Profit sourcing: estimating hidden export profits cannot recharacterise foreign-sale gains as taxable in India.

Whether tax authorities may impute additional profits to British India by estimating hidden gains from export transactions: the article concludes they may not. The Commissioner's reliance on supervisory activity and alleged F.O.B. price inflation amounted to an unsupported estimation of profit, not an exercise of statutory best judgment, and cannot recharacterise profits that arise at the place of sale abroad. Profits from a simple buy-in-one-place sell-in-another transaction are to be determined by actual cost and actual foreign sale; such foreign sale profits are not taxable in British India unless received or brought into British India. The proposed Rs. 9,000 addition was rejected.

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Issues: Whether the Income-tax authorities are entitled in law to increase the petitioner's assessment by Rs. 9,000 as being profits made in British India for the year 1936-37.

Analysis: The Commissioner relied on two grounds: (i) supervisory activity over agents within British India added value to animals exported to Colombo, and (ii) F.O.B. pricing usually contains an element of profit not reflected in the Colombo accounts. Those grounds amounted to an estimation by the Commissioner that additional profits had accrued in British India. The assessment was not based on exercise of best judgment under Section 23(4) but on an unsupported estimate of hidden profit. Precedent establishes that in a simple buy-in-one-place and sell-in-another business, profits arise at the place of sale and are to be calculated from actual cost and actual sale in the foreign market; invoice figures or alleged internal price inflation do not alter the place where profit accrues. Relevant authorities treat profits made by sale abroad as not assessable in British India unless received or brought into British India; the Privy Council decision relied on by the Revenue does not alter this principle in the facts of the present case.

Conclusion: The proposed increase of Rs. 9,000 as profits made in British India is not permissible and the question is answered in favour of the assessee.

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