CASE NO.: Appeal (civil) 60 of 1953 PETITIONER: COMMISSIONER OF EXCESS PROFITS TAX WEST BENGAL RESPONDENT: ADAIR DUTT & COMPANY LTD. DATE OF JUDGMENT: 29/10/1954 BENCH: M.C. MAHAJAN (CJ) & S.R. DAS & G. HASAN & N.H. BHAGWATI & T.L.V. AIYYAR, JUDGMENT:
JUDGMENT
AIR 1955 SC 254
The Judgment was delivered by BHAGWATI, J.
BHAGWATI, J.
The respondent, the assessee, is a limited company and has its head office
in London. It has three branches in India. The control and management of
its business during the five chargeable accounting periods (commencing from
the 1st September, 1939, and ending on the 31st March, 1944) were in London
but as its Indian profits exceeded the London profits it was treated as a
resident company under Section 4-A(c), sub-clause (b), of the Indian
Income-Tax Act, 1922 The assessee had chosen as its standard period the
previous years for the assessment years 1936-37 and 1938-39 under Section
6(2)(b) of the Excess Profits Tax Act. Its profits for these years as
determined in the respective income-tax assessments were as follows :–
Previous year for 1936-37 assessment year–
(a) Indian profits–Rs. 10, 525 (b) London profits–Rs 66, 386
Previous year for 1938-39 assessment year–
(c) Indian profits–Rs. 79, 611 (d) London profits–Rs. 20, 813
The Excess Profits Tax Officer treated the assessee as non-resident in the
assessment year 1936-37 as its foreign profits were more than the Indian
profits and determined the standard profits for that year at Rs. 10, 525
ignoring the foreign profits Rs. 66, 386 altogether. The standard profits
according to him were the aggregate of (a), (c) and (d) (Rs. 10, 525, Rs.
79, 611 and Rs. 20, 813) and he made his order accordingly
The Appellate Assistant Commissioner confirmed the orders of the Excess
Profits Tax Officer and a further appeal was taken by the assessee to the
Income-tax Appellate Tribunal. The Tribunal held that the profits for the
chargeable accounting period as well as the standard period had to be
computed under Rule 1 of Schedule I to the Excess Profits Tax Act on the
principles on which the profits of a business are computed for the purposes
of income-tax under Section 10 of the Indian Income-Tax Act, 1922 and that
the business profits of the assessee had to be determined first and the
question whether the assessee was a resident or a non-resident under
Section 4A of the Act could only be considered at a later stage when
assessable income was being determined. The appeal was accordingly allowed
and the Excess Profits Tax Officer was directed to revise his calculations
on the basis indicated in the orderAt the instance of the appellant, the
Commissioner of Excess Profits Tax, West Bengal, the Tribunal referred the
following question to the High Court under Section 21 of the Excess Profits
Tax Act read with Section 66(1) of the Income-tax Act :–
“Whether in computing the profits for the standard period under
Schedule I of the Excess Profits Tax Act, the London profits (Rs. 66,
386) for 1936-37 income-tax assessment were rightly included by the
Tribunal.”
The High Court answered the question in the affirmative and the appellant
obtained from the High Court the necessary certificate under Section 66A(2)
of the Indian Income-Tax Act, 1922 that this was a fit case for appeal to
this Court
The sole question for our determination in this appeal is 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
and further whether the business profits of the assessee had to be
determined first under Section 10 of the Indian Income-Tax Act, 1922 and
the question 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
Section 6 of the Excess Profits Tax Act prescribes how the standard profits
of a business have to be computed. It provides, so far as is material for
our purposes :–
“(1) For the purposes of this Act, the standard profits of a business
in relation to any chargeable accounting period shall, subject to the
provisions of sub-sections (3) and (4), be an amount bearing to the
profits of the business during the standard period, if in respect of
that business a standard period is available, the same proportion as
the chargeable accounting period bears to the standard period(2) For the purposes of this section the standard period shall, at the
option of the person carrying on the business, be(b) The ‘previous
year’ as so determined for the year ending on the 31st day of March,
1937, and that for the year ending on the 31st day of March, 1939Provided that in no case shall any period of less than nine months be
taken as a standard period.”
It is clear that whatever be the standard period chosen by the assessee it
is a unit by itself and the profits of the business during the standard
period must be computed as a whole. The total profits thus computed would
then be divided by two, if the standard period was one of two years and the
resultant profits would then be compared with the profits of the chargeable
accounting period. There is nothing in the section to warrant the splitting
up of the standard period, determining the business profits of each year
separately and considering whether the assessee was a resident or non-
resident for the particular assessment year
The profits of the assessee, Indian as well as foreign, were determined in
the respective income-tax assessments as stated above and for the purposes
of excess profits tax all the profits earned by the assessee during the
standard period had to be added together. The Excess Profits Tax Officer
should therefore have added together (a), (b), (c) and (d) above and not
only (a), (c) and (d) as he did
The Excess Profits Tax Officer however considered the profits of assessment
year 1936-37 separately and on a consideration of the Indian and foreign
profits comprised in that assessment he determined that the assessee was a
non-resident in that year and therefore those foreign profits were not to
be considered at all while arriving at the figure of standard profits
We are of the opinion 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 Indian Income-Tax Act, 1922. 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 determinedIt 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 determination of business profits under Section 10 would therefore
be the first step to be taken before Section 4A could be applied. The same
procedure would have to be followed while determining the business profits
for the purpose of the excess profits tax also and Section 4A could not be
considered till after the business profits had been determined under
Section 10 in the first instance. Both Indian and foreign profits would
have to be determined for the purpose of this computation and they would be
the business profits to be taken into account while computing standard
profits without excluding any of them by applying Section 4A
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. The appeal
will accordingly stand dismissed with costs