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TMI Blog1950 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees contend that in respect of such oil a portion of the profits earned by them is attributable to their business of manufacturing oil at Raichur and that portion of the profits should not be assessed to tax under the Excess Profits Tax Act. The taxing authorities rejcted the contention of the assessees. The Income-tax Tribunal agreed with them. On a reference the High Court disagreed with the view of the Tribunal and held that the assessees contention was correct. The Commissioner of Income-tax has come in appeal from that decision. In the Excess Profits Tax Act, Section 2(5) defines, " business " as follows :-- " 'Business' includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture...... Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act." Section 5 of the Act runs as follows :-- " 5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (i) or sub-clause (ii) of clause (b) of sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The relevant portion of Section 42 of tine Indian Income-tax Act is in these terms :-- " 42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India, or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent... (2) Where a person not resident or not ordinarily resident in British India carries on business with a person resident in British India, and it appears to the Income-tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he manufactures. Similarly because he is a manufacturer and a trader it does not follow that the two activities necessarily become one indissoluble business of which the profits cannot be separately ascertained. Because a man is a manufacturer, a trader and even an exporter it is not correct to say that unles all the three activities take place in an Indian State he is not entitled to the benefit of the proviso because a part of his business is not in the Indian State. The argument of the appellant is that there should not only be a separate composite unit of the assessee's business in an Indian State but that each operation making up the assessee's business must take place in an Indian State. I find no justification for putting such construction on proviso 3 to Section 5. No authority is cited to support such interpretation of the proviso. It is not contended in the present case that the activities of the assessee as a manufacturer are so spread out as to be incapable of being ascertained as one unit of business in an Indian State. For instance, difficulties may arise if a manufacturer buys groundnuts in one place, has a crushing mill in another place, has a refinery in the third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bought and sold goods. In my opinion those are not relevant to determine the question before us because in the present case the business is of a different nature. In Commissioner of Taxation v. Kirk, Lord Davey distinguished Sulley v. Attorney-General and Grainger & Son v. Gough on this ground. The place of sale was not considered the test when the business was of manufacture and sale. Similarly cases which deal with the liability of the assessee under the Indian Income-tax Act because the profits were received (and not only accrued or arose) in India are also unhelpful. The Judges of the High Court strongly relied on Commissioner of Taxation v. Kirk for their conclusion in favour of the assessee. It was a case of mining operations where the mines were in one colony and the sale of the ore in another. Under the Taxing Act in that case, it was observed that it was wholly immaterial whether the person to be taxed resided in the colony or not. Nor was it material whether the income was received in the colony or not, if it was earned outside the colony. The Board attached no importance to the word " derived " which was treated as synonymous with arising or accruing. The real questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves the appellant's contention. It shows that when the manufacturing portion of the activity of the assessee is in one province and the sale is in another province, the whole profits are not necessarily considered as arising from the sale or at the place of sale although they may be treated as received on sale of the products. Secondly, it shows that profits could be apportioned between the manufacturing and trading activities, particularly when the assessee carried on the business of a manufacturer and trader together. This decision was sought to be distinguished by the Attorney-General on the ground that Sections 23 and 24 of the Taxing Act of that colony made it a completely different scheme of taxation. I do not think that is a good point of distinction, because proviso 2 to Section 5 of the Indian Excess Profits Tax Act, read with Section 21, prescribes also a scheme in respect of a non-resident although not in the same details or with the same results under the Indian Act. The expression " part of a business " must in my opinion be read with the same meaning and implication in provisos (2) and (3) to Section 5 of the Excess Profits Tax Act. I am also unable to accept the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same basis was also imposed on the assessees. The assessees contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur which are an essential part of their business, and that such profits must be excluded from the assessment, under the third proviso to Section 5 of the Excess Profits Tax Act, as having accrued or arisen in the Hyderabad State. The contention was rejected and the whole of the profits arising out of the sales in British India of the oil produced in Raichur were included in the assessments. After unsuccessful appeals to the Appellate Assistant Commissioner, Bombay, the assessees carried the matter to the Income-tax Appellate Tribunal, Bombay, but with no better result. The assessees thereupon applied to the Tribunal requiring them to