Holding

A deficiency of profit can be set off only if profit is actually made in the accounting period to which the deficiency relates; therefore, the earlier manufacturing‑only periods could not be set off against the later chargeable period.

Summary

The appellant, Commissioner of Excess Profit Tax, Kanpur, challenged the High Court's order allowing the assessee, Kalyan Mal Phool Chand, to set off deficiencies of profit for the periods 28 Oct 1940‑31 Mar 1941 and 23 Nov 1942‑31 Mar 1943 against profits of the chargeable accounting period 1 Apr 1943‑31 Mar 1944 under the Excess Profits Tax Act, 1940. The assessee argued that the same business of extracting and selling Katechu continued across the periods and that manufacturing activity without immediate sale should generate a profit deficiency that could be set off. The Tribunal and the High Court had held that the deficiency could be set off, relying on the notion that manufacturing activity contributed to later profits. The Supreme Court examined the statutory definitions of "accounting period" and "chargeable accounting period" and held that a set‑off under Section 7 is permissible only when profit is actually made in the accounting period to which the deficiency relates; profits arising from manufacturing in earlier periods without sales cannot be attributed to the later chargeable period. Consequently, the Court allowed the appeal, set aside the High Court judgment and ruled that no set‑off was permissible. The decision underscores that excess‑profit tax is computed on the same basis as income‑tax profit and that apportionment across different chargeable periods is not allowed for set‑off purposes.

Issues considered

Whether a deficiency of profit for a period in which only manufacturing took place and no sale occurred can be set off against profits of a later chargeable accounting period under Section 7 of the Excess Profits Tax Act, 1940.
How the terms 'accounting period' and 'chargeable accounting period' are to be interpreted and applied for the purpose of computing excess profits and granting set‑off relief.
Whether profits attributable to manufacturing activity in one chargeable period can be apportioned to sales occurring in a subsequent chargeable period for the purpose of set‑off.

Legislation cited

Excess Profits Tax Act, 1940s. 2, s. 5, s. 6, s. 7, s. 7A
Income Tax Act, 1922s. 13

Subjects

Excess Profits TaxDeficiency of profitsSet‑offAccounting periodChargeable accounting periodProfit apportionmentWar taxIncome Tax Act

Judgment

COMMISSIONER OF EXCESS PROFIT TAX, KANPUR
A
v.
KALYAN MAL PHOOL CHAND, NAGAR GANJ, KANPUR

MARCH 13, 1987

[SABY ASACHI MUKHARJJ AND B
S. NATARAJAN. JJ.J

Excess Profit Tax Act, 1940--Sections 2, 5-7-'Accounting
period'-'Chargeable account period'-'Standard profits'-What are-
Deficiency in profits-Setting off-Basis of determination.

The assessee was an unregistered firm carrying on business of c
manufacture and sale of Katechu. The firm carried on the work of
extraction of Katechu in Nepal and sales were affected in Kanpur. It
~ had first taken a jungle on lease and Katechu were extracted from
October 1940 to September, 1941. Sales were effected from 30th May,
1941 to 29th September, 1941. Thereafter, another jungle was taken on D
lease and Katechu were extracted from 23rd November, 1942 to 6th
November, 1944. The sales were effected between 26th July, 1943 to 4th
April, 1944.

The assessee claimed set off of deficiency of profit for the periods
20th October, 1940 to 17th October, 1941 and 23rd November, 1942 to E
31st March, 1943 on the ground that the business carried on during the
chargeable accounting period 1-4-1943 to 31-3-1944 was not separate to
and distinct from the business carried on in 1940-41.

The Excess Profit Tax Officer did not set off the deficiency of
profits that accrued in respect of the period 1940-41 out of the profits F
for the chargeable accounting period from 1-4-1943 to 31-3-1944, and
held that the business carried on during October, 1940 to October, 1941
was completely different from the business carried on during the afore-
said chargeable accounting period.

So far as the deficiency pertaining to the period November, 1942 G
to 31st March, 1943 was concerned, the manufacturing operations
started on or about 23rd November, 1942 and the sales started on 26th
July, 1943. Katechu produced from 23rd November, 1942 to 31st
March, 1943 remained in stock till the last date of the chargeable ac-
counting period. namely, 31st March, 1943. As the assessee did not,
maintain any books of account, the provisions ofs.13 of the Income Tax H

601
602 SUPREME COURT REPORTS [1987] 2 S.C.R.

