P L D 1955 Lahore 621 (PLP)

AKHLAQUE HUSAIN, J.--‑The facts which have led to this reference by the Income‑tax Appellate Tribunal are these. The assessee firm, Messrs. Mangat Ram Bishan Lal Kuthalia, Jhelum, carried on the business which, in its application to the Appellate Tribunal for referring the questions of law to this Court, is described as follows :‑ "The assessee's business consisted in exploitation of forests. He used to take lease of specific blocks of certain forests in the State of Jammu and Kashmir for extracting timber." It was stated at the Bar before us that the assessee used to bring the timber from Kashmir State to Jhelum and sold it there. The business in question was admittedly commenced some time during the year ending the 31st of March, 1941 ; but the assessee made no profits in that year. During the assessment to excess profits tax for the chargeable accounting period between the 1st of April, 1941 and the 31st of March, 1942 the assessee claimed "deficiency of profits" during the preceding chargeable accounting period ending the 31st of March, 1941. The amount of deficiency of profits, as would be presently explained, depends upon the length of this latter period which has been held by the authorities to commence with the date of the commencement of the business itself. The Excess Profits Tax Officer held that, on the material on the record, this date should be taken to be the 1st of January, 1941 ; but the Appellate Assistant Commissioner of Income-tax, with whom the learned Income‑tax Appellate Tribunal agreed, was of the opinion that the 31st of December, 1946 should, in the circumstances of this case, be deemed to be the date of the commencement of the business. At the instance of the assessee, the Tribunal has referred the following ques tions to this Court :‑ (1) Whether in the facts and circumstances of this case there is any material in support of the Tribunal's conclusion that the business should be taken to have commenced on or about the 1st December, 1940 ? (If the answer to the above question be in the negative). (2) Whether in the circumstances of this case the business can be taken to have commenced on or about the 1st of September, 1940 as claimed by the assessee or on any date earlier than the 1st of December, 1940 ? The assessee also made an application to this Court asserting "that the real controversy between the parties to the . . . reference is as to what stage or by which operation commencement of business took place in law" and "that therefore, the questions as framed by the Appellate Tribunal do not clearly bring out the controversy between the parties and, therefore, are required to be suitably refrained before being answered by this Honourable Court." During the hearing before us Mr. H. L. Chadda, the General Attorney of the assessee, who addressed us at great length and with considerable ability and knowledge of the subject, agreed that the real controversy between the parties would be resolved by answering the questions referred to us and that it was quite unnecessary to require the Tribunal to reframe the questions. Section 4 of the Excess Profits Tax Act XV of 1940 hereinafter referred to as the Act, provides for the charge of excess profit tax, hereinafter referred to as the tax. It lays down : "Subject to the provisions of this Act, there shall, id 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') . . . ". It will be seen that the basis for calculating the profits chargeable to the tax are the " standard profits ". The seventh i section of the Act provides for relief to the assessee on occurrence of "deficiency of profits" which expression is defined in section 2 (9) of the Act 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 standard profits ; (ii) Where a loss has been made in any chargeable accounting period, the amount of the loss added to the amount of the standard profits." Thus the ascertainment of the exact deficiency of profits, like profits, is dependent upon "the standard profits". It is agreed that the standard profits in this case are determinable in accordance with the proviso to subsection (4) of section 6 of the Act which runs :‑ "Provided that if the chargeable accounting period is greater or less than one year the sum of rupees thirty‑six thousand shall for the purpose of this subsection be increased or decreased proportionately." The deficiency in profits can be ascertained only with reference to the standard profits of a chargeable accounting period. This period may in a given case be less than one calendar year and in this particular case the chargeable accounting period ending with the 31st of March, 1941 was admittedly so because the business in question was commenced some time after the 1st of April, 1940. The precise question, therefore; which falls to be decided in this case is as to what part of the year ending with the 31st of March, 1941 con stitutes the chargeable accounting period‑or, in other words, when did this period commence ? This question in its turn can only be answered with reference to the definition of "chargeable accounting period" which is as follows :‑ "2 (6) 'chargeable accounting period' means‑ (a) any accounting period falling wholly within the term beginning on the first 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 falls within the said term." The "accounting period". according to section 2 (1) of the Act means :‑ "(a) Where the accounts of the business are made up for successive periods of twelve months, each of such