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Nahalchand Laloochand Vs. Commissioner of Excess Profits Tax, Bombay City - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Judge
Reported inAIR1954Bom227; (1953)55BOMLR955; [1953]24ITR617(Bom)
ActsExcess Profits Tax Act, 1940 - Schedule - Rule 1
AppellantNahalchand Laloochand
RespondentCommissioner of Excess Profits Tax, Bombay City
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateN.P. Engineer, Adv.
Excerpt:
.....up at end of accounting period that it could be predicted that certain sum is profit or loss - excess profits tax officer (epto) empowered to apportion or not to apportion profits - epto deals with profits and not with items in profits made by business of assessee - epto has crystallized said amount in category of profits and refused to apportion that amount and made assessee liable to pay excess profits tax on whole amount - epto cannot assume something contrary to law - when there were losses in other businesses of assessee said sum was capable of being set off against losses - assessee entitled to have apportionment with regard to whole amount and epto not entitled to exclude said amount from apportionment. - section 31(4) (since repealed) :[tarun chatterjee & h.l.dattu, jj]..........represented income of the assessee from an undisclosed source. when the matter came before the excess profits officer, he took the same view and he held expressly that the amount of rs. 1,65,000 represent undisclosed profits of the assessee firm from business. two appeals were preferred to the appellate tribunal, one under the income-tax act and the other under the excess profits tax act, and both the appeals were dismissed by the tribunal. 4. the first contention raised by mr. kolah is that on the finding of the tribunal this amount of rs. 1,65,000, although it may be the income of the assessee, is not the income from the business and therefore the amount is not liable to pay excess profits tax. mr. kolah has attempted to catch hold of a sentence in the order of the tribunal. it is.....
Judgment:

Chagla, C.J.

1. The assessee is a firm and it acts as a selling agency of certain mills. The total income of the assessee which was assessed to income-tax for the assessment year 1947-48 was Rs. 4,96,944. In this there was an item of Rs. 1,65,000 and the controversy that has arisen and which has given rise to this reference is with regard to this amount.

2. It appears that the case of the assessee with regard to this item was that this amount was credited on the 20th of December, 1945, to Bai Jivibai who was the widow of a late partner of the firm and it was further the case of the assessee that her husband had given gold ornaments to his wife and she had melted these ornaments and she sold the gold which was the result of this melting on the 20th of December, and the sale proceeds of the gold that was sold was Rs. 1,65,000 which was credited to the account of Bai Jivibai.

3. The taxing authorities held that the case of the assessee was not true and the sum of Rs. 1,65,000 represented income of the assessee from an undisclosed source. When the matter came before the Excess Profits Officer, he took the same view and he held expressly that the amount of Rs. 1,65,000 represent undisclosed profits of the assessee firm from business. Two appeals were preferred to the Appellate Tribunal, one under the Income-tax Act and the other under the Excess Profits Tax Act, and both the appeals were dismissed by the Tribunal.

4. The first contention raised by Mr. Kolah is that on the finding of the Tribunal this amount of Rs. 1,65,000, although it may be the income of the assessee, is not the income from the business and therefore the amount is not liable to pay excess profits tax. Mr. Kolah has attempted to catch hold of a sentence in the order of the Tribunal. it is really an attempt at catching hold of a straw is a legal straw the assessee is certainly entitled to do so.

5. Now, when we turn to the order of the Tribunal, what the Tribunal says is this :-

'We therefore think that the Income-tax authorities were right in adding to the income of the appellant a sum of Rs. 1,65,000 as profits of the assessee firm from some undisclosed sources.'

6. The contention of Mr. Kolah is that this finding does not indicate that the source of this income was a business source. Mr. Kolah says that although it may be the income of the firm it may be income which may fall under Section 12 of the Income-tax Act and unless there is an express finding that the income was form the business the amount is not liable to pay excess profits tax. We cannot read this sentence divorced from the context. The context is that the assessee had preferred an appeal against the decision of Excess Profits Tax Officer which was confirmed by the Appellate Commissioner, and the Excess Profits Tax Officer has, we said before, expressly and specifically held that this was income from business. Therefore in dismissing this appeal the Appellate Tribunal confirmed the decision of the Excess Profits Tax Officer. Therefore in dismissing this appeal there was the implicit finding that this sum of Rs. 1,65,000 was an income from business and therefore liable to payment of excess profits tax.

7. Our attention is draw to further order made by the Tribunal, That order was made on the application of the assessee that the Tribunal must consider its alternative contention that the excess profits tax should be apportioned. In that order the Tribunal observes :-

'If the finding in respect of this item was that these were the suppressed sales of the assessee's business or income relating to the business carried on, the assessee's position would have been stronger and, in our opinion, an apportionment had to be made. But this item has been treated as income from some undisclosed source in respect of which there was no income subsequent to that date.'

