BANERJEE, J. - This is a reference under Section 21 of the Excess Profits Tax Act, 1940, read with Section 66(1) of the Income-tax Act, made at the instance of the Commissioner of Excess Profits Tax, West Bengal, for our opinion on the following question :-
'Whether in computing the profits for the standard period under Schedule I of the Excess Profits Tax Act, the London profits (Rs. 66,386) for 1936-37 income-tax assessment were rightly included by the Tribunal ?'
There were five appeals to the Tribunal covering five chargeable accounting periods, viz., ended 31st March, 1940, to 31st March, 1944, respectively, which were disposed of by one order as the point involved in all the appeals was the same.
Five applications were made to the Tribunal for reference to the High Court questions of law arising out of the order. The applications were consolidated and one reference has been made. In that reference the question has been asked as stated above.
The assessee (respondent before us) is a limited company and has its head office in London. It has three branches in India. The control and management of the business is in London.
The assessee filed its return under Section 13(1) of the Act.
In the chargeable accounting periods in question the Indian profits of the company exceeded its London profits. The company accordingly was, under Section 4A(c), sub-section (b), of the Income-tax Act treated as a resident company.
The assessee had chosen as its standard period the previous years for the assessment years 1936-37 and 1938-39. The profits of the assessee for these years as determined in the respective assessments were as follows :
Previous year for 1936-37 assessment year :
Previous year for 1938-39 assessment year :
The Excess Profits Tax Officer computed the standard profits as the total of (a), (c) and (b). His reason was that for the assessment year 1936-37, the assessees foreign profits were more than its Indian profits. And as such the assessee was to be treated as non-resident in that year. He determined the standard profits for that year at Rs. 10,525 ignoring Rs. 66,386 which was the London profit, the standard profits, therefore, according to that officer were the aggregate of Rs. 10,525, Rs. 79,611 and Rs. 20,813 and he made his order accordingly. There was an appeal from the order of the Excess profits Tax Officer to the Assistant Commissioner of Income-tax who confirmed the assessment order and dismissed the appeal. Against the dismissal, the assessee appealed to the Tribunal and it was contended on behalf of the assessee before the Tribunal and it was contended on behalf of the assessee before the Tribunal that the standard profits should have been taken as the total of (a), (b) (c) and (d). Counsel contended before the Tribunal that the standard period namely the total of (b) and (d). He added that according to this method of computation the Indian profits are higher than the foreign profits and the assessee must be treated as a resident company and the standard profits must be taken as the total of (a), (b), (c) and (d). Counsel further said than although the standard period extended over two years, they should not be taken into consideration separately as they formed one unit. Counsel further contended that under the Excess Profits. Tax Act, the profits for the chargeable accounting period as well as for the standard period had to be computed under Rule 1 of Schedule I on the principles on which profits of a business are computed under Section 10 of the Income-tax Act. In computing profits under Section 10 the business profits of the assessee have to be determined first and the question whether the company was a resident or a non-resident under Section 4A of the Income-tax Act could only be considered at a later stage when assessable income was being determined. On the basis of these arguments Counsel submitted that the Excess Profits Tax Officer was wrong in his calculation. He should have first determined the business profits of the assessee in the standard period which must include that total business profits in the two years and it was only after the business profits of the assessee, Indian and foreign, had been determined that the Excess Profits Tax Officer was entitled to go into the question as to whether Section 4 and Section 4A of the Income-tax Act should be applied. Counsel said that the Excess Profits Tax Officer had erred by ignoring Rs. 66,386. He should have added the total business profits for the two years, Indian as well as foreign.
The marginal note of Section 3 is 'Charge of Income-tax :' that of Section 4 is 'Application of Act.' Section 3 defined who has to pay, i.e., every individual company etc., on what he is to pay, viz., the total income of the previous year; and at what rates, viz., the rates imposed by the Finance Act every year; and at what rates, viz., the rates imposed by the Finance Act every year. Section 4 limits the scope of section 3 by defining and limiting the nature of the income that may be included in total income of the previous year. Section 4 contemplates three classes of assessees viz., (1), resident in British India, (2) resident but not ordinarily so resident, and (3) not resident in British India. Section 4A defines when an individual, or a firm or a company is resident in British India. The portion of the section material to the judgment is sub-section (c) which is as follows :-
'(c) a company is resident in British India in any year (a) if the control and management of its affairs is situated wholly in British India in that year, or (b) if its income arising in British India in that year exceeds its income arising without British India in that year.'
