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TMI Blog1960 (4) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... shall use the expression India in this judgment to mean British India as it was then called in contradistinction to an Indian State) showed business profits assessable under the provisions of the Act; but the business carried on in the name and style of Sarabhai Chemicals in Baroda showed a loss in the relevant chargeable accounting periods which were four in number, namely, (1) April 1, 1946 to December 31, 1946; (2) January 1, 1947 to December 31, 1947; (3) January 1, 1948 to December 31, 1948; and (4) January 1, 1949 to March 31, 1949. The assessee claimed that its assessable income in India should be reduced by the loss suffered by it in its business in Baroda. The Income-tax Officer rejected the claim of the assessee and held that the Act did not apply to the business carried on in an Indian State unless profits and gains of that business were received or deemed to have been received in or brought into India. On appeal the Appellate Assistant Commissioner upheld the contention of the assessee and allowed the appeal. The Department went up in appeal to the Appellate Tribunal, which held that under the relevant proviso to section 5 of the Act, profits and losses of a business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41, but by several annual Finance Acts the term was extended up to March 31,1946. In 1947 came the Act in which "chargeable accounting period" means: (a) any accounting period falling wholly within the term beginning on April 1, 1946, and ending on March 31, 1949, and (b) where any accounting period falls partly within and partly without the said term, such part of that accounting period as falls within the said term. The Act extended to the whole of India. The word "business" is defined in section 2(3) of the Act as including any trade, commerce or manufacture, etc., the profits of which are chargeable according to the provisions of section 10 of the Indian Income-tax Act, 1922. There are two provisos to this definition clause, and the second proviso states that all businesses to which the Act applies carried on by the same person shall be treated as one business for the purposes of the Act. The expression "taxable profits" is defined under section 2(17) of the Act and it means the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. What is meant by "abatement" is defined in section 2(1) of the Act. The charging sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accrue or arise in the taxable territories or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then except where the business being the business of a person who is resident, but not ordinarily resident, in the taxable territories is controlled in India, this Act shall apply only to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business: Provided further that this Act shall not apply to any income, profits or gains of business accruing or arising within any part of India to which this Act does not extend unless such income, profits or gains are received... in or are brought into the taxable territories in any chargeable accounting period, or are assessable under section 42 of that Act." We have read the section as it stands today. The expression "taxable territories" in the provisos was substituted for "British India" by the Adaptation of Laws Order, 1950 and the third proviso originally referred to any income, profits or gains of business accruing or arising within " any Indian State "; then the expression " a Part B State " was substituted, but this was again changed by the Adaptation of Laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempting the income, profits or gains of the Baroda business except when they are received or brought into India, but the business itself is not excluded from the purview of the Act; the business is still one to which the Act applies under the substantive part of section 5 and as the third proviso exempts income, profits or gains only, the losses of the Baroda business can be set off against the profits of the business in India. These are the two main rival contentions which we have to consider in this appeal. Now, let us examine a little more closely sections 4 and 5 of the Act. We have stated earlier that section 4 is the charging section, which levies tax on the amount of taxable profits during any chargeable accounting period, in respect of any business to which the Act applies. The corresponding section in the Excess Profits Tax Act, 1940, was also section 4 thereof, which levied a tax on the amount by which the profits during any chargeable accounting period exceeded the standard profits in respect of any business to which that Act applied. Under the Excess Profits Tax Act, 1940, as also under the Act under our consideration, the unit is the business--business to which the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to one of them only. Unlike the other two provisos, the third proviso does not use the language of exclusion in respect of any business. What it takes out of the ambit of the Act is merely the " income, profits and gains " of a particular business. The language is thus more apt to effectuate an exemption from tax of " income, profits or gains " rather than an exclusion of the business from the purview of the Act. On behalf of the appellant it is contended that such a construction results in this anomaly that if the income, profits or gains are not brought into India, they escape tax and yet the losses of a business which is outside India are taken into consideration in computing the profits etc. in India. This, it is argued, could not have been the object of the Legislature in enacting the third proviso to section 5 of the Act. It is contended that the object was to exclude the business in an Indian State as also the income, profits or gains thereof, unless such profits etc. were received in or brought into India. This argument is not devoid of plausibility and requires careful consideration. We may here refer to the relevant provisions of the Excess Profits Tax Act, 1940 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the change in language did something more, because it assimilated the position under the proviso to that under section 14(2)(c) of the Indian Income-tax Act, namely, that though profits of a business in an Indian State cannot be taxed unless they are brought into the taxable territories, yet the losses incurred can be adjusted in computing the profits of the business as a whole. Learned counsel for the assessee has relied on the decision of this court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd., and the decisions of the Bombay High Court in Commissioner of Income-tax v. Murlidhar Mathurawalia Mahajan Association and Commissioner of Excess Profits Tax v. Bhogilal H. Patel. The first two decisions cited above considered the effect of section 24(1) of the Indian Income-tax Act, 1922, with special reference to the first proviso thereto (as it stood at the time relevant therein) and its impact on section 10 of the said Act. It was held that sub-section (1) of section 24 dealt only with set-off of loss under one head against profits under any other head, and therefore the old first proviso to sub-section (1) of section 24 applied and barred the right of set-off only whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce, that the Legislature had before it the language used in section 14(2)(c) of the Indian Income-tax Act and it knew the effect of those provisions and it used the same language in the third proviso to section 5 of the Act. If the object of the Legislature was to exclude the business itself from the ambit of the Act while taxing the profits which were brought into the taxable territories, then it used language which failed to achieve that object. On behalf of the appellant it has been pointed out that the expression used in the third proviso to section 5 is--"Provided further that the Act shall not apply to any income, profits or gains of a business etc." it is argued that this language, (namely, that the Act shall not apply) is apt to exclude from the purview of the Act business the profits of which accrue or arise in an Indian State, except in so far as such profits are brought into the taxable territories. In support of this argument a reference has been made to section 4(3) of the Indian Income-tax Act as it stood prior to 1939 and reliance is placed on the decisions in Commissioner of Income-tax v. Somasundaram Chettiar; and Provident Investment Co. Ltd. In re. It is true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a different meaning in the latter part of the proviso. The appellant cannot therefore say that the third proviso excludes the business altogether, because it takes away from the ambit of the Act not only income, profits or gains but also losses of the business referred to therein. On behalf of the appellant it has been argued that though the language of the third proviso to section 5 of the Act is similar to that of section 14(2)(c) of the Indian Income-tax Act, the language of the two provisions is not identical and it is not correct to say that their effect is substantially the same. It is pointed out that the language of section 14(2)(c) was one of exemption only in respect of any income, profits or gains accruing or arising in an Indian State, though for purposes of " total income " the Income-tax Act applied thereto, and therefore the normal process of aggregating profits and losses wherever they occurred could be adopted. But, says learned counsel for the appellant, the position is otherwise under the third proviso to section 5 of the Act, because, firstly, it uses the expression, "the Act shall not apply" and secondly, there is no question of exempting the profits from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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