MOSELEY A.C.J.—Bonar Co. and Commissioner of Income Tax. 317
1943Present: Moseley A.C.J. and Jayetileke J.
BONAR CO., Appellant, and COMMISSIONER OF INCOMETAX, Respondent
-108-S—D. C. (Inty.) Income Tax.
Excess Profits Duty—Calculation of pre-war standard of profits—Option oftaxpayer—Old and new business—Identity of personnel—Excess ProfitsDuty Ordinance, No. 38 of 1941, s. 6 (3).
The proviso to section .6 (3) of the Excess Profits Duty Ordinanceaccording to which pre-war standard of profits may, at the option of thetaxpayer or taxpayers, be computed by reference to the profits arisingfrom any trade, business, office, employment or profession carried on bybim or them before his or their new business commenced, applies onlywhere there is complete identity between the personnel forming the oldand the new business.
ASE stated to the Supreme Court under section 13 of the ExcessProfits Duty Ordinance, No. 38 of 1941.
H. V. Perera, K.C. (with him E. F. N. Gratian), for the appellant.
H. H. Basnayake, C.C., for the Commissioner of Income Tax.
Cur. adv. vult.
April 8, 1943. Moseley A.C.J.—
This is an appeal by way of case stated for the opinion of this Court asprovided by section 74 of the Income Tax Ordinance (Chapter 188) theprovisions of which have been made applicable by section 13 of theExcess Profits Duty Ordinance (No. 38 of 1941), to an appeal against anassessment of excess profits duty under the latter Ordinance.
The duty is imposed by section 2 of the Ordinance upon the amountby which the profits arising from any business to which the Ordinanceapplies exceed, by more than three thousand rupees, the pre-war standardof profits. Section 6 (1) sets out the various formulae by which thepre-war standard of profits is determined, according to whether thebusiness has been in existence for a period of three years or more, for aperiod less than three years but more than two years, or for a period lessthan two years but not less than one year. Section 6 (2) read with 6 (4)provides that when the pre-war standard of profits is less than ten percentum of the capital of the business (it is unnecessary to particularizefurther on this point) the pre-war standard of profits shall be taken to bethe said percentage. Section 6 (3) provides for the case where there has
318MOSELEY A.C.J.—Bonar Co. and Commissioner of Income Tax.
not been one pre-war trade year, and since the decision of -the questiLibefore us hinges upon the construction of the proviso thereto, it isconvenient to set out the sub-section in extenso :
“Where there has not been one pre-war trade year, the pre-wa,rstandard of profits shall be taken to be the percentage standard.
Provided that where the business is an agency or business of lanature involving capital of a comparatively small amount, the preVwar standard of profits may, if the taxpayer so elects, be computed"by reference to the profits arising from any trade, business, office,employment or profession of any sort, whether liable to excess profitsduty 6r not, carried on by him before his new business commenced asif it was the same business : but only to the extent to which the incomefrom the former trade, business, office, employment or profession hasbeen diminished”.
Section 6 (5) (a) provides for an artificial pre-war standard of profitsof four thousand rupees, in the case of a business of which the pre-warstandard of profits as determined under the preceding provisions is lessthan four thousand rupees.
The appellants are in partnership and carry on the business of Engineers& Contractors. The partnership consists of two members, viz., Mr.James Bonar and Mr. Harold Nightingale. Prior to their entry intopartnership Mr. Bonar was employed by Messrs- Walker Sons & Co.,Ltd., while Mr. Nightingale was, and still is, a consulting engineer.The partnership commenced business on June 1, 1939, and it is commonground that Mr. Bonar is the only working partner.
It will be observed that there had not been, as far as the partnership isconcerned, one pre-war trade year. The capital employed in the businessis'admittedly very small so that, the Assessor, to the advantage of thepartnership, adopting the minimum provided for by section 6 (5) (a)assessed the pre-war profits at Rs. 4,000. The appellants, however,sought to bring their case under the proviso to sub-section (3), on theground that each of the partners in the new business is a “ taxpayer ”for the purposes of the Ordinance and that the diminishment of theincome from the former trade, business, office, employment or pro-fession of each or either of them is a factor to be taken into account incomputing the pre-war standard of profits of the business.
