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Commissioner of Income-tax, U.P. and V.P. Vs. Chandra Prakash Raiz. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberMiscellaneous Case No. 227 of 1952
Reported in[1964]53ITR366(All)
AppellantCommissioner of Income-tax, U.P. and V.P.
RespondentChandra Prakash Raiz.
Excerpt:
- - what is taxed is the profits in a taxable territory and not the profits of the branch in part b state and the failure to recognise this important fact has resulted in confusion. the condition for the applicability of section 10a is fully satisfied when a person carrying on business in taxable territory opens a branch with the main purpose of avoiding or reducing his liability to excess profits tax;.....of section 10a ?(2) whether in view of the provisions of the third proviso to section 5 of the excess profits tax act the tribunal was justified in holding that section 10a does not apply to the case ?'the material facts, which give rise to the questions and are taken from the statement of the case, are these :the assessee is a wholesale dealer in cloth and carries on the business at its head office, farrukhabad, and a branch officer at ahmedabad. in 1940 the excess profits tax act was enacted to tax excessive profits made by businessmen on account of the prevalence of the war. the material provisions are as follows :under section 2(5) all businesses to which the act applies, carried on by the same person, is to be treated as one business for the purposes of the act. section 4 is the.....
Judgment:

DESAI C.J. - The Income-tax Appellate Tribunal, Allahabad Bench, has referred under section 66(1) of the Income-tax Act the following two questions for its opinion :

'(1) Whether the starting of a business in an Indian State is a transaction within the meaning of section 10A ?

(2) Whether in view of the provisions of the third proviso to section 5 of the Excess Profits Tax Act the Tribunal was justified in holding that section 10A does not apply to the case ?'

The material facts, which give rise to the questions and are taken from the statement of the case, are these :

The assessee is a wholesale dealer in cloth and carries on the business at its head office, Farrukhabad, and a branch officer at Ahmedabad. In 1940 the Excess Profits Tax Act was enacted to tax excessive profits made by businessmen on account of the prevalence of the war. The material provisions are as follows :

Under section 2(5) all businesses to which the Act applies, carried on by the same person, is to be treated as one business for the purposes of the Act. Section 4 is the charging section; it lays down that subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits a tax known as 'excess profits tax' at a certain percentage. 'Standard profits' within the meaning of section 4 have been fixed at Rs. 36,000. Section 5 deals with the application of the Act; the Act is to apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to tax under section 4(1)(b) or (c) of the Indian Income-tax Act, subject to three provisos. The first proviso exempts from the application of the Act a business, the whole of the profits of which accrue or arise outside the taxable territories, if it is carried on by a person resident, but not ordinarily resident, in the taxable territories, if it not controlled in India. The second proviso is that where the profits of a part only a business carried on by a person not resident, or not ordinarily resident, in the taxable territories, accrue in the taxable territories then, if the business is of a person resident, but not ordinarily resident, in the taxable territories and is not controlled in India, the Act will apply only to such part of it and such part will be deemed to be a separate business. The third proviso is that the Act will not apply to any business the whole of the profits of which accrue or arise in the territories which, immediately before November 1, 1956, were comprised in part B States and that where the profits of a part of a business accrue or arise in the said territories such part shall be deemed to be a separate business, the whole of the profits of which accrue or arise in the said territories, and the other part of the business shall, for all the purposes of the Act, be deemed to be a separate business. The third proviso was added by the Amendment Act XXIV of 1941. By the same Act section 10A was added and it provides that : 'Where the Excess Profits Tax Officer is of opinion that the main purpose for which any transaction or transactions was or were effected [whether before or after the passing of the Excess Profits Tax (Second Amendment) Act, 1941] was the avoidance or reduction of liability to excess profits tax, he may. . . 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.' Taxable territories are the territories previously known as British India.

On March 8, 1943, the assessee opened a new branch of his business at Ratlam, which was previously in Part B State. For the assessment year 1944-45, the accounting period was November 9, 1942, to October 28, 1943, and it was during this accounting period that the new branch was opened at Ratlam. The profits from the Ratlam business for the period March 8, 1943, to April 7, 1944, were worked out at Rs. 30,061 by the Excess Profits Tax Officer and he fixed the profits of the Ratlam business for the period March 8, 1943, to October 28, 1943, proportionately at Rs. 19,578. He was of the opinion that the main purpose for which the new business was opened at Ratlam was the avoidance or reduction of the excess profits tax liability, applied the provisions of section 10A and added the amount of Rs. 19,578 to the amount of the profits accrued at Farrukhabad and Ahmedabad. On appeal the Tribunal held that the third proviso to section 5 made section 10A inapplicable in the present case and that no part of the profits which accrued or arose at Ratlam could be included in the computation of the total income for the purpose of assessing the excess profits tax. The Tribunal also held that opening a new branch was not a transaction within the meaning of section 10A. It gave no finding about the main purpose for which the branch was opened at Ratlam.

