M.C. Chagla, C.J.
1. By this reference the assessee seeks to challenge an order made by the Excess Profits Tax Officer under Section 10A of the Excess Profits Tax Act. The assessee is a firm carrying on business at Ahmedabad in piece-goods, and the partners of the firm are one Punjabhai Dipchand and Goculdas Chhotalal. On June 28, 1941, another firm of the same name was started at Jorawarnagar in the Wadhwan State, which is an Indian State, and in that firm Punjabhai and Goculdas were partners and there was also a third partner by the name of Chunilal Tribhovan. This firm made certain profits, and the question is whether the profits of this firm are liable to payment of excess profits tax.
2. Now, Section 5 of the Act which deals with the application of the Act contains a special exception in the case of business done in an Indian State, and it expressly provides that the Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State. It is not disputed in this case that as far as the profits of this business started in Wadhwan State are concerned, the whole of the profits accrued or arose in Wadhwan State. But the Excess Profits Tax Officer having failed to get at these profits resorted to a most extraordinary procedure. He availed himself of what he thought were his powers under Section 10-A of the Excess Profits Tax Act. That section deals with transactions which are designed to avoid or reduce liability to excess profits tax, and if the Excess Profits Tax Officer is of the opinion that an assessee has entered into any transaction or transactions which are effected with that object, he may, with the previous approval of the Inspecting Assistant Commissioner, make such adjustments as respects liability to excess profits tax as he considers appropriate so as to counteract the avoidance or reduction of liability to excess profits tax which would otherwise be effected by the transaction or transactions. Acting under this section and with the previous approval of the Inspecting Assistant Commissioner, the Excess Profits Tax Officer adjusted the liability of the assessee to excess profits tax by adding to their profits accruing in Ahmedabad the profits which accrued to them in the Wadhwan State. I am conscious of the fact that the Income Tax Department has very wide powers given to it under the Income-tax Act and the Excess Profits Tax Act, but I did not imagine that those powers went so far as to permit an Officer of the Department to dictate to an assessee as to how he should carry on business and what methods he should adopt in conducting his business. The Excess Profits Tax Officer seems to have taken the view that there was no reason whatever why the assessee should have started a new business at Wadhwan, and he discusses at some length the arguments which led him to the conclusion that this business was started solely for the purpose of avoiding Excess Profits Tax. Now, it has been often repeated, and very rightly, that it is always open to a subject to avoid paying income-tax or excess profits tax if he could legally and legitimately do so. The Legislature has exempted profits which accrue in an Indian State from the purview of the Excess Profits Tax Act. Therefore, it is open to a subject in India to start business in an Indian State deliberately and openly, knowing full well that if he makes profits he will not have to pay excess profits tax on those profits. There is no liability whatever to pay excess profits tax on profits which accrue in an Indian State. If that be the position, it is impossible to understand how the Excess Profits Tax Officer, by resorting to his powers under Section 10-A, could defeat and override the provisions of the Act itself. What the Excess Profits Tax Officer has really done is to have made the profits accruing in an Indian State liable to excess profits tax, although the Legislature has thought fit to exempt those profits from tax. Mr. Joshi says he has done so because in his opinion the business was started at Wadhwan in order to avoid the payment of excess profits tax. It is difficult to understand how there can be an avoidance of liability if there is no liability at all. The section really aims at fraudulent acts on the part of an assessee. Although the word 'fraud' is not expressly used, that was obviously the object of the Legislature, viz. that when an assessee who is liable to pay excess profits tax enters into any transaction or transactions or takes resort to some subterfuge or device in order to avoid tax which he is liable to pay, then the Excess Profits Tax Officer can act under the powers conferred upon him by Section 10-A. But here we start with this basis that there is no liability whatever on an assessee to pay tax in respect of profits accruing outside British India. If that be so, there cannot possibly be an avoidance of payment of tax within the meaning of Section 10-A of the Act. The motive of the assessee for opening the business is entirely immaterial and irrelevant. It is no concern of the Department how an assessee should conduct and carry on his business, and even if an assessee deliberately chose to start a business in a part of India where no excess profits tax is payable, he was perfectly entitled to do so and he was within the law in doing so. In my opinion, therefore, the order made by the Excess Profits Tax Officer was clearly wrong and in excess of the jurisdiction conferred upon him by the statute.
3. The question is not properly framed. We will reformulate the question and the question will read thus:
Whether in view of the provisions of the third proviso to Section 5 of the Act, the Tribunal was justified in holding that Section 10A applies to the case?
4. To that the answer is in the negative. The Commissioner to pay the costs.
5. I agree.