DESAI, C.J. - (1.) THE Income-tax Appellate Tribunal, Allahabad Bench, has referred under section 66(1) of the Income-tax Act the following two questions for its opinion : (1) Whether the starting of a business in an Indian State is a transaction within the meaning of section 10A ? (2) 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 ?
(2.) THE material facts, which give rise to the questions and are taken from the statement of the case, are these : THE assessee is a wholesale dealer in cloth and carries on the business at its head office, Farrukhabad, and a branch officer at Ahmedabad. In 1940 the Excess Profits Tax Act was enacted to tax excessive profits made by businessmen on account of the prevalence of the war. THE material provisions are as follows : Under section 2(5) all businesses to which the Act applies, carried on by the same person, is to be treated as one business for the purposes of the Act. Section 4 is the charging section; it lays down that subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits a tax known as excess profits tax at a certain percentage. Standard profits within the meaning of section 4 have been fixed at Rs. 36,000. Section 5 deals with the application of the Act; the Act is to apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to tax under section 4(1)(b) or (c) of the Indian Income-tax Act, subject to three provisos. THE first proviso exempts from the application of the Act a business, the whole of the profits of which accrue or arise outside the taxable territories, if it is carried on by a person resident, but not ordinarily resident, in the taxable territories, if it not controlled in India. THE second proviso is that where the profits of a part only a business carried on by a person not resident, or not ordinarily resident, in the taxable territories, accrue in the taxable territories then, if the business is of a person resident, but not ordinarily resident, in the taxable territories and is not controlled in India, the Act will apply only to such part of it and such part will be deemed to be a separate business. THE third proviso is that the Act will not apply to any business the whole of the profits of which accrue or arise in the territories which, immediately before November 1, 1956, were comprised in part B States and that where the profits of a part of a business accrue or arise in the said territories such part shall be deemed to be a separate business, the whole of the profits of which accrue or arise in the said territories, and the other part of the business shall, for all the purposes of the Act, be deemed to be a separate business. THE third proviso was added by the Amendment Act XXIV of 1941. By the same Act section 10A was added and it provides that : Where the Excess Profits Tax Officer is of opinion that the main purpose for which any transaction or transactions was or were effected [whether before or after the passing of the Excess Profits Tax (Second Amendment) Act, 1941] was the avoidance or reduction of liability to excess profits tax, he may. . . make such adjustments as respects liability to excess profits tax as he considers appropriate so as to counteract the avoidance or reduction of liability to excess profits tax which would otherwise be effected by the transaction or transactions. Taxable territories are the territories previously known as British India. On March 8, 1943, the assessee opened a new branch of his business at Ratlam, which was previously in Part B State. For the assessment year 1944-45, the accounting period was November 9, 1942, to October 28, 1943, and it was during this accounting period that the new branch was opened at Ratlam. The profits from the Ratlam business for the period March 8, 1943, to April 7, 1944, were worked out at Rs. 30,061 by the Excess Profits Tax Officer and he fixed the profits of the Ratlam business for the period March 8, 1943, to October 28, 1943, proportionately at Rs. 19,578. He was of the opinion that the main purpose for which the new business was opened at Ratlam was the avoidance or reduction of the excess profits tax liability, applied the provisions of section 10A and added the amount of Rs. 19,578 to the amount of the profits accrued at Farrukhabad and Ahmedabad. On appeal the Tribunal held that the third proviso to section 5 made section 10A inapplicable in the present case and that no part of the profits which accrued or arose at Ratlam could be included in the computation of the total income for the purpose of assessing the excess profits tax. The Tribunal also held that opening a new branch was not a transaction within the meaning of section 10A. It gave no finding about the main purpose for which the branch was opened at Ratlam. The word transaction has a very wide meaning and can be applied to any particular act done in the carrying on of a business. The following acts are held to be transactions within the meaning of section 10A : (1) Splitting a firm partners into two firms each of two partners (Ramaswamier and Sons v. Commissioner of Income-tax). (2) Starting a new firm and transferring to it a part of the business of the old firm (Chhaju Ram Ram Kumar v. Commissioner of Income-tax, Dhaukal Mal Dwarka Prasad v. Commissioner of Income-tax and Jathmall Sadasukh v. Commissioner of Income-tax). (3) Partial partitioning of a joint Hindu family (Sohan Pathak & Sons v. Commissioner of Income-tax. This decision was reversed by the Supreme Court but on another point, it not having been argued at all before it that partial partitioning and constituting two fresh partnerships were not transactions). (4) Shifting a business temporarily to another place (Harihar Kesholal v. Commissioner of Income-tax). (5) Appointing two joint general managers (Maheshwari Devi Jute Mills Ltd. v. Commissioner of Income-tax).