Act, 1922 were applicable. The Revenue, therefore, valued the stock-in- ~:)"'
A trade at cost and held that there could be no profit or loss during the )
chargeable accounting period.

In appeal, the assessee urge that deficiency in profits pertaining to
the chargeable accounting periods from October, 1940 to 31st March,
B 1941, and 23rd November, 1942 to 31st March, 1943 should be allowed
a set off in computing the excesss profits and as there were no profits )J..
during the said. chargeable accounting period, the standard profits be-
came the deficiency of the said two years which should have been
allowed set off and that as manufacturing operations were carried on -~ ••
during the said periods, it could not be said that the assessee did not
carry on any bnsiness.
c
The Appellate Assistant Commissioner found that the constitution ~
of the firm during the chargeable accounting period was the same as in
1940-41, that the accounts were maintained in the same fashion and the
same business was carried on, that the assessee had effected sales only
o during 30th May, 1941 to 29th September, 1941 and held that the
assessee was entitled to set off in respect of the deficiency of profits. He,
therefore, confirmed that there were no profits and losses during the
chargeable accounting period ending on 31st March, 1941 and as such
there could be no deficiency of profits. The assessee was, therefore,
held to be entitled to a set off of the deficiency only for the chargeable
E accounting period ending on 31st March. 1942 which consisted of the
period Isl April, 1941to29th September. J94J. •

The Tribunal, however, held that no profits accrued unless sale
was effected and accepting the contention of the Revenue that no part of
profits, which accrued during the said two chargeable accounting
F periods could be charged and were in fact not so charged to income-tax,
as no sales were effected, the Act itself did not apply and confirmed the
order of the Appellate Assistant Commissioner.

The High Court divided the entire period of manufacture and
sales to determine the question whether there was manufacturing acti-
G vity and sale; (1) October 28, 1940 to March 31, 1941, falling in the
financial year ending March 31, 1941, Katechu was manufactured but
there was no sale; (2) April I, 1941 to September 29, 1941, falling in the
financial year ending March 31, 1942; sales took place from May 30,
1941 to September 29, 1941; (3) November 23, 1942 to March 31, 1943
falling in the financial year ending March 31, 1943; Katechu was
Il mannfactured but there was no sale; (4) April 1, 1943 to March 31,
C.E.P.T. v. KALYAN MAL PHOOL CHAND 603

1944, falling in the financial year ending March 31,. 1944; sale took
place from July 26, 1943 to March 31, 1944; (5) April 1, 1944 to April 4, A
1944, falling in the financial year ending March 31, 1945; sales were
effected from April I, 1944 to April 4, 1944 when the business was
discontinued. It held that while there was manufacturing activity there
was no sale during the fmancial years ending March 31, 1941 to March
31, 1943, that the profits earned upon sales effected during the charge- B
able accounting period ending 31st March, 1944 must be apportioned
between the manufacturing activity during the chargeable accounting
period ending 31st March, 1943 and the sales during the chargeable
- /~ · ·accounting period ending 31st March, 1944 and that the deficiency of
profits must be set off in computing the excess profits for the chargeable
accounting period ending 31st March, 1944. The High Court, there-
fore, did not accept the opinion of the Tribunal and held that the asses- c
see was entitled to a set off of deficiency of profits relating to the periods
28-10-1940 to 31-3-1941and23-11-1942 to 31-3-1943 from the profits of
the chargeable accounting period 1-4-1943 to 31-3-1944.

Allowing the Appeal, D

HELD: I. The scheme contained in the Excess Profits Tax Act is
a legislation intended to tax the profits of certain business in excess of a
certain limit as provided in that Act. It is, therefore, complementary to
the Income Tax Act by its very nature. [610D]
E
Commissioner of Income Tax, Bombay v. Raipur Manufacturing
Co., Ltd., 14 ITR 725 at733, followed.