periods ; (b) in any other case, such period as the Excess Profits Tax Officer may determine: Provided that in determining any accounting period under sub‑clause (b) the Excess Profits Tax Officer shall have regard to the period, if any, which is, or has been, determined as the previous year for that business for the purposes of the Income‑tax Act, 1922." As the presence of the conditions for the applicability of either sub‑clause (a) or the proviso is not alleged, the accounting period in this case is determinable only in accordance with the provisions of the sub‑clause (b). This sub‑clause, on the face of it, leaves the decision to the discre tion of the Excess Profits Tax Officer‑which, of course, has to be exercised reasonably and on the basis of some tangible data. Therefore, the first question referred to us should have really been : " Whether, in the facts and circumstances of this case, there is any material in support of the Tribunal's conclusion that the chargeable accounting period ending with the 31st of March, 1941 commenced on or about the 1st of December, 1940 "; which was the real question which the Excess Profits Tax Officer had ultimately to decide in this case. It was, however, open to that officer to decide that this particular period commenced with the commencement of the 18 business itself. This was obviously the correct approach and both the parties are agreed that the matter should have been decided on that basis. Like the question of the commencement of the accounting period, the question of the commencement of the business is air matter for the exercise of the discretion of the Excess Profits Tax Officer and is obviously not a question of law. It is a matter for inference from the facts and circumstances of each case. The facts and circumstances of this case are succinctly and lucidly set forth in the order of the Appellate Tribunal as follows:-- "(2) The assessee's business consisted in exploitation of forests. He used to take lease of specific blocks of certain forests in the State of Jammu and Kashmir for extracting timber. The assessee then sold the timber in the open market. The State of Jammu and Kashmir invited tenders for leasing its forests on the 2nd July, 1940. The assessee's tender was received by the Government on the 19th August, 1940, and was accepted on the 28th August, 1940 on which date the assessee also paid a sum of Rs. 40,000 in part payment of the lease money. A deed of lease was executed by the assessee on the 10th September, 1940 and an order to commence work was given by the State on the 21st September, 1940. . . . . . . . . . . . . (3) The Appellate Assistant Commissioner, however, on the basis of a report submitted by the Divisional Forest Officer in respect of the month commencing the 16th November, 1940, has reached the conclusion that the assessee started exploitation in or about the end of November or the beginning of December. The exact date being unknown, he considered that the assessee should be taken to have commenced the business on the 1st December, 1940. (4) The assessee's contention that the business should be deemed to have commenced from the 1st September, 1940 cannot be upheld. What the assessee had `purchased' was 'the right to covert and remove : . . . . the timber from the trees marked for feelings in the compartment'. It appears that on the 16th September, 1940 permission to start work was sought by the assessee and on the 18th September, 1940 the assessee wrote to the Divisional Forest Officer that possession "be formally handed over to our above‑named supervisor." It is not known when possession was delivered. It is provided in the deed that ' before starting feelings the purchaser shall get all the existing damage in the leased. area properly attested marked by the Divisional Forest Officer or an officer appointed by him on his behalf.' It is not known when this was done: And, what is worse the assessee did not produce his account books before the Excess Profits Tax Officer, and it cannot be gainsaid that the account books would have been the best evidence for determining the date of commencement of the business. The assessee himself is to blame if he has with held the material evidence in support of his case. The only material in possession of the Excess Profits Tax Authorities was the report of the Divisional Forest Officer dated the 24th December, 1940 which showed that the feelings were 'in full swing' during the month under report." In this state of affairs, it is impossible to say that there was no material in support of the Tribunal's conclusion that the business should be taken to have commenced on or about the 1st of December, 1940. Nor can it be said that the facts found or admitted cannot at all support the conclusion of fact arrived at by the Tribunal. It is not for us either to judge the sufficiency or insufficiency of evidence or to substitute a better or more appropriate conclusion of our own for that of the Tribunal. The attorney for the assessee firm argued the question as one of law. Some of the authorities cited by the attorney himself clearly show that he was in error. In Western India Vegetable Products Ltd. v. Commissioner of Income‑tax (26 I T R 151) the question before the Bombay High Court was as to the date on which the assessee company could be considered to have "set up" its business within the meaning of section 2 (11) (c) of the Income‑tax Act,‑which defines the expression previous year", and is as follows :‑ "(c) where a business, profession