Place of accrual of profits determines exemption; profits from separable operations in Indian States are exempt, remainder taxable.

Where part of a business is carried on in an Indian State and profits can be apportioned on recognised mercantile-accounting principles, that part may be treated as a separate business for exemption under the proviso to Section 5 of the Excess Profits Tax Act; the governing test is where profits accrue or arise, not merely where receipts occur, and profits must be distributively attributed to the transactions or operations producing them. Applying the attribution rule (via incorporation of income-tax attribution principles), profits attributable to the separable operations of buying, transport and loading in Mysore and Cochin are exempt, while the remaining profits are taxable as arising in British India.

---

---

Issues: Whether the whole of 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.

Analysis: Relevant statutory scheme includes the third proviso to Section 5 of the Excess Profits Tax Act, the incorporation by reference of Section 42(3) of the Income Tax Act via Section 21 of the Excess Profits Tax Act, and the concept of income accruing or arising in an Indian State for residents. Where a part of a business is carried on in an Indian State, that part may be treated as a separate business for exemption purposes if apportionment of profits to that part is possible on recognised principles of mercantile accountancy. The place where profits accrue or arise, not merely the place of receipt, is the governing criterion; profits may be distributed distributively among transactions or operations that produce them. Applying these principles to the facts: the buying of goats and sheep in Mysore, their transport to Cochin and loading at Ernakulam formed a separable part of the assessee's business carried on in Indian States, operated through an establishment at Ernakulam; other activities such as contracting, supervision and realisation of price were carried on in British India. Section 42(3) of the Income Tax Act provides the basis for attributing to operations carried out in British India only such profits as are reasonably attributable to those operations, and correspondingly for attributing profits to operations carried out in an Indian State.

Conclusion: Profits attributable to the separable 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 are taxable as accruing or arising in British India.

---