TaxTMI 
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1949 (12) TMI 33
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.... control of the Board of the principal company. The control, however, is very general and is confined only to safeguarding the interests of its shareholders. Until the war scare of 1942, the company (in this judgment referred to as the assessee) was a resident of Madras and was assessed as such. On the 22nd April, 1942, the office of the managing agents and the factory of the company were shifted to Mysore, but were brought back in May, 1943. The "previous year" of the company ended on 31st December, 1942, the assessment year being 1943-44. From the 22nd April, 1942, to 31st December, 1942, the factory of the company and the office of the managing agents were undoubtedly in Mysore. The Appellate Tribunal found that out of the total sales of ₹ 2,42,917 during the accounting year, sales of the amount of ₹ 46,559 were made in Mysore outside British India, but the balance of ₹ 1,96,358 represented the sales in British India. The Appellate Assistant Commissioner held that 80 per cent of the profits made by the company had accrued and arisen in British India and therefore the company was a resident in British India during the accounting period within the mean....
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....ng year and this clause was not relied on to establish that the company is resident in British India. The sole question for determination, therefore, is whether on the facts the income that arose in British India in the accounting year exceeded the income of the company that arose without British India in that year. Mr. Subbaraya Ayyar, the learned advocate for the assessee, argued the case from two aspects. The first position he maintained was that notwithstanding the alteration of the language of Section 42(3) in 1939, the profits that accrued from the sales in British India during the year must be treated as "deemed profits" and not profits which had actually arisen in British India. There is no authority, however, to support this construction of the section. Merely because under the law as it stood before 1939 the profits that arose in British India were treated as deemed profits under Section 42(3), as it then stood, is no reason to construe the present Section 42(3) in the same manner notwithstanding its clear and unambiguous language. We are not concerned with the policy or the scheme behind the alteration of the section. We are bound to give effect to the langua....
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....nt case arising out of the sales in British India must be treated as "deemed profits", to use a compendious expression, must be rejected and the decision of the Appellate Tribunal which rested solely on this view is clearly erroneous. The second line of argument adopted by Mr. Subbaraya Ayyar, the learned advocate for the assessee, was that the income, profits and gains referred to in Section 4(1) of the Act must be restricted to merchanting profits, and that the manufacturing profits must be excluded as in the present case the manufacturing processes of the medicines were carried out in the factory at Mysore and the goods were sold in British India. In other words, apart from cases falling under Section 42(3), the contention of the learned advocate in substance amounts to saying that the same principle must also be applied and adopted in the case of profits arising in British India by reason of sale of goods in British India manufactured outside India. This contention, as would be seen, is quite apart and independent of the applicability of Section 42(3) of the Act. The question for consideration, therefore, is whether in the case of a non-resident carrying on manufactu....
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....artificial process of splitting up of what was merely one business into its component operations. So long as a business is one and entire, it must be treated as a single unit and the result of its operations, which end in profits, must be ascertained. A manufacturing process itself may consist of several operations carried on in different places and may be situated at different places where such processes are carried on. For the purpose of the imposition of the income-tax, the place of the source, however, is not at all material as it is now finally decided by the Privy Council in Chunilal Mehta's case [1938] 6 I.T.R. 521; I.L.R. 1938 Bom. 752. Probably the various places at which the processes are carried may be legitimately considered as places where the income is earned in part as they are all links in a chain of profit-making operations, but the cumulative effect of all such operations is to produce profits and the profits accrue and arise only at one place, namely, the place of the sale in the case of goods. The income producing transactions may be several in a business and the profits of each such transaction may be produced and may accrue or arise at different places; bu....
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....n the language of the particular statute which had to be construed. Of the decisions in India reference may be made to the decision of this Court in Commissioner of Income-tax, Madras v. Mathias [1937] 5 I.T.R. 435; I.L.R. 1938 Mad. 25. (High Court). The decision on appeal to Privy Council in the same case is [1939] 7 I.T.R. 48; I.L.R. 1939 Mad. 178 which was concerned with agricultural income or produce of land. The remarks of the learned Judges in that case were confined to income from agricultural land and this is made clear in the judgment itself by the observations of the learned Judge Varadachariar, J., who delivered the judgment of the Court, occurring in more than one place. The proviso to Section 4(2) of the Act, which was construed in that case, contained the words "Nothing in this sub-section shall apply to income from agricultural arising or accruing in a State in India from land for which any annual payment in money, or in kind is made to the State." The question which arose for consideration in that case was whether in the case of coffee grown and harvested in Mysore, but brought to Mangalore where it was dried and cured and was sold the income received fro....
