Actual receipt and apportionment of business profits under Indian income tax law in composite cross-border operations
Actual receipt of income in India under section 4(1)(a) was held to exclude the deeming fiction in section 42(1) of the Indian Income-tax Act, 1922, so section 42 had no application where taxability rested on receipt. For section 4A(c)(b), income could not automatically be treated as wholly arising in India merely because it was received there; in a composite business, profits had to be apportioned according to the distinct profit-producing operations carried on within and outside the taxable territory. The analysis affirmed that manufacturing and sales operations may generate income in different places, requiring business-like apportionment.
Issues: (i) Whether, where the assessee's income was actually received in India under section 4(1)(a), section 42(1) of the Indian Income-tax Act, 1922 had any application. (ii) Whether income received in India could be said to wholly arise in India for the purposes of section 4A(c)(b), or whether the income had to be apportioned between business operations carried on within and without India.
Issue (i): Whether, where the assessee's income was actually received in India under section 4(1)(a), section 42(1) of the Indian Income-tax Act, 1922 had any application.
Analysis: Section 42 is concerned with income deemed to accrue or arise in British India. Where the basis of charge is actual receipt in India, the statutory fiction created by section 42 does not come into play. In such a case, section 42(3) also has no independent role because apportionment under that provision is tied to the operation of section 42(1). The controlling principle was affirmed by the later decision in Turner Morrison, which rejected the contention that section 42 displaced section 4(1)(a) in cases of actual receipt.
Conclusion: Section 42(1) had no relevancy to income actually received in India under section 4(1)(a). This issue was decided against the assessee.
Issue (ii): Whether income received in India could be said to wholly arise in India for the purposes of section 4A(c)(b), or whether the income had to be apportioned between business operations carried on within and without India.
Analysis: The expression "income arising in British India" in section 4A(c)(b) was held to require identification of the place where the profit-producing operations took place. In a composite business involving manufacture and sale at different places, profits do not necessarily arise wholly at the place of sale or receipt. The principle in Ahmedbhai Umarbhai was applied, namely, that profits attributable to manufacturing operations arise at the place of manufacture, and profits attributable to sales arise at the place of sale, so that a business-like apportionment is required where operations are partly inside and partly outside the taxable territories. The distinction between "accrue" and "arise" did not exclude this apportionment principle.
Conclusion: Income received in India could not be said to wholly arise in India for the purposes of section 4A(c)(b), and the income had to be apportioned between the relevant business operations. This issue was decided in favour of the assessee.
Final Conclusion: The appeal succeeded in part, because actual receipt in India did not attract section 42, but the residence test under section 4A(c)(b) required apportionment of profits between operations carried on within and without the taxable territories.
Ratio Decidendi: For income-tax purposes, actual receipt in the taxable territory excludes recourse to the deeming fiction of section 42, and in a composite business the place where profits arise must be determined by apportioning income according to the distinct profit-producing operations carried on in different territories.
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