8. According to Mr. Kolah this statement makes it clear that the finding of the Tribunal was that the source of this income was not the assessee's business. Now, again, it would not be fair to the Tribunal to read the sentence torn from its context and in this context it is clear that it means that this particular sum of Rs. 1,56,000 was not the income from the normal ordinary business carried on by the assessee. When one reads the report of the Excess Profits Tax Officer it is clear that the view he took was that this sum of Rs. 1,65,000 was the result of a single adventure in the nature of business undertaken by the assessee firm. Its ordinary business was to act as selling agents of the mills and in this particular case it entered into a transaction of sale of gold which resulted in a certain income. Therefore, what the Tribunal was emphasising was that this sum of Rs. 1,65,000 was not the result of the ordinary business activities of the assessee firm but was a result of a single adventure which in the nature of business the assessee firm had undertaken. Further in the statement of the case submitted to us the Tribunal has stated that the money was brought in as a result of the sale of gold bars and the Tribunal held it to be a business receipt. Therefore whatever doubt or ambiguity there might be to which reference has been made, when we turn it the statement of the case, when we have a clear statement from the Tribunal that they have held this receipt to be business receipt. If that is so, then the amount of Rs. 1,65,000 must be subjected to the payment of excess profits tax.

9. The other question raised by Mr. Kolah is that in any view of the case this amount should be apportioned as provided by the proviso to Rule I, Schedule I, to the Excess Profits Tax Act. No, certain dates are important. The sum of Rs. 1,65,000, as already stated, was credited in the books of account of the assessee firm on the 20th of December, 1945. The Excess Profits Tax Act came to end on the 31st of March, 1946, and the assessee's accounting period is the Samvat year commencing from the 5th of November, 1945, to the 24th of October, 1946. Therefore the Excess Profits Tax Act was not applicable during the whole of the relevant accounting period of the assessee. the legislature realised the difficulty of determining profits of the accounting period could only be ascertained at the end of the accounting period the profits made subsequent to the 31st of March, 1946, were not liable to payment of excess profits tax, and the Legislature had to devise some machinery whereby profits could be ascertained for the period ending with the 31st of March, 1946. In this particular case the broken period would be form the 5th of November 1945, to the 31st of March, 1946. In this particular case the broken period would be from the 5th of November 1945, to the 31st of March, 1946. Therefore the third proviso to Rule I of Schedule I gave the power to the Excess Profits Tax Officer to apportion profits for the broken to the Excess Profits Tax Officer to apportion profits for the broken period in the light of the profits made during the whole of the accounting period. But this proviso also gives the power to the Excess Profits Tax Officer Tax Officer to apportion profits for the broken period in the light of the profits made during the whole of the accounting period. But this proviso also gives the power to the Excess Profits to apportion profits having regard to special circumstances, and the view taken both by the Officer and the Tribunal is that in this particular case there are special circumstances which entitled the Excess Profits Tax Officer not to apportion the profits Tax Officer did apportion the profits of the assessee other than the profit of Rs. 1,65,000 but when it came to the sum of Rs. 1,65,000 the view he took was that the receipt of this amount was on the 20th of December, 1945, and that no further income was derived from this particular source and therefore no case for apportionment had been made out. this view was also taken by the Tribunal, and the question is whether this view is justified in law.

10. In our opinion the power given to the Excess Profits Tax Officer under the proviso is to apportion profits and also in special cases not to apportion profits. But whether he apportions profits or he does not apportion them, he dealing with profits and not with items in the profits made by the business of the assessee. In this connection it is very material to bear in mind that for the purposes of the Excess Profits Tax Act the business of the assessee is an entity. The assessee may have several business, but when profits have to be ascertained for making it liable to excess profits tax, all the businesses of the assessee must be looked upon as one and the profits tax, all the business of the assessee must be looked upon as one and the profits tax, all the businesses of the assessee must be looked upon as one and the profits made be different businesses are not different profits but one profit made by one business carried on by the assessee as an entity. The further fact to bear in mind is that profits cannot be ascertained till the end of the accounting period of the assessee. A certain business may yield a profit at a particular time, but it cannot be said that constitutes a profit of the assessee because there may be a loss in other business and the result of those losses may be that the profit made in one businesses and the result of those losses may be that the loss in other business may be wiped out and at the end of the accounting period the assessee may make a loss although one business has yielded a profit. Now, what the Excess Profits Tax Officer has done in this case is that he has picked out this item of Rs. 1,65,000, crystallised it as it were on the 20th of December, 1945, has put it in the category of profits and has said that as far as this sum of Rs. 1,65,000 is concerned he will not apportion it but will make the assessee pay excess profits tax on the whole amount.