This view wastrejected successively by the Commissioner and by theBoard of Review to whom the partnership appealed. The Board beforedismissing the appeal had considered the case of Mills from Ernelie, Ltd. ’v.Commissioners of Inland. Revenue1 which is not directly in point since,in that case, it was sought by the members of a new business to set up,as the pre-war standard profits, the profits of a defunct business of whichthey had been employees. In the present case the appellants do notseek to take advantage of the pre-war profits made by Messrs. WalkerSons & Co., Ltd., but only of the income drawn from the company byMr. Bonar. This distinction should be bo-ne in mind in considering thefollowing observation of Rowlatt J. at page 80 :— s
“ The rule (the counterpart of the proviso to section 6 (3) ) means■ that, where a man leaves a business of his own to take up another
112 Report of Tax Cases 73.
MOSELEY A.CJ.—Bonar Co. and Commissioner* of Income Tax. 319
business, also his own, then you may look at the amount which he hassacrificed by deserting the 1st business against the profit which hehas made by setting up the new business.”
If those words stood alone and full value were given to each word,disregarding the fact that they were uttered in a context which treated,mainly of the profits of a business where the man referred to was merelyan employee, there would be strong support for the position taken upby the successive authorities who considered the present case. But beforegiving utterance to those words Rowlatt J. had said this :
“ It is said that the appellant company carried on trade before thenew one. The appellant company only came into existence for thepurposes of this new shop and, therefore, strictly, that certainly couldnot have been the case.”
This remark taken with that previously quoted would seem to indcatethat, irrespective, of the actual question then in issue, the learned Judge’sview was that, in order that the rule should be applicable, the personnelforming the new business must be identical with that carrying on theformer business. This was the attitude taken up by Counsel for the Com-missioner. The design of the Ordinance, he contended, is to impose atax upon business, and the “taxpayer” referred to in the proviso tosection 6 (3), as well as in section 2 (1) and section 6 (1) is the business.Counsel for the appellants preferred to regard the term as a figure ofspeech on the footing that, while the trade or business is the unit of assess-ment, the burden of payment may ultimately fall on either of the individualpartners. This argument does not appeal very strongly, since it wouldnormally only be upon failure to extract the tax from the business thatrecourse would be had to an individual member. The analogy whichhe drew between this tax on businesses and the more familiar taxes uponmotor cars and dogs will not bear close examination although the unitof assessment in these cases is respectively the business, the motor earand the dog.
Mr. Perera also, and I think that this was his main argument, invokedthe aid of the provision of the Interpretation Ordinance to the effectthat words in the singular number include the plural, and contended thatwhat the proviso to section 6 (3) means is that the pre-war standardof profits may, at the option of the taxpayer or taxpayers, as the casemay be, be computed by reference to the profits arising from any trade,business, office, employment or profession carried on by him or them,or either of them, before his or their new business commenced.
It seems to me that this construction carries too far the meaning ofthat provision of the Interpretation Ordinance and that there- is nojustification for importing into the proviso the words “ or either of them ”,although without them the paraphrase is unobjectionable, since thewords “ carried on by him or them ” could., only refer respectively to“ taxpayer or taxpayers ”. It seems to me that the Excess Profits DutyOrdinance not only intended that there should be complete identitybetween the personnel forming the old . and new-businesses but has madethat intention clear.
We were presented with a picture of the hardship that would fall upontwo partners, .who had been in separate businesses before, the sum of whose
320 DE KRETSER J.—de Silva v. Magistrate & Police Inspr. Herat.
individual incomes was greater than the income of the subsequentlyformed partnership, and who would nevertheless be liable to pay thisduty if the principle adopted here by the successive authorities is affirmed.That is a matter with which we cannot concern ourselves. Indeed, it.may be that the Legislature, out of consideration for such a case, or similarcases which may result in hardships or anomalies, has thought fit to createthe artificial minimum standard of pre-war profits of four thousandrupees.
The question which we are invited in the first place to decide is “ whether,in terms of the proviso to section 6 (3) of the Excess Profits DutyOrdinance, No. 38 of 1941, the appellant partnership (whose business isof a nature involving capital of a comparatively small amount) is entitledto elect that the pre-war standard of profits of the appellant’s business becomputed by reference to the profits arising, from the trade, business,office, employment or profession’ carried on by Mr. Bonar, the onlyworking partner in the' appellant partnership, before the partnershipbusiness commenced”.
The answer to that question is in the negative. That being so, thesupplementary questions do not arise. I would dismiss the appeal withcosts.
Jayetileke J.—I agree.