TMI Blog1953 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of Section 4A(c)(b) of the Act. Appeal allowed. - C.A. 11 OF 1952 - - - Dated:- 8-12-1953 - Judge(s) : MEHR CHAND MAHAJAN., N. H. BHAGWATI., S. R. DAS., VIVIAN BOSE JUDGMENT The Judgment of the Court was delivered by BHAGWATI, J. --- This is an appeal from the judgment and order of the High Court of Judicature at Madras upon a reference made by the Income-tax Appellate Tribunal under Section 66 (1) of the Indian Income-tax Act, 1922. The appellant company, the assessee, is incorporated in the United Kingdom under the English Companies Act and has its registered office in London. It owns a spinning and weaving mill at Pondicherry in French India where it manufactures yarn and cloth. Messrs. Best and Co. Ltd., Madras, have been appointed the agents of the assessee under an agreement dated the 11th July, 1939, and have been invested with full powers in connection with the business of the assessee in the matter of purchasing stock, signing bills and other negotiable instruments and receipts and settling, compounding or compromising any claim by or against the assessee. The yarn and cotton manufactured in Pondicherry were sold mostly in British India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia during the previous year ? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the entire income of the assessee company during the accounting year ended 31st December, 1941, was assessable under Section 4(1) of the Income-tax Act, and that no portion of such income was entitled to be exempted under Section 42(3) of the Act ? The Appellate Tribunal however referred the following questions to the High Court :--- (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 to the assessee company in British India and to the income attributable to the sale proceeds received by it in British India during the previous year? (2) Whether on the facts and in the circumstances of this case the entire profits and gains arising to the assessee company in British India should be taken into account for the purpose of applying the test laid down under Section 4A(c)(b) or only that part of the profits which could be determined after the application of Section 42(3) of the Act as reasonably be attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et figure of ₹ 4,58,026 which was shown as the British Indian income. It was, thus contended that the income arising in British India in the year of account did not exceed its income arising without British India and that therefore the assessee was non-resident in British India. This calculation of profits at the rate of 10 per cent. on British Indian sales did not make any allocation between manufacturing profits and merchanting profits and all the profits arising out of British Indian sales were shown in one lump sum. The Income-tax Officer took it as settled law that the profits arose in the country in which the sales took place and as the bulk of the sales had taken place in British India the bulk of the profits accrued or arose in British India. He held that the provisions of Section 42(3) would apply only where the profits arose outside British India but which by virtue of Section 42(1) were deemed to accrue or arise in British India, and that it did not apply where the profits actually arose in British India by the sale of goods in British India. He therefore held that the entire profits on sales made in British India actually arose in British India and were liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in British India. Therefore, it could not be said that for the purpose of Section 4A(c) a proportionate deemed income should be taken as income that arose in British India. When the application for reference was made to the Appellate Tribunal the Commissioner of Income-tax in the question (1) which he suggested included within its ambit this aspect of the income having been received by the assessee in British India during the previous year. But when the Appellate Tribunal reframed the question (1) it merely confined it to income accruing and arising to the assessee in British India and to the income attributable to the sale proceeds received by it in British India during the previous year. The question (1) as finally framed by the High Court adverted to the income accruing or arising by reason of sales in British India on manufactured goods where manufacturing process took place outside British India and the aspect of the income having been received by the assessee in British India was absolutely ignored. When the questions were originally referred to the High Court the position in law as then understood was that profits arose in the country in which the sales took place. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of remand of the Supreme Court and also in the judgment of this Court under appeal. It is, therefore, unnecessary to state them over again. It was found that the yarn and cotton manufactured in Pondicherry were sold mostly in British India and partly outside British India, the contracts in respect of the sales in British India during the accounting year were entered into in British India and the delivery of the goods in pursuance of the contracts was made and the sale price was received in British India. In regard to sales outside British India also, it was found that the payment of price in respect of such sales was also received in Madras. The remand was necessitated in view of the decision of the Supreme Court in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co. Bombay. At the time this Court pronounced the judgment now under appeal, we had not the benefit of the judgment of the Supreme Court. The view we took was that in the case of a composite business, which consists of manufacture and sale, where the operations are carried on at different places the profits accrued and arose in the place where the sales took place and the price was received. This v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint is that assuming that there was receipt of income, profits and gains within India, such income, profits and gains clearly arose through or from a business connection in India and, therefore, the