Appeal No 304 of 1958
Appeal from the judgment and order dated September 7 1956 of the Bombay High Court in Income tax Reference No 19 of 1956
C K DaphtarySolicitor General of IndiaK N Rajagopal Sastri and D Gupta for the appellant
N A Palkhivala and section N Andley for the respondent
April 28
The Judgment of the Court was delivered by SK DAS J
This is an appeal on a certificate of fitness granted by the High Court of Bombay and the short question for decision is the true scope and effect of the third proviso to section 5 of the Business Profits Tax Act 1947 Act No XXI of 1947 hereinafter referred to as the Act
The appellant is the Commissioner of Income tax Ahmedabad and the respondent is a private limited company under the name and style of Karamchand Premchand Ltd Ahmedabad to be called hereafter as the assesses
729 The relevant facts are these  the assessee held the managing agency of the Ahmedabad Manufacturing and Calico Printing Co Ltd It also had a pharmaceutical business in the Baroda State which was at the relevant time an Indian State run in the name and style of Sarabhai Chemicals
The assessee s business in India we shall use the expression India in this judgment to mean British India as it was then called in contra distinction to an Indian State showed business profits assessable under the provisions of the Act but the business carried on in the name and style of Sarabhai Chemicals in Baroda showed a loss in the relevant chargeable accounting periods which were four in number namely 1 April 1 1946 to December 31 1946 2 January 1 1947 to December 31 1947 3 January 1 1948 to December 31 1948  and 4 January 1 1949 to March 31 1949
The assessee claimed that its assessable income in India should be reduced by the loss suffered by it in its business in Baroda
The Income tax Officer rejected the claim of the assessee and held that the Act did not apply to the business carried on in an Indian State unless profits and gains of that business were received or deemed to have been received in or brought into India
On appeal the Appellate Assistant Commissioner upheld the contention of the assessee and allowed the appeal
The Department went up in appeal to the Appellate Tribunal which held that under the relevant proviso to section 5 of the Act profits and losses of a business in an Indian State were not to be taken into consideration unless they were received or deemed to have been received in or brought into India
In that view of the matter the Tribunal set aside the order of the Appellate Assistant Commissioner and restored that of the Income tax Officer
The assessee then moved four applications in respect of the four relevant chargeable accounting periods and by these applications the assessee required the Tribunal to state a case to the High Court of Bombay on the question of law which arose out of its order
These four applications were consolidated
The Tribunal on being satisfied that a question of law arose out of its order in the four cases numbered as 85 86 87 730 and 88 of 1953 54 referred that question to the Bombay High Court in the following terms  Whether on the facts and in the circumstances of the case the loss suffered by the assessee in the business of Sarabhai Chemicals should be deducted in computing the business income of the assessee company liable to business profits tax  The High Court answered the question in the affirmative and came to the conclusion that the assessee was entitled to deduct the losses incurred by it in its Baroda business and set them off against the profits made in the taxable territories
The appellant then moved the High Court and obtained a certificate of fitness
On that certificate the present appeal has come to us
The main contention on behalf of the appellant is that the High Court came to an erroneous conclusion with regard to the true scope and effect of the third proviso to section 5 of the Act
It is necessary here to refer to some of the provisions of the Act to understand its general scheme
In 1940 the Central Legislature passed the Excess Profits Tax Act 1940 Act No XV of 1940 to impose a tax on excess profits arising out of certain businesses
We shall have occasion to refer to some of the provisions of that Act in due course
For the purposes of that Act the expression  chargeable accounting period  meant a any accounting period falling wholly within the term beginning on September 1 1939 and ending on March 31 1946 and b where any accounting period fell partly within and partly without the said term such part of that accounting period as fell within the said term
It may be here stated that originally the term was from September 1 1939 to March 31 1941 but by several annual Finance Acts the term was extended up to March 31 1946
In 1947 came the Act in which  chargeable accounting period means a any accounting period falling wholly within the term beginning on April 1 1946 and ending on March 31 1949 and b where any accounting period falls partly within and partly without the said term such part 731 of that accounting period as falls within the said term
The Act extended to the whole of India
The word business is defined in section 23 of the Act as including any trade commerce or manufacture etc the profits of which are chargeable according to the provisions of section 10 of the Indian Income tax Act 1922
