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In Re: Excess Profits Tax Assessment of Chaturbhuj and Co., Kanpur - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberMisc. Case No. 13 of 1950
Judge
Reported inAIR1960All413
ActsExcess Profits Tax Act, 1940 - Sections 7 and 16
AppellantIn Re: Excess Profits Tax Assessment of Chaturbhuj and Co., Kanpur
Appellant AdvocateR.S. Agarwala, Adv.
Respondent AdvocateG.S. Srivastava, Adv.
Excerpt:
direct taxation - determination of liability - section 16 and 7 (a) of excess profits tax act, 1940 - for determining the maximum amount of penalty - excess profit tax officer has to consider ultimate liability to excess profits -not transitory profit for a chargeable accounting period. - - before the appellate assistant commissioner also, there were appeals in respect of the proceedings for assessment of income-tax as well as excess profits tax. this view of the excess profits tax officer was upheld in the appeals by the appellate assistant commissioner as well as-the tribunal. appellate tribunal for our opinion, 2. the facts given above clearly indicate that, in preparing the statement of the case as well as in passing their appellate order, the income-tax appellate tribunal.....v. bhargava, j.1. the two questions referred by the income-tax appellate tribunal for the opinion of this court are :'1. whether in the circumstances of the case as stated above the penalty of rs. 6,200/- maintained by the tribunal was in accordance with the provisions of section 16 (1), e. p. t. act or the basis for it should have been only the e. p. t. which was avoided in respect of the chargeable accounting period in question, namely, rs. 2,947-5-0.2. whether in face of the fact that the whole e. p. t. was refunded in the following chargeable accounting period before the order of imposition of the penalty was passed by the excess profits tax officer there was any avoidance of the e. p. t. and any penalty could legally be imposed under section 16, e.p.t. act in respect of the.....
Judgment:

V. Bhargava, J.

1. The two questions referred by the Income-tax Appellate Tribunal for the opinion of this Court are :

'1. Whether in the circumstances of the case as stated above the penalty of Rs. 6,200/- maintained by the Tribunal was in accordance with the provisions of Section 16 (1), E. P. T. Act or the basis for it should have been only the E. P. T. which was avoided in respect of the chargeable accounting period in question, namely, Rs. 2,947-5-0.

2. Whether in face of the fact that the whole E. P. T. was refunded in the following chargeable accounting period before the order of imposition of the penalty was passed by the Excess Profits Tax Officer there was any avoidance of the E. P. T. and any penalty could legally be imposed under Section 16, E.P.T. Act in respect of the chargeable accounting period in question?'

In deciding this reference, we have had considerable difficulty because in the statement of the case full facts were not given by the Income-ax Appellate Tribunal. In fact, the whole statement of the case consists of a discussion of the points involved but does not at any stage narrate all the facts On account of which these points arose. Consequently, in order to decide this reference, we had to look at the copies of documents which were produced before us by learned counsel for the Income-tax Department. The facts that we could gather show that, for the chargeable accounting period 29-10-1943 to 13--10-1944, the order of assessment by the Excess Profits Tax Officer was passed on 13-3-1946,

In those proceedings for assessment, the asses-see had shown a sum of Rs. 5,921/- as his income in accordance with the profit and loss account. The Excess Profits Tax Officer added back a sum of Rs. 4,421/-, in respect of inadmissible expenditure or in respect of other items which should have been included for computation of income such as an amount which the assessee had shown as loss. In addition a sum of Rs. 30,675/- was added back on the basis of two cash credit entries on the finding that the amounts shown in these entries were concealed income of the assessee. The Excess Profits Tax Officer thus determined the total income of the assessee for this chargeable accounting period at Rs. 38,872/-. The assessee filed an appeal against this order before the Appellate Assistant Commissioner.

It may be mentioned that the proceedings for assessment of the excess profits tax were simultaneous with the proceedings of assessment of income-tax and the principal orders had been passed in the income-tax proceedings whereas the orders in the excess profits tax proceedings were made by referring to the orders in the income-tax proceedings. Before the Appellate Assistant Commissioner also, there were appeals in respect of the proceedings for assessment of income-tax as well as excess profits tax.