or vocation has been newly set up in the financial year preceding the year for which the assessment is to be made, the period from the date of the setting up of the bussiness . . . . ." The expression "setting up of the business" is not defined in the Income‑tax Act as the expression "commencement of the business" is not defined by the Excess Profits Tax Act. While sub‑clause (b) of section 2 (1) of the Act leaves the determination of the "accounting period", and, therefore, of the date of the commencement of the business, to the discretion and judgment of the Excess Profits Tax Officer, the Income tax Act does not expressly leave the question of "the date of the setting up of the business" to the discretion of the Income‑tax Officer. Therefore, the observations of the learned Judges of the Bombay High Court showing that the question as to the elite when a particular business was set up is one of fact will apply a fortiori to the decision of the question of the date of the commencement of the accounting period, or the business, in this case. The learned Chief Justice, delivering the judgment of the Division Bench, expressed his conclusions thus :‑ "The Tribunal has, as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the Appellate Assistant Commissioner and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favourable to the assessee than the one we are giving to the expression "setting up" that these expenses do not show that the business was set up prior to the 1st of September, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence. As vie have often said, we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction." The most important, and also the only, contention of the assessee's attorney, which he argued with conspicuous ability, was based upon the cases decided under subsections (1) and (3) of section 42 of the Income‑tax Act. Section 21 of the Excess Profits Tax Act provides that the provisions of section 43 of the Income‑tax Act shall apply as if the said provisions of the Excess Profits Tax Act had referred to excess profits tax instead of to income‑tag. The relevant provisions of section 42 of the Income‑tax Act, the marginal note where of is "Income deemed to accrue or arise within British India"; are as follows :‑ "(1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, . . . shall be deemed to be income accruing or arising within British India . . . . . . ." (3) In the case of a business of which all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India. . . . . . . . . . . . . . . . " It is contended on behalf of the assessee that any acts which may have been held to be "business connection" or "operations of a business" should be treated as parts of the business and as indicative of the fact that the business has commenced. The argument is ingenious but not sound. In the first place, there may be a business connection or an operation of (that is to say in relation to) the business before the business may have actually commenced, or even after it has ceased to function. An illustration of the latter part of this statement is furnished by the case of Ghanshyam Das Gangadhar v. Commissione, of Income‑tax (19 I T R 349) decided by the Patna High Court. In this case the assessee was a cloth dealer. On the 31st of March, 1944 the assessee had no stock and there was no purchase or sale after that date. All the employees were discharged before that date but some realisa tions and some payments were made during the period from the 1st April, 1944 to the 31st of ' July, 1944. The question was whether for the purpose of the Excess Profits Tax Act 1940 the assessee continued business throughout the whole of the accounting year ending the 31st of July, 1944. The High Court agreed with the Income‑tax Appellate Tribunal that the assessee ceased to carry on his business after the 31st of March, 1944. It is obvious that the realisations of the out standing dues of the assessee and the payments of his business debts were undoubtedly operations of the business ; but they related to a period when the business as such had ceased to function and was in the stage of being wound up. The following observations in the judgment are significant as showing that the question whether a business was or was not being carried on (and, therefore, whether it had or had not commenced or cease) is a question of fact and the only concern of the High Court on a reference is to say whether there was any material or evidence for the finding on that question :‑ "Whether the Company was or was not carrying on business would depend upon the nature of the business which the Company had to carry on . . . . . . . In this case the business of the assessee was that of a cloth‑dealer. Admittedly this business had ceased on 31st of March, 1944 and there was no sale or purchase of any stocks, and even the employees had been discharged. On these materials the Tribunal was justified in coming to a finding that the business of the assessee discontinued after the 31st March, 1944." On the reasoning contained in this judgment, the assessee in the present case cannot contend that it was carrying on its business before the 1st of December, 1940 inasmuch as before that date there was on sale or purchase of any stocks" and the account books have not been produced to show that any persons had been employed for the purposes of the business. It cannot be contended that the taking of the lease amounted to purchase of stocks ; it did not give the assessee the ownership in the