1951 (3) TMI 38 - HC - Income Tax

Excess Profits Tax Act: Location-based Profit Taxation Ruling

Commissioner of Income Tax, Excess Profit Tax, Madras Versus A.S.T.F. Rodrigues and Co., Katpady

The court held that profits from operations in Mysore and Cochin States are exempt from excess profits tax under the third proviso to Section 5 of the ... - Issues Involved:1. Whether the profits from the supply of sheep and goats to the military authorities accrued or arose in an Indian state and hence are exempt from liability to excess profits tax under the proviso to Section 5 of the Excess Profits Tax Act.Issue-wise Detailed Analysis:1. Accrual of Profits and Tax Liability:The core issue is whether the profits from the supply of sheep and goats to the military authorities accrued or arose in an Indian state, making them exempt from excess profits tax under the proviso to Section 5 of the Excess Profits Tax Act. The assessee, a registered firm, entered into a contract with the military authorities in British India for the supply of live goats and sheep. The animals were purchased in Mysore, transported to Cochin State, and loaded onto ships provided by the military authorities at Ernakulam. The revenue authority assessed the profits to excess profits tax, arguing that they arose in British India. However, the assessee contended that the profits arose in Mysore and Cochin where the goods were bought and delivered.2. Legal Provisions and Precedents:The judgment delves into the relevant statutory provisions, including Section 4 of the Income Tax Act and the third proviso to Section 5 of the Excess Profits Tax Act, which exempts profits accruing or arising in an Indian State. The court referenced prior judgments, including 'Commissioner of Excess Profits Tax v. Goculdoss Jamnadass & Co.' and 'Commissioner of Income Tax v. Parasuram Jethanand', and the Supreme Court's decision in 'Commissioner of Income Tax v. Ahmedbhai Umarbhai & Co.', which emphasized the need to apportion profits between different parts of a business.3. Separation of Business Operations:The court examined whether the operations in Mysore and Cochin formed a separate part of the business. It was concluded that the purchase, transport, and loading of goats and sheep constituted a separable part of the business conducted outside British India. This part of the business was managed from an establishment in Ernakulam, Cochin State, and could independently generate profits.4. Place of Accrual of Profits:The court discussed the place of accrual of profits, distinguishing between the place of receipt and the place of accrual. It emphasized that the criterion under the third proviso to Section 5 of the Excess Profits Tax Act is the place where the profits accrue or arise. The court referenced several landmark cases, including 'Commissioner of Income Tax v. Chunilal B. Mehta' and 'Commissioner of Income Tax v. Govindram Seksaria', to elucidate the principles governing the place of accrual of profits.5. Apportionment of Profits:The court concluded that the profits attributable to the operations conducted in Mysore and Cochin must be apportioned and considered exempt from excess profits tax. The rest of the profits, arising from the contract entered into, supervised, and realized in British India, would be liable to tax. The court acknowledged the significance of the contract made in British India as a source of the profits, despite the substantial performance of contractual obligations in Indian States.Conclusion:The court held that the profits attributable to the part of the business carried on in Mysore and Cochin States are exempt from excess profits tax under the third proviso to Section 5 of the Excess Profits Tax Act. The remaining profits, arising from the business operations in British India, are liable to such tax. The court provided a nuanced analysis of the place of accrual of profits and the need for apportionment based on the specific operations conducted in different locations. No order as to the costs of the reference was made, as each party succeeded and failed in part.