2. In order to work out the scheme of the Act, there must be
proper dovetailing of the concept of 'accounting period'. 'chargeable
accounting period' and basic scheme of the Income-Tax Act bearing in F
mind that excess profits are excess of profits which were intended to be
mopped up during the war period, to be taxed separately and diffe-
rently. [612H; 613A-B]

3. If the right to receive those profits had accrued or arisen subse-
quently then even though they had accrued or arisen by reason of work G
~ done during the chargeable accounting period, these were not liable to
be treated as the profits of that chargeable acconnting period. [613C]

4. Whether the profits in the one case could be identified with the
profits in the other would be determined by reference to the period in
which those accrued or arose. The profits during the chargeable H
604 SUPREME COURT REPORTS [1987] 2 S.C.R.

accounting period must be computed under the Excess Profits Tax on
A the same basis as are profits for an income-tax assessment. [6130-E]

Haji Rahmat Ullah and Co. v. Commisioner of Income-tax, U.P.,
59 I.T .R. 109, relied upon.

B 5. It has to be clearly borne in mind that the Act is not an entirely
different Act in the sense that it proceeds upon the concept completely
different from the notions of Income Tax and has its source in )'-
an entirely different tax concept. More profits which were likely to
have been earned due to profits, these were made subject to excess
~-
profits. [613E-F]
c 6. Though profit in a composite transaction could be apportioned
as between manufacture and sale in the same accounting year, such an
apportionment is not permissible when one part of the transaction, i.e. '>
manufacture, falls in one chargeable accounting period and falls in
another part of the accounting period i.e. the trading operations i.e.
D falls in another accounting period, then set off deficiency in profits
under section 7 of the Act is permitted but a necessary precondition was
that profit must be made in the accounting period to which the defi-
ciency relates. [613G-H; 6!4AJ
-i..
7. The excess profit under the Act is profit determined under the
E Income Tax Act subject to prescribed adjustments. If the income tax
assessment discloses nil profits, no separate profit can be determined •
independently under the Act. [614A-B]

8. It is a general principle, in the computation of the manual A>

F
profits of a trade or business under the Income Tax Acts, that those
elements of profits or gain, and those only, enter into the compntation
.....,
which are earned or ascertained in the year to which the enquiry
refers; and in like manner, only those elements of loss or expense
enter into the computation which are suffered or incurred during that
year. [614C-D]

G Edward Collins & Sons Ltd. v. The Commissioners of Inland
Revenue, 12 T.C. 773 at 780, followed and Commissioner of Income-
tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18 I. T.R. 472,
"-
~..r-

distinguished.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1375
H of 1974
C.E.P.T. v. KALYAN MAL PHOOL CHAND (MUKHARJI, J.] 605

From the Judgment and Order dated 21.2.1971 of the Allahabad
A
High Court in Excise Profit Tax Reference No. 55 of 1968.

Dr. V. Gauri Shankar and Miss A. Subhashini for the
Appellant.
B
S.T. Desai, Harish Salve, Mrs. A.K. Verma and D.N. Mishra for
the Respondent.

The Judgment of the Court was delivered by

SABY ASACHI MUKHARJI, J, This appeal is directed against
the judgment and order of the High Court of Allahabad dated 21st C
February 1971. It relates to the assessment under the Excess Profits
Tax Act, 1940 (hereinafter called the 'Act'). The assessee was an
unregistered firm carrying on business of manufacture and sale
of katechu. The chargeable accounting period was 1-4-1943 to
31.3.1944. There were two partners of the assessee firm, namely, L. D
Phoolchand and M/s Biharilal Balkishan each having profits in propor-
tion of 11 annas and 5 annas respectively. The work in connection with
the extraction of Katechu was carried on in Nepal by L. Phoolchand
and the sale of Katechu were effected by M/s Biharilal Balkishan at
their shops in Kanpur. The assessee firm did not maintain any books of
account and the entire record of the business transaction was E
maintained in the books of M/s Biharilal Balkishan in the account
styled "Kalyanmal Phoolchand".
l The assessee firm had taken a jungle on lease for this purpose
and had extracte<!_ Katechu from October, 1940 to September, 1941.
The sales of katechu extracted were effected from 30th May, 1941 to F
29th September, 1941. Thereafter another jungle was taken on lease in
November, 1942 and Katechu were extracted from 23rd November,
1942 to 6th November, 1944. The sales in this case were effected
between 26th July, 1943 to 4th April, 1944. The High Court divided
the entire period of manufacture and sale as follows:

--,
........... 1. October 28, 1940 to March 31, 1941, falling in the financial
year ending March 31, 1941. Katechu was manufactured but
G

there was no sale.

