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Haji Salar Bux Haji Ramzan v. Commissioner Of Income-Tax
Factual and Procedural Background
The reference arises under Section 66(1), Income-tax Act, as applied to the Excess Profits Act by Section 21 of that Act. The assessee, Messrs Haji Salar Bux Haji Ramzan of Tanda (district Faizabad), carried on business both in British India and a cloth business at Bhutwal in Nepal (outside British India). The Excess Profits Tax Officer assessed the whole of the assessee's business income — including profits from the business carried on outside British India — to Excess Profits Tax. The assessee claimed that Rs. 4,500 should be deducted from the profits computed for the Bhutwal (outside British India) trade under the third proviso to Section 4(1) of the Income-tax Act.
On appeal the Appellate Assistant Commissioner decided in favour of the assessee. On further appeal the Appellate Tribunal held that the third proviso was not applicable, and that the assessee was not entitled to the Rs. 4,500 deduction for purposes of excess profits tax. The assessee applied for a reference and the following question of law was referred to the Court for opinion (quoted in the opinion and reproduced below in the Issues section).
The dispute thus centrally involves whether a deduction expressly available under the third proviso to Section 4(1) of the Income-tax Act when computing income-tax can be applied when computing profits chargeable to excess profits tax under Section 5 of the Excess Profits Tax Act — and, more broadly, whether the provisos and explanations to Section 4(1) are incorporated into Section 5 by the reference made in that provision.
Legal Issues Presented
- The specific question referred to the Court: "Whether the deduction of Rs. 4500 allowed in the Income-tax assessment of the applicant under the third Proviso to Section 4(1), Income-tax Act, is allowable in computing profits chargeable to excess profits tax under Section 5, Excess Profits Tax Act."
- Whether, by incorporation of part of Sub-section (1) of Section 4 of the Income-tax Act into Section 5 of the Excess Profits Tax Act, the provisos and explanations to Section 4(1) (in particular the third proviso) were intended to be included as part of the provisions made applicable to the Excess Profits Tax Act.
Arguments of the Parties
Appellant's Arguments (Mr. Hyder Husain for the assessee)
- This is a taxing statute and must be strictly construed in favour of the taxpayer where two interpretations are possible.
- The wording of Section 5 — referring to profits "chargeable to income-tax by virtue of ... Section 4(1)" — means Section 4 should be read as a whole, including its provisos; therefore if the third proviso excludes Rs. 4,500 from income-tax, those profits cannot be said to be "chargeable to income-tax" and should not be included for excess profits tax.
- He relied on authoritative treatment of statutory interpretation (passages from Halsbury's Laws of England and Maxwell's Interpretation of Statutes) and on Jennings v. Kelly to support the proposition that provisos must be read with the enacting part of a section.
Respondent's Arguments (Mr. Das for the Commissioner of Income-tax)
- The portion of Section 4 incorporated in Section 5 of the Excess Profits Tax Act is only the enacting part of Sub-section (1) Clause (b) (sub-clauses (i) and (ii)) and Clause (c) — i.e., the charging provisions — and not the whole of Section 4(1) including provisos and explanations.
- The Excess Profits Tax Act was intended to be self-contained. Exclusions and other special provisions applicable to excess profits tax are set out within the Excess Profits Tax Act itself (including its own provisos), so it would be improper to import the third proviso to Section 4(1) of the Income-tax Act into Section 5 when the Legislature did not expressly include it.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (from the opinion) |
|---|---|---|
| Jennings v. Kelly, (1940) A. C. 206 | Principle that where a section contains a proviso, the enacting part is not to be construed without reference to the proviso; the section must be read as a whole. | The Court acknowledged this interpretive principle (quoted in the opinion) but, applying it to the statutory scheme, concluded that the Legislature had only incorporated the charging portion of Section 4(1) into Section 5 and had not thereby automatically included the provisos; thus Jennings did not require inclusion of the third proviso into Section 5 in the circumstances of this Act. |
| Commissioner of Income-tax Madras v. Arunachalam Chettiar, 1946-14 I.T.R. 760 (Mad.) | Authority cited for the proposition that when money (income accruing outside British India) is brought into British India, income-tax becomes payable on such amount. | The Court cited this decision as part of illustrating that, under the Income-tax Act, the Rs. 4,500 can become taxable on being brought into British India; this supported the Court's concern that importing the third proviso into the Excess Profits Tax Act could produce an anomalous result whereby Rs. 4,500 would escape excess profits tax permanently. |
