt shall be subject to such deductions for depreciation as are necessary to reduce the asset to its written down value and to such other deductions in respect of reduced values of assets as are allowable in computing profits for the purposes of income-tax and, in the case of a debt, the nominal amount of the debt shall be subject to any deduction which has been allowed in respect thereof for income-tax purposes.' The Excess Profits Tax Officer considered that at the time of making the income-tax assessments, covering the standard periods, the Income-tax Officer had accepted the stock valuations made by the assessee on the basis of a fixed rate whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to the computation for the purposes of excess profits tax to be made in the case of the assessee company. The first Schedule to the Excess Profits Tax Act contains the rules for the computation of profits for the purpose of excess profits tax and the second Schedule contains rules for computing the average amount of the capital employed in the business concerned. In order to make calculations for excess profits tax in any case four elements have to be considered. First, the profits for what the Act describes as the standard period; secondly, the capital on which such standard period profit was made; thirdly, the profits for the chargeable accounting period; and fourthly, the capital employed in the chargeable accounting period to make those profits; and, it is by comparing the first and the second with the third and the fourth of these calculations that the necessary basis of computation is arrived at. In this reference it is the capital during the standard period, which was the accounting year for income-tax purposes of 1936-37, with which we are concerned, and as formulated by the Appellate Tribunal the question referred to us is: Whether upon the facts found by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce the assets to their written down value ; secondly, other deductions in respect of reduced values of assets, other than a debt, as are allowable in computing profits for purposes of income-tax; and, thirdly, deductions in respect of a debt being the nominal amount of the debt, subject to any deduction which has been allowed in respect thereof for income-tax purposes. Such an analysis invokes the question as to the right to make the deductions in respect of these three categories. The first category is dependent upon Section 10(2)(vi) of the Indian Income-tax Act and rule 8 of the Income-tax Rules made thereunder, and when that sub- section and that rule are examined, it will be found that what is to be allowed is such percentage on the original cost as is prescribed with respect to the particular commodity and it is Rule 8 which sets out in columns the commodity and fixed percentage. There is nothing discretionary about this, it is all prescribed by a table of percentages. With regard to the second category there is in respect of it no reference in the Income-tax Act, and the right to make the deductions depends on commercial usage in making up accounts. It is in fact the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his reference. KANIA, J.--In the statement of case the Tribunal has observed as follows:- While making the excess profits tax assessments for the chargeable accounting periods commencing from 1st September 1939 to 31st December 1939 and the years 1940 and 1941 the Excess Profits Tax Officer had to compute the capital employed for the business of the assessee during the standard periods and in the course of that computation the question of valuing the business assets was taken up......He considered that at the time of making the income-tax assessments, covering the standard periods, the Income-tax Officer had accepted the stock valuations made by the assessee on the basis of a fixed rate which was lower than either the market or cost. Upon this consideration, the Excess Profits Tax Officer felt that the deductions in respect of the reduced values allowable to the assessee was nil, since the cost price was below the market price and in his opinion no further deduction was called for in terms of sub-rule (1)(a) of the rules of the second Schedule to the Excess Profits Tax Act. In this view he rejected the valuations made at a fixed rate in income-tax assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that the profits of a business during the standard period or during any chargeable accounting period shall be separately computed and shall, subject to the provisions of that Schedule, be computed on the principles on which the profits of a business are computed for the purposes of income- tax under Section 10 of the Indian Income-tax Act. There is a proviso to this rule which runs as follows:- Provided further that where the profits during any standard period have already been determined for the purpose of an assessment under the Indian Income-tax Act, 1922, such profits as so determined shall, subject to the adjustments required by this Schedule, be taken as the profits during that period for the purpose of excess profits tax: The remaining provisions of the Schedule are not material on the facts of this case. The expression average amount of capital is defined in Section 2(3) of the Act as the average amount of capital employed in any business as computed in accordance with the second Schedule. The material portion of Rule 1 runs as follows:- (1) Subject to the provisions of this Schedule, the average amount of the capital employed in a busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinction sought to be made by the use of these two expressions is imaginary. The Court must look at the substance of the legislation and the whole scheme of the Act. It is pointed out that if the Commissioner's argument is accepted, the result will be that while for income-tax purposes the standard profits will be one figure, for the same period it will be a different figure for the excess profits tax. It is contended that this cannot be the scheme of the Act. In this connection strong reliance is placed on the proviso to Rule 1 of the first Schedule where it is provided that the Excess Profits Tax Officer is bound to accept the computation of profits for the standard period as made by the Income-tax Officer. It is argued that the present contention is a device to get round this position, which the taxing authorities cannot legitimately do under the provisions of the Income-tax Act. They find that they are unable to revise or set aside a computation of profits made by the Income-tax Officer for the standard period, and to get round that difficulty this argument is advanced. The question for determination therefore is, what is the effect of Schedule I, Rule 1, and the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the account are the sales. Moreover the stock in hand at the end of the year has to be entered. The balance is the profits of the year. This recognised method of computing profits has been accepted as the correct method. The Income-tax Officer, working on this method, arrives at a particular figure as the profits for the standard period. The conclusion, i.e., the amount so determined, is binding on the Excess Profits Tax Officer under Schedule I, Rule 1, proviso. Moreover in accordance with the first rule of the first Schedule it is equally his duty to calculate the profits of the business during the standard period and also during the chargeable accounting period on the principles on which the profits of a business are computed for the purposes of income-tax under Section 10 of the Indian Income- tax Act. This leaves no doubt in my mind that it is not open to the Excess Profits Tax Officer to tinker with any of the figures which have been used for arriving at the profits. The provisions of the second Schedule are to be taken into consideration when he is faced with the question, what increase or decrease in the profits is due to a change in the average capital used in the year? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich would come under the expression written down value of the Income-tax Act, and the debts which had been allowed to be reduced. No other deductions were permissible. To defeat that argument the Legislature inserted the second sentence in the clause. According to that, such other deductions in respect of reduced values of the assets, as are allowable for the purpose of computing profits for the purposes of income-tax, are to be allowed. The standard for all allowances and deductions therefore remains the standard which is allowed under the Income-tax Act. The last sentence deals with debts and it is clearly connected with Section 10(2)(xi) of the Income-tax Act. The words which has been allowed are clearly proper in that case, because a debt is a fixed sum. The question to what extent a deduction is permissible is a matter of inquiry. It has to be ascertained to what extent and within what period it has become a bad debt. The Income-tax Officer has to make these inquiries and allow the necessary deductions under Section 10 of the income-tax Act. It is therefore clear that all the three provisions contained in Schedule II, Rule 1(2), relate to and are directly connected with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern ; and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purpose of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits ; indeed, you do not ascertain, and cannot ascertain, whether there is such a thing as a profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word profits in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name profits can be properly applied.' Bearing in mind these observations, it is clear that when the word profits is used it means the balance of an account in which on one side are entered the opening stock, the cost of goods purchased, the sales expenses, and the expenses of manufacture during the year, and on the other side the price realised by sales and the balance of stock and materials on hand. Each of these figures remains fixed if the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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