1968 (8) TMI 9 - SC - Income Tax

According to the third proviso to s. 5, the Act was not applicable to any business, the entire profits of which accrued or arose in an Indian State with the result that the profits of that business could not be included in the total computation of income of the assessee for the purpose of excess profits tax - Therefore s. 10A could not be applied to the present case - assessee s appeal allowed

Issues Involved:
1. Whether the starting of a business in an Indian State is a transaction within the meaning of section 10A of the Excess Profits Tax Act, 1940.
2. Whether, in view of the third proviso to section 5 of the Excess Profits Tax Act, section 10A applies to the case.

Issue-wise Detailed Analysis:

1. Whether the starting of a business in an Indian State is a transaction within the meaning of section 10A of the Excess Profits Tax Act, 1940:

The Excess Profits Tax Officer included the income from the Ratlam business in the total income of the assessee for the purpose of excess profits tax, under section 10A of the Act. The Officer concluded that the main purpose of starting the business at Ratlam was to avoid excess profits tax liability, thereby considering it a "transaction" within the meaning of section 10A. The High Court answered affirmatively, stating that the word "transaction" in section 10A had a very broad meaning and could apply to any act done in the carrying on of business. However, the Supreme Court did not find it necessary to return an answer to this question due to their conclusion on the second issue.

2. Whether, in view of the third proviso to section 5 of the Excess Profits Tax Act, section 10A applies to the case:

The third proviso to section 5 of the Act exempts any income accruing or arising in an Indian State from excess profits tax. The Income-tax Appellate Tribunal held that the profits of the Ratlam business could not be included in the total computation of income for excess profits tax purposes. The High Court disagreed, reasoning that the law did not permit profits to be diverted from a taxable territory to a Part B State to avoid tax.

The Supreme Court examined relevant precedents, including *Commissioner of Income-tax v. Ahmedbhai Umarbhai & Co.*, where it was held that profits from a business part located in an Indian State were not assessable to excess profits tax under the third proviso to section 5. Another relevant case, *Sohan Pathak & Sons v. Commissioner of Income-tax*, established that section 10A could not apply to a business exempted by section 5.

The Supreme Court concluded that section 10A could not override the third proviso to section 5. They referenced *Commissioner of Excess Profits Tax v. Moholal Maganlal*, where it was determined that section 10A did not have the power to negate the exemptions provided by section 5. The Supreme Court criticized the High Court for not appreciating that the view expressed in the Bombay decision had been approved in *Sohan Pathak & Sons*.

The Supreme Court held that in the presence of the third proviso to section 5, section 10A could not be applied to the present case. Therefore, the second question was answered in favor of the assessee and against the revenue.

Conclusion:

The appeal was allowed with costs, and the answers returned by the High Court were discharged. The Supreme Court ruled that the third proviso to section 5 of the Excess Profits Tax Act exempted the profits of the business in an Indian State from excess profits tax, and section 10A could not be applied to override this exemption.

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