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PETITIONER: COMMISSIONER OF EXCESS PROFIT TAX, KANPUR

       Vs.

RESPONDENT: KALYAN MAL PHOOL CHAND, NAGAR GANJ, KANPUR

DATE OF JUDGMENT13/03/1987

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) NATRAJAN, S. (J)

CITATION:  1987 AIR 2140            1987 SCR  (2) 601  1987 SCC  (2) 458        JT 1987 (1)   691  1987 SCALE  (1)563

ACT:     Excess  Profit  Tax Act,  1940---Sections  2,  5-7--’Ac- counting  period’--’Chargeable  account   period’--’Standard profits’--What are-Deficiency in profits--Setting off--Basis of determination.

HEADNOTE:     The assessee was an unregistered firm carrying on  busi- ness of 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  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 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  dis- tinct from the business carried on in 1940-41.     The Excess Profit Tax Officer did not set off the  defi- ciency  of  profits that accrued in respect  of  the  period 1940-41  out  of the profits for the  chargeable  accounting period  from 1-4-1943 to 31-3-1944, and held that the  busi- ness  carried on during October, 1940 to October,  1941  was completely different from the business carried on during the aforesaid chargeable accounting period.     So far as the deficiency pertaining to the period Novem- ber, 1942 to 31st March, 1943 was concerned, the manufactur- ing  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  accounting  period. namely, 31st March, 1943. As the assessee did not,  maintain any books of account, the provisions of s. 13 of the  Income Tax 602 Act,  1922 were applicable. The Revenue,  therefore,  valued

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the  stock-intrade 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  Octo- ber,  1940 to 31st March, 1941, and 23rd November,  1942  to 31st  March, 1943 should be allowed a set off  in  computing the  excess profits and as there were no profits during  the said  chargeable  accounting period,  the  standard  profits became  the  deficiency of the said two years  which  should have  been allowed set off and that as manufacturing  opera- tions were carried on during the said periods, it could  not be said that the assessee did not carry on any business.     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 during 30th  May,  1941 to 29th September, 1941 and held  that  the assessee was entitled to set off in respect of the deficien- cy  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  accounting  period ending on  31st  March,  1942 which  consisted of the period 1st April. 1941 to 29th  Sep- tember. 1941.     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 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  manu- facturing  activity and sale; (1) October 28, 1940 to  March 31,  1941,  failing in the financial year ending  March  31, 1941,  Katechu was manufactured but there was no  sale;  (2) April  1, 1941 to September 29, 1941, failing in the  finan- cial  year ending March 31, 1942; sales took place from  May 30,  1941  to September 29, 1941; (3) November 23,  1942  to March  31, 1943 failing in the financial year  ending  March 31,  1943; Katechu was manufactured but there was  no  sale; (4) April 1, 1943 to March 31, 603 1944, failing 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, 1944, failing in  the  financial year  ending March 31, 1945; sales were effected from  April 1, 1944 to April 4, 1944 when the business was discontinued. It  held that while there was manufacturing  activity  there was no sale during the financial years ending March 31, 1941 to  March 31, 1943, that the profits earned upon  sales  ef- fected  during the chargeable 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, therefore, did not accept the opinion of the Tribunal  and held that the assessee was entitled to  a  set off of deficiency of profits relating to the periods  28-10- 1940  to  31-3-1941  and 23-11-1942 to  31-3-1943  from  the

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profits  of  the chargeable accounting  period  1-4-1943  to 31-3-1944. Allowing the Appeal,     HELD: 1. 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]     Commissioner of Income Tax, Bombay v. Raipur Manufactur- ing Co., Ltd., 14 ITR 725 at 733, 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 mind that excess profits  are excess of profits which were intended to be mopped up during the  war  period, to be taxed  separately  and  differently. [612H; 613A-B]     3. 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 account- ing  period,  these  were not liable to be  treated  as  the profits of that chargeable accounting period. [613C]     4.Whether  the profits in the one case could be  identi- fied  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 604 accounting period must be computed under the Excess  Profits Tax  on  the  same basis as are profits  for  an  income-tax assessment. [613D-E]     Haji Rahmat Ullah and Co. v. Commissioner of Income-tax, U.P., 59 I.T.R. 109, relied upon.     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]     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. 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 deficiency relates.  [613G-H; 614A]     7. 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  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  profits of a trade or business under the Income  Tax Acts,  that  those elements of profits or  gain,  and  those only, enter into the computation which are earned or  ascer- tained 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]     Edward  Collins  &  Sons Ltd. v.  The  Commissioners  of Inland Revenue, 12 T.C. 773 at 780, followed and Commission-

