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Shri Sita Ram Kayan, Kanpur Vs. the Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-Tax Misc. Case No. 219 of 1957
Judge
Reported inAIR1958All648; [1958]34ITR841(All)
ActsExcess Profits Tax Act, 1940 - Sections 2(5)
AppellantShri Sita Ram Kayan, Kanpur
RespondentThe Commissioner of Income-tax
Appellant AdvocateR.L. Gulati, Adv.
Respondent AdvocateJagdish Swarup, Adv.
Excerpt:
.....effect of the pioviso is that all those businesses are treated as one business for purposes of the excess profits tax act. if it be held that a discontinuance of one business by the same person would disentitle him to a deduction in respect of deficiency in it against excess profits earned in another business which continued to be carried on by him, it would clearly go against the principle laid down in the act. in these circumstances, we must hold that, in the present case, the business, which was carried on by the assessee during the period from 24-3-1944, to 28-5-1945, as well as the business which was carried on earlier during the chargeable accounting period from 8-11-1942 to 30-9-1943, were one business and, consequently, the deficiency in one chargeable accounting period must be..........to claim deficiency attributed to the chargeable accounting period under consideration against the excess profits in the preceding chargeable accounting periods?'2. the assessee is an individual who was carrying on business in cloth and cotton, during the chargeable accounting period commencing from 8-11-1942, and ending on 30-9-1943, he was assessed to excess profits tax. on 30-9-1943, the assessee closed his business and went to his place of origin. he returned to the place where he was carrying on the business and then on 24-3-1944, he started a new business in cloth and cotton. this business was carried on upto 28-5-1945.during this period between 24-3-1944, and the 28-5-1945, the assessee earned profits which were far below the standard profits of his earlier business which had been.....
Judgment:

V. Bhargava, J.

1. The following question has been referred by the Income-Tax Appellate Tribunal for the opinion of this Court:

'Whether on the above facts and the findings of the Tribunal, the assessee is entitled to claim deficiency attributed to the chargeable accounting period under consideration against the excess profits in the preceding chargeable accounting periods?'

2. The assessee is an individual who was carrying on business in cloth and cotton, During the chargeable accounting period commencing from 8-11-1942, and ending on 30-9-1943, he was assessed to excess profits tax. On 30-9-1943, the assessee closed his business and went to his place of origin. He returned to the place where he was carrying on the business and then on 24-3-1944, he started a new business in cloth and cotton. This business was carried on upto 28-5-1945.

During this period between 24-3-1944, and the 28-5-1945, the assessee earned profits which were far below the standard profits of his earlier business which had been assessed to the excess profits tax mentioned above. The assessee claimed that the deficiency of profits in his business, which was run between the 24-3-1944 and 28-5-1945, should be set off for the purpose of reducing the excess profits tax which had been assessed on his business for the chargeable accounting period from 8-11-1942 to 30-9-1943.

One of the contentions of the assessee was that, when he started the business on 24-3-1944, he did not start a new business at all and that it was a continuance of his old business. This contention was rejected by the Income-Tax Appellate Tribunal which held that it was really a new business. According to the statement of the case sent up by the Tribunal, this finding of the Tribunal was not challenged by learned counsellor the assessee before the Tribunal when the application under Section 66(1) of the Income-Tax Act read with Section 21 of the Excess Profits Tax Act was argued. Further, as remarked by the tribunal, this was a finding of fact.

Accepting this finding of fact, however, it was contended by the assessee that he was still entitled to deduct the deficiency of profits in his new business out of the excess profits which had been earned by him and on which tax had been charged during the chargeable accounting period from 8-11-1942 to 30-9-1943. In these circumstances, the Tribunal has described the period beginning on 24-3-1944, and ending on 28-5-1945, as the chargeable accounting period under consideration and the period between 8-11-1942, and 30-9-1943, has been described as the preceding chargeable accounting period. It is on the basis of this description that the question has been framed by the Tribunal in the form reproduced above.

3. On behalf of the assessee, reliance has been placed on the provisions of Sections 5 End 7 of the Excess Profits Tax Act and, further, on the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act.