There are two provisoes to this definition clause and the second
proviso states that all businesses to which the Act applies carried on by the same person shall be treated as one business for the purposes of the Act
The expression  taxable profits is defined under section 217 of the Act and it means the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period
What is meant by  abatement is defined in section 21 of the Act
The charging section is section 4 and we may read that section here so far as it is relevant for our purpose in order to understand the general scheme of the tax imposed under the Act
 section 4
Charge of tax Subject to the provisions of this Act there hall in respect of any business to which this Act applies be charged levied and paid on the amount of taxable profits during any chargeable accounting period a tax in this Act referred to as  business profits tax which shall in respect of any chargeable accounting period ending on or before the 31st day of March 1947 be equal to sixteen and two third per cent of the taxable profits and in respect of any chargeable accounting period beginning after that date be equal to such percentage of the taxable profits as may be fixed by the annual Finance Act
 Shortly stated the scheme is that in respect of any business to which the Act applies there shall be charged levied and paid a tax called business profits tax on the amount of the taxable profits which means the amount exceeding the abatement during any chargeable accounting period the tax shall be equal to sixteen and two third per cent
of the taxable profits in respect of the chargeable accounting period ending on or before March 31 1947 and in respect of any charge
able accounting period after that date the tax shall 732 be equal to such percentage of the taxable profits as may be fixed by the annual Finance Act
Then comes section 5 which is the section dealing with the application of the Act and it is in these terms section 5
Application of Act This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income tax by virtue of the provisions of sub clause i or sub clause ii of clause b of subsection 1 of section 4 of the Indian Income tax Act 1922 or of clause c of that sub section Provided that this Act shall Dot apply to any business the whole of the profits of which accrue or arise without the taxable territories where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in the taxable territories unless the business is controlled in India Provided further that where the profits of a part only of a business carried on by a person who is not resident in the taxable territories or not ordinarily so resident accrue or arise in the taxable territories or are deemed under the Indian Income tax Act 1922 so to accrue or arise then except where the business being the business of a person who is resident but not ordinarily resident in the taxable territories is controlled in India this Act shall apply only to such part of the business and such part shall for all the purposes of this Act be deemed to be a separate business  Provided further that this Act shall not apply to any income profits or gains of business accruing or arising within any part of India to which this Act does not extend unless such income profits or gains are received in or are brought into the taxable territories in any chargeable accounting period or are assessable under section 42 of that Act
 We have read the section as it stands to day
The expression  taxable territories  in the provisoes was substituted for  British India  by the Adaptation of Laws Order 1950 and the third proviso originally referred to any income profits or gains of business accruing or rising within an Indian State then 733 the expression  a Part B State  was substituted but this was again changed by the Adaptation of Laws No 3 Order 1956 and the present expression  any part of India to which this Act does not extend  was introduced
For the purposes of this appeal nothing turns upon these changes and we may read the third proviso as referring to any income profits or gains of a business accruing or arising in an Indian State
Section 6 deals with relief on occurrence of  deficiency of profits  an expression which is defined in section 27 of the Act
The rest of the Act deals with matters such as issue of notice for assessment assessments profits escaping assessment penalties appeal etc with which we are not directly concerned in this appeal
Now sections 4 and 5 of the Act make it quite clear that the unit of taxation is the business that is any busi
ness to which the Act applies and if a person carries on more than one business to all of which the Act applies all the businesses carried on by the same person shall be treated as one business for the purposes of the Act
Section 5 in its substantive part states to which business the Act applies and says that the Act applies to every business of which any part of the profits made during the chargeable accounting period is chargeable to income tax by virtue of the provisions of sub cl
i or sub cl
ii of cl
b of sub section 1 of section 4 of the Indian Income tax Act 1922 or el
c of that sub section