The Appellate Assistant Commissioner decided the appeals on 28-10-1947 and upheld the decision of the Excess Profits Tax Officer with the modification that he directed a reduction of a sum of Rs. 897/- from the total business income of the assessee which had been added back by the Excess Profits Tax Officer on his view that this amount had wrongly been shown as loss of the assessee. The result of this order of the Appellate Assistant Commissioner should have been that the total income of the assessee for the chargeable accounting period in question should have been computed at Rs. 87,975/-.

The assessee went up in second appeal before the Income-tax Appellate Tribunal and challenged the order relating to adding back of the sum of Rs. 30,675/- which was included in the income on the basis of the cash credit entries. The Income Tax Appellate Tribunal dismissed the appeal on 17-3-1949. In the meantime and before the decision of this appeal by the Tribunal, the Excess Profits Tax Officer had taken proceedings under Section 16 of the Excess Profits Tax Act against the assessee and on 20-2-1948 a penalty of Rs. 9,000/- was imposed by him.

The penalty was imposed on the basis that the assessee had concealed the particulars of his income by making these cash credit entries thus trying to show that the amounts in those cash credit entries were not his income. Against this order imposing the penalty under Section 16 of the Excess Profits Tax Act, an appeal was filed before the Appellate Assistant Commissioner who dismissed it. The assessee then went in appeal to the Income-tax Appellate Tribunal which decided the appeal on 17-3-1949, i.e. the same day on which the second appeal against the assessment of the excess profits tax was decided by the Tribunal.

The Tribunal upheld the finding of fact that there had been concealment of particulars of income by the assessee so that he was liable to pay penalty under Section 16 of the Excess Profits Tax Act. It was further held that, in case the return, which had originally been filed in respect of this chargeable accounting period by the assessee, had been accepted by the Excess Profits Tax Officer, the assessee would, have avoided excess profits tax to the extent of Rs. 2,947-5-0 for the chargeable accounting period in question and in addition he would have avoided a sum of Rs. 3,355-5-0 for the chargeable accounting period 6-11-1942 to 28-10-1943 and another sum of Rs. 6,108-11-0 for the chargeable accounting period 29-9-1941 to 5-11-1942.

The Tribunal's finding thus was that the total amount of excess profits tax which would have been avoided by the assessee if his incorrect return had been accepted would have been the sum of Rs. 12,411-5-0. Considering the circumstances of the case, the Tribunal was of the opinion that, in order to mitigate the rigour of penalty that has been imposed by, the Excess Profits Tax Officer, a penalty equal to half the amount of tax avoided would be adequate punishment and on this view the Tribunal reduced the penalty to a round figure of Rs. 6,200/.-.

One of the contentions of the assessee Before the Excess Profits Tax Officer, the Appellate Assistant Commissioner and the Tribunal was that on 25-2-1947 an assessment order was made in proceedings relating to the subsequent chargeable accounting, period 14-10-1944 to 1-11-1945. In that assessment order it was held that in the chargeable accounting period 14-10-1944 to 1-11-1945 the assessee had a deficiency of Rs. 37,473/. This deficiency was carried back to the excess profits which had been taxed in the earlier chargeable accounting periods to the extent of Rs. 18,617/- leaving a further net deficiency of Rs. 18,856/- in respect of which the order was that it would be carried forward to the next subsequent chargeable accounting period.

It was held that the assessee was entitled to a refund of Rs. 12,411-5-0 being the amount of excess profits tax paid in the earlier chargeable accounting periods to which the deficiency was carried back under Section 7 of the Excess Profits Tax Act. This order, as it will be noticed, was passed before the first order of the Excess Profits Tax Officer imposing penalty under Section 16, which was passed on 20-2-1948. It was on the basis of this assessment order for the chargeable accounting period 14-10-1944 to 1-11-1945 that the assassee took up the plea that, as a result of this order, the excess profits tax payable by him during all the three chargeable accounting periods had to be refunded so that ultimately he was found not to be liable to pay any excess profits tax for those three chargeable accounting periods and consequently it could not be held that, even if his incorrect return had been accepted, he could have avoided the payment of any excess profits tax.

