CEPT Vs. GOCULDOSS JAMNADOSS AND CO

JUDGEMENT

(1.) THE question referred to us by the Appellate Tribunal is as follows:

(2.) 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 Sub-Clause (i) or (ii) of Clause (b) of sub-Section (1) of Section 4, 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 Tax (Second Amendment) Act XXIV (24) of 1941. At the same time Section 14, Income-tax Act was also amended by S. 8, Income-tax (Amendment) Act 1941, (Act XXIII (23) of 1941) by inserting in Section 14 (2) a new Clause (c). The object of those two amendments is to make provison in respect of profits or gains accuring or arising to an assessee within an Indian State under Clause (c) of sub-Section (2) of Section 14, Income-tax Act such income, profit or gains accruing with in 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, 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 purpose 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, be deemed to be a separate business. In other words, if in respect of a part of a business, pro-fits accrued or arose in an Indian State such part is deemed to be a separate business and the profits of such business are entirely excluded from the assessment during the chargeable accounting period.

(3.) VISWANATHA Sastri J.--This case raises a question relating to the proper interpretation of proviso 3 to Section 5, Excess Profits Tax Act. For the sake of brevity I shall refer to this statutory provision as the proviso. The facts have been stated in the judgment of my learned brother and need not again be repeated. The argument of Mr. Rama Rao Sahib for the department is that it is not every single transaction relating to a business entered into in an Indian State that can be considered to be "part of a business" and therefore deemed to be "a separate business" within the meaning of the proviso. Before the proviso can be invoked the following matters have to be established : (l) There must be an identifiable or recognizable part of a business; (2) profits which accrue or arise from that part; and (3) that part of the business should be carried on and the profits should accrue or arise in an Indian state. It is not contended before us that the words "part of a business" in the proviso are confined only to a branch where every portion of the main business is carried on and that unless the business operations carried on in an Indian State are of the same character and are carried on in the same way as those which characterise the trade or business carried on in British India, the proviso would be inapplicable. Apart from the business from which profits are contemplated as accruing or arising, it may refer to a business organisation which is either a branch of the business carried on in British India but situate in an Indian State or a distinct and severable part of such business but conducted in an Indian State. Where, for instance, a factory is situate in an Indian State, but the owner is residing and the sales are effected in British India, the factory can rightly be regarded as a part of the business, the business itself consisting of the manufacture and sale of goods. Where there are distinct processes either of manufacture or manufacture and sale, the profits resulting from the sale of the goods can be attributed in some measure to each of these processes. In such cases it may be said that they are different parts of the same business which produce a separate profit. The characteristics or attributes of a business must also appertain to the part of the business which is in question such as separate set of accounts, separate capital, separate establishment and so forth. As Mr. Rama Rao Sahib put it in the course of his arguments, you cannot speak of every brick that has gone into a wall as a part: of the house. The part of the business must be such as to be capable of being identified as a distinct and severable portion of a business, but nevertheless partaking of the character of a business to which a portion of the total profits could be attributed. This is made clear from the provision that the part of the business contemplated by the proviso must be such as is capable of earning a portion of the profits. It is common both in legislative practice and in-mercantile accountancy to separate manufacturing profits from the merchanting or selling profits where the same person is a manufacturer and trader, see Commrs of Taxation v. Kirk, 1900 A. C. 588 : (69 L. J. P. C. 87), the Saskatchewan case, 1949 A. C. 36 and Ahmed Bhari Umar Bhai's case, A. I. R. 35 1948 Bom. 425 : (1948-16 I.T.R. 192). These decisions proceed on the basis that unrealised profits accrue or arise in the case of a manufacture at the stage when a manufacturing process is complete and before sale of the goods and that enhanced values arising from manufacturing processes could be deemed to be profits, though it is only on sale that the increased value imparted by the manufacturing processes is converted into actual profits. It is this principle that has been given effect to in the proviso.