provisions of Section 42(1) would apply and such income, profits and gains should be dealt with as income, profits and gains deemed to accrue or arise in India and consequently the inclusion of such income, profits and gains in the total income should be under Section 4(1)(c) for the Association is non-resident. Mr. Mitra urges that the charging under Section 3 is to be 'in accordance with and subject to the provisions of this Act.' Likewise, Section 4(1) is also 'subject to the provisions of this Act.' This, according to Mr. Mitra at once attracts Section 42 and such income, profits and gains being within Section 42 must be included in Section 4(1)(c) and the other alternative, i.e., Section 4(1)(a), is no longer applicable. In other words, according to Mitra's contention, Section 4(1)(a) becomes a dead letter so far as income, profits and gains, arising or accruing to a non-resident are concerned. We are unable to accede to this contention. Section 42 only speaks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut, if he did actually receive the profits in British India, he becomes liable to tax under Section 4(1)(a) on the basis of receipt and no question of apportionment of profits would arise. This hardship was noticed by the Supreme Court for it is stated by Das, J., in that very paragraph, which was already quoted in part, in the concluding portion as follows :--- It may be that the construction we are adopting in agreement with the High Court may operate harshly against non-residents in that income, profits and gains attributable to business operations outside India may also be brought to charge as having been received in India and such consequence may deter non-resident merchants from doing business in India. These indeed are serious considerations but the courts have to construe the statute according to the plain language and tenor thereof and if any untoward consequences result therefrom, it is for authority, other than this court, to rectify or prevent the same. In the light of the authoritative pronouncement of the Supreme Court, question No. (1) should be answered in the negative and against the assessee. In fact, both the learned counsel appearing in the case agree th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India because it was received here or it arises partly in British India and partly outside notwithstanding its receipt in British India by reason of the fact that the business carried on by the company consisted of operations carried out both in and out of British India. The manufacturing process was undoubtedly carried outside British India. This takes us to a consideration of the question whether or not the principle of the decision in Ahmedbhai Umarbhai's case which arose under the Excess Profits Tax Act applies to the present case. It must be mentioned that the business carried on by the assessee consisted of purchase of raw material on a large scale through an agent, conversion of it into yarn and cloth, and their sale through an organisation which booked orders and carried them out, all of which operations resulted in a receipt of profits in British India. Some of these operations were outside British India and some were inside it. In the recent case relating to this very assessee, which went on appeal to the Supreme Court in Anglo-French Textile Co. v. Commissioner of Income-tax and was disposed of on December 22, 1952, and in which again the decision of Ahmedbhai Umarbh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally and habitually made through the agency of Best and Co. and it is undoubtedly an operation which contributed to the profits of the business and this operation was in British India. The manufacturing operations were at Pondicherry, the sales were in British India and the receipt of the profits was also in British India. On the principle of the decision in Ahmedbhai Umarbhai's case, apart from Section 42 and independently of it, can it be said that the entire income had arisen in British India within the meaning of Section 4A(c)(b) as the sale proceeds were received in British India ? The answer undoubtedly must be in the negative. No doubt, the view this Court took in Commissioner of Income-tax, Madras v. The Little's Oriental Balm and Pharmaceuticals Ltd. and was followed in the judgment under appeal, was to the contrary. But in view of the decision of the Supreme Court in Ahmedbhai Umarbhai's case that view no longer prevails. Mr. Rama Rao Sahib, the learned counsel for the Commissioner of Income-tax, adopted two lines of argument to induce us not to apply to the present circumstances the law as laid down in that decision. The first was that that case was concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the chargeability depended not on the income accruing or arising in the country but on the source of the income being in the country, for he observed in the concluding portion of the judgment :--- This was, presumably, because chargeability in both cases depended not on the income accruing or arising in the country, but on the source of the income being in the country. The decision was based on the language of the statute and the scheme of taxation disclosed thereby and what I have said about Kirk's case equally applies to it. Though in the result his Lordship agreed with the conclusion reached by the High Court and agreed with the other learned Judges in dismissing the appeal, his decision was based upon the statutory provisions of the Excess Profits Tax Act which incorporated Section 42(3) of the Income-tax Act. But the majority of the Judges took a different view. Their Lordships not only rested their decision on the statutory provisions but dealt with the question apart from the provisions of the Act and reached the conclusion that the allocation of profits in a composite business between manufacturing operations carried on outside British India and merchanting oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be brought to the charge. Fazl Ali, J., agreed with the judgment of his Lordship Mahajan, J., who considered the question more elaborately. In dealing with the question whether any profits of the manufacturing business of the assessee accrued