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....hich attracted the exemption under the proviso. This decision, therefore, though it was reversed in appeal in Mathias' case [1939] 7 I.T.R. 48; I.L.R. 1939 Mad. 178 by the Privy Council, is no authority for holding that the manufacturing profits, which arose or accrued in a Native State, should be separated as not forming part of the income received in British India. The Privy Council rested their decision on the fact that the entire income was received in British India and therefore Section 4(1) applied to the case. There were however two passages in the judgment of the Judicial Committee which are seemingly irreconcilable and which are relied on by both sides. On behalf of the Crown reliance was placed upon the passage at page 186 in which it was observed: "The business operations cannot be arbitrarily cut into two portions, but must be regarded as a whole". From this it is argued that there is no warrant under any of the provisions of the Act save in the case provided by Section 42(3) of the Act to a portion of the profits by cutting up the business operations and separating the profits attributable to operations outside British India from the profits attributab....
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....f Chagla, C.J., and Tendolkar, J., in Ahmedbhai Umarbhai v. Excess Profits Tax Officer [1948] 16 I.T.R. 192 had to construe the third proviso to Section 5 of the Excess Profits Tax Act, which provided that: "Where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business." The facts in that case were: the assessee was the owner of three mills in Bombay and one in Raichur in Hyderabad State. The business he carried on consisted of purchasing groundnuts and converting them and extracting oil in the mills. The oil extracted was sold. The case was confined to the oil extracted in the mill at Raichur, some of which was sold in British India. The assessee was a resident in British India and he claimed that the profits of part of his business, which accrued in Raichur and were referable to the manufacturing process at Raichur should be excluded from taxation. The argument advanced by the Advocate-General on behalf of the Excess Profits Tax Officer was that the business of the assessee was one comprehensive and integrated business and that the profits accrued and arose only w....
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....ts. The decision in the Hira Mills' case [1946] 14 I.T.R. 417 and in Chunilal Mehta's case [1938] 6 I.T.R. 521; I.L.R. 1938 Bom. 752 are clear authorities on the interpretation of the language of Section 4(1) and the decision in Ahmedbhai Umarbhai & Co. v. Excess Profits Tax Officer [1948] 16 I.T.R. 192 is not in conflict with that view, if understood in the manner suggested above. The decisions in Jiwan Das v. Income-tax Commissioner, Lahore [1929] I.L.R. 10 Lah. 657, Board of Revenue v. Madras Export Co. [1923] I.L.R. 46 Mad. 360 and Sudalaimani Nadar v. Commissioner of Income-tax, Madras [1940] 8 I.T.R. 619, relate to businesses of a simple nature of purchase at one place and sale at another place and it has been held that the profits accrued and arose at the place of sale and not at the place of purchase. They are not cases relating to the business of manufacture and do not, therefore, afford assistance in the solution of the question that arises in this case. Mr. Subbaraya Ayyar, learned counsel for the assessee, pressed upon us also three decisions: Kirk's case [1900] A.C. 588, Federal Commissioner of Taxation v. W. Angline Co., Pty. Ltd. 46 Com. L.R. 417 and Int....
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....he company's Works in a place in South Australia and the contracts for sale were not made in New South Wales. The sale of the products of the company was made and the purchase money was received either in London or in Melbourne. The following passage on the construction of the Act, which occurs at page 592 of the report is instructive:- "The word 'trade' no doubt primarily means traffic by way of sale or exchange or commercial dealing, but may have a larger meaning so as to include manufactures. But if you confine trade to its literal meaning, one may ask why is not this income derived (mediately or immediately) from lands of the Crown held on lease under Section 15, sub-section (3), or from some other source in New South Wales under sub-section (4). Their Lordships attach no special meaning to the word 'derived', which they treat as synonymous with arising or accruing. It appears to their Lordships that there are four processes in the earning or production of this income-(1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; ....
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....r time profits should be taken into account. In the statute there in force the place of the source from which the income or profit was derived was important and therefore the decision is of no assistance under the Indian Act. The decision in International Harvester Co. of Canada Ltd. v. Provincial Income-tax Commissioner [1949] A.C. 36; 17 I.T.R. Suppl. 58 arose under the Income Tax Act of 1932 of Saskatchewan in Canada. Under that Act income was defined by Section 3 and in the case of business it provided that income means only net profit or gain received by a person from any trade, manufacture, or business as the case may be, whether derived from sources within Saskatchewan or elsewhere. Section 7 imposed a tax on a non-resident and, sub-section (1)(d) of that section provided that a person shall be assessed to income-tax who, not being resident in Saskatchewan, is carrying on business in Saskatchewan during such year. Section 21 was as follows:- -"Where any corporation carrying on business in Saskatchewan purchases any commodity from a parent, subsidiary or associated corporation at a price in excess of the fair market price, or where it sells any commodity to such a corp....
