1987 (3) TMI 109 - SC - Income Tax

Distinction between accounting period and chargeable accounting period Held that - the period of assessment in the Act is an accounting period in the same way as the previous year is the period of assessment for the purpose of income-tax. Though profit in composite transaction could be apportioned as between manufacture and sale in the same accounting year, such an apportionment is not permissible when one part of the transaction, i.e., manufacture, falls in one chargeable accounting period and another part of the transaction, i.e., the trading operations, falls in another accounting period. Then, set off of deficiency in profits under section 7 of the Act is permitted but a necessary precondition was that profit must be made in the accounting period to which the deficiency relates. The profit attributed on apportionment was outside the scope of section 7 of the Act. It must be remembered that the it excess profit under the Act is profit determined under the Income-tax Act subject to prescribed adjustments. If the income-tax assessment discloses nil profits, no separate profit can be determined independently under the Act. It is a general principle, in the computation of the annual profits of a trade or business under the Income-tax Acts, that those elements of profit or gain, and those only, enter into the computation which are earned or ascertained in the year to which the enquiry refers ; and in like manner, only those elements of loss or expense enter into the computation which are suffered or incurred during that year. The same principle, in our opinion, would be applicable to the facts of this case. Appeal allowed.

Issues Involved:
1. Set off of deficiency of profits under the Excess Profits Tax Act, 1940.
2. Determination of whether the business carried on in different periods was the same.
3. Computation of profits and losses for chargeable accounting periods.
4. Apportionment of profits between manufacturing and sales activities.
5. Application of the principles of the Income-tax Act to the Excess Profits Tax Act.

Detailed Analysis:

1. Set off of Deficiency of Profits under the Excess Profits Tax Act, 1940:
The primary issue was whether the assessee was entitled to a set off of deficiency of profits for the periods October 28, 1940, to March 31, 1941, and November 23, 1942, to March 31, 1943, against the profits for the chargeable accounting period from April 1, 1943, to March 31, 1944. The Excess Profits Tax Officer initially denied this set off, determining that the business during these periods was distinct from the business during the chargeable accounting period under consideration. The Tribunal upheld this view, stating that no profits accrued unless sales were effected, and hence, no deficiency of profits could be set off for periods without sales.

2. Determination of Whether the Business Carried on in Different Periods was the Same:
The Appellate Assistant Commissioner found that the business carried on during the chargeable accounting period was the same as in 1940-41, with the same firm constitution and accounting practices. The High Court also concluded that the business activities from October 28, 1940, to April 4, 1944, were part of the same business for the purposes of the Act. This conclusion was based on the continuous nature of manufacturing and sales activities, despite occurring in different financial years.

3. Computation of Profits and Losses for Chargeable Accounting Periods:
The High Court held that profits attributable to manufacturing activities should be considered even if the sales occurred in a different year. It was necessary to apportion the profits realized from sales between the manufacturing activities of the previous periods and the sales period. The Tribunal and the Excess Profits Tax Officer had not accepted this apportionment, leading to the dispute. The Supreme Court emphasized that the assessment must be made on the basis of the accounting period, and any deficiency of profits should be carried forward and set off against excess profits in subsequent periods.

4. Apportionment of Profits Between Manufacturing and Sales Activities:
The High Court recognized that profits realized were not solely from sales but also attributable to manufacturing operations. It suggested that profits realized from sales should be apportioned to the periods of manufacturing activity. This apportionment was necessary to determine the deficiency of profits for the chargeable accounting periods ending March 31, 1941, and March 31, 1942. The Supreme Court, however, emphasized that such apportionment between different chargeable accounting periods was not permissible under the Act, as profits must be computed on a yearly basis.

5. Application of the Principles of the Income-tax Act to the Excess Profits Tax Act:
The Excess Profits Tax Act was complementary to the Income-tax Act, and the principles of the latter were applicable to the former. The Supreme Court noted that the Excess Profits Tax Act aimed to tax excess profits arising during the war period and was not an entirely independent legislation. The profits during the chargeable accounting period must be computed in the same manner as for income-tax purposes. The Supreme Court held that the deficiency of profits must be determined on the basis of the accounting period, and any unabsorbed deficiency could be carried forward to subsequent periods.

Conclusion:
The Supreme Court concluded that the deficiency of profits for the periods without sales could not be set off against the profits of the chargeable accounting period ending March 31, 1944. The profits and losses must be computed on a yearly basis, and any deficiency of profits should be carried forward and set off in subsequent periods. The appeal was allowed, and the judgment and order of the High Court were set aside. The question was answered in the negative and in favor of the Revenue.

← Previous Next →