CHAGLA, C.J. - The question that arises on this reference is the interpretation of certain provisions of the Excess Profits Tax Act, and the material facts are that the assessee company, the Scindia Steam Navigation Co. Ltd., was carrying on for many years the business of plying ships for hire and was also the managing agents of many steamship companies. In the chargeable accounting period which is from the 1st of July, 1940, to 30th June, 1941, it incurred an expenditure of Rs. 3,46,850 towards the construction of a ship-building yard at Vizagapatam, and the contention of the assessee company was that it was entitled to include this sum as a capital employed in its business for computing the average amount of capital according to the rules in Schedule II to the Excess Profits Tax Act, 1940. This contention was rejected by the Tribunal.
Now, it is important to note two findings of fact arrived by the Tribunal. The first finding is that the business of plying ships which the assessee company was carrying on is an entirely different and distinct business from the business of building ships which it proposed to carry on by building a yard at Vizagapatam. The second finding of fact is that the business of shipbuilding had not been commenced during the charging period. With these findings of fact as constituting the background, we must turn to the relevant provisions of the Excess Profits Tax Act. Section 2(3) defines average amount of capital, which means the average amount of capital employed in any business as computed in accordance with the Second Schedule, and when we turn to the Second Schedule the relevant rule on which Sir Jamshedji relies is rule 1(1) (a) which i : "Subject to the provisions of this Schedule, the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken to be -
(a) so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those assets were acquired, subject to the deductions hereafter specified."
The contention of Sir Jamshedji is that as soon as the assessee company spent Rs. 3,46,850 and thereby acquired an asset which was the ship-building yard at Vizagapatam, it must be deemed to have commenced business, whether in fact any shipbuilding activity was carried on in the yard or not. The argument advanced before us has been that there is commencement of a business when an assessee spends any amount for the purpose of a business. This contention is obviously fallacious when one looks at the object the scheme of the Excess Profits Tax Act. The entity which is charged to tax under the Excess Profits Tax Act is a business and the scheme of the Act is to have a standard period which is compared to the charging period and the comparison proceeds on what were the profits earned in a business during the standard period and what were the profits earned during the charging period, and in order to arrive at the rate of tax it is necessary to ascertain what was the average amount of capital employed during the statutory period and during the charging period. Therefore, the business which is contemplated by the Act is a business which is in fact being carried on and which is capable of yielding profits. The business contemplated is not one for which preparations are made, for which assets are purchased, for which expenditure is incurred, but which has not reached the stage of being carried on and of yielding profits. Sir Jamshedji has suggested that if this interpretation were to be placed on the expression "commencement of the business", then a very curious anomaly would result. According to him, if an asset was acquired by a purchase before the commencement of a business, then it could never be made use of for the purpose of rule 1(1)(a) at the time of the commencement of the business if commencement of the business was used in the sense of carrying on the business, because the asset was already there and it was not acquired on or after the commencement of the business. In my opinion, that is not the correct interpretation to put upon rule 1(1)(a). It may be that the rule is not very happily drafted, which could be said of any rule drafted under this Act. But the only proper construction to put upon this rule is that you have to find out what are the assets of a business at the time business starts running or is carried on and those assets must be assets which are acquired by purchase. Those assets fall under rule 1(1)(a); assets which are acquired otherwise fall under rule 1(1)(c); but rule 1(1)(a) does not contemplate the acquiring of assets only on or after the commencement of the business, What it also contemplates is the particular business having certain assets at the time of the commencement of the business. it is irrelevant as to when those assets were acquired; how long before the business was in fact commenced.
It is then urged that in any case the assessee companys case falls under the proviso to Section 2(5). This proviso lays down that all businesses to which Act applies carried on by the same person shall be treated as one business for the purpose of this Act. But here again, Sir Jamshedji is confronted with the same difficulty, because it is not to all business of an assessee that this proviso applies; it is only to those businesses which are carried on by him. Under the memorandum of association the assessee company could do several businesses; one of those businesses was plying ships, the other was constructing a ship-building yard. But the question still falls to be determined whether both those businesses were carried on by the assessee company. The mere fact that the assessee company is entitled to carry on a business or has made preparations for carrying on a business or has spent money so that ultimately it should be in a position to carry on a business, does not mean the same thing as that it in fact is carrying on that business. Therefore, as I said before, referring to the findings of fact by the Tribunal, it is clear that the ship building business of the assessee company was not being carried on at the relevant period, viz., between the 1st of July, 1940, and the 30th of June, 1941. Therefore the assessee company cannot avail itself of this proviso. In other words, these two businesses do not constitute one business within the meaning of the proviso.
Sir Jamshedji has referred to an English case which ultimately went up to the House of Lords. The decision of the Judge of the first instance is reported in Inland Revenue Commissioners v. Byron Ltd. The assessees in that case were carrying on the business of theatre proprietors and one of the theatres belonging to them was destroyed by enemy action during the last war, and the Crown contended that the capital represented by the theatre and the land on which the theatre stood should be excluded from the computation of the capital employed during the charging period. That contention of the Crown was rejected by Mr. Justice Macnaghten. It is difficult to understand how this decision can be of any assistance to us in deciding the point that we have to decide, because in this English case the assessees were carrying on businesses of theatres, the particular asset in question was a theatre, and there was no question that the assessees had started a new business or that the particular business was not being carried on by them. It is also clear that this particular asset was in existence at the time the business was carried on. It is on those facts that Mr. Justice Macnaghten came to the conclusion that although a particular asset of a business was destroyed, as the business was still being carried on and the asset originally belonged to the business, the asset must be treated as still being part of the capital of the assessees. We are dealing with facts which are entirely different. We are dealing with a business which has no connection with the business so far carried on by the assessee company. We are dealing with an asset which has just come into existence and we are dealing with an asset which has come into existence before the other business of the assessee company to which this asset is going to belong has even been commenced.
Therefore, in my opinion, the Tribunal was right in coming to the conclusion that the assessee company could not take the benefit of rule 1(1)(a) of Schedule II for the purpose of treating the sum of Rs. 3,46,850 as a part of its capital for the purpose of the Excess Profits Tax Act, 1940. I would therefore answer the question raised in the negative. Assessee to pay the costs.
TENDOLKAR, J. - I agree.
Reference answered accordingly.