and arose in the Hyderabad State, Mahajan, J., repelled the argument of the Commissioner that the place where the profits accrue or arise is not ordinarily the place where the source that produces the profits is situate, but the place of sale, in these words :--- It was said that profits in such a case only accrue at the place of sale and not at the place of manufacture. I am unable to accede to this contention. It is true that no profits are realized until the oil is sold but 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. Act of sale is the culminating process in the earning of profits but it goes without saying that the act of sale could not be performed unless the goods were produced at Raichur and it would be wrong from a business point to say that all the profits. resulted from that operation. It was the oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the source from which they originate would in the case of certain businesses be the place where they can be said to accrue or arise. In this situation, the profits realised 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 as no other activity has produced those profits. No other place can be suggested where this increase can be said to have arisen. Das, J., agreed with the judgment of Mukherjea, J. Mukherjea, J., dealt with this question from page 502 onwards. At page 5I5 after considering the decisions and the language of the statute, his Lordship stated his conclusion as follows :--- When a raw material is worked up into a new product by process of manufacture, it obviously increases in value in other words, there is an accretion of profit to it and the increased value represents this income or profit which is the result of manufacture. As these profits accrue by reason of manufacture, the accrual, in my opinion, cannot but be located at the place where the manufacturing process is gone through. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and for the purpose of fixing a home to the company, we must take into consideration all the profits that became receivable by reason of the manufacturing and trading operations of the assessee. The profits of the manufacturing activities could not be excluded. There is no doubt some force in this argument and the omission of the word accruing in the section seems to be deliberate. But the learned Judges in Ahmedbhai Umarbhai's case practically treated the two words accrue and arise as synonymous notwithstanding the difference in the shades of the meaning between the two words---Vide observations of Mahajan, J., at page 496, and Mukherjea, J., at page 515. The learned Chief Justice has not commented on the distinction between the two words. According to the Shorter Oxford English Dictionary edited by Onions the word accrue means to fall to any one as a natural growth or increment, to come as an accession or advantage, to arise or spring from as a natural growth or result. Arise means to spring up, come into existence or notice, spring forth from its source. It is rather difficult to draw a distinction based upon the meaning of these two words and exclude the manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the direction that it should give its opinion on these two questions. The High Court has accordingly considered these two questions which were referred to it for opinion and has answered Question No. 1 in the negative and against the assessee and Question No. 2 in the manner following, i. e., 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 principle contained in the judgments in Ahmedbhai Umarbhai's case and in Anglo-French Textile Company v. Income-tax Commissioner relating to the same assessee. When the matter came up for further arguments before us on this opinion of the High Court, Shri S. N. Mukherjee, the learned counsel for the appellant did not contest the correctness of the answer to Question No. 1 in view of the decision of this Court in Turner Morrison Co. Ltd. v. Commissioner of Income-tax, West Bengal. It may be noted that even before the High Court the learned counsel appearing for both the parties agreed that the matter was conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the decisions which held that income, profits or gains arose or accrued at the places where the sales took place were good law, because then there was no question of apportionment of income, profits or gains arising from the business operations carried on in the taxable territories and income, profits or gains arising from business operations carried on without the taxable territories. The moment however it was held, as it was done in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co., Bombay, that though profits may not be realised until a manufactured article was sold, profits were not wholly made by the act of sale and did not necessarily accrue at the place of sale and to the extent profits were attributable to the manufacturing operations profits accrued at the place where business operations were carried on these decisions went by the board. The question whether a particular part of the income, profits or gains arose or accrued within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profits or gains could be said to arise or accrue. Section 42 of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one---is more appropriate when applied to a particular case. In the case of a composite business, i. e., in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of the accrual of profits and their apportionment inter se. For instance, where a person carries on manufacture, sale, export and import, it is not possible to say that the place where the profits accrue to him is the place of sale. The profits received relate firstly to his business as a manufacturer, secondly to his trading operations, and thirdly to his business of import and export. Profit or loss has to be apportioned between these businesses in a businesslike manner and according to well established principles of accountancy. In such cases it will be doing no violence to the meaning of the words accrue or arise if the profits attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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