COMMISSIONER OF INCOME-TAX, AHMEDABAD· versus KARAMCHAND PREMCHAND LTD., AHMEDABAD

arbitration they did not anticipate the complications which have subsequently arisen. That is why an arbitration agreement may have been introduced in the contract in question. All these facts have been considered by both the courts, and though it is true that in their approach and final decisions in respect of these facts the two courts have differed in material particula1:s, they have in the result agreed with the conclusion that the discretion vested in them should be exercised in not granting stay as claimed by the appellant. Under these circumstances we do not think we would be justified in substituting our discretion for that of the courts below. It may be that if we were trying the appellant's application under s. 34 we might have come to different conclusion; and also that we may have hesitated to confirm the order of the tnal court if we had been dealing with the matter as court of first appeal; but the matter has now' come to us under Art. 136, and so we can justly inter-fere with the concurrent exercise of the discretion by the .courts below only if we feel that the said exercise of discretion is patently and manifestly unreasonable, capricious or perverse and that it may defeat the ends of justice. Having regard to all the circumstances and facts of this case we are not disposed to hold that case for our interference has been made out by the appellant. That is why we dismiss this appeal but make no order as to costs throughout.

Appeal dismissed.

COMMISSIONER OF INCOME-TAX, AHMEDABAD·

K:ARAMCHAND PREMCHAND LTD.,

AHMEDABAD.

(S. K. DAS, J. L. KAPUR and

K. DAS, KAPUR M. HIDAYADULLAH, JJ.)

Income-tax-Set-off-Business loss in Indian State-Profits in British India-Applicability of the Act to business in Indian State-Business Profits Tax Act, 1947 (21 of 1947), ss. 2(3), 4, 5.

The assessee held the managing agency of limited company in what was then called "British India" and had also pharma-

Printers (Mysore) Privale Ltd.

Pothan Joseph Gajendragailkar J.

1960 April 28.

SUPREME COURT REP<;JRTS [ lYuQJ

ceutical business in the Baroda State which was at the relevant time an Indian State. The business in British India showed pro-fits asessable under the provisions of the Business Profits Tax Act, 1947, but the business carried on in Baroda resulted in .2 loss, ·in the relevant chargeable accounting 'periods between 1946 and 1949. Before the Income-tax authorities the assessee claimed that the loss suffered by it in its business in Baroda should be deducted in computing ·its ,bus,iness in~ome liable .~o business pro-fits tax, but this claim was rejected on the· ground that though under s. 'S of the Act, if it stood by itself without any of the pro-visoes, the Act wound be applicable to the Baroda business, tile third proviso had the effect of extluding that 'business from tl\e purvie\\,. of the Act, except in so far as the income, profits or _gains of the business were received or deemed to 1 be received in or brought into British India: ' . · '

Commissior.tr of Incomt·tax v.

Karamchand Prtmchand Ltd.

Held, th.at the citecr of the third proviso to s. 5 of ,the. Busi-ness Profits Tax Act, 1947, was merely to exempt the income, profits and gains of the Baroda business except whet\ they were reteived or brought into British India, but the. business itself v{as one to which the Act was applicable under \he substantive part of s. 5. Consequently, the losses of the business could. be set off against the profits of the business in. British India. ,The relevant provisions of .the Act _are set o.\lt ,in the judg-~ent. · C1v1L {\PPELLATE JURISDICTTQN: Civil Appe_al No. 304. of 1958'. · · · '

Appeal from the j1ulgment and order dated Sep-tember 7, 19.56, qf, the. Bombay: High Court. in Income-tax Reference No. 19 qf 1956. ·

C. K. Daph.tary, Solicitor-General of 1[l·11di11, ]K. N. Ri1jagofial Sasti;i and D. (Guf1ta, for. the appel-. Jant.

· N. A. Palkhivala and S. N. Andley, for the res-pondent. 1960, ,April 28. The Judgment.of the Court was delivered by

SX. Das J,

S. K. DAs, J.-This is an appeal on· 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 s. 5 of the Business Profits Tax Act, 194-7 (Act No. XXI of 1947), herein-after 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 · Lt,d., , \ • Ahmedahad,. to ' ' . . be called hereafter -' ' , ,as " the I " assessee.

