Excess Profits Tax scope excludes agricultural income sources from capital computation under the 1940 Act

Under the Excess Profits Tax Act, 1940, only businesses whose profits are chargeable to income-tax fall within the statutory scope, so an agricultural business generating exempt agricultural income is outside the Act. The inclusive definition of "business" does not enlarge that scope, because the second proviso and Section 5 confine the Act to businesses of the described character. Rule 6 of Schedule II applies only where the Act already applies to part of a business and cannot bring an exempt agricultural source into the capital base. The capital employed in the agricultural business is therefore excluded from excess profits tax computation.

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Issues: Whether agricultural business is a business to which the Excess Profits Tax Act, 1940 applies, and whether the capital employed in such agricultural business is to be included while computing the capital of the assessee for excess profits tax purposes.

Analysis: Section 2(5) of the Excess Profits Tax Act, 1940 uses an inclusive definition of business, but the second proviso makes it clear that only businesses to which the Act applies are to be treated as one business. Section 5 confines the Act to businesses of the described character only where part of the profits are chargeable to income-tax under Section 4(1)(b)(i), Section 4(1)(b)(ii), or Section 4(1)(c) of the Indian Income-tax Act, 1922. Agricultural income may fall within those heads, but it remains exempt from income-tax by reason of Section 4(3) of the Indian Income-tax Act, 1922. Rule 6 of Schedule II to the Excess Profits Tax Act, 1940 applies only where the Act is applicable to part of a business and does not enlarge the ambit of Section 5. The agricultural business, being a source of agricultural income and not itself subject to the Act, cannot be brought into the capital computation.

Conclusion: Agricultural business is not a business to which the Excess Profits Tax Act, 1940 applies, and its capital is excluded from the computation.

Final Conclusion: The reference was answered against the assessee and in favour of the revenue, with costs awarded to the assessee's opponent.

Ratio Decidendi: Under Section 5 of the Excess Profits Tax Act, 1940, only a business whose profits are chargeable to income-tax falls within the Act, and a source of agricultural income exempt under Section 4(3) of the Indian Income-tax Act, 1922 is outside its scope.

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