1956 (9) TMI 71 - HC - Income Tax

Interpreting Business Profits Tax Act: Deductions, Exemptions, and Capital Computation

Karamchand Premchand Ltd. Versus Commissioner of Income-tax

Karamchand Premchand Ltd. Versus Commissioner of Income-tax - [1956] 30 ITR 849 (BOM.) Issues Involved:1. Interpretation of the third proviso to section 5 of the Business Profits Tax Act.2. Applicability of the Business Profits Tax Act to businesses in Part B States.3. Inclusion of losses in the term 'income, profits or gains' in the context of the third proviso.4. Distinction between exemption and exclusion under the Business Profits Tax Act.5. Computation of capital and abatement under rule 2A of the Business Profits Tax Act.Issue-wise Detailed Analysis:1. Interpretation of the third proviso to section 5 of the Business Profits Tax Act:The primary issue was the proper construction of the third proviso to section 5 of the Business Profits Tax Act. The court noted that this proviso does not exempt the business itself from the application of the Act but rather exempts the 'income, profits or gains' accruing or arising within a Part B State unless such income is received or brought into the taxable territories. This distinction was crucial in determining whether the losses incurred in a Part B State could be set off against the profits made in the taxable territories.2. Applicability of the Business Profits Tax Act to businesses in Part B States:The court emphasized that section 5 of the Business Profits Tax Act applies to every business, including those carried on in Part B States. The third proviso, however, limits the applicability of the Act to the income, profits, or gains received or deemed to be received in the taxable territories. This interpretation was consistent with the scheme under the Indian Income-tax Act, where profits from a business in an Indian State were not taxable unless brought into the taxable territories.3. Inclusion of losses in the term 'income, profits or gains':The court examined whether the term 'income, profits or gains' in the third proviso included losses. It was argued that if 'income, profits or gains' included losses, the business in a Part B State would be effectively excluded from the Act. However, the court concluded that in the context of the third proviso, 'income, profits or gains' referred only to profits and not losses. This conclusion was based on the language used in the proviso and the history behind its enactment, which indicated that the Legislature intended to tax only the profits brought into the taxable territories.4. Distinction between exemption and exclusion:The court addressed the distinction between exemption and exclusion, noting that the third proviso does not exempt the income from a Part B State but excludes it from the operation of the Act unless brought into the taxable territories. This distinction was important because it affected how the income from a Part B State was treated under the Business Profits Tax Act compared to the Indian Income-tax Act, where certain incomes were exempted from tax.5. Computation of capital and abatement under rule 2A:The court also considered the implications of rule 2A of Schedule II of the Business Profits Tax Act, which deals with the computation of capital for abatement purposes. The rule provides that if only part of the profits is chargeable under the Act, the capital should be proportionately reduced. The court interpreted this to mean that if no profits from a Part B State are brought into the taxable territories, the assessee would not be entitled to any abatement for the capital used in that business. This interpretation avoided any anomalies in the computation of capital and abatement.Conclusion:The court concluded that the assessee is entitled under the third proviso to section 5 to deduct the losses incurred in the Indian State and set them off against the profits made in the taxable territories. The question was answered in the affirmative, and the Commissioner was ordered to pay the costs of the reference.