draw up a statement of the case and refer it to the High Court at Bombay for decision of the question of law involved and the Tribunal accordingly stated the case and referred the following question : " Whether on the facts stated above income accruing or arising to the assessees on sales made in British India of goods manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of which accrue or arise without British India where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in British India unless the business is controlled in India : Provided further that where the profits of apart only of a business carried on by a person who is not resident in British India or not ordinarily so resident accrue or arise in British India or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise then, except where the business being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply only to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business : Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of 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 whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured there, and there was thus at that place a complete cross-section of their business which consists of manufacturing and selling oil. Apart from this consideration, I can find nothing in the context of Section 5 to exclude the ordinary meaning of the words " part of a business " and to compel the somewhat strained and artificial interpretation sought to be put upon them which, it may be observed in passing, seems inconsistent with the view which left untaxed the profits derived from the sales at Raichur. Furthermore, Section 5 is to be read with the provisions of Section 42 of the Indian Income-tax Act which has been made applicable, with certain modifications not material here, to excess profits tax by Section 21 of the Excess Profits Tax Act " as if the said provisions were provisions of this Act and refer to excess profits tax instead of to income-tax ". That section has, in my opinion, an important bearing on the issues involved in this appeal and deserves careful consideration. So far as material here it reads thus : " 42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same connotation. It follows that the manufacture of oil in the mill at Raichur is a part of the assessees' business. The question next arises whether the profits derived from such manufacture, other than those arising from sales at Raichur which are not now in question, accrued or arose in Raichur, so as to bring the case within proviso (3). It is clear that the oil manufactured at Raichur cannot itself be regarded as income, profits or gains within the meaning of the Indian Income-tax Act or the Excess Profits Tax Act any more than the green coffee in Mathias' case which the Privy Council held could not be so regarded. The oil is manufactured for purposes of sale in order that profits may be earned, and such profits are realised only when the commodity is sold and not before. But, as the test of non-liability under proviso (3) is the accruing or the arising of the profits in an Indian State, the question is whether the profits, when they do arise from the sales at Bombay of the product of the mill at Raichur, arose in whole or in part at Raichur ? As pointed out by the Privy Council in Chunilal Mehta's case the words " profit accruing or arising in " (a country) require a plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of any statutory requirement " to that effect, to cut business operations arbitrarily into two or more portions and to apportion, as between them, the profits resulting from one continuous process ending in a sale. It appears, however, unnecessary, in the present case, to consider the applicability of the decision in Kirk's case to assessments arising under the Indian Act which makes the place at which the profits accrue or arise the test of liability or non-liability, as the case may be, as I am of opinion that Section 42 of the Income-tax Act which, as already stated, has been incorporated in the Excess Profits Tax Act, is applicable here and sanctions such apportionment. It is noteworthy that the first part of sub-section (1) of Section 42 providing that certain classes of income are to be deemed to accrue or arise in British India is not confined in its application to non-residents, but is in general terms so as to be applicable to both residents and non-residents. Before its amendment in 1939 the sub-section began with the words " in the case of any person residing out of British India " which obviously restricted the application of the provision to non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a corollary, that the rest of the profits, attributable to the manufacture at Raichur, must be regarded as accruing or arising in the Hyderabad State. Therefore proviso (3) to Section 5 of the Excess Profits Tax Act becomes applicable to the case and exempts the manufacturing part of the assessees' business from the operation of the Act. On behalf of the respondent, Mr. Munshi called attention to certain observations of the Privy Council in Chunilal Mehta's case as supporting his contention that, although all the operations of a business must be completed before profit is received, the accrual of the profit begins with the first operation and continues cumulatively till the goods are finally sold, and that, therefore, the expression " accruing or arising in " a place must be applied distributively to the different operations and the places where such operations are carried out. The observations relied on are as follows : " But the legislature has chosen a different test and applied it to all kinds of profit accruing or arising in British India. It may even have chosen it as fairer because it can be applied distributively to the profits of a single source ", and again, " no dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to be assessed were all received in the province where the goods