Lancelot Sanderson, C.J.
1. This is a Reference under Section 51(1) of the Indian Income Tax Act, 1918, and Rule 31 of the Excess Profits Duty Rules.
2. It appears that Messrs. Martin and Co. were required to pay duty upon excess profits calculated at a certain figure which is named in the Reference, The Adviser on Excess Profits Duty to the Government of India made a representation to the Board of Revenue that Certain items in the calculation were wrong and under Rule 20 of the Excess Profits Duty Rules, 1920, the Board called upon Messrs. Martin and Co., to show cause why the Excess Profits Duty Assessment should not be enhanced. On the 21st of January this year Messrs. Martin and Co. put in an answer to this requisition, and that answer is attached to the case. Messrs. Martin and Co., requested that if the contentions of the Board of Revenue were persisted in, reference should be made to the High Court on two questions. The questions were as follows: '(I) Whether they are entitled to treat as capital employed in the business such assets of the firm as consist of money invested in public companies and in Government securities and in loans to individuals and business concerns and similarly to treat as income of the business dividends and interest received on such investments and loans? (2) Whether the capital employed in the business should be ascertained in a manner analogous to that provided in Section 5(6) of Act X of. 1919, for the ascertainment of profits is the accounting period?'
3. The first question was treated by the Board of Revenue under three heads, the first head relating to the capital invested by Messrs, Martin and Co, in public companies; the second one relating to money invested in Government securities, and the third one relating to loans to business concerns and individuals.
4. The decision of the Board was as follows: with regard to the first head they concluded: 'The amount credited in the accounts in respect of dividends upon shares in these companies should be deducted from the total profits of Messrs. Martin and Co. and the capital value of the shares should be excluded from any capital computation both for the accounting period and the standard years,' As regards the second head the Board concluded as follows: 'In view of Section 5(a) of the Excess Profits Duty Act and in the absence of any specific provision of the Act regarding investments the Board is of opinion that the money invested by Messrs. Martin and Co. in Government securities is part of the capital employed in their business and the income from these investments is part of the taxable income of the business,' As to the third head they concluded that money lent by Messrs. Martin and Co. to business concerns and individuals was capital employed in their business and the income from interest on these loans was part of the income of the business.
5. As regards the finding under the first head Mr. Langford James who appeared for Messrs. Martin and Co. did not contest the conclusion of the Board that the amount credited in the accounts in respect of dividends from shares in the companies should be deducted from the total profits of Messrs. Martin and Co. but ho did contest the second part of their conclusion, namely, that the capital value of the shares should be excluded from any capital computation both for the accounting period and the standard years.
6. Mr. B.L. Mitter, who appeared with the learned Advocate-General for the Board of Revenue, contended that the case should be remitted to the Board both as regards the investments in shares of public companies and as regards the investments in Government securities, inasmuch as, he alleged, it was a question of fact whether the investments in the shares of the companies and the investments in Government securities had been treated by Messrs. Martin and Co. as capital or merely as profits. We, however, pointed out during the course of the argument that this point apparently had not been raised before the Board of Revenue or by, the Board of Revenue in the case submitted to this Court, but that, on the other hand, the Board had treated both the investments in the shares of the companies and the investments in Government securities as capital and that consequently we must deal with the reference upon that assumption; and, we declined to remit the case for a further finding to the Board of Revenue in those two respects.
7. The basis of the Board's decision as to the investments in shares of public companies was that the capital thus invested by Messrs. Martin and Co. was the capital of the companies, and could not, therefore, be said to be the capital employed by Messrs, Martin and Co. in their business, and further, that the income received by them from dividends on shares in the companies was part of the 'taxable income' of these companies and was not part of the 'taxable income' of Messrs. Martin and Co. within the meaning of Section 14(1) of the Income Tax Act, VII of 1918, or Section 5(a) of the Excess Profits Duty Act, X of 1919.
