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SUPREME COURT OF INDIA
28th April, 1960
S.K. DAS, J.L. KAPUR AND M. HIDAYATULLAH, JJ.
Commissioner of Income Tax, Ahmedabad, Appellant
Versus
Karamchand Premchand Ltd., Ahmedabad, Respondent.
Civil Appeal No. 304 of 1958.
Advocates appeared
Mr. C. K. Daphtary, Solicitor-General of India and Mr. K. N. Rajagopal Sastri, Senior Advocate (Mr. D. Gupta, Advocate with them), for Appellant; Mr. N. A. Palkhivala, Senior Advocate (Mr. S. N. Andley, Advocate of M/s. Rajinder Narain & Co. with him), for Respondent.
BUSINESS PROFITS TAX ACT, 1947 - S. 5 - Scope and effect of the third proviso - Whether it excludes the business in an Indian State from the purview of the Act or merely exempts the income, profits, or gains of such business unless they are received or brought into India.
Fact of the Case:
The assessee, a private limited company, held the managing agency of a company in India and also had a pharmaceutical business in Baroda State, an Indian State at the relevant time. The assessee's business in India showed assessable profits under the Business Profits Tax Act, 1947 (the Act), but the business in Baroda showed a loss. The assessee claimed that its assessable income in India should be reduced by the loss suffered in Baroda. The Income-tax Officer rejected the claim, holding 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 allowed the assessee's appeal, but the Appellate Tribunal restored the order of the Income-tax Officer. The assessee then moved the High Court of Bombay, which answered the question of law in the affirmative and held that the assessee was entitled to deduct the losses incurred in its Baroda business and set them off against the profits made in the taxable territories.
Finding of the Court:
The Supreme Court held that the third proviso to S. 5 of the Act did not exclude the business in an Indian State from the purview of the Act but merely exempted the income, profits, or gains of such business unless they were received or deemed to have been received in or brought into India. Accordingly, the assessee was entitled to deduct the losses incurred in its Baroda business and set them off against the profits made in the taxable territories.
Issues: Whether the third proviso to S. 5 of the Business Profits Tax Act, 1947 excluded the business in an Indian State from the purview of the Act or merely exempted the income, profits, or gains of such business unless they were received or brought into India.
Ratio Decidendi: The Court interpreted the language of the third proviso to S. 5 of the Act and found that it did not use the language of exclusion in respect of any business. The proviso merely took out of the ambit of the Act the "income, profits and gains" of a particular business. The Court also noted that the first and second provisos to S. 5 used the language of exclusion in respect of businesses, but the third proviso did not. Additionally, the Court considered the language used in the third proviso to S. 5 of the Excess Profits Tax Act, 1940, which was worded differently from the third proviso to S. 5 of the Act. The Court found that the change in language was deliberate and the reason for the change was to make the income, profits, or gains of a business accruing in an Indian or Part B State liable to tax when such income, profits, etc. were brought in India, while under the third proviso to S. 5 of the Excess Profits Tax Act, they were not liable to tax even when they were brought into India.
Final Decision: The appeal was dismissed, and the High Court's decision was upheld.
Judgment
S. K. DAS, J. : This is an appeal on a certificate of fitness granted by the High Court. of Bombay, and the short question for decision is the true scope and effect of the third proviso to S. 5 of the Business Profits Tax Act, 1947 (Act No. XXI of 1947), hereinafter referred to as the Act. The appellant is the Commissioner of Income-tax, Ahmedabad and the respondent is a private limited company under the name and style of Karamchand Premchand Ltd., Ahmedabad, to be called hereinafter as the assessee.
2. The relevant facts are these : the assessee held the managing agency of the Ahmedabad Manufacturing and Calico Printing Co. Ltd. It also had a pharmaceutical business in the Baroda State, which was at the relevant time an Indian State run in the name and style of Sarabhai Chemicals. The assessee s business in India (we 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 S. 5 of the Act, profits and losses of a business in an Indian State were not to be taken into consideration unless they were received or deemed to have been received in or brought into India. In that view of the matter the Tribunal set aside the order of the Appellate Assistant Commissioner, and restored that of the Income-tax Officer. The assessee then moved four applications in respect of the four relevant chargeable accounting periods, and by these applications the assessee required the Tribunal to state a case to the High Court of Bombay on the question of law which arose out of its order. These four applications were consolidated. The Tribunal on being satisfied that a question of law arose out of its order in the four cases numbered as 85, 86, 87 and 88 of 1953-54, referred that question to the Bombay High Court in the following terms :
"Whether on the facts and in circumstances of the case the loss suffered by the assessee in the business of Sarabhai Chemicals should be deducted in computing the business income of the assessee company liable to business profits tax?"
The High Court answered the question in the affirmative and came to the conclusion that the assessee was entitled to deduct the losses incurred by it in its Baroda business and set them off against the profits made in the taxable territories. The appellant then moved the High Court and obtained a certificate of fitness. On that certificate the present appeal has come to us.
3. The main contention on behalf of the appellant is that the High Court came to an erroneous conclusion with regard to the true scope and effect of the third proviso to S. 5 of the Act. It is necessary here to refer to some of the provisions of the Act to understand its general scheme. In 1940 the Central Legislature passed the Excess Profits Tax Act, 1940 (Act No. XV of 1940 to impose a tax on excess profits arising out of certain businesses. We shall have occasion to refer to some of the provisions of that Act, in due course. For the purposes of
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