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....ing from the company's manufacturing business in Ontario and from the company's operations in Saskatchewan taken together, but the profits arising from the company's operations in Saskatchewan." (The italics are mine). These observations were approved by their Lordships of the Judicial Committee. According to their Lordships, Sections 21 to 25 of the Act contain a scheme for dealing with the taxation of profits from the activities of persons or corporations, who carry on certain activities within the Province of Saskatchewan and other activities outside the Province. At page 51 their Lordships observe:- "Section 21 applies both to resident and to non-resident corporations, and is plainly directed to preventing an artificial reduction of the net profit arising from the business of such corporations in Saskatchewan. Section 22 contemplates the case of a person residing and regularly employed outside Saskatchewan, who renders certain services within that province. Sections 23 and 24 show that the legislature contemplated, in the case of a non-resident person, a charge of tax on an apportioned part of income, which, although it might be received outside the pro....
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....ion referred is also identical. The answer to the question in this case also must be in the affirmative and the Commissioner of Income-tax is entitled to his fee, which we fix at ₹ 250. Referred Cases Nos. 57 and 59 of 1946. VISWANATHA SASTRI, J.--These two references raise the question of the liability of two limited companies to pay income-tax as "residents in British India." The two assessees are limited companies registered at Madras and they manufacture and sell an ointment and some medicines. The year of account for both of them was the calendar year 1942. Owing to the scare created by war conditions, the company shifted their office and "factory"--a rather high sounding name for a small and unpretentious affair--to Mysore on 22nd April, 1942, and brought them back to Madras in May, 1943. In Referred Case No. 57 of 1946 the company made a net profit of ₹ 50,157 during the second half-year of 1942, there being no profits in the first half-year. The total sales of the company amounted to ₹ 2,42,917 out of which sales to the extent of ₹ 1,96,358 took place in British India. The company had a depot in Bombay where goods were stocked a....
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....India. Section 4 imposes a heavier burden of tax on residents than on nonresidents or persons not ordinarily resident and Sections 4A and 4B define "residents" and "ordinary residents" as applied to individuals, undivided Hindu families, firms, association of persons and companies. Section 6 classifies income, profits and gains under different heads and Sections 7 to 12 provide rules and directions regulating the manner in which the income, profits and gains under each of the heads specified in Section 6 have to be computed. In view of the arguments advanced before us it is necessary to state at the outset that the tax is not levied on the sources of income situated or having their location in British India. The test of liability under Section 4 of the Act is the place of the accrual or arising of the income, profits and gains, though the source may, in many cases, point to the place of accrual or arising of the income. Though the tax is levied in respect of the income of a person and the liability to tax is measured by the total income of a person computed in accordance with the provisions of the Act, still it is the person to whom income accrues or arises or b....
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....ften changed, given by the place of central control. In such a search the place where commercial activities yield the result is at least as relevant as the place where they are conceived. A company which in substance lives on a country may rationally be treated as living in it." In my opinion the Appellate Tribunal went wrong in holding that no profits at all arose here in British India from the sale of goods manufactured by the company in Mysore and all the profits made by the company by the sale of its products in British India should only "be deemed to have arisen or accrued" under Section 42(1) and should therefore be apportioned under Section 42(3) of the Act. It is pointed out on behalf of the assessee that Section 42(1) has recently been amended so as to apply equally to residents and non-residents and that Section 42(3) has been amended so as to lay down a rule for apportioning and determining the quantum of profits of the assessee, resident or non-resident, chargeable to Indian income- tax under Section 42(1). It is argued that if goods are manufactured and sold in British India the whole of the resultant profits arise in British India, but if the "man....
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....3) of the Act cannot be applied when ascertaining the amount of income arising in British India for the purpose of Section 4A(c)(b) of the Act. It is not possible to ignore the difference between Section 42(3) as it stood before the amendment of 1939 and Section 42(3) as it stands after the amendment and hold that profits arising from sales effected in British India must always be put in the category of profits which are "deemed to have arisen or accrued in British India". The further contention of the assessee's learned advocate raises a point of difficulty and importance. It is to the effect that where the business activities or operations that produce profits and gains are carried out in more than one State, the tax should be levied in each of the States only on that portion of the income which is reasonably attributable to that part of the operations carried on in the State levying the tax. This is stated to be a general principle underlying the scheme of our income-tax legislation and recognised by Section 4 and 4A(c)(b) of the Act. It may be conceded that the ideal system of taxation is to tax the whole of a person's income, gains and profits but that they ....