Section 13 provides for the method of accounting. Section 10 provides for determining the assessable income. Section 10 says that tax shall be payable by an assessee under the head 'profits and gains and of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Such profits or gains shall be computed after making certain allowances which are specified in that section. Before 1918 there was not provision in the Income-tax Act as to the method of computing income from business. The matter was governed by rules and executive instructions. There were certain provisions made in 1918 but they were not very important. In 1939 very considerable changes were made and further amendments were made after 1939 in respect of depreciation allowance. Remembering this section we have to decide the matter under consideration.
Schedule I makes provisions for computation of the profits of a business during the standard period. Rule 1 of the schedule is as follows :-
'1. The profits of a business during the standard period, or during any chargeable accounting period, shall be separately computed, and shall, subject to the provisions of this schedule, be computed on the principles on which the profits of a business are computed for the purpose of income-tax under Section 10 of the Indian Income-tax Act, 1922 :
Provided that any sums (other than any interest paid by a firm to a partner of the firm) excluded under the proviso to clause (iii) of sub-section (2) or clause (a) of sub-section (4) of that section from the allowances made in computing the profits of the business for the purposes of income-tax shall, if paid, be included in those allowances when computing the profits of the business for the purpose of excess profits tax :
Provided (further) that where the profits during any standard period have already been determined for the purpose of an assessment under the Indian Income-tax Act, 1922, such profits as so determined shall, subject to the adjustments required by this Schedule, be taken as the profits during that period for the purpose of excess profits tax :
Provided further that where a standard period or chargeable accounting period is not an accounting period, the profits or losses of the business during any accounting periods wholly or partly included within the standard period or chargeable accounting period shall be so computed as aforesaid and such division and apportionment to specific periods of those profits or losses and such aggregation of those profits and losses, or any apportioned part thereof shall be made as appears necessary to arrive at the profits during the standard period or chargeable accounting period : and any such apportionment shall be made in the proportion to the number of months or fractions of months in the respective periods unless the Excess Profits Tax Officer, having regard to any special circumstances, otherwise directs.'
That rule says that the profits of a business (1) during the standard period, or (2) during any chargeable accounting period, shall be separately computed, and shall be computed on the principles on which the profits of a business are computed for the purposes of income-tax under Section 10 of the Indian Income-tax Act 1922, but then that computation is subject to the other provisions of the schedule.
On behalf of the applicant before us the several provisos to that rule were referred but in our view they do not in any way contravenes Rule 1 in so far as it says that the assessees standard profits have to be determined under Section 10 of the Income-tax Act.
As I have already said Section 10 provides as to how the profits of a business are to be determined, what allowances are to be made in order to arrive at the taxable income. It seems to us that first we have to determine the profits of a person under various heads, such as salaries, property, income from Government securities and business. After that is done the total income is determined under Section 4, excluding certain kinds of income. Section 4A deals with the status of the assessee. Rule 1 provides for the computation of profits for the standard period under Section 4 and 4A have in the first instance to be ignored. These sections come into play at a later stage.
Standard period has been defined in Section 6 of the Excess Profits Tax Act, the relevant portion of which is as follows :-
'2. For the purpose of this section the standard period shall, at the option of the person carrying on the business, be -
(a) the 'previous year' as determined under Section 2 of the Indian Income-tax Act, 1922, for the purpose of the Income-tax assessment for the year ending on the 31st day of March, 1937, or the previous year as so determined for the year ending on the 31st day of March, 1938; or
(b) the 'previous year' as so determined for the year ending on the 31st day of March, 1937, and that for the year ending on the 31st day of March, 1939; or
(c) the 'previous year' as so determined for the year ending on the 31st day of March, 1938, and that for the year ending on the 31st day of March, 1939, or;
(d) the 'previous year' as so determined for the year ending on the 31st day of March, 1939, and that for the year ending on the 31st day of March, 1940 :
Provided that in no case shall any period of less than nine months be taken as a standard period'.
In the present case the standard periods are 1936-37 and 1939-39.
For the reason given above, in our view, the Excess Profits Tax Officer was wrong in his mode of calculation. He first went into the question of status of the assessee under Section 4A, while determining the income under Section 10 for the standard period. That is clearly wrong under Rule 1 of the Schedule.
In our view the Tribunal was right and the sum of Rs. 66,386 cannot be ignored from calculation of profits for the standard period.
We answer the question in the affirmative.
The assessee is entitled to the costs of this Reference.
HARRIES, C.J. - I agree.
Reference answered accordingly.