1948 (10) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction and scope of the Income Tax Act of Saskatchewan.
2. Method of calculating net profit for taxation purposes.
3. Applicability of regulations made under the Income Tax Act.
4. Determination of manufacturing profit earned outside Saskatchewan.
5. Validity of assessments made by the Commissioner of Income Tax.
6. Interpretation of relevant statutory provisions.
7. Findings of fact by lower authorities and their binding nature.

Detailed Analysis:

1. Jurisdiction and Scope of the Income Tax Act of Saskatchewan
The judgment addresses the applicability of the Income Tax Act, 1932, and its amendments, as well as the Income Tax Act, 1936, to the appellant, a corporation incorporated in Ontario but carrying on business in Saskatchewan. The appellant argued that the Commissioner of Income Tax in Saskatchewan incorrectly assessed its income by taxing a portion of its manufacturing profit, which was earned outside Saskatchewan. The court noted that the relevant sections of the Income Tax Act, particularly Section 21a, were intended to tax only the net profit arising from business activities within Saskatchewan.

2. Method of Calculating Net Profit for Taxation Purposes
The appellant contended that the method adopted by the Commissioner to ascertain the "net profit arising from the business of the appellant in Saskatchewan" was incorrect. The Commissioner used Regulation 2, which applied a percentage of the appellant's total net income based on sales within Saskatchewan. This method did not account for the manufacturing profit earned outside Saskatchewan. The court agreed with the appellant, stating that the correct method should exclude manufacturing profit earned outside the province and only include profit arising from activities within Saskatchewan.

3. Applicability of Regulations Made Under the Income Tax Act
The court examined the regulations made under Section 7(4) of the 1932 Act. While Regulation 2 was used by the Commissioner, the court found that Regulation 3 should have been applied, as it allows for a more detailed and equitable method of determining the income attributable to Saskatchewan. The court noted that Regulation 2, if unmodified, could lead to the taxation of income outside the province, which would be inappropriate.

4. Determination of Manufacturing Profit Earned Outside Saskatchewan
The court emphasized that any part of the appellant's net profit attributable to its manufacturing operations outside Saskatchewan should not be taxed under Section 21a. The court suggested that a reasonable method to ascertain the manufacturing profit would be to estimate the net profit if the goods were sold directly to a wholesaler from the factory, rather than through the appellant's selling organization in Saskatchewan.

5. Validity of Assessments Made by the Commissioner of Income Tax
The court found that the assessments made by the Commissioner were flawed as they did not properly account for the manufacturing profit earned outside Saskatchewan. The assessments were based on a percentage of the appellant's total net income, which included profits not arising from business activities within Saskatchewan. Consequently, the court set aside the assessments and referred them back to the Commissioner for re-assessment in light of the judgment.

6. Interpretation of Relevant Statutory Provisions
The court interpreted Sections 21 to 25 of the Income Tax Act, noting that these sections provide a scheme for taxing profits earned from activities within Saskatchewan. The court highlighted that the intention of Section 21a was to exclude manufacturing profit earned outside the province from taxation. The court also referenced the case of Commissioners of Taxation v. Kirk, which supported the appellant's contention that profits should be apportioned based on the stages of production and sale.

7. Findings of Fact by Lower Authorities and Their Binding Nature
The court addressed the findings of fact by the Commissioner, the Board of Revenue Commissioners, and the Judge of the Court of King's Bench. It concluded that these findings were based on a misconstruction of Section 21a and, therefore, could not be binding on the appellant. The court emphasized that the correct interpretation of Section 21a should exclude manufacturing profit earned outside Saskatchewan from the taxable income.

Conclusion
The appeal was allowed, and the assessments were set aside and referred back to the Commissioner for re-assessment, considering the exclusion of manufacturing profit earned outside Saskatchewan. The respondents were ordered to pay the appellant the balance of all costs from previous appeals and the costs of this appeal.