1954 (10) TMI 9 - SC - Income Tax

Whether the Excess Profits Tax Officer was justified in splitting up the standard period as he did in order to arrive at the standard profits of the assessee? Whether the business profits of the assessee had to be determined first under Section 10 of the Income-tax Act? Whether the assessee was a resident or non-resident under Section 4A of the Act was to be considered after the determination of those profits? Held that - The Excess Profits Tax Officer was in error when he excluded the foreign profits for the assessment year 1936-37 from computation. Rule 1 of Schedule I to the Excess Profits Tax Act provides that business profits during the standard period are to be computed on the principles on which business profits are computed for purposes of income-tax under Section 10 of the Income-tax Act. Business profits under Section 10 may comprise Indian as well as foreign profits. All these profits would come within the computation of business profits and they would be determined as such in the income-tax assessment for the particular assessment year. The question whether Indian or foreign profits are greater would become relevant for determining the status of the assessee, whether he is a resident or non-resident, and would be considered later when the assessable income came to be determined. It is only after the business profits are determined under Section 10 that the question can be considered whether the assessee is a resident or non-resident and that question can certainly not be determined unless and until the Indian and foreign profits of the assessee have been in the first instance determined under Section 10 - The decision of the Excess Profits Tax Officer was therefore wrong and the Tribunal and the High Court were right in the view they took - Appeal allowed.

Summary

Issues:
1. Determination of standard profits for a limited company with branches in India and head office in London.
2. Interpretation of provisions under the Excess Profits Tax Act and Income-tax Act regarding computation of business profits.
3. Consideration of Indian and foreign profits in determining the residency status of the assessee.
4. Correct application of Section 4A in relation to the computation of standard profits for excess profits tax assessment.

Analysis:
The judgment by the Supreme Court dealt with the determination of standard profits for a limited company with branches in India and a head office in London. The company's control and management were in London, but it was treated as a resident company in India due to its Indian profits exceeding the profits in London. The Excess Profits Tax Officer initially excluded foreign profits for the assessment year 1936-37 when computing standard profits, leading to a dispute. The Tribunal held that standard profits should be computed based on business profits as per Section 10 of the Income-tax Act, without splitting the standard period or considering residency status prematurely.

The Court analyzed Section 6 of the Excess Profits Tax Act, emphasizing that the standard period chosen by the assessee should be treated as a unit, and profits during that period must be computed as a whole. The Excess Profits Tax Officer's approach of excluding foreign profits for the assessment year 1936-37 was deemed incorrect. The Court highlighted that business profits, including Indian and foreign profits, should be determined first under Section 10 before considering residency status under Section 4A. Both Indian and foreign profits are relevant for computing standard profits without any exclusions based on residency status.

The judgment clarified that the determination of business profits under Section 10 is a prerequisite before applying Section 4A to ascertain the residency status of the assessee. The correct procedure involves considering all profits, Indian and foreign, in the computation of business profits for both income tax and excess profits tax assessments. The Court upheld the Tribunal and High Court's decision, dismissing the appeal and emphasizing the importance of correctly determining business profits before assessing residency status under Section 4A.

In conclusion, the Supreme Court's judgment underscored the proper interpretation of provisions under the Excess Profits Tax Act and the Income-tax Act regarding the computation of standard profits for a company with operations in multiple jurisdictions. The decision emphasized the sequential process of determining business profits before assessing residency status, highlighting the significance of considering all profits, Indian and foreign, in computing standard profits for excess profits tax assessment.