1960 (4) TMI 6 - SC - Income Tax

Whether the High Court came to an erroneous conclusion with regard to the true scope and effect of the third proviso to section 5 of the Business Profits Tax Act, 1947 (XXI of 1947)? Held that - The appellant relies on the third proviso to section 5 of the Act in support of the contention that it excludes the Baroda business of the assessee and the losses of that business cannot be set off against the profits of the business in India, and the appellant can succeed only on establishing that the proviso clearly and without any ambiguity excludes the Baroda business. We agree with the High Court that if there is any ambiguity of language, the benefit of that ambiguity must be given to the assessee. However, the conclusion at which we have arrived is that on the language of the proviso as it stands, it does not exclude the Baroda business of the assessee but exempts only the income, profits or gains thereof unless they are received or deemed to be received in or brought into India. Accordingly, the High Court correctly answered the question of law referred to it. The appeal fails and is dismissed.

Issues Involved:
1. Scope and effect of the third proviso to section 5 of the Business Profits Tax Act, 1947.
2. Applicability of the Business Profits Tax Act to business profits and losses accrued in an Indian State.
3. Interpretation of the term "income, profits or gains" within the context of the third proviso to section 5.
4. Comparison of the third proviso to section 5 with section 14(2)(c) of the Indian Income-tax Act, 1922.
5. Potential consequences of the High Court's interpretation of the third proviso to section 5.

Detailed Analysis:

1. Scope and Effect of the Third Proviso to Section 5 of the Business Profits Tax Act, 1947:
The central issue in this case is the interpretation of the third proviso to section 5 of the Business Profits Tax Act, 1947. The appellant contends that the proviso excludes the Baroda business from the purview of the Act, except for the income, profits, or gains received or brought into India. The respondent argues that the proviso merely exempts the income, profits, or gains from tax but does not exclude the business itself. The Supreme Court, agreeing with the High Court, held that the third proviso exempts only the income, profits, or gains unless received or brought into India, and does not exclude the business from the Act's purview.

2. Applicability of the Business Profits Tax Act to Business Profits and Losses Accrued in an Indian State:
The respondent's business in Baroda showed a loss, and the respondent sought to set off this loss against profits made in India. The Income-tax Officer rejected this claim, but the Appellate Assistant Commissioner upheld it. The Appellate Tribunal reversed this decision, leading to the High Court's involvement. The Supreme Court analyzed sections 4 and 5 of the Act, concluding that the Act applies to every business with profits chargeable to income-tax, including the Baroda business. The third proviso does not exclude the business itself but exempts its income, profits, or gains unless brought into India.

3. Interpretation of the Term "Income, Profits or Gains":
The Supreme Court emphasized that the term "income, profits or gains" in the third proviso does not include losses. The proviso exempts these from tax unless received or brought into India. The Court noted that losses cannot be brought into India except in an accounting sense, reinforcing that the third proviso does not exclude the business but only exempts its income, profits, or gains.

4. Comparison with Section 14(2)(c) of the Indian Income-tax Act, 1922:
The Court compared the third proviso to section 5 of the Act with section 14(2)(c) of the Indian Income-tax Act, 1922. The latter exempts profits from tax unless brought into India but allows losses to be set off against profits. The Court noted that the language of the third proviso aligns with section 14(2)(c), indicating that the Legislature intended a similar effect. The Court rejected the appellant's argument that the third proviso excludes the business, emphasizing that the language used exempts income, profits, or gains but does not exclude the business itself.

5. Potential Consequences of the High Court's Interpretation:
The appellant argued that the High Court's interpretation could lead to unintended consequences, such as anomalies in computing capital and relief for deficiency of profits. The Supreme Court addressed these concerns, stating that no real difficulty arises from the application of rule 2A of the Rules in Schedule II or section 6 of the Act. The Court reiterated that any ambiguity in the language of the proviso should benefit the assessee. The Court concluded that the third proviso exempts only the income, profits, or gains unless brought into India, and does not exclude the Baroda business from the Act's purview.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming that the third proviso to section 5 of the Business Profits Tax Act, 1947, exempts only the income, profits, or gains of the Baroda business unless received or brought into India, and does not exclude the business itself. The appeal was dismissed with costs.

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