8. The material sections of the Excess Profits Duty Act, X of 1919, are Sections 5 and 6. Section 5 provides as follows, '5 The profits of a business in the accounting period shall, at the option of the person by whom the Excess Profits Duty in respect of that business is payable, be or be deemed to be,--(a) the taxable income as finally ascertained for the purposes of the Indian Income Tax Act, 1918,' for the present purpose it is not necessary for me to read the remainder of that section. Section 5, it appears from what I have read, deals with ascertainment of profits in the accounting period. Section 6 deals with the ascertainment of standard profits. It is not necessary for me to read Sub-section (1)(a) of Section 6, because that does not apply to this case but sub Section (1)(b) of Section 6 does apply and that provides as follows: '
The standard profits of a business shall be...at the option of the person by whom Excess Profits Duty in respect of the business is payable.' (Then follow three sub clauses the third of which is applicable to this case namely) 'if the profits of the business have been assessed for the said purposes in all the five years 1913, 1914, 1915, 1916 and 1917--the aggregate of one-fourth of the profits assessed in the years 1913 and 1914 and in such two of the years 1915,1916 and 1917 as may be selected by the said person and one-fourth of the interest, if any, received in the same four years on securities forming part of the assets of the business'. So far, therefore, it appears that the question of capital employed in the business does not arise, but to that section there is a proviso and that proviso is as follows, 'provided that if the average capital employed in the business in the years adopted for the purpose of determining the standard profits is less or more than the capital so employed at the end of the accounting period there shall be made to or from the standard profits an addition or a deduction, as the case may be, which shall bear to the standard profits the same proportion as such increase or decrease of capital bears to the average capital so employed in the years so adopted.
9. Then there is explanation, viz., 'for the purpose of ascertaining the average capital employed, the capital employed in the business in any year shall be deemed to be the capital so employed at the end of that year,' This proviso applies when the standard profits are to be ascertained under Section 6(1)(b), as in this case. Therefore, it becomes necessary to ascertain what was the average capital employed in the business in the years adopted for the purpose of determining the standard profits: and, it also becomes necessary to ascertain what was the capital employed in the business at the end of the accounting period, and it is in reference to this proviso that the question arises whether the investments of Messrs. Martin and Co. in the shares of public companies are to be included or excluded both for the accounting period and for the period which has been described in the case as 'the standard years.' As to this matter, the learned Counsel appearing for the Board of Revenue admitted that he could not support the contention of the Board of Revenue that because the dividends received on the shares of these companies were not part of the 'taxable income' of Messrs. Martin and Co., by reason of Section 12(1) of the Income Tax Act. VII of 1918, it must follow that the investments were not capital employed in the business of Messrs. Martin and Co.: and, therefore, the only question which remains to be considered is whether the investments in shares of public companies are capital employed in the business of the company or are not capital employed in the business of the company, because the investments must be considered as the capital of the companies themselves. I have already stated that in this reference, as this case is stated for our opinion, the investments must be taken as having been treated as part of the capital of the firm of Messrs. Martin and Co., and, that being so, in my judgment the investments in the shares of the public companies were capital employed in their business. The statement of Messrs. Martin and Co. which is to be found at page 7 of the paper-book was as follows: 'The business of the firm is and has been for very many years carried on under the terms of a deed of partnership which thus describes the business which the firm may carry on. The business of the firm shall be that of engineers, contractors architects, builders, merchants and agents and such other business as the partners may from time to time decide,' '(6) for very many years past the partners of the firm have from time to time decided to apply the money and assets of the partnership in various ventures, e.g, they have invested money in shares in public companies; in response to an appeal by Government they invested money in War Loan. They have granted loans to individuals for whom they were constructing houses and to business concerns. Such investments have been made with the concurrence of all the partners, In many, if not, most cases the investments in public companies have been made with a direct reference to other business carried on by the partnership. Thus, for instance, the partnership acts as managing agents for a large number of companies. It is desirable that as such managing agents they should own shares in such companies and in one instance, at any rate the articles render it obligatory upon them to hold shares in the company far which they act as managing agents. The 'partnership has also promoted companies, floated private concerns, in which the partnership was interested, into public companies and as a natural result taken shares, (c) The moneys so invested by the partners in the interest of the partnership have been invariably treated in the books of the firm as assets of the partnership and any profit or loss derived or suffered by the sale of such investments has been invariably treated as profit or loss derived or suffered by the partnership and all dividends or interest have been invariably in the profit and loss account of the partnership and such income employed for the general purposes of the partnership.'