| Shirinbai N.U. Dadyln re, 1947-15 I.T.R. 284 | Authority cited similarly in relation to taxation when income brought into British India. | The Court relied on this and the other cited Income-tax decisions to explain the tax treatment under the Income-tax Act and to demonstrate the practical consequences if the third proviso were held to apply to excess profits tax assessments. |
| Commissioner of Income-tax Madras v. Subramania Chettiar, 1947-15 I.T.R. 339 (Mad.) | Authority cited regarding the incidence of income-tax when funds are brought into British India. | Used in the same way as the other Income-tax decisions: to show that application of the third proviso in the context of excess profits tax would have the effect of exempting Rs. 4,500 from excess profits tax even when brought into British India. |
| Commr. of Income-tax, Bombay Mofussal v. Western India Life Ins. Co. Ltd., Satara, 1949-17 I.T.R. 125 (P.C.) | Held that the third proviso to Section 4(1) was not applicable to insurance business (profits to be ascertained under Rule 2(b) of the Schedule to the Income-tax Act). | The Court considered this Judicial Committee decision but observed it turned on insurance-specific provisions and was not directly relevant to the present question under the Excess Profits Tax Act. |
Court's Reasoning and Analysis
The Court proceeded by examining the language of Section 5 of the Excess Profits Tax Act and the portion of Section 4(1) of the Income-tax Act that was incorporated into it. The key analytical steps recorded in the opinion are:
- Identification of what was incorporated: Section 5 refers only to the charging portions of Sub-section (1) of Section 4 (specifically Clause (b) sub-clauses (i) and (ii), and Clause (c)) — i.e., provisions that state what profits are chargeable to income-tax.
- Textual interpretation of the third proviso to Section 4(1): the proviso operates to exclude from assessment (for income-tax) up to Rs. 4,500 of income that accrues outside British India when the amount brought into British India in that year is less than the income accrued outside British India. The proviso therefore functions as an exemption from income-tax in specific circumstances.
- Application of the interpretive principle (provisos to be read with enacting parts): although the Court acknowledged authorities (Halsbury, Maxwell, Jennings) that provisos usually inform interpretation of the enacting part, it emphasized that the Legislature in Section 5 referred only to a portion of the enacting part of Section 4(1). The provisos and explanations are parts of the whole sub-section; they cannot be treated as automatically incorporated into Section 5 where only part of the enacting text was referenced.
- Structural and legislative-intent considerations: the Excess Profits Tax Act contains its own provisos and explanatory rules (for example, Section 5 itself has provisos and the Act contains Schedule I which defines "profits" and rules for computation under Section 2(19)). The Court regarded these features as showing the Excess Profits Tax Act was intended to be a self-contained charging and computation code for excess profits tax.
- Practical consequence analysis: the Court noted that under the Income-tax Act the Rs. 4,500 exemption can be rendered taxable when income is brought into British India (as demonstrated by cited Income-tax decisions). If the third proviso were held to apply to excess profits tax, the Rs. 4,500 would escape assessment forever for excess profits tax because mere bringing into British India would not, under the Excess Profits Tax Act, render it liable for excess profits tax. This consequence supported the conclusion that the Legislature did not intend to import the exemption provision into Section 5.
- Conclusion from combined textual, structural and practical considerations: given that only a portion of Sub-section (1) was incorporated by Section 5, and that the Excess Profits Tax Act contains its own comprehensive provisions (including provisos and a schedule for computation), it was not appropriate to treat the third proviso to Section 4(1) as having been included in Section 5 by implication.
Holding and Implications
HOLDING: The Court answered the referred question in the negative: the deduction of Rs. 4,500 allowed in the assessment of income-tax under the third proviso to Section 4(1), Income-tax Act, is not allowable in computing profits chargeable to excess profits tax under Section 5 of the Excess Profits Tax Act.
Direct implications:
- The assessee is not entitled to the Rs. 4,500 deduction for the purpose of computing excess profits tax under Section 5.
- The assessee must pay the costs of the reference as fixed by the Court at Rs. 300.
Broader implications: The opinion rests on textual and structural interpretation of what the Legislature incorporated into the Excess Profits Tax Act and on the self-contained scheme of that Act. The Court treated the question as one of first impression (no direct authorities on the specific point). The opinion does not elaborate broader precedent beyond its reasoning on incorporation and will be directly binding as the Court's answer to the referred question in this case.
1. This is a reference under Section 66(1), Income-tax Act, as applied to the Excess Profits Act by Section 21 of the latter Act.
