Commercial profit computation and remittance taxation: only the embedded profit element can be treated as income on the facts.
In computing remittable profits under the Income-tax Act, prior years' losses were not an automatic deduction unless actually brought forward in the books, and depreciation on assets in a native State could not be imported without a specific provision; profits were to be understood in their commercial sense. The department had to show that profits were available for remittance, and a remittance in the ordinary course of business was only presumptively treated as trading receipt; its profit element had to be determined proportionately, not by taxing the whole amount. Where reciprocal head office and branch remittances existed, the presumption was weakened by the accounts, so only the excess representing income could be taxed.
Issues: (i) Whether prior years' losses and depreciation under the Income-tax Act were deductible in computing the available profits; (ii) whether the sum of Rs. 90,000 had been rightly included in the amount of profits available for remittance to the taxable territories; (iii) whether the sum of Rs. 97,398 was rightly treated as remittances of income under section 4(1)(b)(iii) of the Income-tax Act.
Issue (i): Whether prior years' losses and depreciation under the Income-tax Act were deductible in computing the available profits.
Analysis: Prior years' losses could not be treated as an automatic deduction in computing the profits of the year unless they had in fact been brought forward in the books of account. Depreciation on assets situated in a native State could not be imported into the computation of profits under section 4(1)(b)(iii) in the absence of a specific provision. The relevant profits had to be understood in their commercial sense and not by applying the full statutory computation scheme for business income.
Conclusion: The Tribunal was right in disallowing both the prior years' losses and the depreciation claim.
Issue (ii): Whether the sum of Rs. 90,000 had been rightly included in the amount of profits available for remittance to the taxable territories.
Analysis: The department had to prove that profits arising outside the taxable territories were available for remittance when the transfer took place. A remittance made in the ordinary course of business was presumed to be out of trading receipts, and profits embedded in those receipts could be attributed proportionately. But the entire remittance of Rs. 90,000 could not be treated as profit merely because profits had been earned in the relevant year; its profit element had to be determined by reference to the turnover and surrounding circumstances.
Conclusion: The entire sum of Rs. 90,000 was not rightly included as available profits, and only the proportionate profit element attributable to that remittance could be brought into account.
Issue (iii): Whether the sum of Rs. 97,398 was rightly treated as remittances of income under section 4(1)(b)(iii) of the Income-tax Act.
Analysis: Where remittances moved both ways between the head office and branches, the presumption that outward remittances represented profits was weakened and had to be assessed on the facts. The books showed that the Bombay office incurred expenditure for the branch business, so the presumption could not extend to the gross figure of remittances. However, the remittances to Kutch-Mandvi stood on a different footing because no business expenditure there was shown to have been incurred for the branch operations. The proper taxable amount was therefore the amount representing the excess of remittances, and not the full figure of Rs. 97,398.
Conclusion: The Tribunal erred in taxing the entire sum of Rs. 97,398 as remittances of income; only Rs. 71,874, subject to availability of accumulated profits, could be treated as remittances of income.
Final Conclusion: The reference was answered partly against the assessee and partly against the revenue, with the taxable remittance figure reduced from the full amount adopted by the department to the amount supported by the available profit element and the factual presumption arising from the accounts.
Ratio Decidendi: In taxing remittances from non-taxable territories, the department bears the initial burden of showing available profits, but the presumption that remittances represent profits is rebuttable and may be limited by the surrounding accounts and business circumstances; only the profit element embedded in trading receipts can be treated as remitted income.
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