2. April 1, 1941 to September 29, 1941, falling in the financial
year ending March 31, 1942. Sales took place from May 30, H
1941 to September 29, 1941.
606 SUPREME COURT REPORTS [1987] 2 S.C.R.

3. November 23, 1942 to March 31, 1943, falling in the financial
A
year ending March 31, 1943. Katechu was manufactured but -r
there was no sale.

4. April 1, 1943 to March 31, 1944, falling in the financial year
ending March 31, 1944, sales took place from July 26, 1943 to
B March 31, 1944.

5. April 1, 1944 to April 4, 1944, falling in the financial year ~
ending March 31. 1945, sales were effected from April 1, 1944
to April 4, 1944, when the business was discontinued. -~

C Therefore, while there was manufacturing activity there was no
sale during the financial years ending 31st March, 1941 and 31st
March, 1943. The di_spute in this case is with regard to the set off of ';!'-
deficiency of profit relating to the periods 20th October, 1940 to 17th
October, l.941and23rd November, 1942 to 31st March, 1943.

D The Excess Profit Tax Officer did not set off the said deficiency
of profits that accrued in respect of the period 1940-41 out of the
profits for the charg{able accounting period from 1.4.1943 to
31.3.1944. The submission of the assessee was that the business carried
on during the chargeable accounting period under consideration was -f..
not separate to and distinct from the business carried on in 1940-41.
E The Excess Profit Tax Officer held that business carried on during
October, 1940 to October, 1941 was completely different from the
business carried on during the chargeable accounting period under
consideration.

The Appellate AssiStant Commissioner on appeal found that the
F constitution of the firm during the chargeable accounting period was --?'
the same ;:s in 1940-11 and the accounts were maintained in the same
fashion; and that the oame business of manufacturing Katechu in
Nepal and selling the finished products at Ko.."1p'lr was carried on. The
Appellate Assistant Commissioner, therefore, held that the asse•,ee
was entitled to set off in respect of the deficiency of profits accruing in
G the year 1940-41. The Appellate Assistant Commissioner further
found that the assessee had effected sales only during 30th May, 1941
to 29th September, 1941. As such there were no sales either during or
until 30th May, 1941 land subsequent to 29th September, 1941. As
such he held that there was no profit arising during the accounting
period ending on 31st March, 1941. He, therefore, confirmed that
H there were no profits and losses during the chargeable accounting
C.E.P.T. v. KALYAN MAL PHOOL CHAND [MUKHARJI, J.] 6fJ7

period ending on 31st March, 1941 and as such there could be no
deficiency of profits. In the premises, according to the Appellate A
~ Assistant Commissioner, the assessee was entitled to a set off of the
deficiency only for the chargeable accounting period ending on 31st
March, ·1942 which consisted of the period 1st April, 1941 to 29th
September, 1941. He allowed such deficiency ofRs.5,600 only. So far
as the deficiency pertaining to the period November. 1942 to 31st B
March, 1943 was concerned, the facts were that the manufacturing
>'{ operations started in Nepal on or about 23rd November, 1942 and the
sales of Katechu started at Kanpur on 26th July, 1943 Katechu pro-
duced in Nepal from 23rd November, 1942 to 31st March, 1943 re-
? mained in stock till the last date of the chargeable accounting period
namely 31st March, 1943 and no part of it was sold. As the assessee did
not maintain any books of account, the provisions of section 13 of the c

.... Income Tax Act, 1922 as applied to the Act vide section 21 of the Act
were applicable. The revenue, therefore, valued the stock-in-trade at
cost and held that there could be no profit or loss during the charge-
able accounting period. In appeal, the assessee had urged that defi-
ciency in profits pertaining to the chargeable accounting periods from D
October, 1940 to 31st March, 1941 and 23rd November, 1942 to 31st
March, 1943 should be allowed a set off in computing the excess profits
for the year under consideration. It was submitted that there was no
profits pertaining to the said chargeable accounting period, and there-
~ fore, the standard profits as provided in the Act became the deficiency
of the said two chargeable accounting periods which should have been E
allowed set off. It was further urged on behalf of the assessee that the
manufacturing operations were carried on during the said periods and
as such it could not be said that the assessee did not carry on any
L business.