2. The assesses, Messrs Haji Salar Bux Haji Ramzan of Tanda, district Faizabad, besides having business in British India, has cloth business at Bhutwal in Nepal which is outside British India. On the assessment made by the Excess Profits Tax Officer the whole of the assessee's income from business, whether carried on in British India or outside British India, was assessed to Excess Profits Tax. The assessee claimed that from the entire profits computed from the business outside British India, that is, Bhutwal cloth business, a sum of Rs. 4500 should be deducted in accordance with the third proviso to Section 4 (1), Income-tax Act.
3. On appeal the Appellate Assistant Commissioner decided in favour of the assessee, but on further appeal the Appellate Tribunal held that the proviso was not applicable and the assessee was not entitled to the deduction of Rs. 4500 from the assessable income.
4. On assessee's application the following question of law was referred to this Court for its opinion:
"Whether the deduction of Rs. 4500 allowed in the Income-tax assessment of the applicant under the third Proviso to Section 4 (1), Income-tax Act, is allowable in computing profits chargeable to excess profits tax under Section 5, Excess Profits Tax Act."
Section 5, Excess Profits Tax Act, 1940, is as follows :
"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 (1) or Sub-clause (ii) of Clause (b) of Sub-section (1) of Section 4, Income-tax Act, 1922 or of Clause (c) of that Sub-section : ......"
The portion of Section 4, Income tax Act, which is made a part of Section 5, Excess Profits Tax Act, is as follows :
"4 (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which ...... :
(b) if such person is resident in British India during such year,
(i) accrue or arise or are deemed to accrue or arise to him in British India during such year, or
(ii) accrue or arise to him without British India during such year, or
(c) if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year...." After the main enacting part of Section 4 (1) there are three provisos and three explanations and then follow the other sub-sections of Section 4. It would appear that only a part of the enacting portion of Section 4 (i) has been incorporated in Section 5, Excess Profits Act. The question for decision is whether the Legislature, though it excluded a part of Sub-section (1) of Section 4 and incorporated only a part of that sub. section, intended to include the provisos and the explanations to Sub-section (1) of Section 4.
5. The third proviso to Section 4(1) is as follows:
Provided further that if in any year the amount of income accruing or arising without British India exceeds the amount brought into British India in that year, there shall not be included in the assessment of the income of that year so much of such excess as does not exceed four thousand five hundred rupees.
6. The proviso clearly refers to a case where the income has accrued outside British India and only a part of it has been brought into British India and the part so brought into British India is less than the amount that has accrued outside British India. In that case the assessee is entitled to claim that a sum not exceeding Rs. 4500 shall not be included in the assessment of the income of that year.
7. The Excess Profits Tax Act was passed .to impose a tax on excess profits arising out of certain business due to the conditions prevailing during the last World War and it made taxable profits from business from September 1939 after the second World War commenced. Excess profits tax is payable on all income, profits and gains which accrue or arise or are deemed to accrue or arise from business, In the case of a person resident in British India it does not matter whether the business was carried on in British India or outside British India, while in the case of a person not resident in British India under Clause (c) of Section 4 (1), Income-tax Act, which has been incorporated in Section B, Excess Profits Tax Act, only income from business in British India is taxable.
8. Mr. Hyder Husain on behalf of the assessee has urged that this being taxing statute it must be interpreted strictly and if two views are possible, the view most favourable to the assessee must be adopted. He has further relied on the words
"profits made during the chargeable accounting period is chargeable to income-tax by virtue of Section 5, Excess Profits Tax Act."He has urged that the whole of Section 4 must be read together, the proviso being a part of the section, and if by reason of the proviso a sum of Rs. 4500 was not liable for income tax, then it could not be said that to this extent the profits were chargeable to income-tax under Sub-clause (ii) of Clause (b) of Sub-section (1) of Section 4.
9. The argument of Mr. Das on behalf of the Commissioner of Income-tax, is that the portion of Section 4 that has been incorporated in Section 5, Excess Profits Tax Act, is Section 4, Sub-section (1) Clause (b), Sub-classes, (i) and (ii) and Clause (c) of that sub-section and not the whole of it. The portion incorporated deals with what are profits chargeable to income-tax. What has to be excluded for purposes of excess profits tax is separately mentioned in the Excess Profits Tax Act itself which was intended to be a self-contained Act, and it would not be proper to include the proviso to Section 4(1), Income-tax Act, as a part of Section 5 Excess Profits Act when it had not been so included.
10. Mr. Hyder Husain has relied on certain passages in Halsbury's Laws of England, Hailsham Edn. vol. 31, at pp. 484 and 489. The passage at p. 484 is as follows :
"Among the parts of a statute which must be considered in arriving at its true meaning are the sections or parts of sections known as provisos, exceptions, and saving clauses.