SUPREME OOURT REP~)R'T:S

3 S.C.R.

... The relevant .facts are tbe,5.e.: the assessee ·l1dd .the . managing agency -of the Abmedabad · ·Manufa1=turing .aii:d Calico Printing Co. L~d. 'It also haid ,a: pharma· ·(;e,utic~l business ,in the. Baroda State, wh,ich was · ~t: the relevant. ~ime an indian State run: in tl1e name and· sty le· of Sarabhai Chem.icals. The assessee' s busi-ness in India (we ,shaU qse. the -expression i India ·in thisr:judgment to .mean·:British . .India as it was then caHed: in contra-distinction. ,to .an Indian .State) showed b:nsiness profits • as~~s~a~le l1nder the provisions of the A.ct; but the .business , carried on in the name· and style of Sarabhai Chemicals in. Baroda ~.howed lq~s in the relevant chargeable accounting , periods ·which were four in number, namely: (1) April 1, 1946, 1 tp December 31, 1946; (2) January 1, 1 947, to Decem-ber .31, 1947;. (3) January l, 19,48, -to December 31, 1-948; ancl (4) J anrtary l., 1949, 1 [~o ][fy[arch ][31, · ][l 949, ]The assessee claimed t.hat ,-its assessable income : in ,hi~ia should be reduced by•the·lo~s '.sµffered RYiit· ;in its business -in Baroda. The Income-tax Officer reject-ed the claim of the assessee and held that. the Act did 'pot apply to the business carried o~. ip 'an :Indian Sta~e µnless profits and gains of th.at business were rcceiv~d Ol'• deemed to ·hqve beer re~e~ved .in ,pr brought into -lndia. On appeal the Appellate Assistant Commis-sioner upheld the 'cqptenti9n of the .· as~es~ee arfl allowed the appeal. The -Departrp.ep.t we~t up ,in appeal to the Appelhte Tribunal, _which help. . th<j.t qnder the . relevant proviso. to _s. ,5 of the A~t, profits and losses of ,a busin~ss in <j-P Iµdian St<J.te were ppt to be .ta}\.en illto consideration unless th~y we~e receiv-ed. or deem~F1 to have· been r~c~ived in or brot1ght into India. .In that view of the matter the Tribunal set aside the order of. the Appellate Assistan't Co'm~is­sioner and restored that ,of the Income-tax ,Officer. The assessee then moved four applications iri' resp7ct of the four relevant chargeable accounting periqds, and by these applications the assessee required , t_he .Tr.ibunal to state. case to the .High Court. 0£ Bombay on the question of la:w which arose. out .of its. order. These four applications were consolidated.' The Tribu-nal on being satisfied that .. question of law,,arqse out , 9£ ;its o;r,d.er i:n. the four cases. numqered as >:8,5, 1.:8,fi, c-;87

11 Commi,1sioner Income'.tax

K aramc.!umd Premchand · Ltd.

S._K. Das J.

C0111missioner of lncmne-tax v. Karnmchond Premchand Ltd.

S. K. Das] ..

I 19GO)

7:10 SUPREME COURT REPORTS

and 88 of 1 %3-!i4, referred that question to the Bombay High Court in the following terms: "W'hether on the facts and in the circumstances of the case the loss suffered by the assessee in the busine'S 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 affirma-tive and came to the conclusion that the assessee was entitled t:o deduct the losses incurred by it in its Baroda business and set them off against the profits made iu the taxable territories. The appellant then moved the High Court and obtained 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 reg<ml to the true scope and effect of the third· proviso. to s. 5 of the Act. It is necessary here to refer to some of the provisions of the Act to under-st~nd its general scI:eme. In 1940 the Central Legis-lature passed the Excess Profits Tax Act, 1940 (Act No. XV of 1940), to impose tax on excess profits arising out. uf certain businesses. vVe shall have occa-sion to refer to some of the provisions of that Act, in due comsc. For the pmposes of that Act, the expres-sion "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 I, 1939, to March 31, 1941, but by several annual Finance Acts the term was extended up to March 31, 1946.

ln 1947 came the Act in which "chargeable account-ing period" means: .

