Grover, J. - (1.) The short point for determination in this appeal by certificate is whether in view of the provisions of the third proviso to Section 5 of the Excess Profits Tax Act, 1940 (XV of 1940), hereinafter called the Act, Section 10A of that Act can be made applicable to the case of an assessee who had his head office in the taxable territories but had also started a new business in an Indian State which was not within the taxable territories.
(2.) The assessee, who is the appellant, carried on cloth business on wholesale basis having its head office at Farrukhabad and a branch at Ahmedabad under the name and style of Chandra Prakash Anand Prakash. During the chargeable accounting period from November 9, 1942, to October 28, 1943, the assesses started a new wholesale cloth business at Ratlam which was in an Indian State. That business was started with effect from March 8, 1943. the first accounting period of which was from that date to April 7, 1944. A profit, of Rs. 30,601 was determined for income-tax purposes for the aforesaid period, the assessment year being 1944-45. Since the profits of Ratlam business were to be computed for the period of March 8, 1943, to April 7, 1944, a proportionate profit for the chargeable accounting period from March 8, 1943, to October 28, 1943, was worked out, the amount coming to Rs. 19,578. The Excess Profits Tax Officer was of the view that the main purpose of starting the new business at Ratlam was to avoid excess profits tax liability. Therefore, under Section 10A of the Act he included the income from Ratlam business in the total income of the assessee for the purpose of excess profits tax. The assessee was the sole proprietor of the entire business in the taxable as well as non-taxable territories. Ordinarily he was liable to be assessed to excess profits tax on his total income from all the business under the second proviso to Section 2(5) of the Act. The third proviso to Section 5 of the Act, however, provided that any income which accrued or arose in an Indian State was exempt from excess profits tax. The conclusion of the Excess Profits Tax Officer was that the main purpose of starting the business at Ratlam was to take benefit of the third proviso to Section 5 for avoiding tax liability ; therefore, the starting of a business in an Indian State fell within the meaning of the expression "transaction" in Section 10A of the Act. The Income-tax Appellate Tribunal, to which an appeal was taken, held that, according to the third proviso to Section 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. The Commissioner of Income-tax asked for a reference to the High Court and the Tribunal referred the following two questions : " (i) Whether the starting of a business in an Indian State is a transaction within the meaning of Section 10A (ii) Whether, in view of the provisions of the third proviso to Section 5 of the Excess Profits Tax Act, the Tribunal was justified in holding that Section 10A does not apply to the case "
(3.) The High Court answered the first question in the affirmative and the second question in the negative. It was of the view that the word " transaction" appearing in Section 10A had a very wide meaning and could be applied to any act done ia the carrying on of business. It agreed that the profits accruing in a Part B State were not subject to excess profits tax but was of the opinion that the law did not permit profits to be diverted from a taxable territory to a Part B State. The reasoning of the High Court was that, if a person who was not doing any business in a taxable territory opened a business in a Part B State, whatever profits he earned therefrom would be exempt from tax under the proviso but the case of a person who was carrying on business entirely in a taxable territory and who opened a branch in a Part B State and transferred some of his old business to it would be quite different. It was observed, inter alia, " the Act, including Section 10A applies to the business at Farrukhabad and Ahmedabad and when the amount of profits of the business carried on at these places is adjusted, Section 10A is applied to that business and not to the business carried on at Ratlam.";