TaxTMI 
TaxTMI 
1953 (12) TMI 1
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....ling, compounding or compromising any claim by or against the assessee. The yarn and cotton manufactured in Pondicherry were sold mostly in British India and partly outside British India. In the accounting years 1941 and 1942 all the contracts in respect of the sales in British India were entered into in British India and the deliveries were made and payments received in British India. In regard to the sales outside British India also, payments in respect of such sales were received in Madras through the said agents. The total sales of the goods in the assessment year 1942-43 were Rs. 69,69,145 and for the assessment year 1943-44 were Rs. 93,48,822. The value of the sales in British India amounted to Rs. 57,07,431 for the assessment year 1942-43 and to Rs. 67,98,356 for the assessment year 1943-44. The value of the total sales outside British India amounted to Rs. 12,61,714 for the year 1942-43 and Rs. 25,50,472 for the year 1943-44. Out of the said amounts received in respect of the foreign sales the amounts received in British India were Rs. 9,62,434 for 1942-43 and Rs. 75,230 for 1943-44 and the amounts received outside British India were Rs. 2,99,280 for 1942-43 and Rs. 24,75,....
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.... which could be determined after the application of Section 42(3) of the Act as reasonably be attributable to that part of the operations carried on in British India? and (3) Whether on the facts and in the circumstances of the case, the provisions of the Indian Income-tax Act contained in Section 4(1) with the sub-sections and Section 4A(c)(b) are not ultra vires in so far as they seek to assess foreign income of the company registered outside British India ?" The third question was concluded by the decision of their Lordships of the Privy Council in the case of Wallace Bros. & Co. Ltd. and was therefore not argued before the High Court and the High Court answered it by stating that the provisions of Section 4(1) and Section 4A(c)(b) of the Act were not ultra vires the Indian Legislature. The question (1) was further amended by agreement between the learned counsel for the revenue authority and the assessee and it was reframed as under :--- "(1) Whether on the facts and in the circumstances of the case Section 42(1) and (3) of the Act alone and not Section 4 of the Act have application to the income accruing or arising by reason of sales in British India of manufactured goods w....
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....made in British India actually arose in British India and were liable to tax under Section 4(1)(c). On a calculation of the figures he came to the conclusion that the income of the assessee arising in British India in the accounting year exceeded its income arising without British India and that the assessee was resident in British India under Section 4A(c). The assessee was also held ordinarily resident in British India under Section 4B(c) and he assessed the company accordingly on that basis. The Appellate Assistant Commissioner also proceeded on that basis and confirmed the order of the Income-tax officer. He was however further of the opinion that the entire profits were received where the sale proceeds were received and the assessee was therefore liable to tax under Section 4(1)(a) also. This conclusion was arrived at by him relying upon two decisions of their Lordships of the Privy Council, Pondicherry Railway Company v. Commissioner of Income-tax, Madras and Commissioner of Income-tax, Madras v. Diwan Bahadur Mathias, in the first of which at page 369 Lord Macmillan observed as follows : "Their Lordships accordingly are of opinion that the income derived by the Pondicherry R....
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....s that profits arose in the country in which the sales took place. This position was however negatived, particularly in the case of manufacturing businesses, in a decision of this Court in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay. After hearing at considerable length the arguments urged before us on behalf of the assessee as well as the Income-tax authorities we feel that in view of that decision the questions framed by the Tribunal and the High Court do not bring out the real point in controversy between the parties and it is agreed that the following two questions truly represent and bring out the matter on which the parties are at issue. We therefore resettle the questions originally framed and reframe them as below : (1) Whether in view of the finding of fact in this case that the entire profits were received in India and the company is liable to tax under Section 4(1)(a) of the Act, the provisions of Section 42(1) have any relevancy ? (2) Can the income received in India be said to arise in India within the meaning of Section 4A(c)(b) of the Act ? If not, should only those profits determined under Section 42(3) as attributable to the operations....
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....sales took place and the price was received. This view however was not accepted by the Supreme Court in the decision above referred to. The first question raises the point whether in a case where the assessment proceeds on the basis of receipt of income, profits and gains under Section 4(1)(a) of the Act, where there is an allocation between manufacturing profits and merchanting profits and where the two operations were carried on at different places, the former outside British India and the latter inside British India, the provisions of Section 42(1) of the Act can be invoked to allocate the profits between the manufacturing operations outside British India and the merchanting operations carried on inside British India. Section 4(1)(a) applies to both residents and non-residents. Under this clause, the total income of any previous year includes all income, profits and gains from whatever source derived which are either received in British India in the said year by or on behalf of the assessee or deemed to be received in British India during such period. As the basis of liability in the present case was actual receipt and not deemed receipt, Section 42 has no application as it app....