I The Tribunal, however, held that no profits accrued unless sale
'1: F
was effected and, therefore, there was no merit in the submission
made on behalf of the assessee that during the said two chargeable
accounting periods, although there were no sales effected, yet profits
accrued to the assessee. It was urged on behalf of the revenue that as
provided in the Act, the provisions of the Act would apply to every
business of which any part of profits was made during the chargeable G
accounting period, is chargeable to income-tax. It was further urged
,......... that no part of profits, if any, which accrued during the said two
chargeable accounting periods could be charged and were in fact not so
charged, to income-tax, as no sales were effected and, therefore, the
Act itself did not apply to the said two chargeable accounting periods.
The Tribunal accepted this contention on behalf of the revenue and as H
608 SUPREME COURT REPORTS [1987] 2 S.C.R.

such confirmed the order of the Appellate Assistant Commissioner.
A
--y
On the said facts, the following question of law was referred to
the High Court at the instance of the assessee:

"Whether, on the facts and in the circumstances of the
B case, the assessee was entitled to a set off of deficiency of
profits relating to the period 28.10.1940 to 31.3.1941 and
23.11.1942 to 31.3.1943 from the profits of the chargeable y
accounting period 1.4.1943 to 31.3.1944 in accordance with
the provisions of the E.P.T. Act, 1940?"
-4...
The High Court held that it was not disputed before them that
c the assessee was carrying on the same business from 28th October,
1940 to 4th April, 1944 for the purpose of the Act. The only question
was whether the assessee could be said to have suffered any deficiency :....
of profits during the period 28th October, 1940 to 31st March, 1941
and 23rd November, 1942 to 31st March, 1943 and was whether
D entitled to be given the benefit of such deficiency of profit.

The High Court referred to certain definitions and recognised
and in our opinion rightly that there were several stages in business
activities before profits could be realised. The High Court observed
that profits realised were not of the sale alone. The profits were +
E attributable to the manufacturing operations as well. The High Court
referred to certain decisions to which our attention was also drawn
where under the Act as to the place where the profits arose, the courts
had- enquired into the place where the manufacturing took place and
where the sales took place. This contention is no longer relevant for
the controversy before us. It was accepted before us that a manu-
F facturing process may begin in one year and result in sale in another
year and also that manufacturing process may take at one place and
-:r
sale at another place. For the purpose of computing the profit of
certain operation, it is true as the High Court noted, that manufacture
and sale might take place in two different years.

G The High Court held that though chargeable levy was an annual
charge and generally for the purpose of the levy of the annual charge
_,,.,_
the profits of the year preceding the year of charge are taken into
consideration if the manufacturing activity leading to the production of
finished article which was subsequently sold contributed to the profits
realised, according to the High Court, it mattered little whether or not
H the manufacturing activity of the sale related to the same period of
C.E.P.T. v. KALYAN MAL PHOOL CHAND [MUKHARJI, J.] 609

