Apportionment of manufacturing profits allows a separate business part to arise at the place of manufacture, outside excess profits tax.

A distinct manufacturing operation may constitute a "part of a business" for the third proviso to Section 5 of the Excess Profits Tax Act, 1940, where the business structure permits separate attribution of profits. Applying the apportionment machinery reflected in Section 42(3) of the Indian Income-tax Act, 1922, the Court treated manufacture and sale as separable stages of profit-making and held that profit attributable to manufacture can accrue or arise at the place of manufacture, not only at the place of sale. On that basis, the Raichur manufacturing activity was treated as arising in an Indian State and outside excess profits tax.

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Issues: (i) Whether the manufacturing operations carried on at Raichur constituted a "part of a business" within the third proviso to Section 5 of the Excess Profits Tax Act, 1940; (ii) Whether the profits attributable to such manufacturing operations accrued or arose in an Indian State so as to fall outside the charge to excess profits tax.

Issue (i): Whether the manufacturing operations carried on at Raichur constituted a "part of a business" within the third proviso to Section 5 of the Excess Profits Tax Act, 1940.

Analysis: The statutory scheme treated "business" broadly, including manufacture, and Section 21 of the Excess Profits Tax Act, 1940 incorporated the apportionment machinery of Section 42(3) of the Indian Income-tax Act, 1922. On that reading, the expression "part of a business" was not confined to a complete cross-section of all business activities, but extended to a distinct and severable operation capable of separate profit attribution. Manufacturing at Raichur was a separate and identifiable business activity.

Conclusion: The manufacturing operations at Raichur were a part of the business, in favour of the assessee.

Issue (ii): Whether the profits attributable to such manufacturing operations accrued or arose in an Indian State so as to fall outside the charge to excess profits tax.

Analysis: The profits from the business were not treated as arising only at the place of sale. The Court applied an apportionment approach and held that, where manufacture and sale were separate stages of profit-making, the profit attributable to manufacture could be regarded as accruing or arising at the place of manufacture. Section 42(3) of the Indian Income-tax Act, 1922 reinforced this view by limiting deemed accrual to the part of the operations carried out in the relevant territory. Accordingly, the profit attributable to the Raichur manufacturing activity arose in the Hyderabad State.

Conclusion: The manufacturing profits accrued or arose in an Indian State and were exempt from excess profits tax, in favour of the assessee.

Final Conclusion: The appeal failed because the Raichur manufacturing activity was a separable part of the business and the profit attributable to that activity was treated as arising in the Indian State, placing it outside the Excess Profits Tax Act.

Ratio Decidendi: For purposes of the third proviso to Section 5 of the Excess Profits Tax Act, 1940, a distinct manufacturing operation may constitute a "part of a business", and the profits attributable to that operation can be apportioned and regarded as accruing or arising at the place of manufacture rather than only at the place of sale.

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