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er of Incometax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18 I.T.R. 472, distinguished.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 1375  of 1974 605     From  the  Judgment and Order dated 21.2.  1971  of  the Allahabad  High Court in Excise Profit Tax Reference No.  55 of 1968.     Dr.   V.  Gauri  Shankar  and  Miss A.   Subhashini  for the Appellant.     S.T.  Desai,  Harish  Salve, Mrs. A.K.  Verma  and  D.N. Mishra for the Respondent. The Judgment of the Court was delivered by     SABYASACHI MUKHARJI, J. This appeal is directed  against the judgment and order of the High Court of Allahabad  dated 21st  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  account- ing  period  was   1-4-1943 to 31.3. 1944.  There  were  two partners of the assessee firm, namely, L. Phoolchand and M/s Biharilal Balkishan each having profits in proportion of  11 annas and 5 annas respectively. The work in connection  with the  extraction  of Katechu was carried on in Nepal  by  1.. 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 maintained  in  the books  of  M/s  Biharilal Balkishan in  the  account  styled "Kalyanmal Phoolchand".     The  assessee firm had taken a jungle on lease for  this purpose  and  had extracted Katechu from  October,  1940  to September, 1941. The sales of katechu extracted were effect- ed  from 30th May, 1941 to 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,  failing  in  the financial  year ending March 31,1941. Katechu  was  manufac- tured but there was no sale.   2.  April  1, 1941 to September 29, 1941, failing  in  the financial year ending March 31, 1942. Sales took place  from May 30, 1941 to September 29, 1941. 606   3.  November  23, 1942 to March 31, 1943, falling  in  the financial  year ending March 31, 1943. Katechu was  manufac- tured but there was no sale.   4. April 1, 1943 to March 31, 1944, falling in the  finan- cial year ending March 31, 1944, sales took place from  July 26, 1943 to March 31, 1944.   5.  April 1, 1944 to April 4, 1944, falling in the  finan- cial  year ending March 31. 1945, sales were  effected  from April  1, 1944 to April 4, 1944, when the business was  dis- continued.     Therefore, while there was manufacturing activity  there was  no sale during the financial years ending  31st  March, 1941 and 31st March, 1943. The dispute in this case is  with regard  to the set off of deficiency of profit  relating  to the  periods  20th October, 1940 to 17th October,  1941  and

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23rd November, 1942 to 31st March, 1943.     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  chargeable  accounting period  from  1.4.1943 to 31.3. 1944. The submission of  the assessee was that the business carried on during the charge- able accounting period under consideration was not  separate to and distinct from the business carried on in 1940-41. The Excess  Profit  Tax Officer held that  business  carried  on during October, 1940 to October, 2941 was completely differ- ent  from  the  business carried on  during  the  chargeable accounting period under consideration.     The  Appellate  Assistant Commissioner on  appeal  found that  the  constitution of the firm  during  the  chargeable accounting  period  was the same as in 1940-41 and  the  ac- counts  were  maintained in the same fashion; and  that  the same business of manufacturing Katechu in Nepal and  selling the  finished products at kanpur was carried on. The  Appel- late Assistant Commissioner, therefore, held that the asses- see was entitled to set off in respect of the deficiency  of profits accruing in the year 1940-41. The Appellate  Assist- ant Commissioner further found that the assessee had effect- ed 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 there were no profits and losses during the  chargeable accounting 607 period ending on 31st March, 1941 and as such there could be no deficiency of profits. In the premises, according to  the Appellate 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 of Rs.5,600 only. So  far  as  the deficiency pertaining to the period November, 1942 to 3  Ist March, 1943 was concerned, the facts were that the  manufac- turing  operations started in Nepal on or about 23rd  Novem- ber, 1942 and the sales of Katechu started at Kanpur on 26th July,  1943  Katechu produced in Nepal from  23rd  November, 1942  to  31st March, 1943 remained 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  Income  Tax Act, 1922 as applied to  the  Act  vide section  21 of the Act were applicable. The revenue,  there- fore, valued the stock-in-trade at cost and held that  there could be no profit or loss during the chargeable  accounting period. In appeal, the assessee had urged that deficiency in profits pertaining to the chargeable accounting periods from 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 therefore,  the  standard profits as provided in the Act became the deficiency of  the said  two  chargeable accounting periods which  should  have been 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 business.     The  Tribunal,  however, held that  no  profits  accrued unless sale was effected and, therefore, there was no  merit

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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  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 account- ing periods. The Tribunal accepted this contention on behalf of the revenue and as 608 such confirmed the order of the Appellate Assistant  Commis- sioner.     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  circum-               stances of the 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 accounting period 1.4.1943  to               31.3.1944 in accordance with the provisions of               the E.P.T. Act, 1940?"     The High Court held that it was not disputed before them that  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  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 sever- al  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 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 manufactur- ing took place and where the sales took place. This  conten- tion is no longer relevant for the controversy before us. It was  accepted  before us that a  manufacturing  process  may begin  in  one year and result in sale in another  year  and also  that manufacturing process may take at one  place  and 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.     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  the manufacturing activity of the sale related  to  the same period of 609 twelve  months. Some part of the profits realised  would  be attributable to the manufacturing activities and, therefore,

