JUDGMENT :

Grover, J.

1. The short point for determination in this appeal by certificate is whether in view of the provisions of the third proviso to Section 5 of the Excess Profits tax Act 1940 (Act 15 of 1940), hereinafter called the Act, Section 10-A of that Act can be made applicable to the case of an assessee who had his head office in taxable territories but had also started a new business in an Indian State which was not within the taxable territories.

2. The assessee who is the appellant carried on cloth business on wholesale basis having its head office at Farrukkabad and branch at Ahmedabad under the name and style of Chandra Prakash Anand Prakash. During the chargeable accounting period from November 9, 1942 to October 28, 1943 the assessee started a new wholesale cloth business at Ratlam which was in an Indian State. That business was started with effect from March 8, 1943 the first accounting period of which was from that date to April 7, 1944. A profit of Rs. 30,601 was determined for income tax purposes for the aforesaid period, the assessment year being 1944-45. Since the profits of Ratlam business were to be computed for the period March 8, 1943 to April 7, 1944 a proportionate profit for the chargeable accounting period from March 8, 1943 to October 28, 1943 was worked out, the amount coming to Rs. 19,578. The Excess Profits Tax Officer was of the view that the main purpose of starting the new business at Ratlam was to avoid excess profits tax liability. Therefore under Section 10-A of the Act he included the income from Ratlam business in the total income of the assessee for the purpose of excess profits tax. The assessee was the sole proprietor of the entire business in the taxable as well as non-taxable territories. Ordinarily he was liable to be assessed to excess profits tax on his total income from all the business under the second proviso to Section 2 (5) of the Act. The third proviso to Section 5 of the Act, however, provided that any income which accrued or arose in an Indian State was exempt from excess profits tax.

3. The conclusion of the Excess Profits tax Officer was that the main purpose of starting the business at Ratlam was to take benefit of the third proviso to Section 5 for avoiding tax liability; therefore the starting of a business in an Indian State fell within the meaning of the expression "transaction" in Section 10-A of the Act. The Income Tax Appellate Tribunal to which an appeal was taken held that according to the third proviso to Section in the Act was not applicable to any business the entire profits of which accrued or arose in an Indian State with the result that the profits of that business could not be included in the total computation of income of the assessee for the purpose of excess profits tax. The Commissioner of Income tax asked for a reference to the High Court and the tribunal referred the following two questions:

"(i) Whether the starting of a business in an Indian State is a transaction within the meaning of Section 10-A?

(ii) Whether in view of the provisions of the third proviso to Section 5 of the Excess Profits Tax Act the Tribunal, was justified in holding that Section 10-A does not apply to the case."

4. The High Court answered the first question in the affirmative and the second question in the negative. It was of the view that the word "transaction" appearing in Section 10-A had a very wide meaning and could be applied to any act done in the carrying on of business. It agreed that the profits accruing in a Part B State were not subject to excess profits tax but was of the opinion that the law did not permit profits to be diverted from a taxable territory to a Part B State. The reasoning of the High Court was that if a person who was not doing any business in a taxable territory opened a business in a Part B State whatever profits he earned therefrom would be exempt from tax under the proviso but the case of a person who was carrying on business entirely in a ta