The word 'transaction' has a very wide meaning and can be applied to any particular act done in the carrying on of a business. The following acts are held to be transactions within the meaning of section 10A :

(1) Splitting a firm partners into two firms each of two partners (Ramaswamier and Sons v. Commissioner of Income-tax).

(2) Starting a new firm and transferring to it a part of the business of the old firm (Chhaju Ram Ram Kumar v. Commissioner of Income-tax, Dhaukal Mal Dwarka Prasad v. Commissioner of Income-tax and Jathmall Sadasukh v. Commissioner of Income-tax).

(3) Partial partitioning of a joint Hindu family (Sohan Pathak & Sons v. Commissioner of Income-tax. This decision was reversed by the Supreme Court but on another point, it not having been argued at all before it that partial partitioning and constituting two fresh partnerships were not transactions).

(4) Shifting a business temporarily to another place (Harihar Kesholal v. Commissioner of Income-tax).

(5) Appointing two joint general managers (Maheshwari Devi Jute Mills Ltd. v. Commissioner of Income-tax).

The first question must, therefore, be answered in the affirmative.

The second question is a limited question raising only the question of the effect of the third proviso to section 5 on section 10A. The third proviso and section 10A are entirely different provisions not connected with each other at all and there should not really arise any question of the applicability of section 10A being barred by the third proviso. As the two provisions deal with different matters there can never be any conflict between them and it is possible for section 10A to apply even when the third proviso applies and when one applies it one has not to go against anything contained in the third proviso. The sum and substance of the third proviso is to make the profits of a business carried on in a Part B State not taxable while the sum and substance of section 10A is to allow adjustment in the profits of a business carried on in a taxable territory in order to undo the effect on them of a certain transaction. Under the third proviso profits accruing in a Part B State are not to be taxed as such but this fact will not prevent adjustment of the profits accruing in a taxable territory in order to counteract the avoidance or reduction of liability as a result of a certain transaction. What is adjusted under section 10A is the amount of the profits accruing in a taxable territory. It the transaction in question is the opening of a new branch in a Part B State, and if it was done with the main purpose of avoiding or reducing the liability to excess profits tax, the adjustment of the profits in the taxable territory would consist of fixing the profits at the figure at which they would have stood if the branch had not been opened in the Part B State. The adjustment will not always consist of adding the profits of the branch opened in a Part B State to the profits actually accrued in a taxable territory. If all the businesses that were done by the branch in the Part B State would not have gone to the taxable territory, if the branch had not been opened, all the profits of the branch cannot be added to the actual profits of the business in the taxable territory. If the business done by the branch is new business, which would not have come to the assessee in the taxable territory if the branch had not been opened, there would be no justification for adding the profits of it to the profits accruing in the taxable territory. Therefore, adjustment will not always consist of adding the profits of a branch to the profits accruing in a taxable territory. But even when the profits of a branch, or a part of the profits of a branch, are added to the profits accruing in a taxable territory, it does not amount to taxing the profits of the branch. What is taxed is the profits in a taxable territory and not the profits of the branch in Part B State and the failure to recognise this important fact has resulted in confusion. Under section 10A it is the profits in a taxable territory that are adjusted and even when they are adjusted by adding the entire profits of a branch to the profits actually accrued in the taxable territory, it cannot be said that the profits of the branch are taxed. What is done really is to substitute in place of the amount of the actual profits accruing in the taxable territory an amount which would have accrued if the branch had not been opened. What is taxed is the assumed amount of the profits in the taxable territory and not the profits of the branch. The third proviso simply exempts the profits accruing in a Part B State from being taxed. It does not go further and does not prevent them from being taken into consideration in deciding what should be taken to be the profits in a taxable territory under section 10A. The adjustment consists of not adding the profits governed by the third proviso but of counteracting the avoidance or reduction of liability of the profits in a taxable territory to excess profits tax. Though profits accruing in a Part B State are not subject to excess profits tax, the law does not permit profits to be diverted from a taxable territory to a Part B State. If a person who was not doing any business in a taxable territory opens a business in a Part B State, whatever profits he earns from it will be exempt from taxation under the third proviso, but the case of a person who was carrying on business entirely in a taxable territory and who now opens a branch in a Part B State and transfers some of his old business to it is quite different.