This plea was rejected by the Excess Profits Tax Officer when he imposed the penalty by his order dated 20-2-1948 on the ground that the penalty was liable to be imposed without taking into consideration the right of an assessee to have a deficiency in a subsequent chargeable accounting period carried back to earlier chargeable accounting periods and had to be determined on the basis of the excess profits tax which would have been avoided as a result of the incorrect return in the proceedings for assessment for the chargeable accounting period in respect of which the return was filed and should include even those amounts of excess profits tax which would have become non-payable by the assessee for the earlier chargeable accounting periods. This view of the Excess Profits Tax Officer was upheld in the appeals by the Appellate Assistant Commissioner as well as-the Tribunal. Thereupon the assessee moved an application under Section 21 of the Excess Profits Tax Act read with Section 66 of the Income-tax Act and it is on, that application that the two questions mentioned above have been referred to us by the Income-tax. Appellate Tribunal for our opinion,

2. The facts given above clearly indicate that, in preparing the statement of the case as well as in passing their appellate order, the Income-tax Appellate Tribunal committed a very obvious error in calculations. In the statement of the case as well as in their appellate order, the Tribunal has mentioned that the assessee had shown a profit of Rs. 5,921/- in his excess profits tax return and two deposits of Rs. 16,200/- and Rs. 14,475/- which had not been included were held to be his income and were added back on the ground that they were concealed income. thus bringing up the total income of the assessee for the chargeable accounting period in question to the figure of Rs. 38,872/-. Clearly, the three sums of Rs. 5,921/-, Rs. 16,200/- and Rs. 14,475/- added together do not amount to the figure of Rs. 38,872/-, the total of these three figures is lower.

The facts mentioned by us above, in which we have taken notice of the decisions by the Excess Profits Tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal in proceedings for the assessment of excess profits tax for these chargeable accounting periods, will show that no doubt the Excess Profits Tax Officer had originally assessed the income of the assessee at Rs. 38,872/- which for convenience may be divided into two parts, viz., a sum of Rs. 8,197/- the income shown by the assessee in his profit and loss account and the sum added back by the Income-tax Officer in respect of inadmissible expenditure etc., and another sum of Rs. 30,675/- which was added back as concealed income.

The Appellate Assistant Commissioner allowed the appeal to the extent of Rs. 897/- and this reduction was in the first sum of Rs. 8,197/- bringing down that figure to Rs. 7,300/-. The Income-tax Appellate Tribunal did not make any further amendment in the assessed income when deciding the second appeal in those proceedings so that the amount of income which was ultimately found by the Income-tax Appellate Tribunal was the same as that found by the Appellate Assistant Commissioner. On correct calculations therefore, the statement of the case should have contained a statement that in the assessment proceedings the sum of Rs. 7,300/- had been determined as income on the basis of the return and the further sum of Rs. 30,675/- had been determined as concealed income making up the total of Rs. 37,975/-.

We have mentioned these figures because, if we had decided both these questions referred to us in favour of the department and against the assessee, it would have resulted in a reduction in the amount of maximum penalty which could be imposed in respect of excess profits tax avoided for the chargeable accounting period 9-10-1943 to 13-10-1944. In the view that we are taking on the questions of law referred to us, however, this error in calculation becomes immaterial and consequently we now pass on to the two points that have been referred to us for our decision.

2a. In this reference the contention on behalf of the department has been that, when proceedings for imposition of penalty under Section 16 of the Excess Profits Tax Act are taken, the effect of the concealment of income or incorrectness in the return must be considered with reference to the result that would follow if an assessment order is made for the chargeable accounting period in question so that the amount of tax avoided would be the amount of tax which would have been payable for the chargeable accounting period in question on the basis of the correct figures minus the amount of tax payable on the basis of the correct return and should further include the amount of excess profits tax which might become refundable to the assessee for earlier chargeable accounting periods as a result of determination of a deficiency in the chargeable accounting period in question.

