Statutory profits and rebuttable capital presumption govern excess profits tax computation under the schedule.

Rule 5 of Schedule I to the Excess Profits Tax Act, 1940 was unavailable where an assessee, having exercised the statutory option under the proviso to section 6, had no standard period at all; the special exception depends on the close of a standard period and cannot operate without one. For rule 5 of Schedule II, the expression "profits or losses" was construed as statutory profits under the Act, not book or actual profits. The deeming rule as to even accrual and corresponding increase in capital was held to be rebuttable by proof that actual disbursements prevented any such increase.

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Issues: (i) Whether an assessee which had no standard period because it had exercised the statutory option under the proviso to section 6 could claim the benefit of rule 5 of Schedule I to the Excess Profits Tax Act, 1940. (ii) Whether, for the purpose of rule 5 of Schedule II, the expression "profits or losses" means statutory profits under the Act and whether the resulting presumption as to increase in capital can be rebutted by proof of actual disbursements.

Issue (i): Whether an assessee which had no standard period because it had exercised the statutory option under the proviso to section 6 could claim the benefit of rule 5 of Schedule I to the Excess Profits Tax Act, 1940.

Analysis: Rule 5 of Schedule I operates only after the close of the standard period. Where a business commenced after 31 March 1936 and elected the proviso to section 6, the statutory scheme does not leave it with any standard period at all. In such a case there can be no question of the close of a standard period, and the special exception in rule 5 cannot be invoked.

Conclusion: The assessee was not entitled to the benefit of rule 5 of Schedule I.

Issue (ii): Whether, for the purpose of rule 5 of Schedule II, the expression "profits or losses" means statutory profits under the Act and whether the resulting presumption as to increase in capital can be rebutted by proof of actual disbursements.

Analysis: The expression "profits or losses" in the rule refers to profits as defined by the Act, not to book profits or actual profits. The rule adopts a notional method by deeming profits or losses to accrue evenly throughout the period and by deeming them to increase or decrease capital accordingly. That presumption is rebuttable, and the Department may show that although profits accrued, actual disbursements prevented a corresponding increase in capital.

Conclusion: The expression means statutory profits, and the presumption as to increase in capital is rebuttable by contrary proof.

Final Conclusion: The reference was answered by holding that rule 5 of Schedule I did not apply to the assessee, while the computation under the schedule had to proceed on statutory profits subject to rebuttal of the presumption regarding increase in capital.

Ratio Decidendi: A deeming rule governing capital computation must be applied according to the statutory definition of profits, and a special benefit tied to the close of a standard period is unavailable where the assessee has no standard period under the Act.

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