(a) any accounting· period falling wholly within the term beginning on April I, J 946, and ending on 'March 31, 1949, and

(b) where any accounting period falls partly within and partly without the said term, such part

partly

.. ·- .....

of that accounting period as falls within term.

the said

The Act extended to the whole of India. The world "business" is defined in s. 2(3) of the Act as including any trade, commerce or manufacture, etc., the profits of which are chargeable ·according to. the provisions of s. 10 of the Indian Income-tax Act, · ! 922. 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 clefinecl under s. 2( l 7) of the Act and it means the ain6unt by which the profits during chargeable accounting period. exceed the abatement in. respect of that period. ·what is· meant by "abatement" is defined in s. 2(1) of the Act. The charging section is s. 4 and we may read that section here, so far as it is relevant for out pur-pose, in order to· understand the general scheme of the tax imposed under the Act.

"S. 4. Charge of tax-Subject to the provisions of this Act, there shall in respect of any business to whid1 this Act applies, be charged, levied and paid on the amount of taxable profits during any charge-able accounting period, 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 clay of March, 1947, be equal to sixteen and two-third per cent. of the taxable pro-fits, and in respect of any chargeable . accounting period begini1ing 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 charg· ed, levied arid paid tax called "business profits tax" on the amount: of the taxable profits, which means the ' amount exceeding the abatement, during any charge-able accounting period; the tax shall be equal to six-teen 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

Commissioner Income-tax v.

Karamchand Premcliand ·Ltd.

S. K. Das :J.

Commtssioner of Income~tax v. Karamchand Premckand Ltd. S. [(. Das ].

732 ~UPREME COURT REPORTS [1960]

be equal to such percentage of the taxable profits as may be fixed by the annual Finance Act. Then comes s. 5 which is the section dealing with the application of the Act and it is in these terms :

"S. 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 sub-section (1) of section 4 of the Indian Incorne-t ax Act, 1922, or of clause (c) of that sub-section:

Provided that this Act shall not 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 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 part only of business carried on by 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 person who is resident but not ordinarily resident, in the taxable territories is con-trolled 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 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 >tre received in or are brought into the taxable terri-tories in any chargeable accounting period, or are assessable under section 42 of that Act.''

\Ve 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 a.ceruing or arising within "any Indian State" ; then

· the expression "a Part State" was substituted, but this was again changed_ by the Adaptation of Law~ (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 business accruing or arising in an Indi<m State. Sec-tion 6 deals wjth relief on occurrence of "deficiency of profits" an expression which is defined in s. 2(7) 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, ss. 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 person cfrries on more than one business to all of which the Act applies, all the businesses carried on by the same per-son 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. (l). of sc 4 of the Indian Income-tax· Act, 1922, or cl. (c) of that sub-section. reference to 'the afore-said provis<ions of the Indian Income-tax Act, 1922, shows at once that in so far as they concern the pre-sent assessee s. 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 i~ 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 provisoes, the Baroda business of the assessee would have come within the' wide ambit of s .. ~ and the Act woiild 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 31-6 SCI/ND/82-

ComMissioner of Income-tax

K"rnmchand Premchand Ltd.

SX Das J-

he received ill or brought into India. On behalf ol the assessce the argument is that in its true scope anrl ff · ect the third proviso has merely the effect of exempt-ing the income, profits or gains of the Baroda business except when they arc received or brought into India, . hut the business itself is not: excluded from the pur-view of the Act; the business is still one to 'rhich the Act applies under the sul>stantive part of s. :"i 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.

Commissioner of buow-tax v. Karmnchrmd Prr111rltr111d ],/r/ . SJ<. Das J.