(3.) THE first question must, therefore, be answered in the affirmative. THE second question is a limited question raising only the question of the effect of the third proviso to section 5 on section 10A. THE third proviso and section 10A are entirely different provisions not connected with each other at all and there should not really arise any question of the applicability of section 10A being barred by the third proviso. As the two provisions deal with different matters there can never be any conflict between them and it is possible for section 10A to apply even when the third proviso applies and when one applies it one has not to go against anything contained in the third proviso. THE sum and substance of the third proviso is to make the profits of a business carried on in a Part B State not taxable while the sum and substance of section 10A is to allow adjustment in the profits of a business carried on in a taxable territory in order to undo the effect on them of a certain transaction. Under the third proviso profits accruing in a Part B State are not to be taxed as such but this fact will not prevent adjustment of the profits accruing in a taxable territory in order to counteract the avoidance or reduction of liability as a result of a certain transaction. What is adjusted under section 10A is the amount of the profits accruing in a taxable territory. It the transaction in question is the opening of a new branch in a Part B State, and if it was done with the main purpose of avoiding or reducing the liability to excess profits tax, the adjustment of the profits in the taxable territory would consist of fixing the profits at the figure at which they would have stood if the branch had not been opened in the Part B State. THE adjustment will not always consist of adding the profits of the branch opened in a Part B State to the profits actually accrued in a taxable territory. If all the businesses that were done by the branch in the Part B State would not have gone to the taxable territory, if the branch had not been opened, all the profits of the branch cannot be added to the actual profits of the business in the taxable territory. If the business done by the branch is new business, which would not have come to the assessee in the taxable territory if the branch had not been opened, there would be no justification for adding the profits of it to the profits accruing in the taxable territory. THErefore, adjustment will not always consist of adding the profits of a branch to the profits accruing in a taxable territory. But even when the profits of a branch, or a part of the profits of a branch, are added to the profits accruing in a taxable territory, it does not amount to taxing the profits of the branch. What is taxed is the profits in a taxable territory and not the profits of the branch in Part B State and the failure to recognise this important fact has resulted in confusion. Under section 10A it is the profits in a taxable territory that are adjusted and even when they are adjusted by adding the entire profits of a branch to the profits actually accrued in the taxable territory, it cannot be said that the profits of the branch are taxed. What is done really is to substitute in place of the amount of the actual profits accruing in the taxable territory an amount which would have accrued if the branch had not been opened. What is taxed is the assumed amount of the profits in the taxable territory and not the profits of the branch. THE third proviso simply exempts the profits accruing in a Part B State from being taxed. It does not go further and does not prevent them from being taken into consideration in deciding what should be taken to be the profits in a taxable territory under section 10A. THE adjustment consists of not adding the profits governed by the third proviso but of counteracting the avoidance or reduction of liability of the profits in a taxable territory to excess profits tax. Though profits accruing in a Part B State are not subject to excess profits tax, the law does not permit profits to be diverted from a taxable territory to a Part B State. If a person who was not doing any business in a taxable territory opens a business in a Part B State, whatever profits he earns from it will be exempt from taxation under the third proviso, but the case of a person who was carrying on business entirely in a taxable territory and who now opens a branch in a Part B State and transfers some of his old business to it is quite different. The question before us is whether an adjustment under section 10A can be done in the present case or not. It is different from the question how it should be done. The question what profits were earned by the branch at Ratlam would be relevant, if at all, only for the purpose of deciding how the adjustment of the profits of Farrukhabad and Ahmedabad should be made. In order to decide whether the adjustment can be made at all or not the amount of the profits made by the branch is wholly irrelevant. If the question whether the adjustment can be done or not is decided without any regard to the amount of the profits earned by the branch at Ratlam, it only confirms that the adjustment does not militate against the third proviso. After all the proviso does not lay down, Do not adjust the amount of profits accruing in a taxable territory under section 10A.;