Taxability of building contract income depends on where it arises in substance, not merely where acceptance or payment occurs.

Retrocession of the Civil and Military Station, Bangalore, did not defeat competence of a reference refiled before the Mysore High Court because the governing scheme treated pending proceedings as continuing before the corresponding Mysore authority and preserved application of the Indian Income-tax Act, 1922. On taxability, income from building contracts executed wholly in Mysore was not taxable under the Act as applied to the Civil and Military Station merely because the contract was accepted there or payments were routed through banking arrangements there. The income arose from work done and materials supplied in Mysore, so no taxable business connection or accrual in British India was established. The reference was answered in favour of the assessee.

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Issues: (i) Whether the reference refiled before the Mysore High Court was competent after the retrocession of the Civil and Military Station, Bangalore. (ii) Whether the income from the assessee's building contracts was taxable under the Indian Income-tax Act as applied to the Civil and Military Station, Bangalore.

Issue (i): Whether the reference refiled before the Mysore High Court was competent after the retrocession of the Civil and Military Station, Bangalore.

Analysis: The statutory retrocession scheme treated pending proceedings in the retrocede area as continuing before the corresponding authority in Mysore. The relevant enactments provided for transfer of pending applications and references to the Mysore authorities and for the Indian Income-tax Act, 1922 to continue to apply to such proceedings. On that basis, the earlier return of the reference by the Madras High Court did not defeat competence in the Mysore High Court.

Conclusion: The objection to the competence of the reference was rejected.

Issue (ii): Whether the income from the assessee's building contracts was taxable under the Indian Income-tax Act as applied to the Civil and Military Station, Bangalore.

Analysis: The assessee carried on its business from Mysore State and executed the construction work entirely within Mysore. Mere acceptance of the contract in the Civil and Military Station, and payment through banking arrangements there, did not by itself create a taxable business connection in British India or establish that the income accrued or was received there. The profit arose from work done and materials supplied within Mysore, and the proximate source of income was the construction activity itself, not the place where the contract was accepted or cheques were drawn.

Conclusion: The income was not taxable under the Indian Income-tax Act as applied to the Civil and Military Station, Bangalore.

Final Conclusion: The reference was answered in favour of the assessee and the taxing authorities were held not entitled to assess the income in question under the applicable Indian Income-tax law for the Civil and Military Station, Bangalore.

Ratio Decidendi: For income from a building contract, taxability depends on where the income accrued, arose, or was received in substance; mere acceptance of the contract or payment mechanics in another place does not by itself establish a taxable business connection or source of income there.

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