A reference to the aforesaid provisions of the Indian Income tax Act 1922 shows at once that in so far as they concern the present assessee section 5 in its substantive part makes the Act applicable to his business whether the profits of the business accrued or arose in India or Baroda  and this is so in spite of the fact that the Act extended only to India
Indeed learned counsel for the appellant has conceded that bad section 5 stood by itself without any of the provisoes the Baroda business of the assessee would have come within the wide ambit of section 5 and the Act would be applicable to that business
His contention however is that the third proviso has the effect of excluding the Baroda business from the pur
view of the Act except in so far as the income profits or gains of that business are received or deemed to 95 734 be received in or brought into India
On behalf of the assessee the argument is that in its true scope and effect the third proviso has merely the effect of exempting the income profits or gains of the Baroda business except when they are received or brought into India but the business itself is not excluded from the purview of the Act the business is still one to which the Act applies under the substantive part of section 5 and as the third proviso exempts income profits or gains only the losses of the Baroda business can be set off against the profits of the business in India
These are the two main rival contentions which we have to consider in this appeal
Now let us examine a little more closely sections 4 and 5 of the Act
We have stated earlier that section 4 is the charging section which levies a tax on the amount of taxable profits during any chargeable accounting period in respect of any business to which the Act applies
The corresponding section in the Excess Profits Tax Act 1940 was also section 4 thereof which levied a tax on the amount by which the profits during any chargeable accounting period exceeded the standard profits inrespect of any business to which that Act applied
Under the Excess Profits Tax Act 1940 as also under the Act under our consideration the unit is the business business to which the Act applies
For the application of the Act we have to go to section 5
We have pointed out that section 5 in its substantive part makes the Act applicable to every business of which any part of the profits is chargeable to income tax by virtue of the provisions of sub cl
1 or sub cl
ii of el
b of sub section
1 of section 4 of the Indian Income tax Act 1922 and thus makes the Act applicable to the Baroda business of the assessee
The question then is does the third proviso to section 5 exclude that business except in so far as the income profits or gains of that business are received or deemed to be received in or are brought into the taxable territories in any chargeable accounting period  If that is the true scope and effect of the third proviso then the appellant is entitled to succeed
If on the contrary the third proviso merely makes the Act inapplicable to income profits or gains of the Baroda business unless such income profits or gains are 3 received or deemed to be received in or are brought into the taxable territories but does not exclude the business from the purview of sections 4 and 5 then the answer given by the High Court is correct
The High Court has stated that whichever view is taken the third proviso leads to certain difficulties and in a case where much can be said on both sides the benefit of any ambiguity of language must be given to the assessee
We agree with the High Court that the question is not quite free from difficulty but on the language of the proviso as it stands the answer given by the High Court appears to us to be the correct answer
It is not the case of the appellant that the first and the second provisoes to section 5 apply to the facts of this case
But it is significant to note the phraseology of these two provisoes and contrast them with the third proviso
The first proviso says  Provided that the Act shall not apply to any business the whole of the profits of which accrue or arise without the taxable territories etc
 The language is clear enough to exclude the business referred to therein from the purview of the Act
Similarly the second proviso excludes under certain circumstances part of a business and uses appropriate language to give effect to that exclusion
By a legal fiction as it were it divides a business into two parts one separate from the other and makes the Act applicable to one of them only
Unlike the other two provisoes the third proviso does not use the language of exclusion in respect of any business
What it takes out of the ambit of the Act is merely the  income profits and gains  of a particular business
The language is thus more apt to effectuate an exemption from tax of income profits or gains rather than an exclusion of the business from the purview of the Act
On behalf of the appellant it is contended that such a construction results in this anomaly that if the income profits or gains are not brought into India they escape tax and yet the losses of a business which is outside India are taken into consideration in computing the profits etc in India
This it is argued could not have been the object of the legislature in 736 enacting the third proviso to section 5 of the Act
