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Ahmedabad Manufacturing and Calico Printing Co. Ltd. Vs. Commissioner of Excess Profits Tax, Bombay North - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 27 of 1949
Judge
Reported inAIR1950Bom295; (1950)52BOMLR441; [1950]18ITR727(Bom)
ActsIndian Income Tax (Amendment) Act, 1939; Excess Profit Tax Act, 1940 - Schedule - Rules 1 and 2
AppellantAhmedabad Manufacturing and Calico Printing Co. Ltd.
RespondentCommissioner of Excess Profits Tax, Bombay North
Appellant AdvocateJamshedji Kanga, Adv.
Respondent AdvocateM.C. Setalvad, Adv.
Excerpt:
.....on which the profits of a business are computed for the purposes of income-tax under the indian income-tax act, 1922.;rule 2 in the schedule permits the determination of the assessment of profits during the standard period under proviso 2 to be altered and modified if that assessment is not in accordance with the indian income-tax (amendment) act, 1939.;rule 1 and its second proviso make a distinction between the profits of a standard period and the profits during a chargeable accounting period. whereas the taxing officer is bound to accept the profits already assessed under the income-tax act as the profits of the standard period, he is not so bound with regard to the chargeable accounting period.;the assessee, a textile mill company, was assessed to income-tax for certain..........which the profits of business are computed for the purposes of income-tax under section 10 of the indian income-tax act, 1922.' therefore, this rule applies both to the profits during the standard period and profits during the chargeable accounting period, and the rule lays down that they are to be separately computed and it also lays down how they are to be computed. they are to be computed on the principles on which profits of the business are computed under the indian income-tax act, 1922. then comes proviso 2 and that proviso only relates to the profits during any standard period and that proviso lays down that if these profits have already been determined for the purpose of an assessment under the indian income-tax act, 1922, such profits as so determined shall, subject to the.....
Judgment:

Chagla, C.J.

1. The assessee company is a textile mill and in the assessment years 1940-41 and 1941-42 and in the assessment years prior thereto the company valued its opening stock and the closing stock irrespective of the cost price or the market value and it valued it on a fixed rate basis. The assessment for the two years was made on that basis. Subsequently the department challenged the basis and it attempted to reopen the matter under Section 34, but that attempt failed. When it came to the question of excess profits tax, it assessed the profits for the corresponding charging period on a different basis and the result was that whereas in 1940-41 the income was assessed at Rs. 11,16,664 and in 1941-42 at Rs. 12,15,698, on the other basis the income for 1940-41 was assessed at Rs. 13,31,648 and for the year 1941-42 at Rs. 24,64,646. Having assessed the income on the proper basis as far as the standard period (sic) was concerned, the department assessed the profits during the standard period on the basis adopted by the assessee, viz., the fixed rate basis. The result of this was that for the purpose of comparing the profits in the standard period and the profits in the charging period two different bases were adopted, one was the fixed rate basis and the other was the other basis adopted and accepted by the department. The contention of the assessee was that as the income had been assessed during the charging period on the fixed rate basis, for the purpose of excess profits tax the same income should be accepted and there should be no re-assessment of the income. It was also contended that as far as the standard period was concerned, if the assessment during the charging period was on a different basis, the profit for the standard period should be assessed on the same basis. These were the two contentions that were pressed before the Tribunal and which have been pressed before us by Sir Jamshedji. The Tribunal rejected the contention of the assessee and accepted the assessment made by the department.