The two provisions of law that have to be examined for the purposes of considering this question are Sections 7 and 16 of the Excess Profits Tax Act, In Section 7, Clause (b) and the provisos are not at all material for the purpose of deciding this reference and consequently we reproduce below the remaining part of the section which is relevant for our purposes :

'Where a deficiency of profits occurs in any chargeable accounting period in any business, the profits of the business chargeable with excess profits tax shall be deemed to be reduced and relief shall be granted in accordance with the following provisions : (a) the aggregate amount of the profits so chargeable for the previous chargeable accounting periods shall be deemed to be reduced by the amount of deficiency of profits and the amount of excess profits tax payable in respect thereof shall be deemed to be reduced accordingly and the relief necessary to give effect to the reduction shall be given by repayment or otherwise;'

Section 16 of the Act runs as follows:

'16. If the Excess Profits Tax Officer, the Appellate Assistant Commissioner or the Commissioner, in the course of any proceedings under this Act, is satisfied that any person has without reasonable cause, failed to furnish the return required under Sub-section (1) of Section 13. or to produce or cause to be produced the accounts or documents or other evidence required by the Excess Profits Tax Officer under Sub-section (2) of that section, or has concealed particulars of the profits made by or capital employed in the business, or has deliberately furnished inaccurate particulars of such profits or capital, he may direct that such person shall pay by way of penalty in addition to the amount of any excess profits tax payable, a sum not exceeding

(a) where the person has failed to furnish the return required under Sub-section (1) of Section 13 the amount of the excess profits tax payable; and

(b) in any other case, the amount of excess profits tax which would have been avoided if the return made had been accepted as correct:

Provided that the Excess Profits Tax Officer shall not impose any penalty under this section without the previous approval of the Inspecting Assistant Commissioner.'

Section 16 of the Act thus provides for imposition of penalty for certain acts or omissions of the assessee and thereafter lays down what the maximum amount of penalty can be in cases where the penalty is Imposed for failure to furnish the return required in Sub-section (1) of Section 13. The penalty cannot exceed the amount of excess profits tax payable and in all other cases the penalty cannot exceed the amount of excess profits tax which would have been avoided if the return made had been accepted as correct. The questions which are before us for opinion involve the interpretation of the expressions 'the amount of excess profits tax payable and 'the amount of excess-profits tax which would have been avoided if the return made had been accepted as correct.' It has been contended on behalf of the department that in applying this provision of law, the excess profits tax payable or the amount of excess profits tax which would have been avoided should be determined with reference to the order of assessment made in the assessment proceedings for the chargeable accounting period in question only.

If this is done, it would lead to the interpretation that the maximum penalty can be, in the case of failure to furnish the return, the amount of excess profits tax payable for the chargeable accounting period in question as well as the amount which may become non-payable for earlier chargeable accounting periods because of the failure to furnish the return. In other cases, the amount of excess profits tax which would have been avoided would be the difference between the excess profits tax determined for the chargeable accounting period in question on the basis of the correct return and the similar amount determined on the basis of the incorrect return and would in addition include the amount of tax which might have become refundable to the assessee under Section 7 of the Act in case the result of the incorrect return was to bring about a deficiency which had to be carried back to the earlier years.

Thus it is contended that, in determining the maximum penalty under Section 16, the Excess Profits Tax Officer must take into account the excess profits tax payable or the excess profits tax avoided in that chargeable accounting period as well as in earlier chargeable accounting periods and this should be done because the result follows from the assessment order made for the chargeable accounting period in question.

It is urged that, for purposes of assessment of excess profits tax, each chargeable accounting period-is a separate unit and, consequently, when the assessment for She chargeable accounting period in-question is made the results which follow from it are to be separately given effect to for purposes of determining the penalty under Section 16 of the Act and the fact that, subsequently, there has to be an overall determination of the final excess profits tax liability by applying the provisions of Section 16 on the expiry of the subsequent chargeable accounting periods should not affect the liability which may have been determined in connection with the proceedings for the chargeable accounting period in question.

