Territorial scope of income tax: profits earned and received outside British India were not taxable despite a local head office.

Profits earned and received in Hyderabad were not assessable to income-tax in British India under section 3(1) of the Income Tax Act VII of 1918, because the charging provision applied only to income that accrued, arose, or was received within British India or was deemed so. A head office in British India, managerial control from there, or later use of funds there for dividend-related payments did not convert foreign profits into taxable income within the territory. The Madras HC accordingly held that the whole of the company's profits was not assessable in British India and answered the reference in favour of the assessee.

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Issues: Whether the company's entire profits were assessable to income-tax in British India under section 3(1) of the Income Tax Act VII of 1918, when the factory business was carried on and the charges were received in Hyderabad, and only the head office functions and incidental receipts occurred in British India.

Analysis: The chargeable income was earned by the factory outside British India and was received there. Section 3(1) applied only to income that accrued, arose, or was received in British India, or was deemed so to accrue, arise, or be received. The mere existence of a head office in British India, managerial control from there, or the later use of money in British India for dividend-related payments did not convert the foreign profits into income accruing or received in British India. The reasoning was consistent with the cited authorities that profits earned and received outside British India are not taxable merely because they are later remitted or distributed elsewhere.

Conclusion: The whole of the company's profits was not assessable to income-tax in British India; the answer to the reference was in the negative, in favour of the assessee.

Final Conclusion: Income earned and received outside British India was held not to fall within the charging provision merely because the company's head office was in British India or because dividend-related payments were made there.

Ratio Decidendi: For income-tax purposes, profits are taxable only where they accrue, arise, or are received within the territorial scope of the charging provision, and their later remittance or distribution in British India does not make them taxable if they were earned and received outside British India.

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