twelve months. Some part of the profits realised would be attributable A
to the manufacturing activities and, therefore, could be said to arise
during the period when manufacturing was carried on even though
sales were effected in the next year. The High Court, therefore, was of
the view that it was necessary to determine what part of the profits
realised upon the sales from 30th May, 1941 to 29th September, 1941
B
could be attributed to the manufa :luring activity between 28th
October, 1940 to March, 1941 and then to compute the deficiency of
profits for the chargeable accounting period ending 31st March, 1941.
That might require, according to the High Court, a fresh determina-
tion of the profits earned during the period Isl April, 1941 to 29th
September, 1941 and, consequently, of the deficiency of profits during
the chargeable accounting period ending 31st March, 1942. The High c
Court was of the view that the deficiency of profits for the chargeable
accounting periods ending 31st March, 1941 and 31st March, 1942
would have to be set off when computing the excess profits for the
relevant chargeable accounting period ending 31st March, 1944. The
High Court expressed the view that under section 2(5) of the Act the D
job of the assessee in the extraction and sale of Katechu under the two
jungle leases must be considered as a single business for the purpose of
the Act. The High Court, therefore, came to the conclusion that upon
the principle of apportionment of profits to which it had adverted to,
the profits earned upon sales effected during the chargeable account-
ing period ending 31st March, 1944 must similarly be apportioned E
between the manufacturing activity during the chargeable accounting
period ending 31st March, 1943 and the sales during the chargeable
accounting period ending 31st March, 1944 and the deficiency of pro-
fits worked out on that basis in respect of the charieable accounting
period ending 3Jst March, 1943 must be set off in computing the excess
profits for the chargeable accounting period ending 31st March, 1944. F
The High Court, therefore, did not accept the opinion of the Tribunal
that because the chargeable accounting periods ending 31st March,
1941 and 31st March, 1943 were occupied with manufacturing activity
alone and there were no sales, therefore, no part of the profits realised
upon the sales could be apportioned to those chargeable accounting
periods and consequently that it could not be said that there was any G
deficiency of profits during those periods. The question referred to the
High Court was answered in affirmative.

In order to appreciate the real controversy in this matter, it is
appropriate to refer to the observations of Kania, J., as the Chief
Justice then was, in the decision in the case of Commisioner of Income H
610 SUPREME COURT REPORTS (1987] 2 S.C.R

Tax, Bombay v. Raipur Ma.nufacturing Co., Ltd:, 1411R 725 at 733. It
A
was observed as follows:
~
"The Excess Profits Tax Act as shown by the preamble
itself is a legislation to impose tax on excess profits arising
out of certain business. The Income-tax Act is the principal
B legislation which imposes a tax on the income of a person.
Section 6 divides the income under five heads which are
chargeable to tax. The fourth head is profits and gains of )'-
business, profession or vocation. Out of that a certain por-
lion is carved out by the Legislature for the purpose of ........_
imposing the excess profits tax. I am unable to accept the
contention of the Commissioner that the Excess Profits Tax
c Act is an entirely independent legislation, which is con-
nected with the Income-tax• Act only to the extent it is
expressly so stated in the Excess Profits Tax Act. The ")'-
scheme that the Excess Profits Tax Act is a legislation
intended to tax the profits of certain business in excess of a
D certain limit as provided in that Act. It is therefore com-
plementary to the Income-tax Act by its very nature."

As the Statement of Objects of the Act stated that the outbreak
of war, while it has necessitated greatly increased expenditure by the --j.._
Government on defence and other services, has simultaneously
E created opportunities for the earning by companies and person. en-
gaged in business of abnormally large profits. The object of the Bill
(which later became the Act was to secure for the Government a
considerable portion of the additional business profits which accrued
as a result of the conditions prevailing during the war. To begin with ,..I
the right to impose a tax of 50% of the excess of the ~ rofit made in
F any accounting period after the !st day of April, 1939 was given. It had ··j-
subsequently been increased to 66-2 13%.

Section 2( 1) of the Act defines the 'accounting period'. Section
2(6) defines 'chargeable accounting period as (a) any accounting
period falling wholly within the term beginning on the 1st day of
G September, 1939, and ending on the 31st day of March, 1946 and (b)
where any accounting period falls partly within and partly without the
said term, such part of that accounting period as falls within the said -~
term. The 'standard profits' is defined under section 2(2) which was
required to be computed in accordance with the provisions of section 6
of the Act. It is not necessary in view of the controversy before us to
H refer to other definitions except that section 2(3) deals with 'average
C.E.P.T. v. KALYAN MAL PHOOL CHAND [MUKHARJI, J.l 611

amount of capital' which is relevant for computation of the excess
profits. Section 6 defines the 'standard profits' and how it is to be A
computed. As there was no controversy on this aspect before us, it is
not necessary to deal with it. Section 2(9) defines 'deficiency of profits'
as follows:

(9) "deficiency of profits" means- B

"(i) where profits have been made in any chargeable
accounting period, the amount by which such profits
fall short of the standard profits;

(ii) where a loss has been made in any chargeable
accounting period, the amount of the loss added to c
the amount of the standard profits;"

