SATYANARAYANA RAO, J. - The question referred to us by the Appellate Tribunal is as follows :-
'Whether on the facts and in the circumstances of the case, the interest receipt of Rs. 43,299 in question is exempt from excess profits tax as profit of a part of a business accruing or arising in Mysore State within the meaning of the third proviso to Section 5 of the Excess Profits Tax Act ?'
The question is confined to the interest receipt of Rs. 43,299. The assessee, Messrs. Gouldoss Jamnadoss and Company, are residents in British India, carring on money-lending business at Madras. The chargeable; accounting period is the period commencing from 9th November, 1942, and ending with 28th October, 1943. During that period the assessee received the sum in question as interest accrued under a loan advanced to Messrs. M.L.Varadamanayya and Sons, Mysore, under a mortgage. The property comprised in the mortgage is in Mysore and the deed was executed on Mysore stamp paper and registered at Mysore. This amount was assessed to excess profits tax by the officer on the ground that the interest represented profit accruing and arising in British India to the assessee as it was part of the Madras business, during the chargeable; accounting period. The assessee objected to the inclusion of this sum on the ground that under the last proviso to Section of the Excess Profits Tax Act, it represented profits which accrued to him in an Indian State, namely, Mysore, as part of his business which has to be deemded to be a separate business under the proviso and the whole of the profits so accrued in respect of that part of the business must be excluded from the computation of the profits. The question, therefore, is whether this sum is a profit of part of the business of the appellant within the meaning of the proviso. The Appellate Tribunal answered the question in favour of the assessee. Hence this reference.
Under Section 5, the Excess Profits Tax Act is made applicable to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (1) or sub-clause (2) of clause (b) of sub-section (1) of Section 4 of the India Income-tax Act, 1922, or of clause (c) of that sub-section. But for there the proviso the Act would apply to profits of a business of a resident in British India even though such profits accrued or arose to the assessee without British India during such year. The proviso which arises for consideration in this reference was introduced in the Act by the Excess Profits Tax (Second Amendment) Act (XXIV of 1941). At the same time Section 14 of the India Income-tax Act was also amended by Section 8 of the Indian Income-tax (Amendment) Act, 1941 (Act XXIII of 1941) by inserting in Section 14(2) a new clause (c). The object of those two amendment is to make provision in respect of profits or gains accruing or arising to an assessee within an Indian. Under clause (c) of sub-section (2) of Section 14 of the Income-tax Act such income, profits or gains accruing within an Indian State would not be assessable to income-tax unless they are received or deemed to be received in or are brought into British India in the accounting year by or on behalf of the assessee. Under the proviso to Section 5 of the Excess Profit Tax Act, the Act is not made applicable to any business, the whole of the profits of which accrued or arose in an Indian State and there is a further provision in that proviso that where the profits of a part of a business accrued or arose in an Indian State, such part shall, for the purposes of the provision, be deemed to be a separate business, the whole of the profits of which accrued orarose in an Indian State and the other part of the business shall, for all purpose of the Act, be deemed to be a separate business. In other words, if in respect of a part of a business, profits accrued or arose in an Indian State such part is deemed to be a separate business and the profits of such business are entirely excluded from the assessment during the chargeable accounting period.
The point for consideration, therefore, is whether this money-lending transaction of the assessee under which money was advanced to a resident in an Indian State and interest was received could be deemed to be a part of a businesses within the meaning of the proviso. The contention on behalf of the Crown is that 'part of the business' means either a branch or at least a separate part of the organisation of the business with separate accounts and a separate office; and, as in the present case, there was only a single transaction in respect of which profits accrued undoubtedly in a Native State, it cannot be treated as part of a business. The dictionary mening of the word 'part' is 'portion of a whole', 'that which with another makes up the whole'. All that the section requires is that it must be a part and that part must earn profits and must be situate in an Indian State. The business of the assessee being money-lending business, it is not disputed that this transaction is comprised in that business. But the argument is that the word 'part' is used in the restricted sense of either a branch or part of the organisation or a unit of the business. The transaction in question certainly earned profits and that in an Indian State. There is no reason for construing the word 'part' in the restricted sense, as contrended by the learned counsel for the Crown. In Section 2(5) of the Act 'business' is defined in an extended sense and takes in the definition of business contained in Section 2, sub-clause (4), of the Indian Income-tax Act. Even a single adventure is business under both definitions and what is more under the definition contained in the Excess Profits Tax Act even all the businesses of a person are treated as one single business for the purpose of the Act. If a single adventure could be a business, there is no reason for not treating a single transaction of money-lending with a separate capital as evidenced by the principle advance under the mortgage and the profits accruing as interest under the loan in the Indian State as part of the business. The very object of the two amendments introduced in 1941 in the Excess Profit Tax and in the Indian Income-tax Acts was to exclude the income, profits and gains which accrued or arose in an Indian State. The transaction in question is undoubtedly part of the business of the assessee.
