Separate business deeming rule under excess profits tax bars set-off of Indian-State losses against taxable business profits

The third proviso to section 5 of the Excess Profits Tax Act, 1940 treated the part of a business whose profits arose in an Indian State as a separate business for tax purposes, with the result that segment was excluded from the Act's charge. On that footing, losses attributable to the Indian-State transactions could not be set off against the profits of the taxable Delhi business in computing excess profits tax. The text also notes that the High Court could not supplant the Tribunal's factual basis by making fresh findings that the losses had accrued at Delhi.

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Issues: Whether, for purposes of excess profits tax, losses arising from transactions in an Indian State could be taken into account when that part of the business was treated as a separate business under the third proviso to section 5 of the Excess Profits Tax Act, 1940.

Analysis: The third proviso to section 5 of the Excess Profits Tax Act, 1940, provides that where the profits of a part of a business accrue or arise in an Indian State, that part is to be treated as a separate business for the purposes of the Act. The legal effect of that deeming provision is exclusion of that part of the business from the Act. If the profits of the Bhatinda transactions, had they arisen, would have been outside the charge because the relevant part of the business was to be treated as separate, the corresponding losses incurred in that part of the business could not be brought into the computation of excess profits tax on the Delhi business. The High Court also could not replace the Tribunal's factual basis with fresh findings that the losses accrued at Delhi.

Conclusion: The loss was not allowable in computing excess profits tax. The answer to the second question was against the assessee and in favour of the Revenue.

Ratio Decidendi: Where a proviso deems the Indian-State segment of a business to be a separate business for tax purposes, losses attributable to that separate segment cannot be set off against the taxable business outside the State.

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