Law:

Section:

Section 5 of the Excess Profits Tax Act, 1940 - Excess profits tax - Charge of - Assessment year 1946-47 - Assessee carried on speculative business in bullion at Delhi - It entered into certain hedge transaction in bullion market at Bhatinda (then outside of taxable territories) - This transaction resulted into loss and that loss was claimed as deduction in computing total income - Department disallowed loss - Whether since business carried on in Bhatinda was a separate business for purpose of Act, losses incurred at Bhatinda could not be taken into account for purpose of computing excess profit-tax - Held, yes FACTS The assessee, a firm of Delhi, carried on a speculative business in bullion, mostly in gold and silver. During the relevant accounting periods the firm entered into certain transactions called "hedge" transactions in the bullion market at Bhatinda (then a part of the Patiala State, that was, outside the taxable territories of British India). It claimed that it had incurred losses to non-residents there in the sums of Rs. 6,366 and Rs. 16,615 in the said transactions and claimed that these losses should be taken into consideration in determining its income. The transactions were in the nature of forward transactions carried out by means of telephone messages, letters or telegrams with parties at Bhatinda. This was the nature of the transactions which resulted in the losses for which the firm claimed deduction. The income-tax authorities disallowed the claim on the ground that if the Bhatinda transactions had resulted in profits, such profits would have been exempt from tax in terms of section 14(2)(c) of Indian Income-tax Act, 1922 as it then stood and if the profits were exempt from tax, the proviso to section 24(1) of 1922 Act was a bar to the adjustment of the losses. The Appellate Tribunal, however, allowed the deduction claimed. The High Court also held in favour of the assessee. On appeal to the Supreme Court: HELD In answering the question whether loss in question was allowable in computing the income of the assessee chargeable to excess profit-tax, the High Court proceeded on two grounds; firstly, it referred to section 5, particularly the…

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