The question before us is whether an adjustment under section 10A can be done in the present case or not. It is different from the question how it should be done. The question what profits were earned by the branch at Ratlam would be relevant, if at all, only for the purpose of deciding how the adjustment of the profits of Farrukhabad and Ahmedabad should be made. In order to decide whether the adjustment can be made at all or not the amount of the profits made by the branch is wholly irrelevant. If the question whether the adjustment can be done or not is decided without any regard to the amount of the profits earned by the branch at Ratlam, it only confirms that the adjustment does not militate against the third proviso. After all the proviso does not lay down, 'Do not adjust the amount of profits accruing in a taxable territory under section 10A'.

Section 5 deals with the application of the Act, i.e., of the provisions contained in it including section 10A. The Act is not to apply to the business of the branch at Ratlam; this is what the third proviso lays down. So section 10A also is not to apply to the business carried on at Ratlam. But when it is applied in the present case, it is applied not to the business at Ratlam but to the business at Farrukhabad and Ahmedabad. The Act, including section 10A, applies to the business at Farrukhabad and Ahmedabad and when the amount of the profits of the business carried on at these places is adjusted, section 10A is applied to that business and not to the business carried on at Ratlam.

The power of adjustment includes the power of charging with excess profits tax of a person who but for the adjustment would not be chargeable with any tax. A person would not be chargeable with any tax if the Act did not apply to the business carried on by him. If in spite of the Act not being applicable to the business carried on by him he can be charged, there is no justification for saying that the cannot be charged through adjustment to counteract the effect of his opening a new branch in a Part B State. A person would not be chargeable either because the amount of the profits earned by him is less than the standard profits or because the profits accrued in a Part B State; as regards the applicability of section 10A there is no distinction between these two reasons for his being not chargeable. If he now can be charged through adjustment under section 10A in one case he can also be charged through adjustment under section 10A in the other case, that is, where the profits accrued to him in a Part B State.

There is no substance in the contention that there will be nothing left in the third proviso if section 10A is applied to a transaction consisting of opening a branch in a Part B state. If a person starts business for the first time in a Part B State, section 10A may not be held applicable because commencing business in a Part B State may not be said to be a transaction effected for the main purpose of avoiding liability to excess profits tax. Not incurring a liability may not be avoiding a liability, If so, the third proviso will apply and section 10A will not. Secondly, if the opening of a branch in a Part B State has no effect whatsoever on the business carried on in a taxable territory there would be no question of applying section 10A because there would be no necessity of making any adjustment in the profits accruing in a taxable territory.

The condition for the applicability of section 10A is fully satisfied when a person carrying on business in taxable territory opens a branch with the main purpose of avoiding or reducing his liability to excess profits tax; nothing is wanting for its applicability. That the branch is opened in a Part B State is an unimportant fact not affecting the question of applicability of section 10A. Once opening a branch is held to be a transaction within the meaning of section 10A, it is irrelevant where the branch is opened; all that is necessary is that it should be opened with the particular main purpose, Regardless of where it is opened, section 10A will apply. As I said earlier, what is relevant for applying section 10A is not the amount of profits earned at the branch but the loss in the profits of the business carried on in a taxable territory as a consequence of the opening of the branch.

Section 10A takes into consideration the effect of the transaction and not its legality or the right to effect it. Even if the transaction was legal or within the right of the assessee, if it was done with the particular purpose, section 10A will apply.

In a case similar the instant one, Panjabhai Dipchand v. Commissioner of Income-tax, Chagla C.J. and Tendolkar J. took a different view. The learned Chief Justice observed at page 484 :

'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 . . . 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 profit tax if he could legally and legitimately do so. The legislature has exempted profits which accrue in an Indian State. . . Therefore, it is open to a subject in India to start business in an Indian State deliberately and openly. . . 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 power under section 10A, 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. . . It is difficult to understand how there can be an avoidance of liability if there is no liability at all.'

