Profits accrue where they are finally realised; Baroda State shop income could not be taxed as British India income.

Profits are taxed where they are actually earned, and the mere sourcing of goods from British India or the existence of connected branch operations there does not make the income accrue or arise in British India. On the facts, the ultimate gains from the Baroda State shops were realised in the Baroda State, so the proposed levy sought to tax income outside British India and was without jurisdiction. An assessment made beyond statutory authority is ultra vires, and in that setting the bar against suits under section 39 did not prevent challenge. The suits were therefore maintainable.

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Issues: Whether income-tax could be levied on profits earned from shops situate in the Baroda State on the footing that such profits accrued or arose in British India, and whether the suits were barred by section 39 of the Indian Income Tax Act, 1886.

Analysis: The relevant inquiry was where the profits were actually earned. The mere fact that goods or materials may have come from British India, or that branch operations there may have been connected with the business, did not make the resulting profits accrue or arise in British India. Profits were treated as arising where the final gain was realised after deducting expenditure. On the facts found, the ultimate profits were made in the Baroda State, so the assessment sought to tax income outside British India and was beyond authority. In such circumstances, the statutory bar against suits did not apply because an assessment made without jurisdiction was ultra vires.

Conclusion: The income-tax levy on the Baroda State profits was unauthorised, the assessment was ultra vires, and the suits were maintainable.

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