Territorial income exemption turns on net resultant income, not gross receipts, when computing Part B State profits.

Section 14(2)(c) was construed as granting exemption only to the net income actually accruing in a Part B State after setting off relevant business losses, not to a gross dividend receipt taken in isolation. The Court rejected the view that dividend income could be treated as the exempt figure without accounting for the loss already absorbed in computing the territorial income. It further held that, where only part of the total income is exempt, section 17(2) applies to the taxation of that exempt portion. The exemption was therefore confined to the net Part B State income, and the assessee's contention was rejected.

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Issues: Whether, for exemption under section 14(2)(c), the income accruing in a Part B State is to be taken as the gross dividend income only or as the net resultant income after setting off the business loss against the dividend income; and whether the exempt income, once ascertained, is to be brought to tax under the special computation provision for mixed exempt and taxable income.

Analysis: The assessment was made on the basis of the assessee's total world income. The loss from business in the Part B State was set off against the business profit in the taxable territories, and the resultant total income included the dividend income and the net effect of the Part B State transactions. Section 14(2)(c) was construed as exempting the income, profits or gains actually accruing or arising in the Part B State, which had to be determined on the net result of all relevant heads and not by isolating one head such as dividends. The construction urged by the assessee would disregard the loss that had already entered into the computation of the income accruing in the Part B State and would treat the gross dividend amount as the exempt figure, although the real profit from the Part B State activities was only the balance after setting off the loss. The Court also held that, where only part of the total income is exempt, section 17(2) governs the computation of tax on that exempt portion.

Conclusion: The exemption under section 14(2)(c) was confined to the net income of Rs. 13,865 accruing in the Part B State, not to the gross dividend receipt of Rs. 66,045, and the assessee's contention was rejected.

Final Conclusion: The reference was answered in favour of the Revenue, and the assessee was held liable to pay tax on the assessed amount determined by the Court.

Ratio Decidendi: For exemption provisions tied to income accruing in a specified territory, the relevant income is the net resultant income after all heads relevant to that territorial income are taken into account, and not a gross receipt isolated from the overall computation.

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