This clause came up for consideration before the Bombay High Court in Ahmedbhai Umarbhai v. Excess Profits Tax Officer. The business in that case was the manufacture and sale of oil. The assessee which was a firm resident in British India had the oil mills in Bombay and one at Raicher in the Hyderabad State. Groundnuts were purchased and converted into oil in the mills and sold in and outside British India. With reference to the manufacturing business at Raichur the contention on behalf of the assessee in that case was that it was 'part of the business' within meaning of the proviso to Section 5 and, therefore, the profits earned by that business must be excluded from the computation of profits for purposes of excess profits tax. The contention urged by the Advocate-General on behalf of the Commissioner was that as the business consisted of not only manufacture but also sale of oil and as the business at Raichur was only the manufacturing of oil and not a sale, it could not be said that that was a part of the assessees business. In other words, the contention was that there should be a vertical division of the business. It must be both manufacturing and selling in order to constitute the business at Raichur a part of the assessees business. This contention was rejected by both the learned judges, Chagla, C.J., and Tendolkar, J. At page 197 the learned Chief Justice observedthat the expression 'a part of business' should receive a plain grammatical construction. The learned Chief Justice went on to observe :-
'I should have thought that when a businessman sells an article the acquiring of it is by no means an insignificant part of his business, and if he manufactures it with a view to sell it that certainly is not only a part but also a very important part of his business. Therefore I have no doubt in my mind that the activity that the assessee carries on in Raichur is certainly a part of a the business of the assessee.'
Tendolkar, J., at page 202 in answer to the contention of the Advocate-General on behalf of the Commissioner stated as follows :-
'Taking first the first condition, it is a commonplace to say that carrying on of any business involves a number of operations. It is the case of the Advocate-General that the meaning to be assigned to the words part of a business in this proviso is not the ordinary dictionary meaning of the word part, viz.., a portion only. He says that all the requisite operations constituting a business, only quantitatively less than the whole business, can alone form a part of the business. In other words a part of the business must be a complete cross-section of the whole business and not merely one or more of the operations of that business. Applying this to the facts of the case before us, it is his case that if both the manufacture and sale of oil did in part take place outside British India, as it undoubtedly did, in respect of the oil manufactured and sold outside British India, that is a part of the business. But if only manufacture, which is one of the operations of the business, takes place outside British India, that is not a part of the business. I see no justification for so restricting the meaning of the word part in this proviso. The normal meaning of the word is a portion in whatever way carved out and I have no doubt in my mind that any of the operations that go towards a complete business are a part of that business'.
If the operation which is part of a business is carried on in a Native State and from that operation profits accrued or arose in a Native State there is no reason for not treating such an operation as part of the business of the assessee. A business consists of innumerable operations but it is not every operation that constitutes a part under the proviso. The operation must be such or the transaction must be of a nature in respect of which profits accrued and arose in a Native State. The test is that the operation of the transaction should be such as to earn profits in a Native State.
Though it is not an authority on the construction of the section which is binding upon this court, it is not without the interest that this provision is understood by the Central Board of Revenue in the manner indicated above as is made clear by paragraph 24 of the Excess Profits Tax Mannual, Notes and Instructions, Second Edition, which state : 'In computing for such a chargeable accounting period the profits of a business part of which arise in an Indian State the profits arising in the Indian State must be excluded from the standard profits as well as from the profits of the chargeable accounting period.' The test recognised in this is the accrual and the arising of the profits in the Indian State and that part which earns such profits is treated a part of the business.
For these reasons, in my judgment, the opinion of the Appellate Tribunal is correct and the question referred must be answered is the affirmative and in favour of the assessee. The assessee is entitled to his costs of this reference which I fix at Rs. 250.