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....ede to this contention. Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of the income, profits and gains being one of the tests of liability, where the income, profits and gains are actually received in India, it is no longer necessary for the revenue authorities to have recourse to the fiction and this has been held quite clearly in Hira Mills Ltd. v. Income-tax Officer, Cawnpore, and in Burugu Nagayya and Rajanna v. Commissioner of Income-tax, Madras. This is also implicit in the decision of the Privy Council in Pondicherry Railway Company Ltd v. Commissioner of Income -tax, Madras, to Which reference has already been made. Section 4(1)(a) in terms is, unlike Section 4(1)(b) or 4(1)(c), not confined in its application to any particular category of assessees. Section 4(1)(a) is general and applies to a resident or a non-resident person. The second proviso to Section 4(1) although it relates to the case of a person not ordinarily resident, also indicates that income, profits and gains, which accrue or arise to such a person without the tax....
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....ed counsel appearing in the case agree that the matter is concluded by the decision of the Supreme Court against the assessee. We answer the question accordingly. The second question is important to fix the home or residence of the assessee company for income-tax purposes. Under Section 4A(c) a company is considered to have its residence in British India in any year (a) either because the control and management of its affairs is situated wholly in British India in that year or (b) if its income arising in British India in that year exceeds its income arising without British India in that year (account not being taken in either case of income chargeable under the head "capital gain"). The first part of clause (c) has no application to the present case and is not relied on. The question is, therefore, restricted to Section 4A(c)(b). The principle behind the section as stated by Lord Uthwatt in Wallace Brothers & Co. Ltd. v. Commissioner of Income-tax, Bombay City and Bombay Suburban District at page 247 is :--- "When a company in any particular year derives the major portion of its income from a country, it is a legitimate conclusion that the company has rooted itself there for tha....
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.... the decision of Ahmedbhai Umarbhai's case was considered by the Supreme Court, it was pointed out that by the mere purchase of raw materials or goods in British India and the sale of the goods, it cannot be said that the profits of such sale arose or accrued only at the place where the sales were effected. In such a case, the simple operation of purchase, which was also part of the business activity does not entitle either the assessee or the revenue authorities to claim an allocation of the profits between the place of purchase and the place of sale treating these two as operations which could be considered as profit producing operations to which Section 42(3) would apply. But as pointed out by Mahajan, J., in the course of the judgment :--- "While maintaining the view taken by the High Court in this case we wish to point out that it is not every business activity of a manufacturer that comes within the expression 'operation' to which the provisions of Section 42(3) are attracted. These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well defined business operation. Activit....
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....s that that case was concerned with the interpretation of the provisions of the Excess Profits Tax Act particularly Section 5, proviso 3, and Section 42(3) of the Income-tax Act which was made applicable to assessments under the Excess Profits Tax Act. It is true that one of the learned Judges, Patanjali Sastri, J., (as he then was) confined and restricted his decision to the provisions of the Excess Profits Tax Act read with the provisions of the Income-tax Act. His Lordship was not prepared to accept the contention that apart from statutory provisions, there was a principle of apportionment or allocation of profits between various operations of a composite business deducible from the decisions of the Privy Council in Kirk's case and Chunilal Mehta's case' and International Harvester's case. His Lordship observed at page 486 referring to Kirk's case as follows :--- "While it may well be a 'fallacy', while in applying a taxing statute which directs attention to the situation of the source of income as the test of chargeability, to ignore the initial stages in the production of the income and fasten attention on the last stage when it is realised in mone....
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....nd merchanting operations inside British India where the sale proceeds were received in fact was justified both on principle and on authority. The authorities they relied on were the decisions of the Judicial Committee in Kirk's case and International Harvester's case. It may be pointed out that this later decision has since been followed and applied again by the Judicial Committee in the decision in Provincial Treasurer of Manitoba v. Wm. Wrigley Jr. Co. Limited. The decision cannot, therefore, be restricted to cases arising under the Excess Profits Tax Act. The learned Chief Justice stated the principle at page 478 :--- "On the sale of goods the assessee receives money. While the receipt of the price is thus in Bombay, it is an entirely different thing to say that therefore the whole profits of the manufacture and sale arose in Bombay. This argument overlooks the distinction between accruing or arising on the one hand and receipt on the other. Again, the question of profits has to be determined not on receipt of the price of each lot sold by the assessee but the result of all the operations in connection with the manufacture and sale of oil during the accounting year. A....
