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Issues: (i) Whether any part of the income, profits or gains from the assessee's trading business accrued or arose in an Indian State where the goods were only purchased and exported in raw state for sale in British India. (ii) Whether Section 42(3) of the Income-tax Act, 1922 applied to apportion any part of the profits as deemed to accrue in British India or to support exemption under Section 14(2).
Issue (i): Whether any part of the income, profits or gains from the assessee's trading business accrued or arose in an Indian State where the goods were only purchased and exported in raw state for sale in British India.
Analysis: The business was one of simple trade in which raw commodities were purchased in the Indian States and sold in British India without any manufacturing process in the States. The relevant income was realised when the goods were sold, and the mere act of purchase in the States did not by itself create a portion of the profit there. On the facts found, nothing was done in the States except purchase and export, and the profit therefore arose at the place of sale.
Conclusion: No part of the income, profits or gains accrued or arose in an Indian State; the issue was answered against the assessee.
Issue (ii): Whether Section 42(3) of the Income-tax Act, 1922 applied to apportion any part of the profits as deemed to accrue in British India or to support exemption under Section 14(2).
Analysis: Since no part of the profit was found to accrue or arise in the Indian States, there was no basis for invoking apportionment under Section 42(3) on the premise that part of the business income had arisen outside British India. The claimed exemption under Section 14(2) also failed because the factual foundation for income having accrued in the States was absent.
Conclusion: Section 42(3) was held inapplicable, and the assessee was not entitled to the claimed exemption under Section 14(2); the issue was answered against the assessee.
Final Conclusion: The reference was decided in favour of the Revenue, with the trading profits held to arise at the place of sale in British India and not in the Indian States.
Ratio Decidendi: In a simple trading business involving purchase in one place and sale in another, profit accrues or arises at the place where the sale is effected and the profit is realised, and mere purchase of goods in another territory does not by itself create accrued income there.
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