Excess Profits Tax exclusion of Indian State business prevented set-off of its losses against taxable profits.

Business carried on in an Indian State was held to fall wholly outside the Excess Profits Tax Act where Section 5 and the third proviso excluded any business the whole of whose profits accrued or arose in an Indian State. The proviso was treated as defining the nature of the excluded business, so that such business had to be left out entirely from excess profits tax computation and could not be treated as part of the chargeable business. The set-off principle under Section 10 of the Income-tax Act, 1922 did not apply to that computation. Accordingly, losses from the Indian State business could not be set off against profits of the British India business for excess profits tax purposes.

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Issues: Whether, under the Excess Profits Tax Act, losses from a business carried on in an Indian State could be set off against profits from a business carried on in British India, and whether the principle applicable under Section 10 of the Income-tax Act, 1922 governed the computation of excess profits tax.

Analysis: Section 5 of the Excess Profits Tax Act, read with the third proviso, excluded from its ambit any business the whole of the profits of which accrued or arose in an Indian State, and any part of a business so situated was deemed to be a separate business. The proviso was construed as defining the nature of the business excluded from the Act, not as dealing only with profitable years or with profits alone. Schedule I could not override the substantive exclusion created by the Act itself. The scheme of the Act required a consistent comparison between the standard period and the chargeable accounting period, but the excluded Indian State business had to be left out altogether for purposes of excess profits tax. The principle governing business set-off under Section 10 of the Income-tax Act, 1922 was therefore inapplicable.

Conclusion: The answer was in the negative. The assessee was not entitled to set off the Wadhwan business loss against the Bombay business profits for excess profits tax purposes, and the interpretation adopted by the Revenue prevailed.

Ratio Decidendi: A business excluded by the third proviso to Section 5 of the Excess Profits Tax Act is wholly outside the Act for excess profits tax computation, so losses from that business cannot be brought into the computation or set off against taxable profits under the Act.

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