It is contended that the object was to exclude the business in an Indian State as also the income profits or gains thereof unless such profits etc were received in or brought into India
This argument is not devoid of plausibility and requires careful consideration
We may here refer to the relevant provisions of the Excess Profits Tax Act 1940
Section 5 of that Act in its substantive part and the first and second provisoes thereto were worded in identical language but the third proviso to section 5 of the Excess Profits Tax Act 1940 was worded quite differently from the third proviso to section 5 of the Act
The third proviso to section 5 of the Excess Profits Tax Act 1940 stated  Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in a Part B State and where the profits of a part of a business accrue or arise in a Part B State such part shall for the purposes of this provision be deemed to be a separate business the whole of the profits of which accrue or arise in a Part B State and the other part of the business shall for all the purposes of this Act be deemed to be a separate business The language used was clearly one of exclusion and it said that the Excess Profits Tax Act was not applicable to a business the profits of which accrued or arose in a Part B State
Why then did the legislature use different language in the third proviso to section 5 of the Act On behalf of the appellant it has been submitted that the change in language is deliberate and the reason for the change is to make the income profits or gains of a business accruing in an Indian or Part B State liable to tax when such income profits or gains are brought in India while under the third proviso to a 5 of the Excess Profits Tax Act they were not liable to tax even when they were brought into India
On behalf of the assessee however it has been submitted that the change in language is due to a different reason altogether
The third proviso to section 5 of the Excess Profits Tax Act 1940 and section 142 c now deleted of the Indian Income tax Act 1922 were enacted at about the same time and the broad object of both the 737 provisions was to exclude profits of a business in an Indian or Part B State from charge of tax but under the Excess Profits Tax Act 1940 such profits were not chargeable even if received in or brought into India whereas under section 142 c of the Indian Income tax Act such profits became chargeable to tax if received in or brought into India
This difference learned counsel for the assessee states was no doubt done away with by the change in language of the third proviso to section 5 of the Act but the change in language did something more because it assimilated the position under the proviso to that under section 142 c of the Indian Income tax Act namely that though profits of a business in an Indian State cannot be taxed unless they are brought into the taxable territories yet the losses incurred can be adjusted in computing the profits of the business as a whole
Learned counsel for the assessee has relied on the decision of this Court in Commissioner of Income tax Mysore Travancore Cochin and Coorg vs Indo Mercantile Bank Ltd 1 and the decisions of the Bombay High Court in Commissioner of Income tax Bombay City vs Murlidhar Mathurawalla Mahajan Association 2  and Commissioner of Excess Profits Tax Bombay City vs Bhogilal H Patel Bombay 3 
The first two decisions cited above considered the effect of section 24 1 Indian Income tax Act 1922 with special reference to the first proviso thereto as it stood at the time relevant therein and its impact on section 10 of the said Act
It was held that sub section
1 of section 24 dealt only with set off of loss under one head against profits under any other head and therefore the old first proviso to sub section 1 of section 24 applied and barred the right of set off only where a loss in the Indian State was sought to be set off against Indian profits under any other head where however the assessee sought to set off his loss in the Indian State against his Indian profits under the same head e g set off of loss incurred in a business carried on in an Indian State against the profits of the same or another business carried on in India the proviso did not apply and the assessee was entitled to such set off under section 10 1 1959 Supp 2 SCR 256
2 3 738 of the Indian Income tax Act
Learned counsel for the assessee has submitted that the same principle applies with regard to the third proviso to section 5 of the Act
Learned counsel has submitted that as under section 10 of the Indian Income tax Act different businesses constitute one head and in order to determine what are the profits and gains of a business under section 10 an assessee is entitled to show all his profits and set off against those profits losses incurred by him in the same head so also under section 5 of the Act the Baroda business of the assessee is within the ambit of the Act though the income profits or gains thereof are excluded by the third proviso unless they are received or brought into India
He has pointed out that the position under the Excess Profits Tax Act was different as was explained in Bhogilal Patel s case 1 where the learned Chief Justice said  This contention of Mr Kolah is based on the language used in the proviso namely that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State 