On behalf of the assessee, on the other hand, it is urged that the penalty to be imposed under Section 16 depends On the excess profits tax payable by the assessee or the avoidance of excess profits tax by the assessee and these liabilities of the assessee cannot be determined correctly until all the chargeable accounting periods during which the Excess Profits Tax Act remained in force have been taken into account.

It is urged that the liability to the penalty depends not on the transitory liability to the excess profits in the course of proceedings for a chargeable accounting period hut must depend on the fact whether, ultimately, the assessee was or was not in fact liable to pay any excess profits tax or would have or would not have actually avoided the payment of excess profits tax. The question thus boils down to the point whether the expressions 'excess profits tax payable' and 'excess profits tax which would have been avoided' have to be interpreted to mean the amounts as determined in respect of separate chargeable accounting periods or must be interpreted so as to take into account the ultimate liability of the assessee to the excess profits tax. It appears to us that, considering the whole scheme of the Act, the interpretation sought to be put on behalf of the assessee is more justified by the language and is in line with the scheme and purpose of this provision of law.

3. The most significant point to be considered is the language of Section 7 of the Excess Profits Tax Act. Under that provision, when there is a deficiency in any chargeable accounting period, the profits of the business chargeable with excess profits tax in earlier accounting periods 'are deemed to be' reduced by the amount of the deficiency of the profits and at the same time the amount of excess profits tax payable in respect thereof is deemed to be reduced accordingly. The Legislature laid down this fiction of law and thereafter proceeded to give the direction that the relief necessary to give effect to the deduction must be afforded to the assessee by repayment or otherwise.

The fact that a fiction of law was introduced has great significance. It appears to us that, even without this fiction of law, the relief envisaged by 5. 7 could have been granted by laying down that, whenever there is a deficiency in a subsequent chargeable accounting period, the excess profits tax which had been determined as payable in respect of the earlier chargeable accounting period shall be determined by carrying back that deficiency and by reducing thereupon the amount of excess profits tax determined as payable.

Thereafter, there could be a direction that, if the excess profits tax in respect of those earlier chargeable accounting periods had not already been paid, the amount to be realised should be determined after taking into account the reduction and where it has already been paid, there was to be a refund of the amount paid in excess of the reduced liability. Put in this form, this section would have been prospective, necessitating action in future and a relief being granted in future after the deficiency had occurred.

The Legislature on the other hand chose to use a different language and to introduce a fiction of Jaw by which this future aspect of granting the relief was not recognised. On the other hand, by this fiction of law, the occurrence of deficiency was made to take effect retrospectively. It was laid down that on the occurrence of the deficiency the profits chargeable to excess profits tax for previous chargeable accounting periods were 'deemed' to be reduced.

The expression 'deemed to be reduced' clearly implies that, at least for the purposes of giving relief in respect of excess profits tax, the amount of profits for the previous chargeable accounting periods were to be taken as having been even originally the reduced amounts, so that the larger amounts determined in earlier assessment proceedings become quite ineffective. In the same way, the amount of excess profits tax payable in respect of those profits is also deemed to be reduced so that for the original amount determined the reduced amount has to be treated as having been determined.

The position would have been different if the expression 'deemed to be reduced' had not been used in this section and it had been laid down that the profits of the previous years and the excess profits tax chargeable for the previous years shall be reduced. When such a fiction of law is introduced by the Legislature, full effect to that fiction of law has to be given as held by the Supreme Court in State of Bombay v. Pandurang Vinayak, AIR 1953-SC 244 and Commissioner of Income-tax, Delhi v. S. Teja Singh, AIR 1959 SC 352. In the case of AIR 1953 SC 244, their Lordships said :

'When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and ft should be carried to its logical conclusion.'

The same principle was affirmed in the subsequent decision of their Lordships of the Supreme Court cited above.

4. In order to apply the principle laid down by their Lordships of the Supreme Court, we have to examine the purpose for which this fiction of law was introduced in Section 7 of the Excess Profits Tax Act by the Legislature. As we have indicated earlier, it was not necessary to introduce this fiction merely for the purpose of giving relief in respect of the excess profits tax liability; that relief could have been granted to the assessee without introducing such a fiction of law even by using the language requiring future action to be taken for the purpose of determining the reduced excess profits tax liability.