VISWANATHA SASTRI, J. - This case raises a question relating to the proper interpretation of the third proviso to Section 5 of the Excess Profits Tax Act. For the sake of brevity I shall refer to this statutory provision as the proviso. The facts have been stated in the judgment of my learned brother and need not again be repeated. The argument of Mr. Rama Rao Sahib for the department is that it is not every single transaction relating to a business entered into in an Indian State that can be considered to be 'part of a business' and therefore deemed to be 'a separate business' within the meaning of the proviso. Before the proviso can be invoked the following matters have to be establishe : (1) There must be an identifiable or recognisable part of business; (2) profits must accrue or arise from that part; and (3) that part of the business should be carried on and the profits should accrue or arise in an Indian State. It is not contended before us that the words 'part of a business' in the proviso are confined only to a branch where every portion of the main business is carried on and that unless the business operations carried on in an Indian State are of the same character and are carried on in an Indian State are of the same character and are carried on in the same way as those which characterise the trade or business carried on in British India, the proviso would be inapplicable. A part of the business from which profits are contemplated as accruing or arising, may refer to a business organisation which is either a branch of the business carried on in British India but situate in an Indian State or a distinct and severable part of such business but conducted in an Indian State. Where, for instance, a factory is situate in an Indian State, but the owner is residing and the sales are effected in British India, the factory can rightly be regarded as a part of the business, the business itself consisting of the manufacture and sale of the goods. Where there are distinct processes either of manufacture or manufacture and sale, the profits resulting from the sale of the goods can be attributed in some measure to each of these processes. In such cases it may be said that they are different parts of the same business which produce a separate profit. The characteristics or attributes of a business must also appertain to the part of the business which is in question such as a separate set of accounts, separate capital, separate establishment and so forth. As Mr. Rama Rao Sahib put it in the course of his arguments you cannot speak of every brick that has gone into wall as a part of the house. The part of the business must be such as to be capable of being identified as a distinct and severable portion of a business, but nevertheless partaking of the character of a business to which a portion of the total profits could be attributed. This is made clear from the provision that the part of the business contemplated by the proviso must be such as is capable of earning a portion of the profits. It is common both in legislative practice and in mercantile accountancy to separate manufacturing profits from the merchanting or selling profits where the same person is a manufacturer and trade : see Kirks case, The Saskatchewan case and Ahmedbhai Umarbhais case. These decisions proceed on the basis that unrealised profits accrue or arise in the case of a manufacture at the stage when a manufacturing process is complete and before sale of the goods and that enhanced values arising from manufacturing processes could be deemed to be profits, though it is only on sale that the increased value imparted by the manufacturing processes is converted into actual profits. It is t his principle that has been given effect into the proviso.
The present case, however, is somewhat peculiar. The assessee carries on money-lending business in Madras. The investment which yielded an interest income of Rs. 43,299 during the chargeable accounting period was derived from a mortgage on the security of properties situate in Mysore, the debtors also being residents of that place. The transaction of mortgage was doubtless part of the money lending business but was a severable part. It was not interlaced, interwined or intermmixed with other transactions of the assessee. The principal amount advanced and the interest earned are definite sums earmarked as pertaining to this particular transaction of mortgage and having no connection with other similar transactions. It is true that so far a income-tax is concerned., the sum of Rs. 43,299 received as interest by the assessee would be only one of the many items on the receipt side of the account against which will be set the outgoings and bad debts and the resulting balance alone would constitute the taxable profits of the money-lending business of the assessee. But the proviso makes an exception to the rule that profits derived from a composite business must be viewed as a whole by us setting off against the entire receipts the entire outgoings and sanctions an apportionment and adjustment of the profits to the different stages in the scheme of profit making. Section 2(4) of the Income-tax Act defines 'business' as including any adventure or concern in the nature of trade, and Section 2(5) of the Excess Profit Tax Act defines the term even more widely. A transaction of mortgage entered into by a money-lender in the course of his business can be considered to be a part of his business even apart from the definitions above referred to,. The expression 'deemed to be a separate business' in the proviso means that in contradiction to actual facts a separate business is assumed to exist for the purposes of the proviso. When thing is 'deemed to be' something, the only meaning possible is that whereas it is not in reality that something, the statute requires it to be treated as if it wer : see the Bombay Corporation case. Act XXXIII of 1941 which added Section 14, sub-section (2), clause (c), to the Income-tax Act and Act XXIV of 1941 which added the proviso now in question to the Excess Profit Tax Act were passed at the same time and are in pari material and both provisions were designed to exempt business incomes accruing or arising in Indian States from liability to British Indian income-tax and excess profits according to their respective terms. Looking fairly at the language of proviso 3 to section 5 of the Act I find that it is plain and wide enough to exclude the interest income of the assessee derived from the Mysore mortgage from liability to excess profits tax.
I agree with my learned brother in the answer to the reference and the direction as regards costs.
Reference answered accordingly.