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....n the principle that double taxation should be avoided by Courts, I have to point out that there is here no question of double taxation in the proper sense of that term. It is not as if the same person is charged in respect of the same piece of income under two different sections of the Act by the same taxing authority either directly or indirectly. As already pointed out it is not incompetent for the Indian Legislature to enact that a company shall pay income-tax on the whole of its profits, if the profits arising in British India exceed its profits arising outside, even though the foreign profits might be liable to pay income-tax in the foreign country. Double taxation in that sense and in such cases is due to the co-existence of a personal and impersonal tax liability, personal liability being based on the domicile or residence of the taxpayer and impersonal liability being based on the earning or receipt of income within the territory of a State which claims to tax such incomes without regard to the personal status of the recipient. It is beyond the province of this Court to redress any supposed hardship or injustice to the taxpayer by double taxation in this sense by importing....
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....h India and is imbedded in the marketable goods. In other words unrealised profits exist in British India whence the goods are exported for sale. The legislature has therefore enacted Section 42(1) and (3) of the Act to bring into the net of Indian taxation that portion of the profits which might be apportioned and attributed to the operations in British India. In Rogers Pyatt Shellac Company's case [1925] I.L.R. 52 Cal. 1 and Steel Brothers Company case [1926] I.L.R. 3 Rang. 614 it was held that Section 33(1) of the Act of 1918 corresponding to Section 42(1) of the present Act applied to cases of non-residents whose business connection with British India in the shape of a regular buying agency or establishment yielded profits though the goods were sold abroad. The view of Schwabe, C.J., in the Madras Export Company's case(6) that Section 33(1) of the Act of 1918 corresponding to Section 42(1) of the present Act was mere machinery and not a charging section, a view which was based on the interpretation of Section 31(2) of the English Finance Act of 1915 by the Court of Appeal and the House of Lords in Greenwood v. Smidth and Co. [1922] I. A.C. 417, must now be held to be e....
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....hat business income arises only at the time when and at the place where the sales of goods are effected. Section 4A(c)(b) refers only to "income" and discards its usual and familiar companions "profits and gains" and again refers to the word "arising" without its associate "accruing", an omission which I consider is deliberate. Income denotes a monetary return or money which comes in not as capital but as profit. In the Oxford Dictionary income is defined as "that which comes in as the periodical produce of one's work, business, lands or investments considered in reference to its amount and commonly expressed in terms of money". In Stround's Judicial Dictionary the words "arising in the United Kingdom" are defined as "coming into the person's hands in the United Kingdom." The word "arises" should not in the context be taken as synonymous with "accrues." The expression "arises" means "comes into existence or notice or presents itself" while the word "accrues" means "growing up by way of addition or increase or as an accession or advantage." Th....
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....r arose in Mysore though the raw coffee was cured and then sold in British India, relying upon a somewhat analogous decision of the Judicial Committee in Kirk's case [1900] A.C. 588. The decision of this Court was reversed by the Judicial Committee on another point but with reference to the point now under consideration Sir George Rankin observed:- "But the green coffee itself cannot be regarded as income, profits or gains within the meaning of the Act; it is grown for purposes of sale and in order that profit may be earned. The business operations cannot be arbitrarily cut into two operations but must be regarded as a whole. Thus, if the coffee market may be assumed to have its ups and downs, the assessee, if he delayed his sales in expectation of a rise but found that prices fell, would not expect to be charged to tax on the profits that he would have made had he sold without delay. On the other hand, upon the question whether the profits and gains accrued or arose in British India, it may be that the fact that the coffee was grown in Mysore is by no means to be disregarded notwithstanding that it was sold in British India especially if it be true that it was sold with....
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....rise only when those enhanced values get converted or transmuted into money by the sale of the goods. In the case of a mercantile business the primary object is to sell the goods and thereby make a profit. Profits are obtained by selling goods and the place where profits emerge as profits is where the goods are sold. It is true that buying raw products and manufacturing them into marketable medicines are necessary parts of a business of the kind now in question which derives its profits from selling the medicines. But it does not follow that in order to determine where the profits arise it is proper to enquire into all the causes which in combination or succession operate to produce them. The different links in the chain of causation of profits do not require to be severed. The Court has to ascertain not why but where the profits come into existence. Here the assessees had an agent in Calcutta and a depot in Bombay, the goods were stocked in those places, contracts for sale of the goods were entered into and deliveries of the goods were effected in those places and the price was realised by payment to the account of the assessees in their banks in British India. The income of the a....