It appears to us that, in order to determine the necessity for the introduction of this fiction of law, one of the provisions which is of assistance is that contained in Section 16 of the Excess Profits Tax Act. In Section 16, a maximum limit has been imposed on the amount of penalty and the maximum amount has been related to the excess profits tax payable or the excess profits tax which would have been avoided. The fact that the maximum amount of penalty has been made dependent on excess profits tax payable or the excess profits tax which would have been avoided itself implies that the Legislature did not intend that the penalty under Section 16 should be imposed merely because an assessee had been guilty of an act or omission mentioned in that section.

The omission or commission of an act of the type mentioned in this section by the assessee was no doubt a condition precedent to the applicability of this section and until it was found that the assessee had committed or omitted to commit such an act no question of imposing penalty on him could arise. Even in those cases, however, where the assessee is found to have been guilty of such an act or omission, the provision in Section 18 rendered him liable to penalty only if there was escape from excess profits tax liability.

In one case the escape from excess profits tax liability is determined by the amount of excess profits tax found to be payable by the assessee and in the other case by the amount of excess profits tax which would have been avoided by him if his incorrect return had been accepted as correct. There may be cases where the assessee has been guilty of an act or omission of the type envisaged by this section and yet it might not result in any escape from excess profits tax liability.

In those cases, in spite of the commission of such an act or omission, the provisions of Section 16 of the Act would not empower the Excess Profits Tax Officer to impose a penalty. For such cases, it appears the Legislature made provision in Sections 23 and 24 where the assessee could be prosecuted and convicted for a criminal offence. The act or omission was by these two sections constituted into an offence. This liability for prosecution for an offence is, however, mitigated in cases where Section 16 of the Act is applicable and a penalty is actually imposed under that section.

This provision is contained in Section 25 where it is laid down that no prosecution for an offence punishable under Section 23 or Section 24 or under the Indian Penal Code shall be instituted in respect of the same facts as those in respect of which a penalty has been imposed under this Act. In cases, where due to the fact that the assessee was not or would not have been liable to any excess profits tax the provisions of Section 16 of the Act cannot apply to him, it is still open to take conective measures against the assessee by prosecuting him under Section 23 or Section 24 of the Act.

Even in other cases where Section 16 of the Act may be applicable it is open to the appropriate authorities to choose to take proceedings against the assessee under Section 23 or Section 24 of the Act and not to resort to penalty proceedings under Section 16 of the Act. Section 16 of the Act, it thus appears, was not meant to be a provision for corrective purposes. No doubt, when the provisions of this section are resorted to, the imposition of a penalty would be a corrective measure, but there appears to have been another purpose in introducing this provision for imposition of penalty and it seems to us that that was the principal purpose for which this provision was introduced.

The purpose was that, if any person attempted to evade his excess profits tax liability he should not only be required to meet his liability but he should further become liable to the extent of an amount which may be equal to the liability which he attempted to evade. This not only acted as corrective for the assessee but also enured to the benefit of the revenue. There could be cases where the assessee might escape undetected. It was felt that, when actually detected the revenue should be compensated by being enabled to double their receipts so that on an average the State should not be deprived of its revenues to any considerable extent.

This was, therefore, a provision which appears to us to serve the double purpose of acting as a corrective for the assessee and as granting compensation to the State for the loss of its likely revenues. If the State is to be compensated for loss to its revenues, it would not at all be appropriate to grant compensation on the basis of a temporary or transitory loss to the revenues. The compensation on equitable principles must proceed on the basis of the ultimate loss to the revenues.

The ultimate loss to the revenues can only be determined if the whole period during which the Excess Profits Tax Act remained in force is treated as one unit and the liability affecting the excess profits tax of the assessee in question is determined for the whole period after taking into account the provisions of Section 7 of the Act. It is to be noticed that, at least in Clause (a) of Section 16, the expression used is 'the amount of excess profits lax payable.'

