1946 (3) TMI 19 - HC - Income Tax

Summary

Issues Involved:

1. Computation of capital employed for the business during the standard periods.
2. Valuation of business assets for the purpose of excess profits tax.
3. Authority of the Excess Profits Tax Officer to reject valuations accepted by the Income-tax Officer.
4. Interpretation of Rule 1, sub-rule (2), of Schedule II to the Excess Profits Tax Act.

Issue-wise Detailed Analysis:

1. Computation of Capital Employed for the Business During the Standard Periods:

The Excess Profits Tax Officer (EPTO) had to compute the capital employed for the business of the assessee during the standard periods, which included the periods from 1st September 1939 to 31st December 1939, 1st January 1940 to 31st December 1940, and 1st January 1941 to 31st December 1941. The computation involved valuing the business assets, governed by Rule 1 in Schedule II and sub-rule (1)(a) and (2) of the Excess Profits Tax Act.

2. Valuation of Business Assets for the Purpose of Excess Profits Tax:

The relevant provisions for valuing the assets were considered, specifically Rule 1, sub-rule (1)(a), which states that the average amount of the capital employed in a business (excluding money) shall be taken to be the price at which those assets were acquired, subject to deductions for depreciation and reduced values of assets allowable in computing profits for income-tax purposes. The EPTO noted that the stock valuations made by the assessee during the standard periods were at a fixed rate lower than either market or cost price. Consequently, he felt that no further deduction was necessary, and revalued the stocks based on his valuation for capital computations.

3. Authority of the Excess Profits Tax Officer to Reject Valuations Accepted by the Income-tax Officer:

The assessee contested that the EPTO was not competent to reject the deductions allowed in respect of reduced values of assets for income-tax assessments and substitute fresh valuations for capital computations. The Tribunal accepted this contention, holding that trading stock could not be valued higher than the figure used for computing profits of the standard periods for income-tax purposes.

4. Interpretation of Rule 1, Sub-rule (2), of Schedule II to the Excess Profits Tax Act:

The High Court had to determine whether the EPTO could value trading stocks at cost price higher than the fixed rate used for income-tax purposes. The court analyzed the language of Rule 1, sub-rule (2), which allows deductions for depreciation to reduce the asset to its written down value and other deductions in respect of reduced values allowable for income-tax purposes. The court found that the EPTO could not re-open the accounts and disturb the valuations accepted by the Income-tax Officer nearly ten years ago. The court emphasized that the expressions "as are allowable" and "as has been allowed" in the sub-rule indicated different categories of deductions, with the former being fixed and certain, and the latter depending on the Income-tax Officer's estimate.

The court concluded that the EPTO was bound by the valuations accepted for income-tax purposes and could not revalue the trading stocks. The question was answered in the affirmative, and the Commissioner was ordered to pay the costs of the reference.

Separate Judgments:

STONE, C.J.:

Stone, C.J., emphasized the importance of adhering to the valuations accepted during the income-tax assessments and highlighted the fixed and certain nature of deductions for depreciation and reduced values of assets. He concluded that the EPTO could not revalue the trading stocks and the Tribunal's decision was correct.

KANIA, J.:

Kania, J., supported the view that the Excess Profits Tax Act is complementary to the Income-tax Act and that the EPTO could not ignore the valuations accepted for income-tax purposes. He reiterated that the computation of profits for the standard period was binding on the EPTO and that the deductions for depreciation and reduced values should follow the standards set by the Income-tax Act. He agreed with the Chief Justice's judgment and stated that the reference should be answered accordingly.

Reference Answered Accordingly: