A) ABSTRACT / HEADNOTE

The landmark Supreme Court decision in Commissioner of Income Tax, Ahmedabad v. Karamchand Premchand Ltd., [1960] 3 SCR 727, addressed the crucial issue of whether losses incurred by an assessee in a business situated in a then Indian State (Baroda) could be set off against profits earned in British India for the purposes of computation under the Business Profits Tax Act, 1947. The Court, while interpreting the scope of the third proviso to Section 5 of the said Act, ruled that although the proviso exempted the income, profits, or gains of a business accruing in a princely State unless they were brought into or received in British India, it did not exclude the business itself from the applicability of the Act. Therefore, losses from the Baroda-based business, despite being outside the taxable territories, were allowed to be set off against profits made in British India. The judgment provides clarity on the interpretation of taxing provisions concerning Indian States before their complete constitutional integration and reflects a progressive tax jurisprudence accommodating equitable considerations in tax computation.

Keywords: Business Profits Tax Act, Baroda business losses, third proviso to Section 5, taxable territories, set-off of losses.

B) CASE DETAILS

i) Judgement Cause Title: Commissioner of Income-Tax, Ahmedabad v. Karamchand Premchand Ltd., Ahmedabad

ii) Case Number: Civil Appeal No. 304 of 1958

iii) Judgement Date: 28 April 1960

iv) Court: Supreme Court of India

v) Quorum: Justice S.K. Das, Justice J.L. Kapur, Justice M. Hidayatullah

vi) Author: Justice S.K. Das

vii) Citation: (1960) 3 SCR 727

viii) Legal Provisions Involved: Business Profits Tax Act, 1947 – Sections 2(3), 4, 5; Indian Income-tax Act, 1922 – Section 4(1)(b), Section 14(2)(c); Interpretation of Provisos

ix) Judgments Overruled: None

x) Case is Related to: Tax Law, Corporate Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The appeal arose from a judgment of the Bombay High Court, which had allowed the assessee-company, Karamchand Premchand Ltd., to deduct losses suffered in Baroda—a former princely Indian State—from the profits earned in British India while computing its taxable profits under the Business Profits Tax Act, 1947. The central question pertained to whether the third proviso to Section 5 of the Act excluded such foreign State businesses from the Act’s purview or merely exempted their profits from tax. The appellant, Commissioner of Income Tax, argued for strict exclusion of such foreign business operations unless profits were remitted to India. However, the Supreme Court emphasized a harmonious interpretation of the statutory text that maintained the applicability of the Act to such businesses while only exempting profits unless brought into India. This judgment clarified a significant aspect of post-independence Indian taxation jurisprudence regarding the treatment of cross-jurisdictional losses and profits during the transition from British rule to a unified Republic.

D) FACTS OF THE CASE

The assessee was engaged in two distinct lines of business: a managing agency business based in British India, specifically managing the Ahmedabad Manufacturing and Calico Printing Co. Ltd., and a pharmaceutical business conducted under the name Sarabhai Chemicals in Baroda State, a former princely Indian State. During the relevant chargeable accounting periods (from April 1, 1946 to March 31, 1949), the Baroda business sustained losses, while the business in British India recorded profits. The assessee claimed that the losses from the Baroda business should be set off against the profits in British India for the purpose of calculating tax liability under the Business Profits Tax Act, 1947.

The Income Tax Officer rejected this claim, reasoning that according to the third proviso to Section 5 of the Act, the business profits in Indian States were outside the purview of the Act unless received or brought into British India. The Appellate Assistant Commissioner reversed this decision, allowing the set-off. However, the Appellate Tribunal reinstated the initial rejection. Upon a reference to the Bombay High Court, the Court ruled in favour of the assessee. The Commissioner then appealed to the Supreme Court under Article 136 of the Constitution.

E) LEGAL ISSUES RAISED

i. Whether the third proviso to Section 5 of the Business Profits Tax Act, 1947 excludes from computation losses sustained in businesses located in Indian States unless the profits thereof are brought into India?

ii. Whether the Business Profits Tax Act applies to a business conducted in an Indian State despite no income being received in British India?

iii. Whether the third proviso to Section 5 intends to exclude both profits and losses of such foreign businesses or only profits?

