TMI Blog1962 (10) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... applies, carried on by the same person, is to be treated as one business for the purposes of the Act. Section 4 is the charging section ; it lays down that 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 known as excess profits tax at a certain percentage. Standard profits within the meaning of section 4 have been fixed at ₹ 36,000. Section 5 deals with the application of the Act; the Act is to apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to tax under section 4(1)(b) or (c) of the Indian Income-tax Act, subject to three provisos. The first proviso exempts from the application of the Act a business, the whole of the profits of which accrue or arise outside the taxable territories, if it is carried on by a person resident, but not ordinarily resident, in the taxable territories, if it is not controlled in India. The second proviso is that where the profits of a part only of a business carried on by a person not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 10A and added the amount of ₹ 19,578 to the amount of the profits accrued at Farrukhabad and Ahmedabad. On appeal the Tribunal held that the third proviso to section 5 made section 10A inapplicable in the present case and that no part of the profits which accrued or arose at Ratlam could be included in the computation of the total income for the purpose of assessing the excess profits tax. The Tribunal also held that opening a new branch was not a transaction within the meaning of section 10A. It gave no finding about the main purpose for which the branch was opened at Ratlam. The word transaction has a very wide meaning and can be applied to any particular act done in the carrying on of a business. The following acts are held to be transactions within the meaning of section 10A: (1)Splitting a firm of four partners into two firms each of two partners (Ramaswamier and Sons v. Commissioner of Income-tax [1945] 13 ITR 24). (2)Starting a new firm and transferring to it a part of the business of the old firm (Chhaju Ram Ram Kumar v. Commissioner of Income-tax [1952] 21 ITR 251 , Dhaukal Mal Dwarka Prasad v. Commissioner of Income-tax [1951] 19 ITR 212 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State. The adjustment will not always consist of adding the profits of the branch opened in a Part B State to the profits actually accrued in a taxable territory. If all the businesses that were done by the branch in the Part B State would not have gone to the taxable territory, if the branch had not been opened, all the profits of the branch cannot be added to the actual profits of the business in the taxable territory. If the business done by the branch is new business, which would not have come to the assessee in the taxable territory if the branch had not been opened, there would be no justification for adding the profits of it to the profits accruing in the taxable territory. Therefore, adjustment will not always consist of adding the profits of a branch to the profits accruing in a taxable territory. But even when the profits of a branch, or a part of the profits of a branch, are added to the profits accruing in a taxable territory, it does not amount to taxing the profits of the branch. What is taxed is the profits in a taxable territory and not the profits of the branch in Part B State and the failure to recognise this important fact has resulted in confusion. Under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in a taxable territory under section 10A. Section 5 deals with the application of the Act, i.e., of the provisions contained in it including section 10A. The Act is not to apply to the business of the branch at Ratlam; this is what the third proviso lays down. So section 10A also is not to apply to the business carried on at Ratlam. But when it is applied in the present case, it is applied not to the business at Ratlam but to the business at Farrukhabad and Ahmedabad. The Act, including section 10A, applies to the business at Farrukhabad and Ahmedabad and when the amount of the profits of the business carried on at these places is adjusted, section 10A is applied to that business and not to the business carried on at Ratlam. The power of adjustment includes the power of charging with excess profits tax of a person who but for the adjustment would not be chargeable with any tax. A person would not be chargeable with any tax if the Act did not apply to the business carried on by him. If in spite of the Act not being applicable to the business carried on by him he can be charged, there is no justification for saying that he cannot be charged through adjustment to counteract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction and not its legality or the right to effect it. Even if the transaction was legal or within the right of the assessee, if it was done with the particular purpose, section 10A will apply. In a case similar to the instant one, Punjabhai Dipchand v. Commissioner of Income-tax [1949] 17 ITR 482 , Chagla CJ. and Tendolkar J. took a different view. The learned Chief Justice observed at page 484: I am conscious of the fact that the income-tax department has very wide powers given to it under the Income-tax Act and the Excess Profits Tax Act, but I did not imagine that those powers went so far as to permit an officer of the department to dictate to an assessee as to how he should carry on business and what methods he should adopt in conducting his business. The Excess Profits Tax Officer . . . discusses at some length the arguments which led him to the conclusion that this business was started solely for the purpose of avoiding excess profits tax. Now, it has been often repeated, and very rightly, that it is always open to a subject to avoid paying income-tax or excess profits tax if he could legally and legitimately do so. The legislature has exempted profits which accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is sought to be done is not to tax the profits exempted from tax but to adjust the amount of the profits which are liable to be taxed and that the third proviso does not prohibit the applicability of section 10A. The learned Chief Justice was not correct when he observed that it is not a business in the taxable territories that the Excess Profits Tax Officer is taxing under his powers under section 10A. He is really in substance taxing a business the profits of which accrue or arise in a Part B State. Under section 10A it is the amount of the profits in a taxable territory that is to be adjusted. If in a particular case of adjustment the Excess Profits Tax Officer adds the profits accruing in a Part B State to the profits accruing in a taxable territory and takes the total to be the profits accruing in the taxable territory, he is certainly not taxing the profits accruing in the Part B State. It is illogical to infer identity between two acts from sameness of the result. Charging tax on the adjusted amount of profits of the business in a taxable territory does not amount to charging profits accruing in a Part B State merely because the result is the same. The result will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including in them the profits made in a Part B State. Malik CJ. and Bhargava J. held that the third proviso did not prevent the applicability of section 10A, and I respectfully agree with them. Of course, the judgment contains the dictum any transaction which is entered into with the specific purpose of avoiding liability to excess profits tax can be avoided by the Excess Profits Tax Officer under section 10A of the Act, irrespective of the circumstance whether the effect of that transaction is to make the Act altogether inapplicable to the business or part of the business or whether it merely reduces the liability to the tax or the rate of the tax. It was criticised by Chagla CJ. And Tendolkar J. in Moholal Maganlal's case (supra). As regards the applicability of section 10A, when the business in a taxable territory is completely closed down and a new business is opened in a Part B State, the question did not arise before Malik CJ. and Bhargava J. because the business in a taxable territory had not been completely closed down. They might not be right when they observed by way of obiter that even when the transaction consists of the complete closing down of a business in a t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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