A proviso excepts out of a previous section, or out of the earlier part of the section which contains it, some-thing which but for it would have been within the enacting part."
and at p. 489 :
"A single section of an earlier statute incorporated with a later statute may lay all the other sections of the earlier statute open as a field of interpretation of that section, although they are not incorporated."
He has also relied on similar passages from Maxwell's Interpretation of Statutes and has referred us to the decision in Jennings v. Kelly, (1940) A. C. 206, the relevant portion of the head note being as follows :
"Where a section of an Act of Parliament contains a proviso there is no rule that the first part, which may be described as the enacting part, is to be construed without reference to the proviso. The section must be construed as a whole, each portion throwing light on the rest."
These authorities lay down the principle of interpretation. Prom the scheme of the Excess Profits Tax Act and the language used in Section 5 we have to decide whether' the provisos to Section 4 (i) were or were not intended to be made applicable to the provisions of the Excess Profits Tax Act.
11. The question is of first impressions as we are told that there are no authorities on the point. Having carefully considered the matter we have come to the conclusion that the view of the Appellate Tribunal was right and the third proviso to Section 4 (i), Income-tax Act was not applicable to the provisions of the Excess Profits Tax Act. The Legislature referred only to a portion of the enacting part of Sub-section (1) of Section 4 in Section 5, Excess Profits Tax Act, the provisos and the explanations are parts of the whole sub-section and when only a portion of the enacting part of the sub-section was referred to, the provisos which were provisos to the whole sub-section could not automatically be deemed to have been included in Section 5, Excess Profits Tax Act, and it could not be said that the intention of the Legislature was that the provisos should be further added to it.
12. There is another significant fact that Section 5, Excess Profits Tax Act has got its own provisos and the first proviso to Section 5 reproduces in a slightly modified form the second proviso to Section 4, Income-tax Act, The third proviso to Section 5, Excess Profits Act, reproduces the provisions of Section 14(2)(c), Income-tax Act. From a reference to the various provisions of the Excess Profits Act it would appear that it was intended to be a complete Act for example, the rules for computation of profits for the purpose of the excess profits tax are given in Schedule I to the Act which has been framed under Section 2, Sub-section (19) which is as follows:
'Profits' means profits as determined in accordance with Schedule 1." There is no mention made in Sub-section (19) or in Schedule 1 to a deduction of Rs. 4,500 in accordance with the third proviso to Sub-section (1) of Section 4, Income-tax Act. Section 21, Excess Profits Tax Act mentions whit sections of the Income-tax Act shall apply to the provisions of the Excess Profits Tax Act.
13. There is one more point which has been brought to our notice that while under the Income-tax Act Rs. 4,500 is exempted from income-tax, in the circumstances mentioned in the third proviso to Sub-section (1) of Section 4 when and if the money is brought into British India the income-tax becomes payable on such amount, See Commissioner of Income-tax Madras v. Arunachalam Chettiar, 1946-14 I. T. R. 760 (Mad.) ; Shirinbai N.U. Dadyln re, 1947-15 I. T. R. 284 (Born.) ; Commissioner of Income tax Madras v. Subramania Chettiar, 1947-15 I. T. R. 339 (Mad.). If the third proviso to Section 4 is held to apply to the assessment under the Excess Profits Tax Act, the sum of Rs. 4,500 would escape assessment for all times as the mere fact that it was brought into British India would not make it liable for payment of excess profits tax. In view of all these circumstances, it appears to us that the Legislature only intended to incorporate the charging portion Sub-section (1) of Section 4 and not the exemption portion for which special provision was made in the Excess Profits Tax Act itself.
14. Learned counsel has relied on a decision of their Lordships of the Judicial Committee in Commr. of Income-tax, Bombay Mofussal v. Western India Life Ins. Co. Ltd. Satara, 1949-17 I. T. R. 125 (P. c.), where their Lordships held that the third proviso to Sub-section (1) of Section 4 was not applicable to insurance business as the profits had to be ascertained under Rule 2 (b) of the Schedule to the Income-tax Act, 1922. That case was, however, decided on the special provisions relating to insurance law, and we do not think it is relevant.
15. We are, therefore, of the opinion that the answer to the question referred to us by the Tribunal must be in the negative, that is, the deduction of Rs. 4,500 allowed in the assessment of income-tax under the third proviso to Section 4 (1), Income-tax Act is not allowable in computing profits chargeable to excess profits tax under Section 5, Excess Profits Tax Act.
16. The assesses must pay the costs of this reference which we fix at Rs. 300.
Sub-section (1) of Section 4Alert