Anti-avoidance power cannot create tax liability where statute expressly exempts Part B State business profits

Section 10A of the Excess Profits Tax Act could not be used to bring within charge profits that the third proviso to Section 5 had exempted for a business in a Part B State. The court reasoned that the Act's charging scheme applied only to businesses within its scope, and an anti-avoidance adjustment power could not extend taxation to profits the statute had expressly excluded. Sub-section (2)(a) did not change that position, because it authorised charging only after permissible adjustments, not taxation of an exempt business. The reference was therefore answered in the negative, in favour of the assessee.

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Issues: Whether Section 10A of the Excess Profits Tax Act could be invoked to bring within charge profits of a business in a Part B State which were exempt under the third proviso to Section 5 of the Act.

Analysis: The charging scheme under the Act operated only on a business to which the Act applied, and the third proviso to Section 5 exempted profits accruing or arising in a Part B State. Section 10A empowered the officer to make adjustments to counteract avoidance or reduction of excess profits tax liability, but that power could not be used to extend the Act to a business which was outside its scope altogether. Sub-section (2)(a) did not alter that position, because it referred to charging persons to the extent necessary after adjustments, not to imposing tax on an exempt business. The earlier decision on the same principle was held to govern the present reference.

Conclusion: Section 10A could not override the third proviso to Section 5, and the question referred had to be answered in the negative, in favour of the assessee.

Final Conclusion: A transaction effecting a transfer to a Part B State could not be used under Section 10A to impose excess profits tax on profits that the Act had exempted from charge.

Ratio Decidendi: A power to counteract tax avoidance cannot be exercised to create a charging liability where the statute itself excludes the business or profits from the scope of taxation.

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