Profit accrual outside British India can support exemption where business operations in Indian States are distinct and separable.

Profits are taxable or exempt according to where they accrue or arise, not merely where sale proceeds are realised. On the scheme of the third proviso to section 5 of the Excess Profits Tax Act, read with the apportionment principle in section 42(3) of the Income-tax Act, a substantial and separable part of the business carried on in Mysore and Cochin could generate attributable profits outside British India. The purchase, transport and loading of goats and sheep in the Indian States formed a distinct commercial segment of the business. The profits attributable to that segment were therefore exempt from excess profits tax, while the balance of the profits remained taxable.

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Issues: Whether the profits attributable to the operations of purchasing, transporting and loading goats and sheep in Mysore and Cochin accrued or arose in an Indian State so as to be exempt from excess profits tax under the third proviso to section 5 of the Excess Profits Tax Act.

Analysis: The contractual sale was entered into in British India and the price was realised there, but a substantial and separable part of the business was carried on outside British India through the purchase of animals in Mysore, their transport to Cochin and their loading for shipment at Ernakulam. On the scheme of the third proviso to section 5, read with the apportionment principle in section 42(3) of the Income-tax Act, the relevant inquiry is where the profits accrue or arise, not merely where they are received. The business operations in the Indian States formed a distinct part of the assessee's business and could yield attributable profits on recognised commercial principles.

Conclusion: The profits attributable to the business operations carried on in Mysore and Cochin were exempt from excess profits tax, while the balance of the profits remained taxable.

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