were sold, as the profit brought under charge under the Act was only the net profit arising from the business in the province, the manufacturing profits should be excluded from the assesssment. Their Lordships referred to other provisions of the Act which, in the converse case, sought to charge a proportionate part of any profit derived from sale outside the province of goods produced in the province as being " earned " within the province, and inferred from those provisions that the intention of the legislature in the charging section was to bring within the ambit of taxation only an apportioned part of the profit. Such a construction, they thought, would " result in a fair and reasonable scheme of taxation in accordance with that comity which naturally prevails between one province and another ". Referring to Kirk's case their Lordships remarked " that although the sections under consideration in Kirk's case differed in their language from the provisions which their Lordships were considering, the reasoning which appears in the Judgment in that case was helpful to the appellants' contention in the present case " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising in British India in respect of the Raichur branch. Both the assessment orders were appealed against to the Appellate Assistant Commissioner but without any success. The Income-tax Appellate Tribunal on appeal drew up a statement of case and referred the following question of law to the High Court :--" Whether on the facts as stated above income accruing or arising to the assessee on sales made in British, India of goods manufactured in Raichur situated outside British India has been rightly held by the Tribunal as income accruing and arising in British India and was liable to excess profits tax ?" The High Court re-framed the question as follows :-" Whether on the facts as stated above profits of a part of the business of the assessee accrued or arose in an Indian State ", and answered it in the affirmative. It held that the activity which the respondent carried on at Raichur was a part of its business within the meaning of the third proviso to Section 5 of the Excess Profits Tax Act and that the profits of a part of the business accrued or arose in an Indian State and that the said profits were not assessable to excess profits tax. This order of the High Court is being conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness is carried on by or on behalf of a person who is resident but not ordinarily resident in British India unless the business is controlled in India." This exception has no bearing to the facts of the present case. The second proviso is in these terms : "Provided further that where the profits of a part only of a business carried on by a person who is not resident in British India or not ordinarily so resident accrue or arise in British India or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then, except where the business being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply only to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business." This proviso also concerns a person not resident in British India and does not touch the present case. It however furnishes a clue to the meaning of the following proviso inasmuch as it attracts the application of Section 42 of the Indian Income-tax Act to the case of a non-resident and contemplates the apportionment of income between part of a business controlled in Bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adventure in the nature of trade, commerce or manufacture or any profession or vocation..." It means any continued activity of a person which yields profits and which is in the nature of trade, commerce or manufacture. It may even be any adventure in the nature of trade, commerce or manufacture. A proviso was added to this definition in the year 1940 in these terms :-- "Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act." The effect of the proviso is that if a man is carrying on a number of activities, whether of the same or of different natures, all these various businesses are treated as one. The same person, if engaged in the manufacture of hardware, oils, textiles, motor tyres, bicycles and owning mills for his diverse activities in different places and also trading in merchandise and doing contract business, is deemed to carry on a single business. All the businesses that he carries on are lumped together and treated as one business for the purpose of levying the tax and calculating the profits. The proviso has made an amalgam of all the businesses of one individual an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. But for the purposes of provisos 2 and 3 of Section 5 all these are part of a business and have to be treated as separate businesses. The theory of cross-section of a business contended by the appellant is not very intelligible. It was contended that if a man is a manufacturer as well as a seller of goods and also an importer of goods, then in his case the term " part of a business " means the carrying on of all the three activities together and that unless he carries on all the three activities, it cannot constitute " part of business " under the proviso. This contention to my mind is untenable. The only construction which in the context of the Act can be reasonably placed on the proviso to Section 5 and on the words " part of a business " is the one suggested above. I am therefore of the opinion that the learned Chief Justice was right when he held that the activities which the assessee carried on at Raichur are certainly a part of the business of the assessee. Mr. Justice Tendolkar on this part of the case observed as follows :-- " The normal meaning of the word is a 'portion' in whatever way carved out and I have no doubt in my mind that any of the operations that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess. 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 article came into existence. It was not denied that the business of manufacture at Raichur may produce profits or it may even earn profits and it was conceded that it may also be said that profits are derived from that process of manufacture but it was strenuously argued that earning of profits is not the same thing as the accrual of profits and no profits could be said to accrue or arise at a place where the profits may well have been earned or produced and that the place of accrual of profits must necessarily be the place where the sale proceeds are received or realized. On behalf of the assessee it was urged that the words "derived", "earn", " accrue " or " arise " are synonymous and it is immaterial which word is used indicating the result of the activities of various business operations. The totality of profits that accrues to a business or is earned by it may be ascribed to a number of operations ; though it is ascertained at the place where the produce is sold, it accrues where it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce of his mills is sold at a different place and that it is only the act of sale by which profits accrue and they arise only at that place is to confuse the idea of receipt of income and realization of profits with the idea of the accrual of profits. The act of sale is the mode of realizing the profits. If the goods are sold to a third person at the mill premises no one could have said that these profits arose merely by reason of the sale. Profits would only be ascribed to the business of manufacture and would arise at the mill premises. Merely because the mill owner has started another business organisation in the nature of a sales depot or a shop, that cannot wholly deprive the business of manufacture of its profits, though there may have to be apportionment in such a case between the business of manufacture and business of shopkeeping. In a number of cases such apportionment is made and is also suggested by the provisions of Section 42 of the Indian Income-tax Act, reference to which has also been made in proviso 2 of Section 5 of the Excess Profits Tax Act. In Commissioners of Inland Revenue v. Maxse, Maxse purchased a monthly magazine for pound 1,500 and was the sole prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portioned and so much of it as was obtained by the manufacturing process was assessable. The principle of Maxse's case and of other English cases was applied to the facts of that particular case. In cases where a person is carrying on composite businesses which for purposes of Section 5 are regarded as one business and for purposes of the proviso as several parts of a business, it may be said that there are two stages in the production of the net profit, (1) the manufacture of the article, and (2) the sale of the article and that part of the net profit should be attributed to each stage, the part attributed to the earlier stage being described as a manufacturing profit. Reference in this connection may be made to the case of International Harvester Co. of Canada Ltd. v. Provincial Tax Commission. In that case it was argued that when money was received by the appellant in Saskatchewan as a result of a sale in Saskatchewan the whole of the net profit on the sale arose from the business of the appellant in Saskatchewan, and no apportionment was necessary. This contention was described by their Lordships as fallacious and untenable. Their Lordships quoted with approval the following ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson is one operation and the nature and character of the business is such that the profits arise at the place of sale and that in such a case it is not possible to ascribe any profits to the act of purchase and it is still more difficult to apportion them. These cases are no guide for the decision of cases of manufacturing business or business of a like nature. Observations made in these cases must be limited to the facts of each particular case. A number of cases were cited for the proposition that under the Indian Act it is not the place where a person carries on business (as it is under the English law) where necessarily profits, can be said to arise, because the Indian Act takes notice only of the place of accrual of profits and not of the place where the business is carried on or where the source which produces profit is situate. The matter was discussed by their Lordships of the Privy Council in Commissioner of Income-tax, Bombay v. Chunilal B. Mehta. The assessee in that case was carrying on buying and selling operations in commodities in various foreign markets. No delivery was ever given or taken and the profits of such forward contracts were not received in fact in Brit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, but only on condition that they are profits 'accruing, arising or received in British India,' etc. What connection exists, if any, between place of direction and place at which the profits arise is a matter not touched by Section 4, 6 or 10. Not only do they lay no stress upon the place at which the business is carried on, they make no mention of it. In these circumstances it cannot be held that it is itself the test of chargeability by virtue of a rule, not mentioned either, that profits arise or accrue at the place where the business is carried on." Later in the same judgment it was observed that there seemed to be no necessity arising out of the general conception of a business as an organization that profits should arise only at one place, that profits are frequently, if not ordinarily, regarded as arising from many transactions, each of which has a result---not as if the profits need to be disintegrated with difficulty, but as if they were an aggregate of the particular results. It was said that the assessment order had discriminated between the Bombay and the foreign business income and that to discriminate between all kinds of profits according to the place at which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business