Ambiguous tax exemption language construed for assessee, allowing Part B State losses to be set off against taxable profits.

Ambiguous fiscal language in the third proviso to section 5 of the Business Profits Tax Act, 1947, was construed in favour of the assessee. The provision was read as dealing with the income, profits or gains of a Part B State business, not as excluding losses from consideration. On that construction, losses incurred in the Part B State could be deducted and set off against profits earned in the taxable territories. The reasoning was supported by the statutory scheme, comparable income-tax provisions, and the principle that exemptions and exclusions have the same tax effect unless the statute expressly distinguishes them.

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Issues: Whether, on the true construction of the third proviso to section 5 of the Business Profits Tax Act, 1947, losses incurred by a business in a Part B State could be deducted and set off against profits made in the taxable territories.

Analysis: The third proviso was held to differ materially from the earlier provisos because it did not take the Part B State business itself out of the Act, but dealt with the income, profits or gains of that business. The language of the proviso, read with the reference to income, profits or gains being received or deemed to be received, was treated as indicating only profits and not losses. The Court also drew support from the scheme of the Indian Income-tax Act, the comparable language of section 14(2)(c) of the Indian Income-tax Act, 1922, and the principle that exemptions and exclusions do not differ in their tax effect unless the statute expressly so provides. The possible difficulty under the capital and abatement rules was considered and held not to be insuperable. As the language was ambiguous, the construction beneficial to the assessee was adopted.

Conclusion: The assessee was entitled under the third proviso to section 5 to deduct the losses incurred in the Indian State and set them off against the profits earned in the taxable territories.

Ratio Decidendi: Where fiscal language is ambiguous, and two constructions are possible, the construction favourable to the assessee must be adopted, especially where the statutory scheme supports treating Part B State losses as deductible against taxable-territory profits.

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