11. The error into which the Officer has fallen is this. It could not have been predicated of this sum of Rs. 1,65,000 that it constituted the profits of the assessee on the 20th of December, 1945. Till the accounting period of the assessee came to end, which was on the 24th of October, 1946, it was impossible to state that the assessee had either made profits or losses, because if there were losses in the other businesses of the assessee, this sum of Rs. 1,65,000 was capable of being set off against those losses.

12. Sir Nusserwanji has emphasised the fact that this sum of Rs. 1,65,000 was earned from a source which was not the ordinary normal source of the assessee's business and he has further emphasised the fact that the source came to end during the chargeable accounting period and no possible question could arise of that source yielding any further income or profit, and therefore it is suggested that it was open to the Excess Profits Tax Officer to treat this as a special case or special circumstance and refuse to apportion this sum of Rs. 1,65,000. Now, there is a clear fallacy underlying this argument. To suggest that this particular source which yielded Rs. 1,65,000 ceased to exist is to misunderstand and misapprehend the whole basis of the Excess Profits Tax Act. If all the businesses of the assessee are for the purposes of the Excess Profits Tax Act entity, then you cannot pick out one of the businesses of the assessee is going on, the profits cannot be determined for the purposes of the Excess Profits Tax Officer Act till the end of the accounting period of the assessee. It is clear that the special circumstances which the Legislature contemplated in the proviso is not the special circumstances of a particular business of the assessee being discontinued. The special circumstance which might have been contemplated by the Legislature was a case where, as the Tribunal itself has pointed out, the books of the assessee were closed before the end of the accounting period and the profits of all the businesses carried on by the assessee were ascertained. But the special circumstance contemplated by the Legislature could not possibly have been the case where one particular business ceases to yield income although the other businesses of the assessee were being carried on and the profits of all the businesses could not be ascertained till the end of the accounting period. To put it briefly, the power of the Excess Profits Tax Officer is with regard to profits not with regard to items in the profit and loss account of the assessee. If the Tribunal were right, it would lead to this startling result that it would be open to the Excess profits Tax Officer to treat this sum of Rs. 1,65,000 as profits subject to payment of excess profits tax and if there were losses in other businesses he may apportion those losses and set off those losses against the sum of Rs. 1,65,000 which he has already ascertained as a profit as of the 20th December, 1945. Therefore, whereas the losses would be apportioned, this individual item of profit of Rs. 1,65,000 would remain unapportioned and would be treated as a separate item for the purpose of determination of the assessee's liability to pay excess profits tax.

13. Sir Nusserwanji has also argued that there was nothing to prevent the Legislature from giving the special power to the Excess Profits Tax Officer to treat the profit of a business which has come to an end during the chargeable period as a separate profit. Now, it is settled law that, at least so far as this court concerned, the profit earned by an assessee in a business cannot be ascertained until the end of the accounting period, and, therefore, we would be assuming something which is contrary to fundamental principles of business profits underlying the Income-tax Act if we were to hold that the Legislature wanted to treat something as profit which in law can never be a profit. It therefore Rs. 1,65,000 were not profits of the assessee on the 20th of December, 1945, and the profits were what were ascertained to be profits at the end of the accounting period, the whole basis of the action taken by the Excess Profits Tax Officer was erroneous. His action was based only on the ground that this sum of Rs. 1,65,000 constituted profit of a business which had ceased to exist after the chargeable period and the income from which was received and ascertained prior to chargeable accounting period. The Excess Profits Tax Officer seems to have overlooked the difference between a receipt and a profit. All that could be said of the sum Rs. 1,65,000 was that it was a receipt in the hands of the assessee on 20th of December, 1945. But the difference is vital and fundamental between a receipt and a profit. Every receipt in the hands of an assessee is by no means a profit or his income. It is only when that receipt is taken into consideration with various other items in the account and when the account is finally made up at the end of accounting period that it could be predicated that a certain sum is a profit of the assessee or a loss of the assessee. Therefore, in our opinion, the assessee was entitled in law to have the apportionment with regard to the whole amount of Rs. 4,96,944 and the Excess Profits Tax Officer was not entitled to exclude the sum of Rs. 1,65,000 from the apportionment.

14. We answer question No. 1 in the affirmative, and No. 2 also in the affirmative.

15. We may point out that the assessee offered to have the sum of Rs. 1,65,000 subjected to the payment of business profit tax for the period beginning 1st April to 31st of October 1946 and Mr. Kola stands by that offer.

16. Our answer to question No. 3 is : in view of our decision as to what the finding of the Tribunal is, this question does not arise.

17. No order as to costs.

18. Reference answered accordingly.


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