Section 4 defines 'charge of tax' as follows:

"Charge of tax"-( 1) Subject to the provisions of this Act, D
there shall in respect of any business to which this Act
applies, be charged, levied and paid on the amount by
which the profits during any chargeable accounting period
exceed the standard profits a tax (in this Act referred to as
"excess profits tax") which shall, in respect of any charge-
able accounting period ending on or before the 31st day of E
March, 1941, be equal to fifty per cent, of that excess and
shall, in respect of any chargeable accounting period begin-
ning after that date, be equal to such percentage of that
excess as may be fixed by the annual Finance Act;

Provided that any profits which are, under the provi- F
sions of sub-section (3) of section 4 of the Indian Income-
tax Act, 1922, exempt from income-tax, and all profits
from any business of life insurance shall be totally exempt
from excess profits tax under this Act.

Provided further that in the case of any business G
which includes the mining of any mineral, any bonus paid by
or through the Central Government in. respect of increased
out-put of the mineral shall be totally exempt from excess
profits tax under this Act.

(2)Where a chargeable accounting period falls partly H
612 SUPREME COURT REPORTS [1987] 2 S.C.R.

before and partly after the end of March, 1941, the forego-
A
ing provisions of this section shall apply as if so much of
that chargeable accounting period as falls before, and so
much of that chargeable accounting period as falls after,
the said end of March were each a separate chargeable
accounting period, and as if the excess of profits of that
B separate chargeable accounting period were an appor-
tioned part of the excess of profits arising in the whole
period determined in accordance with the provisions of sec-
tion 7A."

Section 7 deals with the relief on occurrence of deficiency of
profits and provides in substance that where a deficiency of profits
c occurs in any chargeable accounting periqd in any business, the profits
of the business chargeable with excess profits tax shall be deemed to be
reduced and relief shall be granted according to the provisions laid
down therein.

D The main question in this case is to keep the distinction between
'accounting period' and 'chargeable accounting period'. The account-
ing period, it has to be borne in mind, is the twelve months' proceeding
just on the basis of the income-tax year and the assessment must be
made on the same basis. The 'chargeable accounting period' is the
period beginning from 1st September, 1939 ending after amendment
E on 31st March, 1946. So if there is any deficiency of profits in any of
the accounting period which has not been absolved in the assessment
for that year may be carried forward but the assessment must be made
on the basis of the accounting period. This has to be emphasised and it
must be borne in mind that though it is wholly immaterial whether the
manufacture and sale took place in the same year or in two different
F years, the division of time into periods for its assessment must be made
in a real sense as in the income-tax one, and then make appropriate
adjustments. Therefore the profits and losses of each year must be
computed on yearly basis in terms of the definition of 'accounting
period' under section 2(1) of the Act. But if any deficiency of profits
remains unabsolved, it may be carried forward against any excess pro-
G fits made and set off during the next accounting period. The charge-
able accounting period is the period from 1st September, 1939 to 3 lst
March, 1946. But each year's excess profit & loss must be computed in
the manner contemplated in section 2(1) of the Act. So if there was
any deficiency of profits in any particular period, it must be deter-
mined on that basis. In order to work out the scheme of the Act, there
H must be proper devetailing of the concept of "accounting period",
C.E.l>.T. v. KALYAN MAL PHOOL CHAND [MUKHARJI, J.] 613

"chargeable accounting period" and basic scheme of the Income-Tax
A
Act bearing in mind that excess profits are excess of profits which were
intended to be mopped up during the war period intended to be taxed
separately and differently. This view finds support in the decision of
the Allahabad High Court. In the case of Haji Rahmat Ullah and Co.
v. Commissioner of Income-tax, U.P., 591.T.R. 109 the High Court of
Allahabad held that a payment received in any year subsequently to a B
chargeable accounting period is not liable to be treated as the profits of
that period, merely because the work which occasioned that payment
was done during that period. The "profits during the chargeable
accounting period" are those profits respecting which a right to receive
had accrued or arisen during that period. If the right to receive those
profits had accrued or arisen subsequently, then even though they had
accrued or arisen by reason of work done during the chargeable
c
accounting period, these were not liable to be treated as the profits of
that chargeable accounting period. The High Court observed that it
would seem ex facie that if the profits earned during a certain period
are taxable under the Income-tax Act, it is a part of those very profits
which is liable to excess profits tax. Whether the profits in the one case D
could be identified with the profits in the other would be determined
by reference to the period in which those accrued or arose. It was
emphasised that the profits during the chargeable accounting period
must be computed under the Excess Profits Tax on the same basis as
are profits for an income-tax assessment. It is clear that excess profits
tax is attracted in respect of a business to which the Act applied when E
the profits during the chargeable accounting period exceed the
standard profit. It has to be clearly borne in mind that the Act is not an
entirely different Act in the sense that it proceeds upon the concept
completely different from the notions of Income tax and has its source
in an entirely different tax concept. More profits which were likely to
have been earned during those years, these were made subject to F
excess profits.