4. The contention of the assessee is that the business, which was carried on during the preceding chargeable accounting period, was governed by the provisions of the Excess Profits Tax Act by virtue of Section 5 of that Act and that, in fact, excess profits tax was assessed and levied in respect of the profits of that business for that chargeable accounting period.

5. The business, which was run by the assessee between 24-3-1944, and 28-5-1945, was also governed by the provisions of this Act as the profits made in that business during the chargeable accounting period under consideration were chargeable to income-tax under Clause (b) (i) or (ii) or Clause (c) of Sub-section (1) of Section 4 of the Income-Tax Act. Since the Excess Profits Tax Act applied to both these businesses carried on by the assessee, under the second proviso to Clause (5) of Section 2 of that Act, it must be held that these two businesses constituted one business.

The two businesses being deemed to be one business, the assessee claimed that he was entitled under Section 7 of the Excess Profits Tax Act to a deduction out of the profits charged to tax in the preceding chargeable accounting period to the extent of the deficiency of profits computed for the chargeable accounting period under consideration. On behalf of the Department, the contention is that the first business, which was carried on during the preceding chargeable accounting period, was discontinued at the end of taut period and thereafter ceased to exist.

Then a new business was started in the chargeable accounting period under consideration and this cannot now be held to be the same business which had been carried on during the preceding chargeable accounting period. This must be held to be an entirely new business and, consequently, the deficiency in profits in respect of this business cannot be utilised for reducing the chargeable profits in the preceding chargeable accounting period. What was contended was that, in order to obtain this benefit, the business, which was carried on in the chargeable accounting period under consideration, should have been in existence even during the preceding chargeable accounting period and should have been continued as a running business subsequent to that period and also during the chargeable accounting period under consideration. The question that thus arises for decision may be put in simple language as follows:

'Q. Whether, if a person carries on at business in one chargeable accounting period and a new business in another chargeable accounting period, it can be held that the businesses constituted one business under the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act, or whether as contended by the Department, there must be a necessary ingredient that the two businesses must be running simultaneously or must have run simultaneously?'

It seems to us that, on the language of the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act, the interpretation put on behalf of the assessee must be accepted. Under Section 5 of the Excess Profits Tax Act, the Act applies to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax under Clause (b) (i) or (ii) or Clause (c) of Sub-section (1) of Section 4 of the Income-Tax Act.

The two businesses, which were carried on by the assessee during the two chargeable accounting periods in question, are both businesses covered by the provisions of Section 5 of the Excess Profits Tax Act', so that the Excess Profits Tax Act applies to both of them. Further, both the businesses were admittedly owned by the same person, viz., the assessee. The second proviso to Clause (5) of Section 2 of the Excess Pro-fits Tax Act lays down three requirements: Firstly, there should be a number of businesses, secondly, the Act should apply to all of them land, thirdly, they must be carried on by the same person.

If these three requirements are satisfied, then the effect of the pioviso is that all those businesses are treated as one business for purposes of the Excess Profits Tax Act. In the case before us, we have already held that both businesses, which were carried on by the asses-see during the two chargeable accounting periods in question, attracted the applicability of the Excess Profits Tax Act under Section 5 of that Act and both of them were carried on by the same person. In the circumstances, under the proviso, it must be held that they constituted one business.

The contention of learned counsel for the Department that, for purposes of treating the two as one business, there should be continuity in running the businesses does not flow from any words used in this proviso. The proviso also does not lay down that, for purposes of treating several businesses as one business, they must all have been carried on simultaneously during the same chargable accounting period. Had this been the intention, the legislature could have easily introduced in this proviso also a reference to a chargeable accounting period as was done in Section 5 which lays down the applicability of the Excess Profits Tax Act.

The omission of any reference to a chargeable accounting period in this second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act could only be for the purpose of bringing in a fiction of law that, if there be more than one business carried on by one person then, for purposes of charging excess profits tax, all the businesses should be treated as one business and should be taxed on that basis.

It is to be noticed that the Excess Profits Tax Act was passed for a limited period of time with a specific purpose. The purpose was to tax the excess profits made by businesses as a result of the War and the profits which were to be taxed were those which were earned during the period beginning from the first day of September, 1939, and ending on the 31st day of March, 1946.