standing trees but only gave him an opportunity of exploiting the forest and creating "stocks" if it so wished. As pointed out in an earlier part of this judgment the "business", according to the assessee itself, "consisted in exploitation of forests". How can it be rationally con tended by the assessee that the business commenced before the commencement of the exploitation of the forest‑which in its turn could commence only with the felling of the trees standing in the forest ? Secondly, the question whether there was or was not any business connection or operation of the business is, as already pointed out, a pure question of fact to be determined with reference to the facts and circumstances of each particular case and the cases on this point can be useful only as a guide to the Income‑tax or Excess Profits Tax Authorities and can be of little use to the High Courts when answering upon a reference the question whether there was or was not material for the conclusion of fact arrived at by the Appellate tribunal. It would serve no useful purpose to refer to the numerous cases cited for the assessee at the Bar. They are all disting uishable on facts as well as on principle. Practically all of them relate to businesses which were admittedly being carried on. For instance, nobody can deny that purchase of raw material for a running mill or factory is all operation of the business. But can it be said that the mere obtaining of an opportunity to procure raw material, as is the case here, is by itself sufficient to show that the business itself had commenced ? We might, however, note one case which, although decided on its own facts, strongly supports the reasoning adopted by the learned Income‑tax Appellate Tribunal in this case. The facts of that case, namely The Birmingham and District Cattle By‑Products Co. Ltd., v. The Commissioners of Inland Revenue (12 Tax Cases 92), decided by the King's Bench Division, are thus stated in the head‑note : " The appellant Company was incorporated on the 20th June, 1913 and between that date and the 6th October, 1913, the Directors arranged for the erection of works and the purchase of plant and machinery, and entered into agreements relating to the purchase of products to be used in the business and to the sale of finished products. On the 6th October, 1913 the institution of plant and machinery being completed, the Company commenced to receive raw materials for the purpose of manufacture into finished products." The question was as to from what date the business of the assessee actually commenced. The following observations of Justice Rowlatt, which constitute practically the whole of the judgment, are interesting as well as instructive :‑ "It is set forth that they really commenced in June, or, at any rate, some time before August, 1913, to carry on the trade of business. Now apparently the company was in corporated on the 20th June to carry on the business of making some use of the by‑products of the butcher's trade. It arose out of a combination of a number of butchers who entered into a contract with the trustee of the company to be formed that they would supply, and the company to be formed would take, these by‑products. There was a com bination among those butchers for that purpose. Now the company took over those agreements, and having taken over those agreements the directors, at the expense of the company, as was very proper, went about and looked at places of business of a similar character in various parts of the country. That was an admirable thing to do preparatory to commencing business, but it certainly was not com mencing business. If you go and look at other businesses to see how you will conduct your business when you set it up, you are preparing to commence business, but you are not commencing business. Then they entered into a contract for the erection of works, which works were duly erected in July, 1913. That again is preparatory. The company were occupying them selves with activities within their powers, of course ; they were living their life ; but they had not yet begun to conduct their trade or business. Then they purchased machinery and plant for carrying on the business. That was getting ready. Then they entered into agreements for the purchase of products. Those are the agreements which I have already referred to which formed the substratum of the company, but no materials came in nor were any sansage skins made from the 20th June. They waited, and I suppose in October, the date they refer to in their Minutes, having looked round, and having got their machinery and plant, and having also employed their foreman, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their product. I am bound to say that I think the case is extremely clear, and the Commissioners have taken the view that they had not commence business till then, and I do not see the slightest sign of any error in law in the Commissioners having taken that view." On a parity of reasoning, the assessee in this case cannot be said to have commenced his business before making the necessary preparations for the exploiting of the forest of which it had taken a lease from the Government of Jammu and Kashmir State, e.g., the employment of labour and the collection of the machinery or tools for felling the trees etc. For the reasons stated above, we are clearly of the opinion that the answer to first question referred to us must be in the affirmative and, therefore, the second question does not arise. A.H. Reference answered.