This is identical with the expression used in Clause (a) of Section 7 where it is laid down that 'the amount of excess profits tax payable in respect thereof shall be deemed to be reduced'. Normally when the same expression 'the amount of excess profits tax payable' is used in Section 7 as well as Section 16 of the Act, the two must be read together and, if under Section 7 of the Act the reduced amount of excess profits tax is deemed to be payable, then under Section 16 of the Act the original amount determined can no longer be taken into account as it must be treated as having become non-existent bringing about the result that the expression 'the amount of excess profits tax payable' in Section 16 must be that amount which is deemed to be so under Section 7 of the Act.

So far as Clause (b) of Section 16 is concerned, it does not use the expression 'the amount of excess profits tax payable'; on the other hand the expression used is 'the amount of excess profits tax which would have been avoided.' It appears to us that the use of this latter expression in no way changes the interpretation put by us, because the amount of excess profits tax which would have been avoided must inevitably depend upon the amount of excess profits tax payable. If the amount of excess profits tax payable as originally determined is to be deemed to be substituted by another figure, then the amount of excess profits tax avoided must also be calculated on the basis of the figure introduced by substitution and not the figure as originally determined.

It seems to us that in order to give proper effect to the fiction of law introduced in Section 7 of the Act, Section 16 of the Act must be interpreted in the manner indicated by us above so that it must be held that, for purposes of Section 16 of the Act, the amount of the excess profits tax payable or the amount of excess profits tax which would have been avoided must be determined with reference to the ultimate liability of the assessee determined after taking into account all provisions of the Excess Profits Tax Act including Section 7.

5. In this connection learned counsel for the department drew our attention to a decision of the House of Lords in Inland Revenue Commissioners v. John Dow Stuart Ltd., 1950-1 All ER 1. In that case the learned Law Lords had the occasion to consider the provisions of the Finance (No. 2) Act, 1939 by which excess profits tax was imposed there. Section 15 of that Act was in terms very similar to Section 7 of the Excess Profits Tax Act which we have been called upon to interpret. In that case, the further provision which came up for interpretation before their Lordships was Section 18 of the Finance Act which laid down the principle that the amount of excess profits tax paid is to be allowed as a business expenditure when computing income for the purposes of imposition of income tax. The corresponding provision in our Excess Profits Tax Act is contained in Sub-section (2) of Section 12 of the Act.

It was held by their Lordships that, though Section 18 of the Finance Act laid down that the amount of excess profits tax payable in respect of a trade or business for any chargeable accounting period shall, in computing for the purposes of income tax the profits and gains arising from that trade or business, be allowed to be deducted as an expense incurred in that period, deduction was permissible only of the amount of excess profits tax determined for each separate chargeable accounting period and any subsequent reduction in the excess profits tax payable by the fiction of law contained in Section 15 of the Finance Act could not be given effect to when applying the provisions of Section 18. Lord Porter when delivering his judgment held :

'Even however, in Section 15 (2), 'payable' appears to me to refer to the actual and not the reduced figure. The sum payable remains what it previously was, but it is deemed to be reduced for the purpose of giving relief, and for that purpose only. Nor do I see any reason for construing the wording of Section 18 (1) as meaning ultimately payable. The phraseology might indeed be capable of meaning either the excess profits tax payable on the actual figures appertaining to the particular period, or the reduced amount after deducting the permissible deficiencies. The provision that the deduction allowed is of the excess profits tax payable in respect of any chargeable accounting period might of itself tend to cause a preference for the earlier version, but, as I have already indicated, the provision against alteration of the amount of the deduction allowed is in my view decisive.' Reliance was placed on these views expressed by Lord Porter which views were also expressed by the other Law Lords though in slightly different language. It appears to us that this decision given by the House of Lords, when interpreting Section 18 of the Finance Act, cannot be properly applied when we are called upon to interpret Section 16 of the Excess Profits Tax Act. That interpretation could no doubt have been applied if we are called upon to express our opinion in respect of the provision contained in Section 12(2) of the Excess Profits Tax Act. In Section 12 (2) of the Excess Profits Tax Act as well as Section 18 of the Finance Act of England which the House of Lords had had the occasion to interpret the language used was different from the language used in Section 16 of the Excess Profits Tax Act.

