Commissioner Of Excess Profits Tax West... vs Adair Dutt and Company Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Appeal (civil) 60 of 1953

Decision Date: 29 October 1954

Coram: G. Hasan, N.H. Bhagwati, M.C. Mahajan, S.R. Das, T.L.V. Aiyyar

In the appeal numbered 60 of 1953, the Commissioner of Excess Profits Tax for West Bengal challenged the assessment of Adair Dutt and Company Ltd. The judgment was delivered on 29 October 1954 by a bench of the Supreme Court of India that comprised Chief Justice M.C. Mahajan, Justice S.R. Das, Justice G. Hasan, Justice N.H. Bhagwati, and Justice T.L.V. Aiyyar. The written opinion was authored by Justice N.H. Bhagwati. The respondent, Adair Dutt and Company Ltd., is a limited company whose head office is situated in London and which maintains three branches in India. During the five chargeable accounting periods that began on 1 September 1939 and concluded on 31 March 1944, the control and management of the business remained in London. Nevertheless, because the company’s profits earned in India exceeded those earned in London, the company was deemed a resident for tax purposes under Section 4-A(c), sub-clause (b) of the Indian Income-Tax Act, 1922. The company elected to use the “previous year” method as its standard period for the assessment years 1936-37 and 1938-39, in accordance with Section 6(2)(b) of the Excess Profits Tax Act. The income-tax assessments for those years recorded Indian profits of Rs 10,525 and Rs 79,611 respectively, and London profits of Rs 66,386 and Rs 20,813 respectively.

The Excess Profits Tax Officer, treating the company as a non-resident for the 1936-37 assessment year because the foreign profits of Rs 66,386 were higher than the Indian profits, fixed the standard profit for that year at Rs 10,525, entirely disregarding the foreign profit amount. For the standard profit calculation, the Officer added the Indian profit of Rs 10,525 to the Indian profit of Rs 79,611 and the London profit of Rs 20,813, arriving at a total of Rs 110,949, and issued his order on that basis. The Appellate Assistant Commissioner upheld the Officer’s order, prompting the company to appeal to the Income-Tax Appellate Tribunal. The Tribunal held that both the chargeable accounting period profit and the standard period profit must be computed according to Rule 1 of Schedule I to the Excess Profits Tax Act, using the same principles that apply to the computation of business profits under Section 10 of the Indian Income-Tax Act, 1922. It further stated that the business profit must be determined first, and only thereafter should the question of residence or non-residence under Section 4A be considered when assessable income is being established. Accordingly, the Tribunal allowed the appeal and directed the Excess Profits Tax Officer to revise his calculations in line with the Tribunal’s reasoning. At the request of the appellant, the Commissioner of Excess Profits Tax, West Bengal, the Tribunal then referred the matter for further consideration.

In this case the appellant asked the High Court, invoking Section 21 of the Excess Profits Tax Act together with Section 66(1) of the Income-tax Act, to decide whether the Tribunal had correctly included the London profits amounting to Rs 66,386 for the 1936-37 income-tax assessment when it computed the profits for the standard period under Schedule I of the Excess Profits Tax Act. The High Court responded affirmatively, holding that the Tribunal’s inclusion of those London profits was proper. Following that decision the appellant obtained from the High Court a certificate under Section 66A(2) of the Indian Income-Tax Act, 1922, confirming that the matter was suitable for appeal to this Court. The sole issue for determination before this Court therefore concerned two questions. First, it had to be decided whether the Excess Profits Tax Officer was justified in dividing the standard period in the manner he adopted to arrive at the assessee’s standard profits. Second, it required clarification as to whether the business profits of the assessee should first be computed under Section 10 of the Indian Income-Tax Act, 1922, with the resident or non-resident status under Section 4A to be examined only after those profits were ascertained. Section 6 of the Excess Profits Tax Act sets out the method for computing the standard profits of a business. For the purposes of this provision, the Act stated that the standard profits for any chargeable accounting period shall, subject to sub-sections (3) and (4), be an amount proportionate to the profits earned by the business during the standard period, the proportion being the same as that which the chargeable accounting period bears to the standard period. The Act further allowed the person carrying on the business to select the standard period, which could be the “previous year” as determined for the year ending on 31 March 1937, or the year ending on 31 March 1939, with the condition that no standard period could be less than nine months. From these provisions it follows that whichever standard period the assessee chooses, it constitutes a single unit and the business’s profits for that whole period must be calculated in one aggregate. If the chosen standard period consists of two years, the total profits are to be divided by two and the resulting figure compared with the profits of the chargeable accounting period. The statute contains no authority for breaking up the standard period, computing each year’s business profit separately, and then deciding the assessee’s residency status for each specific assessment year. The assessee’s profits, both Indian and foreign, had already been determined in the respective income-tax assessments, and for the purpose of the excess profits tax all such profits earned during the standard period were to be taken together.

In this case the Court explained that all of the assessee’s profits earned during the standard period must be summed together. Accordingly the Excess Profits Tax Officer should have combined the amounts identified as (a), (b), (c) and (d) in the earlier calculation, rather than aggregating only (a), (c) and (d) as he actually did. The Officer, however, treated the profits for the assessment year 1936-37 as a separate block and, after examining the Indian and foreign components of those profits, concluded that the assessee was a non-resident for that year. On that basis he excluded the foreign profits from the computation of the standard-period profit figure. The Court held that this approach was mistaken because the foreign profits for the assessment year 1936-37 should not have been omitted from the overall calculation of profits for the standard period.

The Court further observed that Rule 1 of Schedule I to the Excess Profits Tax Act directs that business profits for the standard period be computed on the same principles that apply to income-tax calculations under Section 10 of the Indian Income-Tax Act, 1922. Under Section 10, business profits may consist of both Indian and foreign earnings, and all such earnings are to be taken into account in the income-tax assessment for the relevant year. Whether the Indian or foreign portion is larger becomes relevant only later, when the assessee’s residential status – resident or non-resident – is to be determined for the purpose of assessing income. The Court emphasized that the determination of residential status can be made only after the total Indian and foreign profits have first been ascertained under Section 10. Consequently, the calculation of business profits under Section 10 must precede any application of Section 4A. The same sequence must be followed when computing profits for the excess profits tax, and Section 4A cannot be applied until the business profits have been established under Section 10. Both Indian and foreign profits therefore have to be included in the computation of standard profits without any exclusion by invoking Section 4A. The Court concluded that the Excess Profits Tax Officer’s decision was erroneous, affirmed the correctness of the Tribunal’s and High Court’s findings, and ordered that the appeal be dismissed with costs.