Apportionment relief under Section 42(3) is unavailable where profits actually accrue or arise in British India.

Section 42(3) of the Indian Income-tax Act, 1922 applies only to profits deemed to accrue or arise in British India under Section 42. It does not extend to income that is found, on the facts, to have actually accrued or arisen in British India under Section 4(1)(c). The statutory scheme therefore leaves the first limb of Section 4(1)(c) intact and does not allow Section 42 to override it. Relief by apportionment under Section 42(3) was consequently unavailable, and the profits remained taxable without that relief.

---

---

Issues: Whether Section 42(3) of the Indian Income-tax Act, 1922 applies to profits that actually accrue or arise in British India so as to override Section 4(1)(c) and confine taxation only to the portion attributable to operations carried out in British India.

Analysis: Section 4(1)(c) distinguishes between income that actually accrues or arises in British India and income that is deemed to accrue or arise there. Section 42(1) creates a deeming rule for specified classes of income connected with British India, and Section 42(3) grants proportionate relief only in cases where profits are deemed under Section 42 to accrue or arise in British India. The relief under Section 42(3) does not extend to income which is found on the facts to have actually accrued or arisen in British India. The statutory scheme does not permit Section 42 to displace the first limb of Section 4(1)(c).

Conclusion: Section 42(3) does not apply to profits which actually accrue or arise in British India and cannot override Section 4(1)(c) in the manner suggested by the assessee.

Final Conclusion: The reference was answered against the assessee and the profits were held taxable without invoking the apportionment relief under Section 42(3).

Ratio Decidendi: Relief under Section 42(3) is confined to profits deemed to accrue or arise in British India under Section 42 and is unavailable where income is held to have actually accrued or arisen there.

---