The scheme being only to tax the excess profits earned as a result of the War, the method of assessment laid down was not to restrict assessments to one single chargeable accounting period only and to fix the liability for payment of excess profits tax on the basis of the assessment of that period but to allow to the assessee the benefit of having the excess profits earned by him spread over the whole period for which the Act was to be in force.

It is true that, for the purpose of convenient assessment, the period, in respect of which the profits earned were to be taxed, was divided into separate chargeable accounting periods which were to be normally of 12 months' duration though, ultimately, to be fixed in accordance with Clause (1) of Section 2 of the Excess Profits Tax Act. After the excess profits were computed for each chargeable accounting period and even if tax had already been realised for some of the chargeable accounting periods, the assessee was given the benefit under Section 7 of that Act of carrying back or carrying forward his deficiency of profits in any chargeable accounting period when the deficiency occurred during the preceding or subsequent chargeable accounting periods and of claiming a deduction in the excess profits which either had already been taxed or were yet to be taxed.

The result of this provision was that the assessee could lawfully claim a deduction in respect of deficiency suffered by him in any particular chargeable accounting period against excess profits earned in all other chargeable accounting period. This would indicate that the intention of the Act was to charge with tax the excess profits earned over the whole period between the first day of September, 1939, and 31st day of March, 1946.

This charge was to be in respect of a business and was not primarily directed against as a person carrying on the business but, by adding the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act, the principle was partly departed from and cognizance was taken of the liability arising out of the circumstance of one single person carrying on more than one business. In the case of a person carrying on more than one business, all his businesses were to be treated as one business and the benefit of Section 7 was to be granted on the basis that all his businesses were one single business.

If it be held that a discontinuance of one business by the same person would disentitle him to a deduction in respect of deficiency in it against excess profits earned in another business which continued to be carried on by him, it would clearly go against the principle laid down in the Act. The proviso makes all businesses one business even though the businesses in different chargeable accounting periods may be changed from time to time. As an example, if in a first chargeable accounting period a person happens to be carrying on a business A and in the second chargeable accounting period he does another business B, in addition to business A he would still be deemed to be carrying on one business in each of the two chargeable accounting periods.

Since his business would be one, any deficiency of profits accruing during the first chargeable accounting period in respect of business A could be carried forward by him to the next chargeable accounting period when he was carrying on businesses A and B. The reverse also applies, viz. any deficiency during the chargeable accounting period when he was carrying on businesses A and B could be carried back to the chargeable accounting period when he was only carrying on business A.

This would be on the basis that in each of the two periods he was carrying on only one business. In a third chargeable accounting period he may be carrying on business B alone. This would again be one business. It cannot be said that the deficiency in the third chargeable accounting period cannot be carried back to the two earlier chargeable accounting periods, or that the deficiency in the earlier two chargeable accounting periods, cannot be carried forward to the third chargeable accounting period.

The result is that a deficiency, which occurred in the first period when he was carrying on business A alone would be liable to be adjusted against the excess profits earned when business B alone was being carried on by him in the third period and vice versa. If such a result could be obtained by running both businesses A and B simultaneously during the one intervening chargeable accounting period while there were different businesses in the earlier and later periods, there appears to be no reason why the same benefit could not be obtained by discontinuing the business A at the end of the first chargeable accounting period 2nd starting business B in the third chargeable accounting period.

This view expressed by us receives partial support from a decision of the Madras High Court in P. A. C. Ramaswami Raja v. Commr. of E. P. Tax Madras, : [1954]25ITR9(Mad) (A) where the assessee had been carrying on two businesses in one period but stopped one of those businesses in the succeeding period. The assessee then claimed under Section 7 of the Excess Profits Tax Act to set off the deficiency in the succeeding period against the earlier profits and it was held that neither Section 8(1) nor Section 8(5) applied to the case and the assessee was entitled to the relief in accordance with Section 7 on a correct interpretation of the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act.