2. Now, in order to decide whether the contention of the assessee is sound, we have got to construe certain provisions of the Excess Profits Tax Act. The profits which have got to be assessed under the Excess Profits Tax Act according to the definition in Section 2(17) are as determined in accordance with the first Schedule and therefore we have to turn to the rules under the First Schedule in order to decide what the profits are. The relevant rules for the purpose of this reference are Rule 1, the second proviso to that Rule, and Rule 2. Rule 1 provide : 'The profits of a business during the standard period, or during any chargeable accounting period, shall be separately compute, and shall, subject to the provisions of this Schedule, be computed on the principles on which the profits of business are computed for the purposes of income-tax under section 10 of the Indian Income-tax Act, 1922.' Therefore, this rule applies both to the profits during the standard period and profits during the chargeable accounting period, and the rule lays down that they are to be separately computed and it also lays down how they are to be computed. They are to be computed on the principles on which profits of the business are computed under the Indian Income-tax Act, 1922. Then comes proviso 2 and that proviso only relates to the profits during any standard period and that proviso lays down that if these profits have already been determined for the purpose of an assessment under the Indian Income-tax Act, 1922, such profits as so determined shall, subject to the adjustments required by this Schedule, be taken as the profits during that period for the purpose of excess profits tax. Then we come to Rule 2 and that Rule applies to profits shall be computed on the same basis and in the same manner as the profits of that business are under the Indian Income-tax Act, 1922, as amended by the Indian Income-tax (Amendment), Act, 1939, computed for the chargeable accounting period, notwithstanding that the Indian Income-tax (Amendment) Act, 1939, may not have been in force in the standard period.

3. Now, the contention of the Attorney-General is that it is true that under Rule 1 both the profits during the standard period and during any chargeable accounting period are to be computed by the same method, viz, according to the principles on which profits are computed under the Indian Income-tax Act. But, says the Attorney-General, the second proviso takes out of Rule 1 the profits during any standard period when such profits have been determined for the purpose of an assessment under the Indian Income-tax Act, and says the Attorney-General, that in this particular case The profits during the standard period were already determined and having been determined they must be accepted as the profits during the standard period. In my opinion, the determination referred to in the second proviso is not an unqualified determination. It must be a determination according to the principles on which the profits of a business are computed for the purposes of income-tax under the Indian Income-tax Act, 1922. I agree with the Attorney-General that the function of a proviso is to exclude and take out certain cases from the Rule to which it is a proviso. But what is taken out of Rule 1 is not every case where there has been determination for the purpose of income-tax. What is taken out of Rule 1 is every determination which has been made in accordance with the principles on which the profits of a business are computed for the purpose of income-tax under the Indian Income-tax Act, 1922. Therefore, if we find a determination which is not in accordance with those principles, then profits have to be assessed during the standard period in accordance with Rule 1. in this particular case the determination of the assessment under the Indian Income-tax Act during the standard period was not according to the principles of the Income-tax Act because it is now accepted by the department, as I said before, that the fixed rate basis was not the correct basis and the basis now adopted by the department is the proper basis. Therefore the assessee is not bound by the determination of the assessment under proviso 2. It is open to the assessee to say that he is entitled to have the assessment of his profits made during the standard period according to the principles of the Indian Income-tax Act and according to these principles the profits must be assessed not according to the fixed rate basis but according to the basis adopted by the department. In my opinion, Rule 2 has no bearing on this particular question. All that Rule 2 does is that it permits the determination of the assessment of profits during the standard period under proviso 2 to be altered and modified if that assessment is not in accordance with the Indian Income-tax (Amendment) Act, 1939. The object of the legislature is clear. As all assessment of profits for the purpose of the excess profits tax would be in accordance with the Indian Income-tax (Amendment ) Act, 1939, the legislature felt that the assessment of profits for the purpose of the standard period should also be made on the same basis and that is the reason why Rule 2 was enacted. But it is not suggested that any alteration or amendment of the assessment is called for by reason of the Indian Income-tax (Amendment) Act, 1939. It is also clear that Rule 1 and the second proviso make a distinction between the profits of a standard period and the profits during a chargeable accounting period. Whereas the Income-tax Officer is bound to accept the profits already assessed under the Indian Income-tax Act as the profits of the standard period, he is not so bound with regard to the chargeable accounting period, and therefore in not accepting the profits as assessed for the years 1940-41 and 1941-42 as necessarily the profits for the purpose of excess profits tax during the chargeable accounting period the department was within its. rights. But, in my opinion, the department was in error when it refused to give effect to the principles of the Indian Income-tax Act when assessing the profits during the standard period.

4. We would therefore answer question (1) in the negative and question (2) in the affirmative. No order as to costs of the reference.

5. Reference answered accordingly.


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