Now this contention is obviously fallacious because the proviso does not say that the Act shall not apply to the profits of a business which accrue or arise in an Indian State
What the proviso says is that the Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State
The expression the whole of the profits of which accrue or arise in an Indian State  is an expression which indicates the nature of the business which is excluded from the purview or ambit of the Act
Now the third proviso to section 5 of the Act uses not the phraseology of the Excess Profits Tax Act but the very phraseology which according to the learned Chief Justice would have made all the difference
Learned counsel for the assessee has argued and we think it has considerable force that the legislature had before it the language used in section 14 2 e of the Indian Income tax Act and it knew the effect of those provisions and it used the same language in the third proviso to section 5 of the Act
If the object of the legislature was to exclude the business itself from the ambit 1 739 of the Act while taxing the profits which were brought into the taxable territories then it used language which failed to achieve that object
On behalf of the appellant it has been pointed out that the expression used in the third proviso to section 5 is Provided further that the Act shall not apply to any income profits or gains of a business etc
 It is argued that this language namely that the Act shall not apply is apt to exclude from the purview of the Act business the profits of which accrue or arise in an Indian State except in so far as such profits are brought into the taxable territories
In support of this argument a reference has been made to section 4 3 of the Indian Income tax Act as it stood prior to 1939 and reliance is placed on the decisions in Commissioner of Income tax Madras vs M P TK M M section M A B Somasundaram Chettiar 1 and Commissioner of Income tax Bombay vs The Provident Investment Co Ltd2
It is true that section 43 of the Indian Income tax Act as it stood prior to 1939 said that this Act meaning the Indian Income tax Act 1922 shall not apply to certain classes of income  and in the two decisions cited it was held that the word  business  meant a business whose profits were being assessed in the year under consideration and there was no justification for deduction of the expenses of a foreign business
We do not however think that the use of the expression  the Act shall not apply  is decisive in this case
We have to read the third proviso as a whole and in the context in which it occurs in order to find out what it means
So read it is difficult to hold that it has the effect of excluding the Baroda business except in so far as the profits thereof are brought into the taxable territories
What it says in express terms is that the Act shall not apply to any income profits or gains of business accruing or arising in an Indian State etc
It does not say that the business itself is excluded from the purview of the Act
We have to read and construe the third proviso in the context of the substantive part of section 5 which takes in the Baroda business and the phraseology of the first and second provisoes thereto which clearly uses the 1 A I R 2 1931 1 L R 740 language of excluding the business referred to therein
The third proviso does not use that language and what learned counsel for the appellant is seeking to do is to alter the language of the proviso so as to make it read as though it excluded business the income  profits or gains of which accrue or arise in an Indian State
The difficulty is that the third proviso does not say so  on the contrary it uses language which merely exempts from tax the income profits or gains unless such income profits or gains are received in or brought into India
Next we have to consider what the expression income profits or gains  means
In the context of the third proviso it cannot include losses because the latter part of the proviso says  unless such income profits or gains are received etc into the taxable territories 
Obviously losses cannot be brought into the taxable territories except in an accounting sense and the expression  income profits or gains  in the context cannot include losses
The expression must have the same meaning throughout the proviso and cannot have one meaning in the first part and a different meaning in the latter part of the proviso
The appellant cannot therefore say that the third proviso excludes the business altogether because it takes away from the ambit of the Act not only income profits or gains but also losses of the business referred to therein
On behalf of the appellant it has been argued that though the language of the third proviso to section 5 of the Act is similar to that of section 142c of the Indian Income tax Act the language of the two provisions is not identical and it is not correct to say that their effect is substantially the same
It is pointed out that the language of section 142c was one of exemption only in respect of any income profits or gains accruing or arising in an Indian State though for purposes of  total income  the Income tax Act applied thereto and therefore the normal process of aggregating profits and losses wherever they occurred could be adopted
