TaxTMI Login
Just a moment...
Press 'Enter' to add multiple search terms. Rules for Better Search
When case Id is present, search is done only for this
of 
of 
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of of 
All Case Laws
of of All Case Laws
Note
Bookmark
Share
Don't have an account? Register Here
of The core legal questions considered by the Court were:
(a) Whether the manufacturing operations carried on by the assessee at Raichur constitute 'a part of the business' within the meaning of the third proviso to Section 5 of the Excess Profits Tax Act.
(b) Whether profits arising from the sale in Bombay of oil manufactured at Raichur can be said to accrue or arise in the Indian State of Hyderabad (where Raichur is situated), or whether such profits accrue or arise only in Bombay, thus making them liable to excess profits tax under the Act.
(c) The proper interpretation of the phrase 'part of a business' in the context of the provisos to Section 5 of the Excess Profits Tax Act, particularly whether it requires a complete cross-section of the business or may include one or more operations separately.
(d) The applicability and effect of Section 42 of the Indian Income-tax Act, 1922, and Section 21 of the Excess Profits Tax Act, which incorporate provisions relating to the apportionment of profits arising from businesses operating partly within British India and partly outside.
(e) The question of apportionment of profits between manufacturing and selling operations carried on at different places and the place where profits are deemed to accrue or arise for the purposes of taxation.
2. ISSUE-WISE DETAILED ANALYSIS
(a) Whether manufacturing operations at Raichur constitute a 'part of the business'
Legal framework and precedents: Section 2(5) of the Excess Profits Tax Act defines 'business' to include any trade, commerce, or manufacture. A proviso to this section provides that all businesses carried on by the same person shall be treated as one business for the purposes of the Act. Section 5 contains provisos that treat parts of a business as separate businesses for tax purposes depending on where profits accrue or arise.
Precedents such as Commissioners of Inland Revenue v. Ransom and Commissioners of Inland Revenue v. Maxse were cited, where apportionment between distinct businesses or professions was recognized.
Court's interpretation and reasoning: The Court rejected the appellant's contention that 'part of a business' must be a complete cross-section of the entire business including all constituent operations (manufacture, sale, export, etc.). Instead, it held that a 'part of a business' can be a distinct and severable business activity, such as manufacturing alone, provided profits can be ascertained separately.
The Court emphasized that the proviso to Section 2(5) amalgamates all businesses of a person for the Act's purposes, but provisos to Section 5 allow treating parts of such amalgamated business separately when profits accrue in different places.
Key findings: The Court found that the manufacturing operations at Raichur were all carried out there and formed a complete unit of business activity. Therefore, the manufacturing operation at Raichur was rightly regarded as 'a part of the business' within the meaning of the third proviso to Section 5.
Treatment of competing arguments: The appellant's argument that the manufacturing and selling operations must be considered inseparable for tax purposes was rejected as unsound and unsupported by authority.
Conclusion: Manufacturing operations at Raichur constitute a 'part of the business' for the purposes of the Excess Profits Tax Act.
(b) Whether profits from sales in Bombay of oil manufactured at Raichur accrue or arise in the Indian State of Hyderabad
Legal framework and precedents: Section 42 of the Indian Income-tax Act, 1922, particularly sub-section (3), provides that where a business's operations are not all carried out in British India, profits deemed to accrue or arise in British India shall be only such profits reasonably attributable to the part of operations carried out in British India.
The Court also considered the Privy Council decision in Commissioner of Taxation v. Kirk, where profits from mining and manufacture in one colony were held taxable there despite sales occurring elsewhere, and International Harvester Company of Canada v. Provincial Tax Commission, where profits were apportioned between manufacturing and selling operations carried out in different provinces.
Court's interpretation and reasoning: The Court rejected the argument that profits necessarily accrue only at the place of sale. It distinguished between the receipt of sale proceeds and the accrual or arising of profits. The act of sale fixes the time and place of receipt but does not determine the place where profits arise.
The Court held that profits attributable to manufacturing accrue or arise at the place of manufacture, even if the goods are sold elsewhere. Apportionment of profits between manufacturing and selling operations is necessary and recognized by the legal framework, including Section 42 of the Income-tax Act and Section 21 of the Excess Profits Tax Act.
Key evidence and findings: The assessees had manufacturing operations entirely at Raichur and sales partly there and partly in Bombay. The profits attributable to manufacturing could be separated and assigned to Raichur.
Treatment of competing arguments: The appellant's reliance on decisions involving pure trading businesses (purchase and sale without manufacture) was distinguished as inapplicable to manufacturing cases. The Court also rejected the contention that profits must be taxed solely where received or realized.
Conclusion: Profits attributable to manufacturing operations accrue or arise at the place of manufacture (Raichur), not solely at the place of sale (Bombay), and thus the manufacturing profits arise in an Indian State.
(c) Interpretation of 'part of a business' and apportionment of profits
Legal framework and precedents: The Court relied on Section 42(3) of the Income-tax Act, incorporated into the Excess Profits Tax Act by Section 21, which provides for apportionment of profits between parts of a business carried on in different places.
