COMMISSIONER OF EXCESS PROFIT TAX, KANPUR versus KALYAN MAL PHOOL CHAND, NAGAR GANJ, KANPUR

Citation: [1987] 2 S.C.R. 601 · Decided: 13-03-1987 · Supreme Court of India · Bench: SABYASACHI MUKHERJI · Disposal: Appeal(s) allowed

Judgment (excerpt)

COMMISSIONER OF EXCESS PROFIT TAX, KANPUR 
v. 
KALYAN MAL PHOOL CHAND, NAGAR GANJ, KANPUR 
MARCH 13, 1987 
[SABY ASACHI MUKHARJJ AND 
S. NATARAJAN. JJ.J 
Excess Profit Tax Act, 1940--Sections 2, 5-7-'Accounting 
period'-'Chargeable account period'-'Standard profits'-What are-
Deficiency in profits-Setting off-Basis of determination. 
A 
B 
c 
The assessee was an unregistered firm carrying on business 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 
D 
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 
E 
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 distinct from the business carried on in 1940-41. 
The Excess Profit Tax Officer did not set off the 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, and 
held that the business carried on during October, 1940 to October, 1941 
was completely different from the business carried on during the afore-
said chargeable accounting period. 
F 
So far as the deficiency pertaining to the period November, 1942 
G 
to 31st March, 1943 was concerned, the manufacturing 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 ac-
counting period. namely, 31st March, 1943. As the assessee did not, 
maintain any books of account, the provisions ofs.13 of the Income Tax 
H 
601 
602 
SUPREME COURT REPORTS 
[1987] 2 S.C.R. 
Act, 1922 were applicable. The Revenue, therefore, valued the stock-in-
~:)"' 
A trade at cost and held that there could be no profit or loss during the 
) 
B 
chargeable accounting period. 
In appeal, the assessee urge 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 excesss profits and as there were no profits )J.. 
during the said. chargeable accounting period, the standard profits be-
came the deficiency of the said two years which should have been 
• 
allowed set off and that as manufacturing operations were carried on -~ • 
c 
during the said periods, it could not be said that the assessee did not 
carry on any bnsiness. 
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 
o 
during 30th May, 1941 to 29th September, 1941 and held that the 
assessee was entitled to set off in respect of the deficiency 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 
E 
accounting period ending on 31st March. 1942 which consisted of the 
period Isl April, 1941to29th September. J94J. 
F 
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 manufacturing acti-
G 
vity and sale; (1) October 28, 1940 to March 31, 1941, falling in the 
financial year ending March 31, 1941, Katechu was manufactured but 
there was no sal

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