1950 (1) TMI 17 - HC - Income Tax

Residence Test based on income actually arising in British India; apportionment of deemed profits not available to reduce that income.

Whether apportionment of profits applies when computing income for the residence test was considered; the court held apportionment applies only to profits ... Residence of company - income arising in British India - application of Section 4A(c)(b) - apportionment of profits under Section 42(3) - profits deemed to accrue or arise in British India - chargeability under Section 4(1)(b)Application of Section 42(1) and (3) to income arising in British India - income arising in British India - application of Section 4A(c)(b) - Section 42(1) and (3) do not apply to the computation of income accruing or arising in British India for the purposes of Section 4A(c)(b), even where the manufacturing took place outside British India. - HELD THAT: - The Court held that for determining whether a company is resident under Section 4A(c)(b) the entire income arising in British India in the year of account must be taken into account. Section 42(3), which permits apportionment of profits where operations are partly within and partly outside British India, applies only where profits are 'deemed' under Section 42(1) to accrue or arise in British India. Section 4A(c)(b) requires consideration of income actually arising in British India and does not include deemed accruals under Section 42. Consequently, the apportionment machinery of Section 42(1) and (3) is not available to exclude any portion of profits arising by reason of sales effected in British India when applying the residence test in Section 4A(c)(b).Section 42(1) and (3) have no application to the computation of income arising in British India for the purpose of Section 4A(c)(b).Entire profits arising in British India - test under Section 4A(c)(b) - chargeability under Section 4(1)(b) - The entire profits and gains arising to the company in British India must be taken into account for applying the test in Section 4A(c)(b); apportionment under Section 42(3) is not to be applied for that purpose. - HELD THAT: - The Court decided that where sales are effected in British India the profits arising by reason of such sales accrue or arise in British India and cannot be excluded as attributable to manufacturing operations outside British India. If, on that computation of profits arising in British India, the company qualifies as a resident under Section 4A(c)(b), then Section 4(1)(b) applies and the company's income both within and without British India is brought into charge. Thus Section 42(3) does not limit the computation of profits for the residence test and apportionment under Section 42(3) is irrelevant to the application of Section 4A(c)(b).The entire profits and gains arising in British India are to be taken into account under Section 4A(c)(b); Section 42(3) has no application to that computation.Final Conclusion: The Court answered that Section 42(1) and (3) do not apply when computing income arising in British India for the purposes of Section 4A(c)(b); the whole profits arising in British India must be taken into account for the residence test, and if residence follows, Section 4(1)(b) renders the company's worldwide income chargeable. The third referred question was answered against the assessee as conceded, upholding the impugned provisions as not ultra vires. Issues: (i) Whether Section 42(1) and 42(3) of the Income-tax Act apply to computation of income accruing or arising in British India for the purpose of Section 4A(c)(b) where manufacturing occurred outside British India; (ii) Whether the entire profits and gains arising in British India or only the portion attributable under Section 42(3) must be taken into account for applying the test in Section 4A(c)(b); (iii) Whether Sections 4(1) and 4A(c)(b) of the Income-tax Act are ultra vires the Indian Legislature.Issue (i): Whether Section 42(1) and 42(3) apply to computation under Section 4A(c)(b) when manufacturing occurred outside British India.Analysis: The Court examined the language and interplay of Sections 4(1)(b)(i) and (ii), 4A(c)(b) and 42(1) and (3). Section 42(3) permits apportionment where profits are deemed to accrue or arise in British India under Section 42(1). Section 4A(c)(b) requires taking income actually arising in British India for the residence test, not profits merely deemed by Section 42. Sales effected in British India produce profits arising in British India; such profits cannot be excluded as attributable to manufacturing outside British India. Consequently Section 42(1) and (3) operate only in cases falling within Section 42(1) and do not override the computation required by Section 4A(c)(b).Conclusion: Section 42(1) and Section 42(3) have no application to the computation of income arising in British India for the purposes of Section 4A(c)(b).Issue (ii): Whether the entire profits and gains arising in British India or only the portion attributable under Section 42(3) must be taken into account for applying the test in Section 4A(c)(b).Analysis: The Court held that for determining residence under Section 4A(c)(b) the full amount of income arising in British India in the year of account must be considered. Section 42(3)'s apportionment applies only to profits deemed under Section 42(1) and is not available when computing income that in fact arises in British India. If on that computation the company qualifies as resident under Section 4A(c)(b), Section 4(1)(b) applies to bring income within and without British India into charge.Conclusion: The entire profits and gains arising in British India must be taken into account for the test under Section 4A(c)(b); Section 42(3) does not apply to that computation.Issue (iii): Whether Sections 4(1) and 4A(c)(b) are ultra vires the Indian Legislature.Analysis: The Court accepted binding precedents of the Federal Court and the Privy Council which addressed comparable challenges and concluded that the provisions are within legislative competence.Conclusion: Sections 4(1) and 4A(c)(b) of the Income-tax Act are not ultra vires the Indian Legislature.Final Conclusion: The Court answered the referred questions by holding that (i) Section 42(1) and 42(3) do not affect computation under Section 4A(c)(b), (ii) the entire income arising in British India is to be taken for the residence test under Section 4A(c)(b), and (iii) Sections 4(1) and 4A(c)(b) are constitutionally valid; accordingly the legal effect is that the assessments based on these statutory interpretations stand supported.Ratio Decidendi: For the residence determination under Section 4A(c)(b) the taxable measure is income actually arising in British India in the year of account; apportionment under Section 42(3) applies only to profits deemed under Section 42(1) and therefore cannot be employed to reduce income taken into account under Section 4A(c)(b).