In Section 12(2) of the Excess Profits Tax Act and in Section 18 of the English Finance Act, which the House of Lords interpreted, the provision for allowing deduction in income tax was that deduction was to be allowed of the excess profits tax payable in respect of any chargeable accounting period. The use of the word 'any' before the expression 'chargeable accounting period' itself gave an indication that the deduction was related to the excess profits tax determined for each separate chargeable accounting period. Similarly Section 12 (2) of the Excess Profits Tax Act when permitting the deduction uses the language, 'the amount to be deducted is to be the amount of any excess profits tax payable under any law on the profits or business in respect of any chargeable accounting period.'

The use of the word 'any' before the words 'excess profits tax payable' and the subsequent use of the word 'any' before 'chargeable accounting period' appears to have made for the purpose of laying down that when applying Section 12(2) of the Excess Profits Tax Act, each chargeable accounting period is to be taken as a separate unit. Further, in both provisions of law, in England as well as in this country, provisos were added making the intention of the Legislature clear that if at any time relief was granted to an assessee by carrying back his deficiencies in subsequent chargeable accounting periods to the earlier chargeable accounting periods, then for the purposes of income tax the reduced excess profits tax was not to be taken into account; on the other hand the relief received by the assesses as a result of carrying back the deficiency was to be treated as his income for charging income tax in that particular chargeable accounting period in which the deficiency accrued entitling him to carry back that deficiency to the earlier chargeable accounting periods.

In fact the quotation from the judgment of Lord Porter cited by me above itself makes it clear that the principal reason for the decision given by the House of Lords was that the language of the provisos left no doubt at all that for purposes of Section 18 of the Finance Act the reduced excess profits tax in earlier chargeable accounting periods was to be ignored. No doubt, Lord Porter in his decision expressed the opinion that even in Section 15 the word 'payable' used after the expression 'excess profits tax' appeared to refer to the actual and not the reduced figure and that the sum payable remained what it previously was but it was to be deemed to be reduced for the purpose of giving relief and for that purpose only. However, after expressing that opinion Lord Porter himself subsequently proceeded to hold that the phraseology might indeed be capable of meaning either the excess profits tax payable on the actual figures appertaining to the particular period, or the reduced amount after deducting the permissible deficiencies.

This clearly shows that, in giving their decision, the learned Law Lords recognised that the phraseology of Section 15 permitted both interpretations and they accepted the one which appeared to be properly applicable in view of Section 18 of the Finance Act which they had occasion to consider. In the case before us, we have to consider not Section 12 (2) of the Excess Profits Tax Act but Section 16 o the Excess Profits Tax Act and, as we have held above, the scheme of the Act indicates that the purpose of introducing the fiction of law in Section 7 was most likely based on Section 16 of the Act so that, whenever there was a deficiency in a subsequent chargeable accounting period, the full relief should be available to the assessee not only in being liable to less excess profits tax but there should also be reduction in his liability to the penalty under Section 16 of the Act. We do not, therefore, consider that the case relied upon by the learned counsel for the department goes contrary to the view that we have taken above.

6. On the view that we have taken above, the conclusion in the present case is that, when determining the maximum amount of penalty that could be imposed under Section 16 of the Excess Profits Tax Act, the Excess Profits Tax Officer wag bound to take into account the ultimate liability to excess profits tax and on its basis determine whether there would have been any avoidance of excess profits tax by the assessee if his incorrect return had been accepted. The facts enumerated by us earlier show that the result of the proceedings for assessment for the subsequent chargeable accounting period 14th October 1944 to 1st November 1945 was that there was no excess profits tax liability on the assessee during any of the earlier chargeable accounting periods so that there was no maximum amount at all to the extent of which penalty could have been imposed. We, consequently, answer the second question referred to us in the negative. The second question having been answered in the negative, the first question no longer arises Let the papers be returned to the Income Tax Appellate Tribunal with this answer to the question referred to us. The assessee will be entitled to his costs of this reference which we fix at Rs. 400/-. The same amount of Rs. 400/- shall be assessed as the fee of learned counsel for the department.


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