TMI Blog1949 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. 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 meaning of Section 4A(c)(b) of the Income-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 language of the section when it is unambiguous and admits of no doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpendious 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 manufacturing business outside British India when the sales are effected in British India, there is any warrant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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; but the transaction itself cannot be split up into its component parts and the situation of each of such part cannot be taken as the place of accrual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner 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 from such sale was within the exemption. The Commissioner of Income-tax treated it as an income, which accrued and arose in British India and hence not exempted unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivy 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 attributable to operations in British India. On the other hand, counsel for the assessee relied upon the passage which occurs a little below on the same page which states: On the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 when oil was sold at the place where it was sold and at the time when it was sold and that till the sale was effected, no profits could have accrued in respect of the assessee's business. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 International Harvester Co. of Canada Ltd. v. Provincial Income-tax Commissioner [1949] A.C. 36; 17 I.T.R. Suppl. 58. In Kirk's case [1900] A.C. 588 the question was whether a company, which had its head office and residence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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; (4) the receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages. The first process seems to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 corporation at a price less than the fair market price, the Minister may, for the purpose of determining the income of such corporation, determine the fair price at which the purchase or sale shall be taken into the accounts of the corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations 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 province of Saskatchewan, could fairly be regarded as having been partially earned inside that province. In their Lordships' view it would be reasonable to suppose that in the present case the legislature would regard a proportion of the profit rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and sales effected. Another limited company was appointed as the sole selling agents of the assessee in Calcutta. The Appellate Assistant Commissioner held that the company was a resident within the meaning of Section 4A(c)(b) of the Income-tax Act as more than 50 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by whom it is received or to whom the income is deemed to arise or accrue or by whom it is deemed to be received that is assessed and made personally liable for payment of the tax. It is artificial to attribute residence to a company, and no less artificial is the selection of its place of residence by Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal 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 manufacture which is also included in the definition of a business in Section 2(4) of the Act, takes place outside British India and only the sales take place here, the profits attributable to the selling operations should be separated from the manufacturing profits under Section 42(3) of the Act and the selling profits alone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways 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 should be taxed only once and the liability should be distributed or divided among the several tax jurisdictions according to their relative importance in the scheme of profit-making. It is said that where there is a composite business consisting of manufacture of goods outside British India and their sales in British India, you must, as a matter of common sense and common fairnes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etent 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 qualifications and implications not required or warranted by the language of the Income-tax Act. Those are matters to be settled by conventional arrangements among States or by legislation. A legislature which passes a law which, in certain circumstances, may have extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 erroneous, in view of the radical difference between the scheme of the English and Indian enactments pointed out by the Judicial Committee in Chunilal Mehta's case [1938] 6 I.T.R. 521; I.L.R. 1938 Bom. 752 (P.C.), Shaw Wallace and Co.'s case [1923] I.L.R. 59 Cal. 1343 (P.C.), Pondicherry Railway Co.'s case [1931] I.L.R. Mad. 691 (P.C.), and Bejoy Singh Dudhuria's case [1933] 1 I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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. The word accrues connotes the idea of a growth or accumulation while the word arises signifies the idea of the growth or accumulation with a tangible shape so as to be receivable (per Mukherji, J., in Rogers Pyatt Shellac Company's case [1925] I.L.R. 52 Cal. 1). In Chunilal Mehta's case [1938] 6 I.T.R. 521; I.L.R 1938 Bom. 752 P.C. Sir George Rankin delivering the judgment of the Court observed: Profits accruing or arising in British India are words which, in their ordinary meaning, seem to require a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 without further process of a manufacturing character. For the moment it is enough to say that it may be so, without examining the matter and without prejudice to either view. The different views referred to above were those of the Madras High Court in Mathias' case [1937] 5 I.T.R. 435; I.L.R. 1938 Mad. 25 and of the Calcutta High Court in the Mohanpura Tea Company's case [1937] 5 I.T.R. 118; I.L.R. (1937) 2 Cal. 201. The Judicial Committee refrained from expressing any opinion as to the effect of Kirk's case [1900] A.C. 588 on the interpretation of the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessees could therefore properly be considered as arising in British India. This is my view on the construction of the language of Section 4A(c)(b). The cases cited by learned counsel on both sides remain to be noticed. In Rogers Pyatt Shellac Company's case [1925] I.L.R. 52 Cal. 1, the assessee, a limited company incorporated in the United States, had a branch office in Calcutta for the purchase of forest produce which was worked into a form available for export to America. The branch also acted as buying agents for other concerns in the United States. No sales were effected in India by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 profits. In the Hira Mills' case [1946] 14 I.T.R. 417 the assessee, a limited company incorporated and manufacturing cloth in Gwalior State sold its goods through salesmen at Cawnpore where the sale proceeds were also received. It was held by the Allahabad High Court that the profits derived from the sales accrued, or arose to the assessee in British India within Section 4(1)(c) of the Act and that the difference between the gross cost to the seller of the goods at the moment and at the point of sale and the nett price which he received represented the taxable profits of the non-resident. Mr. Subbaray ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 were derived from the business of mining in leasehold lands held from the Crown in New South Wales. It was held that the process resulting in the profits consisted of four parts: (1) extraction of ore from the soil; (2) conversion of the crude ore into a merchantable state; (3) sale of the merchantable product; and (4) the receipt of the monies arising from the sale. It was further held that as the first two processes took place in New South Wales the profits were derived from lands of the Crown held under lease from the Crown within the meaning of Section 15(3) or accrued or arose from any kind of property or other source whatsoever in New South Wales within the meaning of Section 15(4) of the New South ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and that the profit did not come into the company's hands until the goods were sold. If an article is sold at a profit by a company which has manufactured it through its own selling organisation, there are two stages in the production of the nett profits, (1) the manufacture of the article, and (2) the sale of the article, and a part of the nett profit might be attributed to each stage, the part attributed to the earlier stage being described as a manufacturing profits . The several provisions of the Colonial Statute and the Regulations framed thereunder for apportionment of profits set out in the judgment of the Judicial Committee show that only the profits arising from the business in Saskatchewan and not the profits arising from the company's business carried on in Saska ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales 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 the sales took place in London and the price was realised there, did not prevent the profits accruing or arising or from being deemed to accrue or arise in British India. It was held that the provisions of Section 42 of the Income-tax Act were wide enough to bring the profits into the net of Indian income-tax even if Section 4 did not catch them. The Court went further and held that in arriving at the amount of profits liable to income-tax a reasonable agent's commission should be deducted in respect of goods exported to and sold in London. In calculating the nett profits due deductions in respect of the London establishment were claimed and allowed but in addition thereto a sum representing the selling agent's commission was also held exempt from tax. Evidently the business profits were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 provisions, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business. The Excess Profits Tax Act treats all the separate business of the same person as one business while the Income-tax Act recognises them as different. In interpreting the expression a part of a business in the proviso above cited, the Court held that the production and manufacture of oil in a Native State and the sale of the oil in British India, were different parts of the business and the profits realised by the sales in British India should be apportioned between the two different parts of the business and an appropriate part should be allotted as the manufacturing profits of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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