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....nd that profits arose at the place where the goods were sold though the process of manufacture was carried on outside British India. This decision was dissented from by a Full Bench of this Court in Mathias' case [1937] 5 I.T.R. 435; I.L.R. 1938 Mad. 25 relying on the decision of the Judicial Committee in Kirk's case [1900] A.C. 588. Later, in the course of this judgment I shall examine Kirk's case [1900] A.C. 588, and in this context it is sufficient to note that when the decision of this Court went up on appeal to the Judicial Committee they expressly refrained from deciding whether this Court was right in relying on Kirk's case [1900] A.C. 588 and reaching the conclusion it did. (See Mathias' case [1939] 7 I.T.R. 48; I.L.R. 1939 Mad. 178 P.C.). In Jiwandas' case [1929] I.L.R. 10 Lah. 657 F.B. the Court held that "in ordinary cases, profits can be ascertained only when the price is realised, because until realisation it cannot be said that the transaction will result in profits............. It is beyond dispute that the place, where the sale is effected and the price realised, is certainly the principal place, if not the place, of the accrual of profi....
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....thin and partly without a colony it was provided that taxation should be directed to that part of its income or profits of which its business connection with the colony could be predicated. In the New South Wales Land and Income-tax Act of 1895 the word "source of income" was used in order to describe acts and things done in that colony which could be regarded as leading to the "income" to be taxed. The words "arising" or "accruing" and "derived" were employed to refer to the relationship of the income sought to be taxed to the "sources" of the business in New South Wales. The New South Wales Act designated as a "source" the operations or transactions taking place within the colony which resulted in the receipt of income either within or without the colony. It is in this background that the decision in Kirk's case [1900] A.C. 588 has to be understood. I am examining this case at some length because it has been strongly relied upon by Courts in this country especially by the Full Bench of this Court in Mathias' case [1937] 5 I.T.R. 435; I.L.R. 1938 Mad. 25. In the Australian case the profits in question we....
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.... assessee from his or its "business in Saskatchewan" was liable to tax. In making the assessment the Commissioner acting under Regulation II made under Section 7(4) of the Act computed the net income of the assessee everywhere and then fixed the "assessee's income applicable to Saskatchewan" by applying the percentage specified in the Regulation. The assessee objected to this method of computation of profits on the ground that the Commissioner thereby taxed a percentage of the assessee's "manufacturing profits all of which were earned outside Saskatchewan". It was held by the Judicial Committee that so much of the profits as might fairly be attributed to the manufacturing operations outside Saskatchewan, referred to as "the manufacturing profits" did not arise "from the business of the assessee in Saskatchewan" within the meaning of Section 21A of the Act and should be excluded in computing the income of the assessee liable to tax under that section. The Judicial Committee observed that the phrase "manufacturing profit" was inaccurate in the sense that no company made an actual profit merely by manufacturing goods ....
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....ia, shall alone be taxable. Nor is there any provision for apportionment of profits under Section 4 similar to that contained in Section 42(3) in respect of income, gains and profits accruing or arising in British India or received in British India. I may now briefly refer to the Indian decisions cited on behalf of the assessee. In the Steel Brothers' case [1926] I.L.R. 3 Rang. 614 (F.B.) a limited company registered in London carried on large business operations in Burma which was then a part of British India. The company exported raw materials purchased in Burma and worked up in its factories as well as commodifies purchased in Burma without being subjected to any process of manufacture, to London where the goods were sold. The question arose whether the profit made as a result of the sales effected in London of commodities purchased here and exported in the same state to London could be taxed. It was held by the Rangoon High Court relying on Kirk's case [1900] A.C. 588 that in determining whether any profits and gains accrued or arose in British India it was not only the last stage of accrual that had to be looked to, but the previous stages as well and the fact that th....
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....e and receipt of the sale proceeds was in British India. The agricultural produce of one's own estate was held to constitute "income" unlike goods which are bought for sale, whether subjected to a manufacturing process or not, in which case the profits and gains would arise only on a sale of the goods. This Court dissented from Mohanpura Tea Company's case [1937] 5 I.T.R. 118; I.L.R. (1937) 2 Cal. 201, which held that even in the case of agricultural produce, "income, profits and gains" would accrue or arise only on the sale of the produce in the market. Though the judgment of this Court was reversed by the Privy Council in Mathias' case [1939] 7 I.T.R. 48 the Judicial Committee expressly avoided resolving the conflict between the views of this Court and the Calcutta High Court. I may now refer to a recent decision of the Bombay High Court in Ahmedbhai Umarbhai's case [1948] 16 I.T.R. 192; A.I.R. 1948 Bom. 425 which arose under proviso 3 of Section 5 of the Excess Profits Tax Act (XV of 1940) running in these terms: "Where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this pro....