These are the two main rival contentions which· we have to consider in this appeal. Now, let us examine little more closely ss. 4 and 5 of the Act. v\'c have stated earlier that s. 4 is the charging secti•)n, which levies tax on the amount of taxable profits during any chargeable accounting period, in respect of_ any brnincss i-o which the Act applies. The corresponding section in the Excess Profits Tax Act, 1940, was also s. 4 thereof, which levied tax on the amount by which the profits during any chargeable accounting period exceeded the standard profits in respect of any business to which that Act applied. lJ nclcr the Excess Profits Tax Act, l 'l4·0, as also nnder the Act under onr consicleratio11, the unit is the husiness-bnsiness· to which the Act applies. For the application of the Act WC have to go to s. !J. vVc have i)ointed 0111. that >. '' in its substantive part makes the Act applicable to cvcrv hminess of which any part of th'e profits 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, and, thns makes the Act applicable to the Baroda. bnsincss of the assessce. The question then is-does the third proviso to s. :; exclude that business except in so far as the income, profits or gains of that. business are received or deemed to he received in or are brought. into the taxable territories in any chargeable accotinting period? If that is the true scope and effect of the third proviso, then the appellant is entitled to succeed. If, on the countrary, the third proviso merely makes the Act in-applicable to income, profits or gains of the Baroda bm1ness unies> such income, profits or gains arcreceived or deemed to be received in or are brought into the taxable territories, but does not exclude the business from the purview of ss. 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 case where much can be said on both sides. the benefit of any ambiguity of language must be given to the assessee. \Ne 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 s. 5 apply to the facts of this case. But it: is significant to note the phraseology of these two ptovisoes 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 b11siness aiicl uses appropriate language to give effect to that exclusion. By •legal fiction as it were, it divides business into two parts, one separate from the other, and makes the Act appli-cable 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. vVhat it takes out of the ambit of the Act is merely the "income, profits and gains" of particular business. The language is thus more apt to effectuate an exemp-tion from tax of "income, profits or gains" rather than an exclusion of the bl.1siness from the purview of the Act. On behalf of the appellant it is contended that such constructi?n results in this anomaly that if the income, profits or gains are not brought into India, they escape tax and yet tl1e losses of business which is ontsicle India are taken into consideration in computing the profits, etc., in lndia. This, it is argued, could not have been the object of the legislature in

Co.mmissioner qf Income· tax v •.

Karamchand Premchand Ltd.

S. K. Das].

enacting I he third proviso to s. 5 uf the Act. It is contended that the object was to exclude the business of in an Indian State as also the income; profits or gains thereof, ttnle~s ~uci1 }Jroiits, etc., \Vere recc1vcc.l in or brought into J ndia. This argument. is not devoid of plausibility and requires careful consideration. \Ve may here refer tu the relev;111t provisions of the Excess Profits Tax Act, l 9·10. Section 5 of that Act in its substantive part and the first and second pro-visoes thereto were worded in identical languag-e, but the third proviso to s. 5 of the Excess Prolit:s Tax Act, HMO, was worded quite dilferemly from the third proviso to s. 5 of the Act. The third proviso to s. 5 of the Excess Prolits Tax Act, lV-IU, stated:

Curn1nissioner lncome~lax v. Karamchand Premchand Ltd,

S.K. Das J.

"Provided further ·that this Act shall not apply to any busiue" the 11·holc oI the profits of which accrue or arise Jn Part State, and where the profits o[. pan of business accrue or arise in Part ll State, sucli part shall, for the purposes of this provision, be clcemcd to be separate business the whole of the profits of which accrue or arise in Part State, and the other part: of the business shall, for all the purposes oI this Act, be deemed to be separate business."

The lang·uagc used was clearly one of exclusion, and it said that the Excess Profits Tax Act was not ap-plicable to business the profits of which <kerned 01 arose in Part ll State. \\'hy then clid the legislature use different language in the third proviso to s. !i of the Act? On behalf of the appellant. it has been sub-mitted that the change in language is deliberate and the reason for the change is to make the income, profits or gains of business accruing in an Indian or Part State liable to tax 11·hen such income, profits or gain; are brought in India while under the third proviso tu s . .5 of the Excess Profits Tax Act, they were not liable to tax even when they were broug·ht int,o India. On behalf of the assessee, however, it has been submitted that the change in lang1iage is due to different reason altcwether. The third J>rol'iso to s. ii of the Excess Profits 0 Tax Act, l !J40, and s. 1+(2)(c) (now deleted) . of the Indian I ncome-t:ix Act, I !l~2, wc1·e cmcted :11 about the same time, and the broad object of both rhc

