KARAMCHAND PREMCHAND LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is one of the net too infrequent cases under the IT Act where much can be said on both sides - on the side of the Revenue and on the side of the assessee -but after carefully considering the very able arguments advanced both by Mr. Joshi and Mr. Palkhivala we have come to the conclusion that in view of the ambiguity in the language sued by the legislature, we should give the benefit of that ambiguity to the assessee.

(2.) THE matter arises this way. The assessee is a private limited company and does the managing agency business of the Ahmedabad Manufacturing and Calico Printing Company Ltd. It had also a pharmaceutical business in the Baroda State during the period of account, and the assessee company's business in India showed a business profit which was assessable under the Business Profits Tax Act. On the other hand, the business carried on in Baroda showed a loss, and the assessee contended that his business profits in the taxable territories should be reduced by the loss suffered by him in the Baroda State, and for this purpose the assessee relied on the third proviso to S. 5 of the Business Profits Tax Act. The Tribunal rejected that contention of the assessee, and the very narrow question that we have to consider on this reference is, what is the true effect of the third proviso to S. 5 and what is the proper construction that must be placed upon it ?

(3.) NOW , S. 4 is the charging section under the Business Profits Tax Act, and S. 5 deals with the application of the Act and as the unit of taxation, as under the defunct EPT Act, is the business, therefore, this section provides that the Act shall apply 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 -cl. (i) or sub -cl. (ii) of cl. (b) of Sub -S. (1) of S. 4 of the Indian IT Act, 1922, or of cl. (c) of that sub -section. Therefore, by reason of its wide ambit, S. 5 made the Act applicable to every business wherever the profits of the business accrued or arose. Then we have the three provisos. The first proviso exempts "a business the whole of the profits of which accrued or arose without the taxable territories where the business was carried on by or on behalf of a person who was resident, but not ordinarily resident in the taxable territories, unless the business was controlled in India." Then the second proviso exempted under certain circumstances part of a business, and the proviso was that "where the profits of a part only of a business carried on by a person who is not resident in the taxable territories or not ordinarily so resident accrue or arise in the taxable territories or are deemed under the IT Act, 1922, so to accrue or arise, then except where the business being the business of a person who is resident, but not ordinarily resident, in the taxable territories is controlled in India, this Act shall apply only to such part of the business, and such part shall for the purposes of this Act be deemed to be a separate business." Then we come to the third proviso : "Provided further that this Act shall not apply to any income, profits or gains of business accruing or arising within a Part B State unless such income, profits or gains are received in or are brought into the taxable territories in any chargeable accounting period, or are assessable under S. 42 of the Act." Now, one striking feature of this third proviso which becomes immediately noticeable is that unlike the first two provisos, this proviso does not exempt the business referred to in this proviso from the application of the Act. The proviso refers to the income, profits or gains of a business accruing or arising within a Part B State. But the proviso does not take such a business out of the ambit of the Act, but what it takes out of the ambit of the Act is the income, profits or gains of that business. Now, this dissimilarity in the language of the first two provides and the third proviso becomes more striking when one considers the analogous language used in S. 5 of the EPT Act. The first two provisos are reproduced in identical language in S. 5 of the Business Profits Tax Act. But when we turn to the third proviso, the third proviso to S. 5 of that Act was :