The third proviso to S. 5 of the Excess Profits Tax Act, 1940 excludes the application of the Act to profits etc, of that part of the business which arose in an Indian State. If that part of the business has to be treated as a separate business for the purposes of the Excess Profits Tax Act, it is difficult to see how the losses incurred in an Indian State can be taken into consideration for the same purposes.

Judgment

S. K. DAS, J. : These two appeals have been brought to this Court on a certificate of fitness granted by the High Court of Punjab under S.66A(2) of the Indian Income-tax Act 1922.

2. The relevant facts are these. Messrs. Chunilal Moonga Ram a firm of Delhi, carried on a speculative business in bullion, mostly in gold and sliver, in Chandni Chowk at Delhi. For the assessment year 1946-47 it was charged to income-tax on its income from the business in the relevant accounting period. Similarly, it was charged to excess profits tax for the chargeable accounting period ending on February 6, 1946. One of the appeals, Civil Appeal. No. 39 of 1960, arises out of the assessment of income-tax and the other appeal, Civil Appeal No. 40 of 1960, arises out of the assessment of excess profits tax. During the relevant accounting periods the firm entered into certain transactions called "hedge" transactions in the bullion market at Bhatinda (then a part of the Patiala State, that is, outside the taxable territories of British India). It claimed that it had incurred losses to non-residents there in the sums of Rs. 6,366/- and Rs. 16,615/- in the said transactions and claimed that these losses should be taken into consideration in determining its income. It appears from the assessment order of the Income-tax Officer, Delhi, dated January 27, 1949, that the firm purchased certain "sillies" (bars of gold and silver) from a Bhatinda party on the telephone, which purchases were later confirmed by a letter or wire. Similarly, the bars Here also, sold by the firm through a Bhatinda party on the telephone. Apparently, no delivery was intended to be taken or was taken of the bars bought or sold; nor did the firm have any branch or agent at Bhatinda. The transactions were in the nature of forward transactions carried out by means of telephone messages, letters or telegrams with parties at Bhatinda. This was the nature of the transactions which resulted in the losses for which the firm, claimed deduction. The Income-tax authorities disallowed the claim on the ground that if the Bhatinda transactions had resulted in profits, such profits would have been exempt from tax in terms of S. 14(2)(c) as it then stood and if the profits were exempt from tax, the proviso to Section 24 (1) of the Act was a bar to the adjustment of the losses. The assessee then moved the Income-tax Appellate Tribunal. The Appellate Tribunal, however, allowed the deduction claimed on grounds which are not very clearly stated. It appears that the Tribunal proceeded on the footing that it was not possible to "split up the transactions of a business located in the taxable territories into two categories of transactions inside and outside such territories" and even if such splitting up was possible, the Bhatinda transactions would fall within S. 42 of the Act and the income etc. therefrom would be deemed to have arisen in British India. In this view of the matter, the Accountant Member of the Tribunal who delivered the judgment of the Tribunal said:

"To start with, it seems to us that there is no warrant either in terms of S. 14(2)(c) or in terms of the proviso to S. 24(1) to split up the transactions of a business located in the taxable territories into transactions in taxable territories and transactions without taxable territories. Even if that treatment were permitted and the profits or losses resulting from transactions outside the taxable territories can be described as income, profits and gains, such income, profits and gains are deemed under S. 42 to have accrued or arisen in British India. The results of transactions of the nature under review are, therefore, not exempt from tax by virtue of S. 14(2)(c). The proviso to S. 24(1) does not in any case come into play. The Income-tax authorities have in this view that we have taken wrongly disallowed the assessee s claim for adjustment of losses amounting to Rs. 6,366/- and Rs. 16,615/-. We allow these losses."

The Tribunal acc