provlSlons was to exclude profits of business ·in an Indian or Part 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 s. 14(2)( c) of the Indian lncome-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 s. 5 of the Act; but the change in language did smnething more, because it assimilated' the position under the proviso· t:o that under s. 14(2)( c) of the Indian Income-tax Act, namely, that though . profits of 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 whole. Learned counsel for the assessee has· relied on the decision of this Court: in Commissioner of lncornc-tax, ·Mysore, Tra·uancore-Cochin and Coorg v. lndo-Afercontile Bank Ltd. (')and the decisions of the Bombay High Court ·in Commis-sioner of Income-tax., Bombay City v., Murlida·r iVl.athu.-rawalla Mahajan Association (2) and Commissioner of Excess Profits Tax, Bo111bay City v. Bhogilal H. Patel. Bombay ('). The first two decisions cited above con-sidered the effect of s. 21( I), Indian Income-tax Act, 1922, with special reference to the first proviso thereto (as it stood at the time relevant therein) and its inipact on ~. 10 of tl1e said Act. It was held that sub-s. (I) of ~. 2-1 dealt onlv with set-off of loss under one head ag'.aimt profits rn;der any other head, and therefore the old first proviso to sub-s; (l j of s. 21 applied and barred the rig·ht of set-off only where 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 I hdian State against his Indian profits under the same head, e.g., set-off of loss incurred in pusiness carried on in an l ndian State against the profits of the same or another business carried on in India, the prm·iso did not apply am! the assessce was en ti tied to such set-off under s. I 0 (!) [19"9] Supp_ 2 S.C.R. 2S6. (2) [19!P.J JG I.T.R. J.t:;, (3) [1952) 21 l.T.R. Z2.

Commissiouer of 11lcorne-tax v.

I( aramchand Premclumd Ltd. S.K. Das J.

'9[60 ]of the Indian Income-tax Act. Learned counsel for -. -. the assessee has submitted that the same principle Commissioner Imome-ta> Imome-ta> of app l' !BB WI "th regar t o · t th h' 1r proviso o . t s. 5 o th v. Act. Learned counsel has submitted that as under Karamchand s. 10 of the Indian Income-tax Act, different businesses Premchand Ud. Ud. constitute one head and in order to determine what s. K. K. Das J. are the profits and gains of business under s. 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 s. 5 of the Act, the Baroda business of the assessee is within the am bit 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 :

-. -. Commissioner Imome-ta> Imome-ta> of v. Karamchand Premchand Ud. Ud. s. K. K. Das J.

" This contention of Mr. Kolah is based on the language used in the proviso, namely, that 'this Act shall not apply to any business thew hole 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 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 s. 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 s. 14 (2) (c) of the Indian Income-tax Act and it knew the effect of those provi-sions and it used the same language in the third proviso to s. 5 of the Act. If the object of the legisla-ture was to exclude the business itself from the ambit (t) (1952] 21 I.T.R. 72.

of the Act wl1ile 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 bas been pointed out -that the expression used in the third proviso to s. 5 is -"Provided further that the Act shall not apply to any income, profits or gains of 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 Jnclian State, - except in so far as _ such profits are brought into the taxable territories. In support of this argument reference has been made to s. 4(3) of the Indian Income-tax Act as it stood prior to 1939 and reliance is placed on the decisions in C.ommis-sioner of Income-tax, Madras v. M. T. T. K. M. M. S. M. A. R. Somasundaram Chettiar (1) and Commis-sioner of Income-tax, Bombay v., The Provident Invest-ment Co. Ltd. (2). It is true that s. 4(3) of the Indian I ncome-t:ax Act, as it stood prior to 1039, said that this Act (meaning the Indian Income-tax Act, 1 ~l22) shall not apply to certain classes of income", and in the two decisions cited it was held. that the word '"business" mca nt business whose profits were being assessed in the year under consideration ·and there was no justification for deduction of the expe1ises of foreign btisiness. 'Ne do not, however, think that the use of the expression, "the Act shall not apply", is. decisive in this case. \;\Te have to read the third proviso as whole :ind in the context in which it occurs, in order to find o_ut what it means. So read it is difficult to hold that it has the effect of excluding the Baroda busi-ness except in so far as the prof-its 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 nd ia n State, etc. It does not say that the lnisiness 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 :ind the phraseology of ,the first and second provisos thereto, which clearly uses the (l' A.I.R. 1928 Mad. 487. , (2) (1931) I.L.R. 56 Born. 92.

(l' A.I.R. 1928 Mad. 487. ,

Commissioner of Income-tax

v. Karamchand Premchand I:.td.

S.K. Das J-

Commissioner of Incomt~lax

ll~,irt•mrhmuf Prnnclwud Ltd.