10. These being the facts, in my judgment, it being conceded that these investments have been treated as part of the capital of the firm, such investments were 'capital in the business of the firm' and consequently as such must be included in the capital computation both for the accounting period and 'the standard years.'
11. As to the Government securities, Mr. B.L. Mitter agreed that there was on this point no difference in principle between these and the investments in public shares, if such investments were to be taken as having been treated by Messrs, Martin and Co. as capital; I consequently, agree with the conclusion arrived at by the Board in this respect.
12. The second question which I have already read deals with a different matter. The conclusion of the Board on that question was as follows: 'in the opinion of the Board no addition can be made to the capital employed on the 3rd September 1918 as there is no provision in the Act for the exercise of an option similar to that allowed in Section 5(b) for the ascertainment of profits.' There again I agree with the conclusion at which the Board of Revenue has arrived and for the reasons which they have stated.
13. The decision of the Board of Revenue with regard to the third head of the first question, which dealt with loans to individuals and business concerns was not contested.
14. Each party will pay his or their own casts of this reference, on the ground that we have decided one question (the first' question) in favour of Messrs, Martin and Co. and the other question (the second question) in favour of the Board of Revenue.
15. Let a copy of our judgment be sent to the Board of Revenue as soon as possible.
John Woodroffe, J.
16. I agree.
17. The matter before us is how the amount of Excess Profits Duty payable by Messrs. Martin and Co. should be determined.
18. By Section 4 of the Excess Profits Duty Act of 1919 the duty payable as 50 per sent, of the amount by which the 'profits in the accounting period' exceed the 'standard profits.' By Section 5(b) for which Messrs. Martin and Co, opted 'the profits in the accounting period' depend on the taxable income 'for the total period specified, ascertained according to the provisions of the Indian Income Tax Act of 1918. Section 5(6), therefore, in corporates by reference Chapter I of the Income Tax Act.
19. Under Section 6 of the Excess Profits Duty Act the 'standard profits' with which the 'profits in the accounting period' have to be compared, depend or may in whole or in part depend, on the capital of the business or the capital employed in the business. Messrs. Martin and Co. selected one of the modes of settling the standard profits allowed by Section 6(1)(b).
20. Two questions of method are in dispute. Both relate to the computation of the capital of the firm. The first turns on the meaning of the words 'capital employed in the business' in the first proviso to Section 6(1)(b) of the Excess Profits Duty Act, and was argued for the Secretary of State with reference to the provisions of Sections 12(1) and 14(1) of the Income Tax Act.
21. In my opinion under the Excess Profits Duty Act capital employed in the business' includes capital of the firm invested by them in the course of their business in Government securities or in shares in public companies. Neither on principle nor by reason of any specific provision is either of these Acts, does such capital case to be the capital of the firm employed in the business because it is so invested or because in the case of the shares the dividends under the Income Tax Act are taxed at the source and are not, when paid to Messrs, Martin & Co, part of their taxable income. It will be observed that under Section 12(1) of the Income Tax Act dividends on shares in a company are only excluded when the company is liable to the tax and that under Section 13 they are included in the total income for the purpose of determining the rate at which the tax is payable.
22. I should add that the Board's Reference assumes that the Government securities and shares represent capital invested by Messrs. Martin and Co.
23. The second question turns on the meaning of the words 'capital so employed' (that is capital employed in the business) 'at the end of the accounting period.' Those words also occur in the proviso to Section 6(1)(b) of the Excess Profits Duty Act. This question was argued for Messrs. Martin and Co. with reference to the provisions of Section 5(b) of the same Act, and I agree that the question is concluded by the definition of 'accounting period' in Section 2. There is nothing in Section 5(6) which enables us to put a meaning on that definition other than that which the words plainly convey.
24. The learned Counsel for the parties, each in his turn, suggested--that if I may be permitted to say so, those suggestions were in no way unduly pressed--that resort should be had to analogy for the purpose of supplying what appear to be, or what may possibly be, lacunae in the Act of 1919; Dealing with legislation of this kind, imposing a tax, drawn on scientific lines and laying down positive rules for calculating the amount of the tax, we are clearly unable to take that course.
25. I concur, therefore, in the answers which my Lord has proposed to the questions put by the Beard of Revenue.