Foreign manufacture, British India sale: realised profits remain taxable there, with no notional split for overseas production.

The Calcutta HC held that where goods are manufactured abroad but sold in British India, the realised profit is taxable in British India and cannot be split by attributing part of it to foreign manufacture. Section 4 taxed profits accruing, arising or received in British India, and the fact that work or expenditure was incurred abroad did not exempt any portion of the sale profit. Section 10 allowed deduction only of actual expenditure and losses incurred in earning profits, not a notional apportionment of realised profits. Section 42 likewise supported taxation of profits connected with business in British India. The assessee's claim to deduct a proportion of profits was rejected and the reference was answered for the Revenue.

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Issues: Whether an assessee assessed under Section 42 in respect of a business whose manufacture takes place in a foreign country and whose sale takes place in British India can deduct, in computing profits and gains, the proportion of profits attributable to manufacture in the country of origin, or whether the whole profit is to be treated as earned in the country of sale.

Analysis: Section 4 taxed profits accruing or arising or received in British India, and a profit that is realised on sale in British India is not exempt merely because work was done or expenditure was incurred abroad in producing the goods. The allowance scheme in Section 10 permits deduction of actual expenditure and loss incurred in earning profits, but it does not authorise splitting up realised profits so as to exempt part of them on the theory that they were earned elsewhere. Section 42 extends the taxable class to profits arising through business connexion in British India, and the computation rule applied to such receipts is inconsistent with the suggested deduction of foreign-manufacture profits.

Conclusion: The assessee was not entitled to deduct any proportion of profits on the footing that they were earned in the foreign country, and the answer to the reference was in the negative, in favour of the Revenue.

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