Case: Commissioner Of Income-Tax,Ahmedabad Vs. Karamchand Premchand Ltd.,Ahmedabad

2. 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 assessees business in India (we shall use the expression India in this judgment to mean British India as it was then called in contradistinction 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,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 S. 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 and 88 of 1953-54, referred that question to the Bombay High Court in the following termson the facts and in 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 profitsHigh 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.

Reasoning: 5. Now, Ss. 4 and 5 of the Act make it quite clear that the unit of taxation is the business, that is, any business 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-s. (1) of S. 4 of the Indian Income-tax Act 1922 or cl. (c) of the 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 S. 4 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 had S. 5 stood by itself without any of the provisions, the Baroda business of the assessee would have come within the wide ambit of S. 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 purview of the Act, except in so far as the income, profits or gains of that business are received or deemed to 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 S. 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.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 correctis true that S. 4 (3) 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 S. 5 which takes in the Baroda business and the phraseology of the first and second provisos thereto, which clearly uses the 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.11. 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 along other, 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.12. On behalf of the appellant it has been argued that though the language of the third proviso to S. 5 of the Act is similar to that of S. 14 (2) (c) 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 S. 14 (2) (c) 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 S. 5 of the Act, because, firstly it uses the expression, "the Act 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 S. 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 S. 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 S. 14 (2) (c) of the Indian Income-tax Act. If on the contrary the proviso or gains of the business to which the Act otherwise applies, then the position is the same as under S. 14 (2) (c). 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 provisos to S. 5 do that, but the third proviso does not.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.