English authorities such as Commissioners of Inland Revenue v. Maxse and Killing Valley Tea Company Ltd. v. Secretary of State were cited to support the principle that profits can be apportioned between distinct parts of a business.
Court's interpretation and reasoning: The Court held that the phrase 'part of a business' must be understood in the same sense in both provisos (2) and (3) of Section 5 of the Excess Profits Tax Act. It rejected the notion that a 'part' must be a complete cross-section including all operations. Instead, it accepted that one or more operations, such as manufacturing alone, can constitute a part of the business if profits can be separately ascertained.
The Court emphasized that apportionment is implied in the provisos, even if not expressly stated, because profits can accrue to parts of a business only when apportionment is possible.
Key findings: The manufacturing operations at Raichur are a distinct part of the business, and profits attributable to them can be separated from profits attributable to sales operations at Bombay.
Treatment of competing arguments: The appellant's argument for a restrictive interpretation of 'part of a business' was rejected as inconsistent with the statutory scheme and practical business realities.
Conclusion: The Court confirmed that apportionment of profits between distinct parts of a business is permissible and necessary, and that manufacturing operations at Raichur constitute such a part.
(d) Applicability of Section 42 of the Income-tax Act and Section 21 of the Excess Profits Tax Act
Legal framework: Section 42(1) deems income, profits, or gains arising through any business connection or source in British India to accrue or arise in British India. Sub-section (3) provides for apportionment of profits where all operations are not carried out in British India. Section 21 of the Excess Profits Tax Act incorporates these provisions for excess profits tax purposes.
Court's interpretation and reasoning: The Court held that Section 42(3) applies to apportion profits between operations carried out in different places and that this principle also applies under the Excess Profits Tax Act by virtue of Section 21.
The Court rejected the appellant's contention that no corresponding provision for apportionment exists in the Excess Profits Tax Act, emphasizing the express incorporation of Section 42.
Key findings: The manufacturing operations at Raichur have a business connection in British India, and profits attributable to these operations are to be deemed to accrue or arise there. Only profits attributable to sales operations in Bombay are deemed to accrue or arise in Bombay.
Conclusion: The statutory scheme supports apportionment of profits and recognizes manufacturing operations at Raichur as a separate business part for tax purposes.
(e) Place and timing of accrual or arising of profits
Legal framework and precedents: The Court examined the meaning of 'accrue' and 'arise' as used in the statute, noting that these words connote the natural result or growth of profits and are distinct from 'receipt' or 'realization'. The Privy Council decision in Commissioner of Income-tax v. Chunilal B. Mehta was considered, which emphasized that profits may accrue distributively in different places and are not necessarily confined to the place of receipt.
Cases involving purchase and sale transactions without manufacture (e.g., Madras Export Company, Jiwandas v. Income-tax Commissioner) were distinguished as inapplicable to manufacturing businesses.
Court's interpretation and reasoning: The Court held that profits attributable to manufacture accrue or arise at the place where manufacture occurs, even though realization of profits happens at the place of sale. The act of sale fixes the time and place of receipt but does not determine the place of accrual.
The Court found it necessary to apportion profits between manufacturing and selling operations and rejected the contention that profits arise solely at the place of sale.
Key findings: Manufacturing adds value and produces profits at the place of manufacture; these profits are separate and distinct from profits arising from sales. Apportionment is both logical and consistent with business principles.
Treatment of competing arguments: The Court rejected the appellant's reliance on cases involving pure trading businesses and the argument that profits must be taxed where received. It also rejected the notion that profits must arise at the place of business or source in all cases.
Conclusion: Profits accrue or arise at the place of manufacture and at the place of sale, depending on the nature of the business operations, and apportionment between these places is proper.
3. SIGNIFICANT HOLDINGS
'The definition of business in the Excess Profits Tax Act clearly envisages manufacture as a business by itself. It is not necessary that a manufacturer must be a trader in the commodity he manufactures. Similarly because he is a manufacturer and a trader it does not follow that the two activities necessarily become one indissoluble business of which the profits cannot be separately ascertained.'
'The act of sale merely fixes the time and place of receipt of profits. Profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale.'
'The profits of the manufacturing part of the assessees' business did accrue and arise at Raichur and the judgment of the High Court should be affirmed.'
'The words 'accrue' or 'arise' though not defined in the Act are certainly synonymous and are used in the sense of 'bringing in as a natural result.''
'The principle of apportionment is implied in the third proviso to Section 5 of the Excess Profits Tax Act. If no apportionment can be made in respect of the processes or activities of a particular business, they will not be considered to be a part of the business at all and the proviso will not apply.'
'The expression 'part of a business' must be taken to signify one or more of the operations of the business.'
'The profits realized at sale have to be apportioned between the different business operations which have produced them and those apportioned to the part of business of manufacture at Raichur can only be said to arise at the place of manufacture.'
The Court concluded that the manufacturing operations at Raichur constituted a separate part of the business and that profits attributable to these operations accrued or arose in the Indian State of Hyderabad, thus exempting such profits from excess profits tax under the third proviso to Section 5 of the Excess Profits Tax Act. The appeal was accordingly dismissed with costs.
TaxTMI 