With great respect I do not agree. The law has dictated to an assessee that he should not carry on his business in such a way as to avoid or reduce his liability to excess profits tax and his exactly is the purpose behind section 10A. There might have been no liability if the assessee had not been carrying on any business at all and had commenced a business at all and had commenced a business for the first time in an Indian State. But there and is a liability when he is carrying on business in a taxable territory and he may avoid or reduce the liability by transferring the business wholly or in part to a Part B State. As I said earlier it is irrelevant to consider whether the transaction was legal and legitimate, if it was done with a particular purpose. With what purpose it was done is a pure question of fact. That section 10A reaches the profits which would otherwise not be reached at all is clear from the proviso of sub-section (2)(a). The same view was taken in Commissioner of Excess Profits Tax v. Moholal Maganlal. The trouble in that case arose from the contention of Sri Nusserwanji P. Engineer for the Commissioner for Excess Profits Tax that section 10A overrides the third proviso, which promptly called for the reply of Chagla C.J. that 'it seems difficult to accept the contention that section 10A can possibly have the effect of extending the applicability of the Act, or. . . to subject a business to tax which is not liable to tax under section 4 of the Act' (page 48). The contention of Sri Nusserwanji P. Engineer should have been that there is no conflict between the provisions of the third proviso and of section 10A, that what is sought to be done is not to tax the profits exempted from tax but to adjust the amount of the profits which are liable to be taxed and that the third proviso does not prohibit the applicability of section 10A. The learned Chief Justice was not correct when he observed that 'it is not a business in the taxable territories that the Excess Profits Tax Officer is taxing under his power under section 10A. He is really in substance taxing a business the profits of which accrue or arise in a Part B State.' Under section 10A it is the amount of the profit in a taxable territory that is to be adjusted. If in a particular case of adjustment the Excess Profits Tax Officer adds the profits accruing in a Part B State to the profits accruing in a taxable territory and takes the total to be the profits accruing in the territory, he is certainly not taxing the profits accruing in the Part B State. It is illogical to infer identity between two acts from sameness of the result. Charging tax on the adjusted amount of profits of the business in a taxable territory done not amount to charging profits accruing in a Part B State merely because the result is the same. The result will not always be the same but even when it is the same but even when it is the same the two acts remain essentially different. Applying section 10A when the transaction consists of opening a branch in a Part B State is certainly not repealing the third proviso or rewriting section 4 as was though by the learned Chief Justice. Sohan Pathak & Sons v. Commissioner of Income-tax does not throw any light on the question under discussion. It contains the observation at page 401 that :

'Section 10A must be construed as applicable only to case where, the business being found to be one to which the Act applies, a transaction of the kind referred to in the section has been effected.'

I have construed section 10A as applicable only to the business carried on at Farrukhabad and Ahmedabad to which the Act undoubtedly applies. Then follows an observation about concession made by the Attorney-General that, if a person who had been paying excess profits tax transferred the business to a Part B State, for the main purpose of avoiding or reducing his liability to the tax, it would not be open to the Excess Profits Tax Officer to take action under section 10A, because to take such an action would be running counter to the prohibition contained in the third proviso and about his not challenging the correctness of the decision in the case of Moholal Maganlal. The Supreme Court was not called upon to, and did not, decide whether that case lays down the correct law or not. The facts of that case are distinguishable. There was no question of applying the third proviso; the business to which section 10A could be applied simply did not exist. Under section 10A the amount of the profits of a business to which the Act applies can be adjusted, but the liability to pay the tax cannot be transferred from one business to another business. If there is no business at all there can arise no question of adjusting the amount of profits under section 10A.

In the case of Harihar Kesholal an assessee who had been carrying on a business in a taxable territory, without closing it down completely, transferred it temporarily to a Part B State for the main purpose of avoiding or reducing his liability to excess profits tax and it was held that the Excess Profits Tax Officer could, under section 10A, adjust the profits from the dormant business in a taxable territory, by including in them the profits made in a Part B State. Malik C.J. and Bhargava J. held that the third proviso did not prevent the applicability of section 10A, and I respectfully agree with them. Of course, the judgment contains the dictum 'any transaction which is entered into with the specific purpose of avoiding liability to excess profits tax can be avoided by the Excess Profits Tax Officer under section 10A of the Act, irrespective of the circumstance whether the effect of that transaction is to make the Act altogether inapplicable to the business or part of the business or whether it merely reduces the liability to the tax or the rate of the tax.' It was criticised by Chagla C.J. and Tendolkar J. in Moholal Maganlals case. As regards the applicability of section 10A, when the business in a taxable territory is completely closed down and a new business is opened in a Part B State, the question did not arise before Malik C.J. and Bhargava J. because the business in a taxable territory had not been completely closed down. They might not be right when they observed by way of obiter that even when the transaction consists of the complete closing down of a business in a taxable territory and opening of a new business in a Part B State section 10A applies, but it would not follow that the other observation which was the only material observation in the case, that section 10A is applicable, when a business in a taxable territory is kept up, though in a dormant state, and a new business is started in a Part B State is not correct.

My answer to the second question is, therefore, 'No'.

The question whether the main purpose of the assessee for opening a branch at Ratlam was or was not to avoid or reduce his liability to excess profits tax is a question of fact and could not be, and has not been, raised before us. I do not say anything on it. A copy of this judgment should be send under the signature of the Registrar and the seal of the court to the Tribunal. The Commissioner shall get his costs of the reference assessed at Rs. 500.

BRIJLAL GUPTA J. - I agree with the answer proposed. The Commissioner should have his costs fixed at Rs. 500.


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