Satyanarayana Rao, J.-The question referred to us by the Appellate Tribunal is as follows:

“Whether on the facts and in the circumstances of the case the interest receipt of Rs. 43,299 in question is exempt from excess profits tax as profit of a ‘part of a business’ accruing or arising in Mysore State within the meaning of the third proviso to section 5 of the Excess Profits Tax Act?”

The question is confined to the interest receipt of Rs. 43,299. The assessee Messrs. Gokuldas Jamnadas and Company are residents in British India, carrying on money-lending business at Madras. The chargeable accounting period is the period commencing from 9th November, 1942 and ending with 28th October, 1943. During that period the assessee received the sum in question as interest accrued under a loan advanced to Messrs. M. L. Varadamanayya and Sons, Mysore, under a mortgage. The “property” comprised in the mortgage is in Mysore and the deed was executed on Mysore stamp paper and registered at Mysore. This amount was assessed to excess profits tax by the officer on the ground that the interest represented profit accruing and arising in British India to the assessee as it was part of the Madras business, during the chargeable accounting period. The assessee objected to the inclusion of this sum on the ground that under the last proviso to section 5 of the Excess Profits Tax Act, it represented profits which accrued to him in an Indian State, namely, Mysore, as part of his business which has to be deemed to be a separate business under the proviso and the whole of the profits so accrued in respect of that part of the business must be excluded from the computation of the profits. The question, therefore, is whether this sum is a profit of part of the business of the appellant within the meaning of the proviso. The Appellate Tribunal answered the question in favour of the assessee. Hence this reference.

Under section 5, the excess profits tax is made applicable to every business, of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (1) or subclause (2) of clause (b) of sub-section (1) of section 4 of the Indian Income-tax Act,. 1922, or of clause (c) of that sub-section. But for the provisos the Act would apply to the profits of a business of a resident in British India even though such profits accrued or arose to the assessee without British India during such year.

The proviso which arises for consideration in this reference was introduced: in the Act by the Excess Profits Act, Second Amendment Act XXIV of 1941. At the same time section 14 of the Indian Income-tax Act was also amended by section 8 of the Indian Income-tax Amending Act, 1941 (Act XXIII of 1941) by inserting in section 4 (2) a new clause (c). The object of those two amendments is to make provision in respect of profits or gains accruing or arising to an assessee within an Indian State. Under clause (c) of sub-section (2) of section 14 of the Income-tax Act such income, profits or gains accruing within an Indian State would not be assessable to income-tax unless they are received or deemed to be received in or are brought into British India in the accounting year by or on behalf of the assessee. Under the proviso to section 5 of the Excess Profits Tax Act, the Act is not made applicable to any business, the whole of the profits of which accrued or arose in an Indian State and there is a further provision in that proviso that where the profits of a part of a business accrued or arose in an Indian State such; part shall, for the purposes of the provision, be deemed to be a separate business, the whole of the profits of which accrued or arose in an Indian State and the other part of the business shall, for all purposes of the Act, is deemed to be a separate business. In other words, if in respect of a part of a business, profits accrued or arose in an Indian State such part is deemed to be