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Commissioner of Excess Profits Tax, West Bengal Vs. Karam Chand Thaper and Bros. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 20 of 1949
Reported in[1950]18ITR722(Cal)
AppellantCommissioner of Excess Profits Tax, West Bengal
RespondentKaram Chand Thaper and Bros.
Cases ReferredKillick Nixon & Co v. Commissioner of Income
Excerpt:
- .....bombay decision precisely covers the facts of this case and should be followed. what is to be compared is the bank loans existing during the accounting period and those existing during the standard period and the only way that can be done is to strike an average of the loans during both the periods. there is no justification for the view that the average loan during the accounting period is to be compared with the actual loan existing on the very last day of the standard period.in my view the appellate tribunal were right in the view they took and i would accordingly answer the question propounded in the affirmative.the assessee will be entitled to the costs of these proceedings. certified for two counsel.sinha, j. - i agree.reference answered in the affirmative.
Judgment:

HARRIES, C.J. - This is reference made by the Income-tax Appellate Tribunal under Section 66 of the Indian Income-tax Act in which the following question has been propounded for the opinion of the Court :-

'Whether the Income-tax Appellate Tribunal was corrected in holding that Rule 5 of Scheduled I to the Excess Profits Tax Act, 1940, did apply in this case.'

The assessee is a limited company whose main business is to act as managing agents for joint stock companies and it appears that at the time the case was before the Appellate Tribunal they were in fact acting as managing agents for about thirty companies. The question arose whether Rule 5 of Scheduled I of the Excess Profits Tax Act applied and whether the assessee was entitled to relief under that rule.

The chargeable accounting period was 1st September, 1939, to 31st March, 1940, the standard period being 31st March, 1938, to 31st March, 1939.

The average bank loan during the standard period was Rs. 2,74,114 though the actual amount due as result of loans by the bank on the last day of the standard period was Rs. 5,37,345.

The average of the bank loans during the chargeable accounting period was Rs. 5,32,143 and on some dates the loans amounted to no less than Rs. 6,25,000.

The Appellate Tribunal came to the conclusion that the proper way of applying Rule 5 of scheduled I Excess Profits Tax Act Was to strike an average of the loans during the standard period and an average of the loans during the chargeable accounting period. The average during the accounting period was very much higher than the average during the standard period and the Appellate Tribunal accordingly held that there had been an increase in the capital of the assessee as envisaged by Rule 5 of Schedule I of the Excess Profits Tax Act and the assessee was therefore entitled to the relief given by that rule.

The Appellate Tribunal was asked by the Commissioner of Excess Profits Tax to state a case on this question and the case has been stated in which the question which I have already set out had been propounded for the opinion of the Court.

Dr. Gupta on behalf of the Commissioner of Excess Profits Tax has contended that the Appellate Tribunal were wrong in taking the average of the loans during the standard period. He has relied upon the wording of Rule 5 of Schedule I of the Excess Profits Tax Act which is in these terms :-

'If at any time after the close of the standard period, any increase in the capital employed in a business has been effected by means of a loan from a bank carrying a on a bona fide banking business, or by means of a public issue of debentures secured on the property of the company, the interest on so much of the loan or debentures as has been utilized in effecting the increase in the capital shall not be deducted in computing the profits for the purposes of excess profits tax and, notwithstanding the provisions of Rule 2 of Schedule II, that amount of such loan or debentures shall not be deducted in arriving at the amount of the capital employed in the business.'

Dr. Guptas argument is that the loans from the bank during the accounting period must be compared with the loan from the bank actually existing at the close of the standard period and he has urged that there is no justification whatsoever for striking an average of the loans during the standard period. He has contended that the works 'If at any time after the close of the standard period' mean that the loans actually at the end of the standard period must be taken and not the average throughout the standard period.

If that construction be right, then it appears to me that a grace injustice might be done to the assessee. Dr. Gupta admits that in ascertaining what the bank loan as during the accounting period it is essential that an average be taken. If an average be taken during the accounting period then it appears grossly unjust that it should not be taken also during the standard period. Why should the state of the loan account on the very last day of the accounting period only be considere Justice would demand that if an average is struck of the loans during the accounting period a similar average should be taken during the standard period. However, if the rule does not permit that then we should have to give effect to Dr. Guptas contention whether it was just or unjust.

In my view, however, there is nothing in Rule 5 which compels the Court to hold that the actual amount of the loan on the last day of the standard period only can be taken into account. It seems to me that the words 'If at any time after the close of the standard period, any increase in the capital employed in a business has been effected by means of a loan from a bank' mean that if at any time after the expiry of the standard period the capital has been increased by loans from the bank then the rule will apply. That however does not mean that if there has been after the expiry of the standard period any increase over and above the loans existing at the last day of the standard period the rule applies. What is being compared is the state of the loan account in the accounting period with the state of the loan account in the standard period and not a comparison of the state of the loan account in the accounting period with the actual loan existing on the last day of the standard period. That was the view of the Appellate Tribunal and i think the Tribunal was right.

This very matter was considered by a Bench of the Bombay High Court in the case of Killick Nixon & Co v. Commissioner of Income-tax in which it was held that the scheme of Section 6 of the Excess Profits Tax Act, 1940, is to compare the average amount of capital during the standard period with the average amount of capital during the chargeable accounting period and make adjustments in the standard profits on the footing of the increase in the capital for the standard period and relevant is the average amount of capital for the standard period and not the amount of capital ascertained as in use on the last date of the standard period, and where the profits of an assessee liable to excess profits tax were computed by taking into account under Rule 5 of Schedule I read with Section 6 of the Excess Profits Tax Act, the average of the bank overdraft and debenture loans during the standard period and not the total of the bank overdraft and debenture loans as on the last date of the standard period, the Bench held that the profits had been rightly computed.

The Bombay decision precisely covers the facts of this case and should be followed. What is to be compared is the bank loans existing during the accounting period and those existing during the standard period and the only way that can be done is to strike an average of the loans during both the periods. There is no justification for the view that the average loan during the accounting period is to be compared with the actual loan existing on the very last day of the standard period.

In my view the Appellate Tribunal were right in the view they took and I would accordingly answer the question propounded in the affirmative.

The assessee will be entitled to the costs of these proceedings. Certified for two counsel.

SINHA, J. - I agree.

Reference answered in the affirmative.


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