Residence test under Income-tax law turns on full income arising in British India, not apportionment under Section 42(3).

For residence under Section 4A(c)(b) of the Income-tax Act, 1922, the relevant inquiry is the income actually arising in British India, and not merely the portion attributable to operations carried on there. Section 42(1) and (3) is an apportionment scheme confined to profits deemed to accrue or arise under Section 42(1), so it does not govern computation under Section 4A(c)(b) where sales in British India produce the income. The text also notes that Sections 4(1) and 4A(c)(b) were previously upheld as within legislative competence, and no contrary distinction was accepted.

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Issues: (i) Whether Section 42(1) and (3) of the Income-tax Act, 1922 applied to the computation of income accruing or arising in British India for the purpose of Section 4A(c)(b) where the manufacturing process was carried on outside British India. (ii) Whether, for applying the residence test under Section 4A(c)(b), the entire profits and gains arising in British India had to be taken into account or only that part attributable to operations carried on in British India. (iii) Whether Sections 4(1) and 4A(c)(b) of the Income-tax Act, 1922 were ultra vires the Indian Legislature.

Issue (i): Whether Section 42(1) and (3) of the Income-tax Act, 1922 applied to the computation of income accruing or arising in British India for the purpose of Section 4A(c)(b) where the manufacturing process was carried on outside British India.

Analysis: The statutory scheme treated Section 42(3) as an apportionment provision applicable only where profits are deemed to accrue or arise in British India under Section 42(1). For the residence test in Section 4A(c)(b), the relevant inquiry was the income actually arising in British India in the year of account. Once the sales were effected in British India, the resulting profits arose there, and no part could be excluded on the ground that manufacturing operations were performed outside British India.

Conclusion: Section 42(1) and (3) had no application to the computation under Section 4A(c)(b) in these circumstances; the issue was decided against the assessee.

Issue (ii): Whether, for applying the residence test under Section 4A(c)(b), the entire profits and gains arising in British India had to be taken into account or only that part attributable to operations carried on in British India.

Analysis: The computation under Section 4A(c)(b) turned on the whole of the income arising in British India, not merely the portion attributable to local operations. Section 42(3) did not control that computation, because the section governed only the apportionment of profits deemed to accrue or arise under Section 42(1). Accordingly, the full profits arising in British India formed part of the residence test.

Conclusion: The entire profits and gains arising in British India were to be taken into account, and the issue was decided against the assessee.

Issue (iii): Whether Sections 4(1) and 4A(c)(b) of the Income-tax Act, 1922 were ultra vires the Indian Legislature.

Analysis: The question was concluded by binding authority, and the provisions had already been upheld. No contrary distinction was available for the present reference.

Conclusion: Sections 4(1) and 4A(c)(b) were not ultra vires the Indian Legislature, and the issue was decided against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on all the substantive questions, and the computation of the assessee's residence and taxable income was upheld without apportionment under Section 42(3).

Ratio Decidendi: For determining residence under Section 4A(c)(b) of the Income-tax Act, 1922, the entire income actually arising in British India must be considered, and the apportionment rule in Section 42(3) applies only to profits deemed to accrue or arise under Section 42(1).

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