But says learned counsel for the appellant the position is otherwise under the third proviso to section 5 of the Act because firstly it uses the expression  the Act 741 shall not apply  and secondly there is no question of exempting the profits from tax while including them for the purposes of  total income 
We agree that the complication of excluding the profits from tax while including them for determining  total income  does not arise under the third proviso to section 5 of the Act but the argument presented is the same as we have dealt with earlier
The argument merely takes us back to the question does the third proviso to B 5 of the Act merely exempt the income profits or gains or does it exclude the business If it excludes the business the appellant is right in saying that the position under the proviso is not the same as under section 142c of the Indian Income tax Act
If on the contrary the proviso merely exempts the income profits or gains of the business to which the Act otherwise applies then the position is the same as under section 142c
It is perhaps repetition but we may emphasize again that exclusion if any must be done with reference to business which is the unit of taxation
The first and second provisoes to section 5 do that but the third proviso does not
Lastly it has been contended that the construction adopted by the High Court is likely to lead to consequences which the legislature manifestly could not have intended
This contention has been pressed in respect of two matters a computation of capital under the rules in Schedule 11 of the Act in a case where the assessee company sustains a loss in an Indian State and b relief for deficiency of profits where the assessee makes profits in an Indian State but sustains a loss in India
As to the first matter it has been fully dealt with by the High Court with reference to r 2A of the Rules in Schedule 11 and it has been rightly pointed out that no difficulty really arise by reason of r 2A
Nor are we satisfied that any real difficulty arises with regard to relief for deficiency of profits when the assessee makes profits in an Indian State but sustains a loss in India
The Act will not apply to such profits unless they are brought into India and if they are brought into India
 a 6 will apply with regard to relief on the ground of deficiency of profits
96 742 It is unnecessary to consider here any hypothetical difficulty which may arise in the application of section 6
The appellant relies on the third proviso to section 5 of the Act in support of the contention that it excludes the Baroda business of the assessee and the losses of that business cannot be set off against the profits of the business in India and the appellant can succeed only on establishing that the proviso clearly and without any ambiguity excludes the Baroda business
We agree with the High Court that if there is any ambiguity of language the benefit of that ambiguity must be given to the assessee
However the conclusion at which we have arrived is that on the language of the proviso as it stands it does not exclude the Baroda business of the assessee but exempts only
the income profits or gains thereof unless they are received or deemed to be received in or brought into India
Accordingly the High Court correctly answered the question of law referred to it
The appeal falls and is dismissed with costs
Appeal dismissed


Summary:
The appellant who was employed in the Punjab Police was found while working as a Police Censor to have detained certain letters illegally and later to have made use of copies and photographs of the them for blackmail
He was consequently reverted to his substantive post of head constable on January 14 1944
Thereafter an enquiry was started against him by the Superintendent of Police and eventually he was dismissed from service on January 25 1944
His representations to higher authorities having failed he instituted a suit challenging the legality of the order of dismissal on the grounds inter alia 1 that section 2403 of the Government of India Act 1935 had not been complied with and 2 that as the appellant was alleged to have committed a criminal offence the Superintendent of Police could not hold a departmental enquiry in respect of such allegations in view of SS 29 and 35 of the 
Held  1 that section 243 of the Government of India Act 1935 65 which was a special provision with regard to the subordinate ranks of police forces in India excluded the operation of section 24G3 of the Act to the appellant who was therefore governed by the conditions of service as provided under the Police Regulations and that the substance of section 2403 which was brought into the Police Regulations in September 1946 long after the appellant had been dismissed was not applicable to him
Accordingly he was not entitled to the second notice under section 2403 giving him a reasonable opportunity of showing cause against the action proposed to be taken in regard to him
North West Frontier Province vs Suraj Narain Anand and High Commissioner for India and High Commis sioner for Pakistan vs I M Lal  referred to
2 that the provisions of the  relating to offences committed by a police officer above the rank of a constable do not bar a departmental enquiry in respect of a matter where it is also possible to prosecute such an officer under that Act