S.K. Das J.

l:111g11agc of exclrnling· the business referred to therein. The third pnl\'iso cloes not use th:il language and 1d1at learned counsel for the appellant is seeking to do is to a~tcr the l:i.ngu1gc of the proviso so as to n1:i.ke it rc:1cl as 1ho11gh it excl11clccl business the income, profits or p;ai'ns of \\'liich accrue or arise in :m Indian Staie. The diflicnhy is that 1he third proviso docs not say so: ou the contr~iry, it uses language which rncrch· exempts from tax the income, profits or gains unless such incnn1c, profits or g·:i.ins arc received in or hro11ght into India.Next. we have to consider what the expression "income, profits or g·ains"' means. In the context of 1he third proviso, it cannot include losses because the latter pan of the pro\'iso .says "unless such income, profits nr g;iins arc received, etc., into the taxable territories". Obvio11sly, losses cannot be hro11ght into 1he t·:1x:ihle territories except in an accounting sense, :rnd the expression "income, profits or gains" in the context cannot include losses. The expression mnst have the same rncanii1g· thro11ghout the proviso, anrl cannot have one meaning in the first part an<i di1Te1'ent mc:rning in the Lnter part o[ the proviso. The ;ippcllant crnnot therefore say that the third prm-iso exclpclcs the business altogether, because it takes away from the ambit of the Act not only income, profits or gains hut also losses of the business referred to therein. On behalf of the appellant it has been arguer! that thong·h the language of the third proviso to s. !J of the· Act is similar to that of s. l4(2)(c) of the Indian 1 ncome-tax Act. the language of the t11·0 provisions is not identical and it is not correct t:o say that their effect is snbstantiall\' the same. It is pointed out 1'11at the language of s. i'-1(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 applier! thereto, and therefore the normal process of aggregating profits and losses where\'cr they occnrred could be adopted. But says learned counsel for the appellant, the posi-tion 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". vVe agreed 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 merely exempts the income, profits 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. '

Lastly, it has been contended that the construction adopted by the High Court is likely to lead to conse-quences which the legislature manifestly could not have intended. This contention has been pi;~ssed in respect of two matters: (a) computation of capital under the rules in Schedule II of the Act in case where the assessee company sustains loss in an Indian State; and , (b) relief for deficiency of profits where th'e assessee makes profits in an Indian State but sustains lossin India. As to the first matter, it has been fully dealt with by the High C<;mrt with reference to r. 2A. of the Rules in Schedule II and it has been rightly pointed out that no difficulty really arises by reasons of r. 2A. Nor are we satisfied that any real difficulty arises with regard to relief for deficiency of profits when the assessec makes profits in an Indian State but sustains loss in India. The Ad will not apply to such profits unles:. thev are brought into India, and if thev are brought inw India, s .. 6 will apply with reg~rd to relief on the ground of deficiency of profits. It is -unnecessary to consider 32--6 SCI/ND/82

Commissi0111Jr of Income-tax v.

Karamchand Premchand Ltd .

S.K. Das J.

here any hypothetical difficulty which may arise in the application of s. 6. .

Commissioner of lnco.ne-ta,,; v.

The appellant relies, on the third proviso to s. 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 re-ceived in or brought into India. Accordingly, the High Court correctly answered the question of law referred to it. The appeal fails. and is dismissed with costs.

Knramch,,nd Pre,nchand Ltd.

S.K. Das J.

Appeal dismissed.

H. C. NARAYANAPPA AND OTHERS

April 28

THE STA.TE OF MYSORE AND OTHERS

(B. P. Sinha, C.J.,' Jafer Imam, A. K. Sarkar,

K. Subba Rao and J.C. Shah, JJ.)

. Transport Business-Stage carriages-Exclusion of private operators-Competence of Parliament to create monopolies-Grant of monopoly to State for transport business-Scheme framed by State for State Transport Undertaking-Legality-Motor Vehicles Act, 1939 (IV of 1939), Ch. IV A, ss. 68C, 68D (2)--Constitution of India, Arts. 12, 13(3)(a), 19(l)(g), 19(6), 298, Seventh Schedule, List II, entry 26, List III, entries 21, 35.

In exercise of the powers conferred by s. 68C of the Motor Vehicles Act 1939, the General Manager of the Mysore Govern-ment Road Transport Departmem published scheme for the ex-clusion of p~ivate operators on certain routes in specified area and reservation of those routes for the State Transport Undertak-ing. The scheme was approved by the Government under s. 68D(2) of the Act ater the Chief Minister of the State bad given an opµortunity to the operators affected by the scheme to make r~i:resentations objecting to it. The petitioners who were