- (1.) THIS is a reference under Section 21, Excess Profits Tax Act, read with Section 66 (1), income-tax Act. The assessee Messrs. Laxmiratan Cotton Mills Co. , Ltd. , Kanpur, is a director-controlled company incorporated under the Indian Companies Act, managed by its managing agents, Messrs. Beharilal Kailashpat. The company manufactures textiles at Kanpur. The share holders are either members of the family of Messrs. Juggilal Kamlapat or are closely connected with them. The company in addition to employing its own capital also borrows money from banks and other sources. The chief sources for borrowing money were the Imperial Bank of india and Messrs. Juggilal Kamlapat of Kanpur. The company started its operations before April 1936.
(2.) A notice under Section 13 (1), Excess Profits Tax Act, was served on the company on 23-9-1940, and the return required by that notice was submitted to the Excess Profits Tax Officer on 15-12-1940. Subsequently on 3-2-1942, the company applied to the Central Board of revenue under Section 26 (1) re-questing that their standard profits may be fixed at a figure of rs. 7,50,000 or alternatively twenty per cent. on the average capital including borrowing from all sources employed in the business during the chargeable accounting period, whichever be higher. In the application the company chose the period from 1-10-1936 to 30-9-1938 as the standard period. In the grounds for this application, the company gave various reasons why the standard pro-fits in relation to the chargeable accounting period arrived at under Section 6 would not be fair to the company. The two principal reasons given were, firstly, that the company had succeeded in obtaining the latest type of machines calculated to give better production than other mills situate in the same area at a very low price as the equipment was purchased at a time when the prices of machinery were at their lowest so that the initial capital investment was not high; and secondly, that the profits during the standard period were particularly low as during that period trained workmen were not available and the company had to work out a scheme for training workmen for extension, to adjust uneven and un-balanced equipment, and for further experimentation and adjustment of departmental operations of the production programme of the mill, the benefit of which did not become available to the company until after the expiration of the standard period. On this application the Board of Revenue passed an order which was communicated to the assessee by the Secretary, Central Board of Revenue through letter dated 23-4-1942 and which is reproduced below as the learned counsel for the asses-see has based his argument very considerably on it : "the Central Board of Revenue, having considered your application, under Sub-section (1) of section 26, Excess Profits Tax Act, 1940; (a) That, by reason of special circumstances alleged by you, it is inequitable that the standard profits of your business in relation to the chargeable accounting period commencing 1-9-1939 and ending 30-9-1939 should be computed in accordance with the provisions of Sub-section (1)of Section 6 : (b) that, by reason of a specific cause peculiar to the business alleged by you, it is just that their direction should not be limited to the statutory percentage of the average amount of capital employed in the business; and having heard your representatives in support of such application, the Central Board of Revenue has directed, that the standard profits of the business, in relation to the said chargeable accounting period shall be computed as if the profits of the standard period via. the previous year commencing 1-10-1936 and ending 30-9-1937 ; and the previous year commencing 1-10-1937 and ending 30-9-1938 were the sum of Rs. 3,20,000. " Subsequently the assessee in reply to some communication addressed by it to the Central Board of Revenue received a letter from the Excess Profits Tax Adviser of the Central Board of revenue intimating that the directions of the Central Board of Revenue had proceeded on the basis that the statutory average capital of the company's standard period was the sum of Rs. 12,01,735.
(3.) THE Excess Profits Tax Officer, when making the assessment for the first chargeable accounting period, held that the average amount of capital employed during the standard period was RS. 12,01,735 and that the average amount of capital employed during the first chargeable accounting period was RS. 14,35,156, without taking into account the amounts borrowed by the assessee. To arrive at the amounts to be added to the capital employed during the chargeable accounting period in respect of borrowings from banks, the Excess Profit Tax Officer took into account the average bank borrowings during the chargeable accounting period as Rs. 13,85,304 and deducted from it bank loans at the end of the standard period which had amounted to Rs. 11,81,920, the difference of Rs. 2,03,384 was thus added by him to the capital of Rs. 14,55,156, for the chargeable accounting period arrived at without including loans from banks. The assessee, however, claimed that in order to work out the figure to be added in respect of the loans from banks the Excess Profits Tax Officer should have deducted, from, the average bank borrowings during the chargeable accounting period, the average bank borrowings during the standard period which were only Rs. 6,09,262 instead of the bank loans at the end of the standard period which were RS. 11,81,920, so that the amount to be added should have been Rs. 7,76,042. This reference to us relates to three different chargeable accounting periods, viz. (1) 1-9-1939 to 80-9-1939, (ii) 1. 10-1939 to 30-9-1940 and (iii) 1-10-1940 to 30-9-1941. In the two succeeding chargeable accounting periods also, the average capital employed during those chargeable accounting periods was worked out by the Excess Profits Tax Officer in the same manner as for the first chargeable accounting period which has been mentioned above. The contention of the assessee before the Appellate Assistant Commissioner, against the order of the excess Profits Tax Officer, was that the Central Board of Revenue had determined the average capital employed during the standard period to be Rs. 12,01,735 and that the Excess Profits Tax officer was not entitled to modify this figure. It was further contended that the Excess Profits tax Officer was wrong in calculating the amounts to be added in respect of bank loans inasmuch as, when calculating that amount, he had wrongly deducted the bank loans at the end of the standard period instead of the average bank borrowings during the standard period from the average bank borrowings during the chargeable accounting period. The Appellate Assistant Commissioner did not accept any of these two contentions of the assessee so that the assessee's appeal was dismissed. The Income-tax Appellate Tribunal agreed with the view of the Appellate Assistant Commissioner and dismissed the appeal. Thereupon the assessee applied that certain questions be referred to this Court for decision. The tribunal, after considering the questions as drafted by the assessee and after taking into account the contentions of the department, referred the following three questions to this Court for decision : "1. What, in the circumstances of the case, mast be deemed to be the amount of capital of the applicant company during the standard period for the purpose of comparison with the capital employed daring the chargeable accounting period? 2. Whether under the provisions of the Act and particularly Rule 5 of Schedule 1 of the Act, the increase in the average capital employed during the chargeable accounting period and the average capital employed during the standard period is (a) difference between the average bank borrowings during the two periods or (b) the difference between the average borrowings during the chargeable accounting period and the borrowed capital at the close of the standard period? 3. Whether the provisions of law as contained in Sections 2, 6 and 26 and Schs. I and II, Excess profits Tax Act, and the directions of the Central Board of Revenue, if any, have been correctly understood and applied by the Excess Profits Tax Officer to the facts of the case in computing the average capital during the standard and chargeable accounting periods. ";