1947 (3) TMI 25 - HC - Income Tax

High Court rules Excess Profits Tax Act doesn't apply to agricultural businesses due to income tax exemption

The Bombay High Court, in a judgment by Justice Chagla, ruled that the Excess Profits Tax Act, 1940 does not apply to agricultural businesses due to the ... - Issues:Interpretation of Section 5 of the Excess Profits Tax Act, 1940 regarding the treatment of agricultural business under the Act.Analysis:The judgment by the Bombay High Court, delivered by Justice Chagla, pertains to the interpretation of Section 5 of the Excess Profits Tax Act, 1940, specifically addressing whether agricultural business falls within the ambit of the Act. The case involved an assessee engaged in both growing sugar-cane and manufacturing sugar, with a dispute arising over the treatment of capital employed in the agricultural business for the purpose of computing standard capital and capital during the chargeable period. The Tribunal had ruled that the capital employed in the agricultural business should not be considered in determining the capital of the company. The crux of the matter lay in whether agricultural business qualifies as a business to which the Excess Profits Tax Act applies.The court examined the definition of 'business' under Section 2(5) of the Act, which includes an inclusive definition covering a wide range of activities. Of significance was the second proviso to the definition, emphasizing that only businesses to which the Act applies are to be treated as one business. This distinction was crucial in determining whether agricultural business falls under the purview of the Act. The court then delved into Section 5 of the Act, the pivotal section, which mandates that the Act applies to businesses whose profits are chargeable to income tax under specific sections of the Indian Income-tax Act. Notably, the Act does not apply to income exempted under Section 4(3) of the Income-tax Act.The judgment highlighted the requirement that profits must be chargeable to income tax for the Act to apply, and agricultural income, falling under exempted categories, does not meet this criterion. The court rejected the argument that agricultural income automatically brings the business under the Act, emphasizing the necessity for income to be chargeable to tax. The court also referenced Rule 6 in Schedule II, clarifying that it pertains to businesses partially covered by the Act, not businesses like agricultural business that do not fall under the Act at all.In conclusion, the court held that while the Act applies to the manufacturing business, it does not extend to the agricultural business due to the exemption of agricultural income from income tax. The judgment emphasized the strict construction of charging statutes and the clear language of Section 5, which limits the application of the Act to specific types of businesses. Therefore, the court answered the reference in the affirmative, requiring the assessee to bear the costs of the reference.