It appears to us that the period of assessment in the Act is an
"accounting period" in the same way as the 'previous year' is the
period of assessment for the purpose of Income-Tax. Though profit in
a composite transaction could be apportioned as between manufacture G
and sale in the same accounting year, such an apportionment is not
permissible when one part of the transaction, i.e. manufacture, falls in
one chargeable accounting period and falls in another part of the
accounting period i.e. the trading operations, i.e. falls in another
accounting period, then set off of deficiency in profits under section 7
of the Act is permitted but a necessary precondition was that profit H
614 SUPREME COURT REPORTS (1987] 2 S.C.R.

A must be made in the accounting period to which the deficiency relates.
The profits attributed on apportionment was outside the scope of sec-
tion 7 of the Act. It must be remembered that the 'excess profit' under
the Act is profit .determined under the Income Tax Act subject to
prescribed adjustments . If the income tax assessment discloses nil pro-
fits, no separate profit can be determined independently under the
B Act.

The position of the Excess Profits Tax Act was explained by Lord
President Clyde in Edward Collins & Sons. Ltd. v. The Commissioner
of Inland Revenue, 12 T.C. 773 at 780 where the Lord President
emphasised that subject to certain modification those profits had to be
C determined in the same way and on the same principle as a trader's
profits and gains have to be computed for the purposes of the Income-
tax Act. It is a general principle, in the computation of the annual
profits of a trade or business under the Income Tax Acts, that those
elements of profit or gain, and those only, enter into the computation
which are earned or ascertained in the year to which the enquiry
D refers; and in like manner, only those elements of loss or expense
enter into the computation which are suffered or incurred during that
year. The same priciple, in our opinion, would be applicable to the
facts of this case.

The decision of this Court in Commissioner of Income-tax,
E Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18 l.T.R. 472 re-
lated entirely to a different context where certain part of the activities
occurred at Raichur and the sales took place in Bombay, the question
was whether the activity which the assessee carried on at Raichur was
part of their business within the meaning of the third proviso to section
5 of the Act, that the profits of a part of the business, the manufactur-
F ing of oil in their mills at Raichur, accured or arose at Raichur and that
such profits were not assessable to excess profits tax under the third
proviso to Section 5 of the Act. That is not the controversy here. The
controversy is not so much where the profits arose nor is the con-
troversy whether the profits arose during the chargeable accounting
period but where the profits arose during the 'accounting period' and
G as such whether the deficiency of the profits not arising during
'counting period' but during the 'chargeable accounting period' could
be set off without computation. The method of computation under
section 7 of the Act must be on the basis of 'accounting period' and
after that the deficiency in profits for that period should be computed
on that basis and after set off carried forward to be set off during the
H chargeable accounting period. It is thus an harmonious construction of
C.E.P.T. v. KALYAN MAL PHOOL CHAND [MUKHARJl, J.] 615

the different provisions of the Act is possible and the true excess A
profits, if any, as contemplated by the Act be determined. The concept
of 'accounting period' in the background of the 'chargeable accounting
period' can thus be harmonised. The accounting period was 1st April,
1943 to 31st March, 1944. In the facts of the case we are of the opinion
that the question must be answered in the negative and in favour of the B
revenue. The appeal is allowed and the judgment and order of the
High Court are set aside.

In the facts and circumstances of the case, parties will pay and
- _____., ·· bear their own costs.

A.P.J. Appeal allowed .

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