Accrual of business profits turns on where performance and payment rights arise, not merely contract formation.

Profits from timber contracts were analysed by reference to where the transaction substantively came into existence and where the right to payment arose, not merely where the offers were accepted. Because the timber was manufactured, inspected, appropriated, delivered, and paid for in Cochin State, the profits were held to have accrued or arisen outside British India, leaving no charge on that basis. The discussion also clarified that Section 42(3) operates only as a deeming rule for profits treated by statute as accruing or arising in British India, and does not extend to profits that in fact accrued there. The revenue's contention was rejected and costs were awarded to the assessee.

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Issues: (i) Whether the profits from the timber contracts accrued or arose in British India or outside British India so as to determine the assessee's residential status and tax liability; (ii) whether Section 42(3) applied only to profits deemed to accrue or arise in British India or also to profits actually accruing or arising there.

Issue (i): Whether the profits from the timber contracts accrued or arose in British India or outside British India so as to determine the assessee's residential status and tax liability.

Analysis: The relevant test was the place where the profits in substance came into existence, not merely the place where the contract was formed. Though the offers were accepted in British India, the contracts were executed wholly in Cochin State: the timber was manufactured there, inspected there, appropriated there, delivered there, and the right to receive the price arose there. In a trading transaction of this kind, the place of contract formation was an important circumstance but not decisive when all material acts of performance and the completion of the sale occurred outside British India.

Conclusion: The profits accrued or arose outside British India, and the assessee was not chargeable on that footing.

Issue (ii): Whether Section 42(3) applied only to profits deemed to accrue or arise in British India or also to profits actually accruing or arising there.

Analysis: The provision was understood as creating a deeming rule. It did not extend to profits which in fact accrued or arose in British India, but only to profits treated by the statute as so accruing or arising by legal fiction.

Conclusion: Section 42(3) applied only to deemed accruals or deemed arisings and not to profits actually accruing or arising in British India.

Final Conclusion: The reference was answered in favour of the assessee, with the revenue's contention rejected and costs awarded to the assessee.

Ratio Decidendi: For taxing business profits under the accrual principle, the decisive factor is where the material operations and completion of the transaction occur and where the right to payment arises; the mere place of contract formation does not control, and a deeming provision cannot be extended beyond its express fiction.

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