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.... the operation of manufacture at Raichur that enabled the assessee to sell oil and some portion of the profits must necessarily be attributable to the manufacturing process. To the extent that the profits are attributable to the manufacture of oil, it is not possible to say that they accrue or arise at any place different from the place where the manufactured articles came into existence." The learned Judge was definite at page 499 when he stated : "My answer unhesitatingly is that the manufacturing profits arise at the place of manufacture. They could arise nowhere else. The sale profits arise at the place of sale and apportionment has to be made between the two, though the place of receipts and realisation of the profits is the place where the sales are made. The manufacturing profits could not be said to have accrued or arisen at that place because there was nothing done from which they could accrue or arise as natural accrual or as an increase. The increase only took place at the place of manufacture and if there was any accrual over the production cost, that accrual was at the place of the production itself." The authorities cited were considered and his Lordship's concl....
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....is immaterial that the manufactured goods are sold later on at various places. If the manufacturer is himself the seller, it might be that he receives the entire profits including that of the manufacture only at the time of the sale ; but in an inchoate shape, a portion of the profits does accrue at the place of manufacture, the exact amount of which is only ascertained after the sale takes place. For purposes of computation, the two parts of the business may be conceived of as being carried on by two different sets of persons. As soon as the manufacture is complete, that part of the business is finished and the profits that accrue to that part certainly arises at the place where the manufacture is carried on and not where the sale ultimately takes place." The quotations from the judgments clearly establish, in our opinion, that the law was laid down not because of the statutory apportionment contemplated by the Excess Profits Tax Act and the Income-tax Act as Mr. Rama Rao Saheb argued, but irrespective of it. The second line of argument addressed to us by Mr. Rama Rao Saheb was that the statute uses the word "arising" and does not add the word "accrue" as in other portions such ....
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....ring profits in the income which is to be taken into consideration in fixing the habitation of the company. The words practically are synonymous and if one may use the analogy from another branch of the law "accrue" seems to connote more or less a lateral accretion while "arise" indicates a vertical accretion. But in both the idea is that the thing springs or grows so as to increase the value of the thing by adding an advantage. It is therefore difficult to accept the distinction and hold that the principle of the decision in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai and Co., Bombay should not be applied to the present case. Our answer, therefore, to the second question is that the income received in British India cannot be said to wholly arise in India within the meaning of Section 4A(c)(b) of the Act and that there should be allocation of the income between the various profit producing operations of the business of the company in the light of the principles contained in the judgments in Ahmedbhai Umarbhai's case and in Anglo-French Textile Company v. Income-tax Commissioner, relating to the same assessee. The questions remitted to us are, therefore, answered a....
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....the assessee and Question No. 1 was answered accordingly by the High Court. In regard to Question No. 2 however Shri Porus A. Mehta, learned counsel for the respondent contended before us that the matter was not concluded by the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, and that the High Court was wrong in the answer which it gave to this question. He contended that the decision in the case of Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, turned on the statutory provisions of the Excess Profits Tax Act read with Section 42(3) of the Indian Income-tax Act which was expressly incorporated therein by virtue of Section 21 of the Act and not on any general principles of apportionment of income, profits or gains enunciated therein. He took us in extenso over the portions of the majority judgments and tried to demonstrate that the decision there was based purely on the applicability of Section 42(3) of the Indian Income-tax Act, but for the applicability of which, according to his submission, there was no room for the apportionment of the income, profits or gains of the business in the manner contended by....
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....o the determination of this question because it is mainly concerned with income which is deemed to have arisen or accrued and not with income which actually arises or accrues within the taxable territories. Section 42(3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question before us. As a matter of fact the use of the words "under Section 42(3)" in Question No. 2 as reframed by us was not appropriate and the only question which should have been sent to the High Court was "If not, should only those profits determined as attributable to the operations carried out in India be taken into account for applying the test laid down in Section 4A(c)(b)?" If therefore Section 42(3) has nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without the taxable territories as understood in Section 4A(c)(b) of the Act what we have got to consider is whether there is anything in the Act which prevents the application of the general principle of apportionment of income, profits or gains between those which are derived from business operations carried on within the ta....
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....ess are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of the sale are said to arise at the place where the sales are made and the profits in respect of the import and export business are said to arise at the place where the business is conducted. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the place of the accrual of profits." The phraseology of Section 42(3) of the Act also repels the contention in so far as the profits and gains of the business which are referred to therein and which are capable of apportionment as therein mentioned are deemed to accrue or arise in the taxable territories thus using the words "accrue" and "arise" as synonymous with each other. The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the Act but on general princ....