Inter-branch accounting entries do not create taxable profit; actual receipt and transaction substance govern income tax treatment.

Inter-branch book entries between parts of the same assessee do not by themselves create taxable profit outside India; taxability depends on the real substance of the transaction and the place where income is actually received. An unexplained book balance cannot be treated as profit brought into British India without direct or circumstantial evidence of receipt there. By contrast, profit on a genuine sale in British India remains taxable as income received there, even if internal invoicing between branches shows a notional margin. The note thus distinguishes actual receipt from mere accounting entries for income-tax purposes.

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Issues: (i) Whether the estimated balance of Rs. 3,545 could be treated as profit brought into British India and taxed under section 4(2); (ii) whether the profit arising from the sale of goods invoiced from Bhadohi to Semohi at Rs. 65,203-13-9 was taxable, and if so, whether it fell under section 4(1) or section 4(2).

Issue (i): Whether the estimated balance of Rs. 3,545 could be treated as profit brought into British India and taxed under section 4(2).

Analysis: There was no direct or circumstantial evidence that this amount was actually brought into British India. The books showed only a book balance between two branches of the same assessee. The Court rejected any presumption that, for income-tax purposes, the assessee must have carried all money with him or that the amount necessarily stood received in British India. Section 114 of the Indian Evidence Act did not justify such a presumption on these facts.

Conclusion: The amount of Rs. 3,545 could not be taxed under section 4(2); this issue was decided in favour of the assessee.

Issue (ii): Whether the profit arising from the sale of goods invoiced from Bhadohi to Semohi at Rs. 65,203-13-9 was taxable, and if so, whether it fell under section 4(1) or section 4(2).

Analysis: The Bhadohi and Semohi shops were not separate legal entities but parts of the same assessee. A person cannot make a profit out of himself, and a notional margin added in the inter-branch invoice could not convert an internal transfer into profit earned outside British India. The taxable profit was the real profit arising on sale in British India, and the substance of the transaction, not the branch book entries, governed liability. The amount was therefore taxable as income received in British India under section 4(1), though not under section 4(2).

Conclusion: The inclusion of the profit was upheld, but only under section 4(1) and not under section 4(2); this issue was decided substantially in favour of the revenue.

Final Conclusion: The reference was answered by excluding the unexplained balance of Rs. 3,545 from taxation while sustaining taxability of the branch-sale profit as income received in British India.

Ratio Decidendi: For income-tax purposes, inter-branch entries between parts of the same assessee cannot by themselves create taxable profit outside India; taxability depends on the real substance of the transaction and the place where income is actually received.

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