It seems to us that this provision of law in principle lays down a rule which is the exact converse of the rule laid down in Section 8(1) of the Act. Under Section 8(1) of the Excess Profits Tax Act if there is a change in the persons carrying on a business, a new business is deemed to have been commenced even if, in fact, the same old business continues to be carried on exactly in the way in which it was being carried on heretofore.

This provision thus introduces a fiction of law by which a business continued to be run is deemed to be discontinued and a new business is deemed to be commenced when, in fact, there is no commencement of a new business and only a change occurs in the persons carrying on the business. The effect of the second proviso to Clause (5) of Section 2 of the Excess Profits Tax Act is that, even though the earlier business is discontinued and a new business is started, the earlier and the later businesses are both deemed to be one business simply because the person carrying on the business happens to be the same.

This principle, as we have indicated above, seems to have been laid down in order to give effect to the scheme of the Excess Profits Tax Act under which it was envisaged that one single owner carrying on more than one business during the whole period, in which liability to excess profits tax was imposed by the Act, should have the benefit of adjustment of his deficiency in any of the chargeable accounting periods against the excess profits earned in any other chargeable accounting period. It is on this interpretation that we have to hold that the cases relied upon by learned counsel for the Department relating to the applicability of Section 10-A of the Excess Profits Tax Act, when there has been a change in persons carrying on the business within the meaning of Section 8(1) of the Excess Profits Tax Act, cannot be applied.

Learned counsel relied on the view expressed by the Supreme Court of India in Sohan Pathak and Sons v. Commr. of Income Tax, U. P. : [1953]24ITR395(All) (B) and Narain Swadeshi Weaving Mills v. Commr. of Excess Profits Tax, : [1954]26ITR765(SC) (C) in which cases it was held by the Supreme Court that the effect of Section 8(1) of the Excess Profits Tax Act was that, in case there was a change in persons carrying on a business, that business ceased to exist and the result was that Section 10-A could not be applied to that business as the applicability of that section depended on the existence of a business to which the Excess Profits Tax Act applied and which attracted the provisions of the charging section, viz., Section 4 of the Act.

In the case before us, there may have been a discontinuance of the first business but, later on, another business came into existence and since, by a fiction of law, both had to be treated as one business, it has to be held that that business does exist, so that, under Section 5, the provisions of the Excess Profits Tax Act can be applied to it and the excess profits become chargeable to tax under Section 4 of the Act. Learned counsel for the Department also referred us to a decision in John Smith and Son v. Moore. (H. M. Inspector of Taxes) (1928) 12 Tax Cas 266 (D).

That case, in our opinion, cannot be applied as the decision in that case depended on the particular provisions of the Excess Profits Tax Act in force in England during the First World War which Act did not recognise the fact that liability to excess profits tax can be affected by a change in the ownership of a business. The Excess Profits Tax Act then in force made the liability to tax depend purely on the running of a business irrespective of ownership.

The Indian Excess Profits Tax Act, which has to be applied to the case before us, specifically makes a provision recognising the effect on liability to excess profits tax of change in the persons carrying on a business or continued identity of persons carrying on several businesses. In these circumstances, we must hold that, in the present case, the business, which was carried on by the assessee during the period from 24-3-1944, to 28-5-1945, as well as the business which was carried on earlier during the chargeable accounting period from 8-11-1942 to 30-9-1943, were one business and, consequently, the deficiency in one chargeable accounting period must be adjusted towards the excess profits earned in the other chargeable accounting period under Section 7 of the Excess Profits Tax Act.

Learned counsel for the Department drew our attention to the fact that the first chargeable accounting period in this case began on 8-11-1942, and ended on 30-9-1943, whereas the period, during which the second business ran, does not cover the corresponding period. This is a circumstance which cannot, in our opinion, affect our decision. It will, of course, be for the income tax authorities to work out the deficiency on the basis of the correct chargeable accounting period which must be applied under the provisions of the Excess Profits Tax Act even to the second business, on the basis that this business and the earlier business were one business and then to make adjustments in accordance with the law.

6. Let the record be returned to the Income Tax Appellate Tribunal with our opinion expressed above which answers the question referred to us. The assessee will be entitled to his costs of this case which we fix at Rs. 250/-.


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