1952 (10) TMI 49 - HC - Income Tax

Summary

Issues:
Interpretation of Section 10A of the Excess Profits Tax Act in relation to the third proviso to Section 5 - Whether the provisions of Section 10A can be invoked to tax a business exempted under the third proviso to Section 5.

Analysis:
The judgment by the High Court of Bombay delves into the interpretation of Section 10A of the Excess Profits Tax Act concerning the third proviso to Section 5. The case involved an assessee who transferred his selling agency business to a private limited company in a Part B State with the alleged purpose of avoiding excess profits tax liability. The Excess Profits Tax Officer added the profits from the business in the Part B State to the assessee's taxable income, leading to the question of whether Section 10A could be applied to override the exemption under the third proviso to Section 5.

The Court emphasized that the unit taxed under the Act is a business, and the charging section is Section 4, which applies to businesses covered under Section 5. The third proviso to Section 5 exempts businesses whose profits arise in a Part B State from the Act. The contention was whether Section 10A could empower the Tax Officer to tax a business exempted under the third proviso to Section 5. The Court analyzed the language and purpose of Section 10A, which allows adjustments to counteract tax avoidance. However, it concluded that Section 10A cannot extend the Act's applicability to a business not liable to tax under Section 4.

The judgment highlighted that Section 10A does not grant the Tax Officer the power to tax a business exempted under the Act. The Court rejected the argument that Section 10A could override the third proviso to Section 5, emphasizing that the legislature did not intend to impose tax on businesses exempted under the Act. The Court referenced a previous decision that emphasized the impossibility of taxing profits from a Part B State when exempted by the legislature.

Furthermore, the Court critiqued a decision by the Allahabad High Court, which suggested that Section 10A could be used to avoid transactions aimed at tax avoidance, regardless of the Act's applicability. The Bombay High Court disagreed with this interpretation, emphasizing the doubt surrounding such an application of Section 10A. Ultimately, the Court answered the referred question in the negative, indicating that Section 10A cannot be invoked to tax businesses exempted under the third proviso to Section 5.