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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 could  be attributed to the manufacturing  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 determination of the profits  earned during  the period 1st April, 1941 to 29th  September,  1941 and,  consequently, of the deficiency of profits during  the chargeable  accounting period ending 31st March,  1942.  The High  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 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,  there- fore,  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 accounting period ending 31st March, 1944 must similarly  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 the deficiency of profits worked out on that basis in respect of the chargeable accounting period  ending 3  Ist March, 1943 must be set off in computing  the  excess profits  for  the chargeable accounting period  ending  31st March,  1944. The High Court, therefore, did not accept  the opinion of the Tribunal that because the chargeable account- ing  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 deficiency of profits during  those periods.  The  question referred to the High Court  was  an- swered 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 Commissioner of Income 610 Tax, Bombay v. Raipur Manufacturing Co., Ltd.; 14 ITR 725 at 733. It 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               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  busi-               ness,  profession or vocation. Out of  that  a               certain portion is carved out by the  Legisla-               ture  for the purpose of imposing  the  excess               profits tax. I am unable to accept the conten-               tion  of  the  Commissioner  that  the  Excess               Profits  Tax  Act is an  entirety  independent               legislation,  which  is  connected  with   the

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             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               certain  limit as provided in that Act. It  is               therefore complementary 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 Government on defence and other services, has simultaneously created opportunities for the earning  by companies  and  persons engaged 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 the right to impose a tax of 50% of the excess of the  profit made in any accounting period after the 1st  day of April, 1939 was given. It had subsequently been increased to 66-2/3 %.     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  begin- ning  on the 1st day of 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 fails  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 refer to other  defini- tions except that section 2(3) deals with ’average 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 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--                       "(i)  where profits have been made  in               any  chargeable accounting period, the  amount               by which such profits fall short of the stand-               ard profits;               (ii) where a loss has been made in any charge-               able accounting period, the amount of the loss               added to the amount of the standard profits;"               Section 4 defines ’charge of tax’ as follows:               "Charge  of tax"--( 1 ) Subject to the  provi-               sions  of this Act, 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  ac-               counting period exceed the standard profits  a               tax (in this Act referred to as "excess  prof-               its  tax")  which  shall, in  respect  of  any               chargeable  accounting  period  ending  on  or               before  the 31st day of March, 1941, be  equal               to  fifty per cent, of that excess and  shall,               in respect of any chargeable accounting period               beginning  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  provisions of sub-section  (3)  of

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             section  4 of the Indian Incometax Act,  1922,               exempt  from income-tax, and all profits  from               any business of life insurance shall be total-               ly  exempt from excess profits tax under  this               Act.                         Provided  further that in the.  case               of  any business 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               612               before  and  partly after the  end  of  March,               1941, the foregoing 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  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 section 7A."     Section  7 deals with the relief on occurrence of  defi- ciency  of  profits and provides in substance that  where  a deficiency  of profits occurs in any  chargeable  accounting period in any business, the profits of the business  charge- able  with excess profits tax shall be deemed to be  reduced and relief shall be granted according to the provisions laid down therein.     The  main question in this case is to keep the  distinc- tion between ’accounting period’ and ’chargeable  accounting period’. The accounting 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 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  manu- facture  and  sale  took place in the same year  or  in  two different  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 profits made and set off during the  next accounting  period. The chargeable accounting period is  the period  from  1st September, 1939 to 31st 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 determined on that basis. In order to work out  the scheme  of the Act, there must be proper devetailing of  the concept of "accounting period", 613 "chargeable  accounting  period"  and basic  scheme  of  the

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Income-Tax  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  differ- ently. This view finds support in the decision of the  Alla- habad  High Court. In the case of Haji Rahmat Ullah and  Co. v. Commissioner of Income-tax, U.P., 59 I.T.R. 109 the  High Court of Allahabad held that a payment received in any  year subsequently to a 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  peri- od"  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 accounting  period,  these were not liable to be treated as the profits of that charge- able  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 could be identified with the profits in the other would be determined by  refer- ence  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 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 excess profits.     It  appears to us that the period of assessment  in  the Act is an "accounting period" in the same way as the ’previ- ous  year’  is the period of assessment for the  purpose  of Income-Tax.  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, fails 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  defi- ciency  in profits under section 7 of the Act  is  permitted but a necessary precondition was that profit 614 must be made in the accounting period to which the deficien- cy  relates.  The profits attributed  on  apportionment  was outside the scope of section 7 of the Act. It must be remem- bered  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 profits, no separate profit can be determined  independently under the 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  modi- fication those profits had to be 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 Incometax  Act. It is a general principle, in the computation of the  annual

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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 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 principle, in our opinion, would be applicable to the  facts of this case.     The  decision of this Court in Commissioner  of  Income- tax,  Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18  I.T.R. 472  related 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 manufacturing of oil in their mills at Raichur,  accused or arose at Raichur and that such profits were not  assessa- ble to excess profits tax under the third proviso to Section 5  of the Act. That is not the controversy  here.controversy is not so much where the profits arose nor is the controver- sy whether the profits arose during the chargeable  account- ing period but where the profits arose during the  ’account- ing period’ and as such whether the deficiency of the  prof- its  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 chargeable accounting period. It is thus an harmonious construction of 615 the different provisions of the Act is possible and the true excess profits, if any, as contemplated by the Act be deter- mined. The concept of ’accounting period’ in the  background of  the  ’chargeable accounting period’ can thus  be  harmo- nised.  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 revenue. The appeal is allowed and the  judg- ment 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. 616