F) PETITIONER/APPELLANT’S ARGUMENTS

i. The counsels for the Appellant submitted that the third proviso to Section 5 of the Business Profits Tax Act clearly excluded income, profits, and gains from businesses located in Indian States unless such amounts were received or brought into taxable territories. Therefore, the Baroda business of the assessee stood excluded entirely from the scope of the Act.

ii. They contended that since the income from Baroda was not brought into British India, the Act could not apply to such a business either partially or fully. Consequently, any loss incurred in such a business could not be considered for set-off against Indian profits.

iii. The phrase “this Act shall not apply” was argued to imply complete inapplicability of the Act to the Baroda business, including both profits and losses, unless profits were remitted to India.

iv. They also submitted that allowing losses from Baroda to be set off while exempting its profits created an anomalous tax benefit, which the legislature could not have intended.

G) RESPONDENT’S ARGUMENTS

i. The counsels for the Respondent submitted that the third proviso to Section 5 of the Act did not exclude the business itself from the Act’s scope but only exempted its income unless received or brought into India.

ii. They asserted that Section 5 in its main clause made the Act applicable to all businesses whose profits were chargeable under Section 4(1)(b)(i) or (ii) of the Indian Income-tax Act, 1922. Hence, the pharmaceutical business in Baroda came within its scope.

iii. They relied on the structure of the Act and asserted that if the Act applied to the business, then its losses must be equally recognized, even if profits were exempt.

iv. The Respondent highlighted the stark difference in language between the third proviso and the earlier provisos in Section 5, which excluded businesses altogether. The third proviso did not use similar exclusionary language.

v. They cited Commissioner of Income-tax, Mysore v. Indo-Mercantile Bank Ltd. [1959 Supp 2 SCR 256], asserting that profits and losses under a single head of income must be aggregated for taxation under Section 10 of the Indian Income-tax Act.

H) RELATED LEGAL PROVISIONS

i. Business Profits Tax Act, 1947 – Section 5 (third proviso) – discussed in terms of scope and limitation regarding Indian State businesses.

ii. Indian Income-tax Act, 1922 – Section 4(1)(b), Section 14(2)(c), Section 10 – covering taxable territories, set-off of losses, and computation of income.

iii. Interpretation of Provisos – Rules on whether provisos restrict, qualify or merely clarify the main provision.

I) JUDGEMENT

a. RATIO DECIDENDI

i. The Supreme Court held that the third proviso to Section 5 of the Business Profits Tax Act did not exclude the Baroda business from the purview of the Act. It only exempted income, profits or gains unless brought into India.

ii. Therefore, the assessee could legitimately set off losses incurred in Baroda against profits earned in British India.

iii. The Court emphasized that losses cannot be “received or brought into India,” and thus are not within the exemption clause. Accordingly, they remain relevant in computing the total business profits.

iv. The Court contrasted the language of the third proviso with the clear exclusionary language of the earlier two provisos and found that Parliament had consciously chosen a narrower scope of exemption here.

b. OBITER DICTA 

i. The Court acknowledged that the drafting of the third proviso might lead to inequities, such as allowing losses from foreign businesses to be set off even when profits would not be taxed, but noted that this was a legislative matter and not a judicial one.

c. GUIDELINES 

• Interpretations of provisos must adhere strictly to their language.

• Tax statutes must be construed strictly; ambiguities should favor the assessee.

• Losses and profits under the same head are to be considered together for computation.

• Businesses not excluded by express terms fall within the Act’s ambit, despite geographical location.

J) CONCLUSION & COMMENTS

This ruling strikes a fine balance between legislative intent and equitable tax administration. The Court’s nuanced interpretation ensures businesses operating across multiple jurisdictions are not unfairly penalized due to complex post-colonial legal transitions. It also reiterates the importance of precise statutory drafting. The judgment serves as a benchmark in interpreting tax exemptions and determining the scope of provisos under taxing statutes.

K) REFERENCES

a. Important Cases Referred

[1] Commissioner of Income-tax, Mysore v. Indo-Mercantile Bank Ltd., 1959 Supp (2) SCR 256.
[2] Commissioner of Income-tax, Bombay v. Murlidhar Mathurawalla Mahajan Association, [1948] 16 ITR 146 (Bom).
[3] Commissioner of Excess Profits Tax v. Bhogilal H. Patel, [1952] 21 ITR 72.
[4] Commissioner of Income-tax, Madras v. Somasundaram Chettiar, AIR 1928 Mad 487.
[5] Commissioner of Income-tax v. Provident Investment Co. Ltd., ILR 56 Bom 92.

b. Important Statutes Referred

[6] Business Profits Tax Act, 1947 – Sections 2(3), 4, 5
[7] Indian Income-tax Act, 1922 – Sections 4(1)(b), 10, 14(2)(c)
[8] Finance Act(s) – Relevant for chargeable accounting periods and rates
[9] Adaptation of Laws Order, 1950 and 1956