at the two dates, the increase shown at a later date compared to the earlier date represents the profits of the business. In this concept of the term the place of business or 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 realized 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. In the view that I have taken it is unnecessary to refer to all the cases that were cited at the Bar, for most of these cases concerned the interpretation of the various sections of the Indian Income-tax Act and none of them concerned the interpretation placed on the Act with which we are concerned. The result therefore is that in my opinion the High Court was right in answering the question in favour of the assessee and no grounds exist for reversing that decision in appeal, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax, Bombay, has come up on appeal to this Court. With a view to appreciate the contentions that have been raised by the learned counsel on both sides, it will be convenient, first of all, to advert to the provisions of the Excess Profits Tax Act which have a bearing on the point. Section 2, sub-clause (5), of the Act defines " business " as including any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation but does not include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications ......... One of the provisos attached to this definition provides that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act. Section 4 is the charging section and under it any business to which this Act applies is subject to payment of excess profits tax in the manner and to the extent indicated in the section. Section 5 lays down to what businesses the Act will apply. "This Act shall apply " so runs the section, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and including parts of each of the processes that are comprised in the same. It is next said that even assuming that the manufacturing operation can be treated as a part of the business, the profits of the same could and did accrue only at the place of sale and hence the proviso could not be attracted to the facts of the present case. As regards the first part of Mr. Setalvad's contention, I do not think that it can be accepted as sound. " Business " is defined in the Act to include any trade, commerce or manufacture. A man may carry on the trade of a seller or purchaser of goods ; he may be a manufacturer of goods or an exporter or importer of the same. Each of these would be a business within the meaning of the Act. Suppose, for example, that he combines all these activities and carries on a business which includes manufacturing, selling and also exporting and importing of goods. Can it not be said that each one of these activities is a part of the business which he carries on ? I agree with Mr. Munshi that if a particular process or activity of a continuous character can be distinguished from other processes and if a separate profit can be ascertained and allotted in respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o means an easy one. The same principle was applied by the Calcutta High Court in a case where the growing of tea as an agricultural produce, which was not liable to income-tax, was carried on along with the business of manufacturing tea : vide Killing Valley Tea Co. v. Secretary of State. It is true that these are cases where several businesses were amalgamated and carried on together, or more of which were not liable to tax or excess profits duty ; but the principle of apportionment upon which these cases were decided could, in my opinion, be applied with equal propriety to cases where one part of the business is distinct and separate from the other parts and is capable of earning profits separately. That profits could and should be allotted to and apportioned between different parts of a business of a composite character is fully illustrated by the decision of the Privy Council in Commissioner of Taxation v. Kirk. In that case the assessees were a mining company who had mines in the Colony of New South Wales. The ore was extracted in New South Wales and was converted there into merchantable product. The product, however, was sold not in New South Wales but in Victoria. Under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint that arises for consideration in this case. It is enough to state at the present stage that on the authority of Kirk's case it would be quite legitimate to hold that a portion of the net profit that the assessees in the present case made out of their total business could and should be allotted to the manufacturing process that was carried on at Raichur. The view is strengthened by two recent pronouncements of the Judicial Committee, the earlier of which reported in International Harvester Company of Canada v. Provincial Tax Commission discusses the point in great details and was followed in its entirety in the later decision in Provincial Treasurer of Manitoba v. Wrigley Jr., Co. Ltd. In International Harvester Co. of Canada v. Provincial Tax Commission the question for decision turned upon the construction of Section 21(a) of the Income Tax Act, 1932, of Saskatchewan which after amendment was in the same terms as Section 23 of the later Act of 1936. The section provides that " the income liable to taxation under this Act of every person residing outside of Saskatchewan who is carrying on business in Saskatchewan either directly or through or in the name of any other person sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasoning applies fully to the facts of the present case, though here again I should point out that the scheme of the Saskatchewan Act was to tax profis arising from a business in a particular place and to that extent the language of the Indian Act is undoubtedly different. Like Kirk's case, it can, however, be taken as an authority for the proposition that in cases like the one we have before us, there could be apportionment of the net profits that accrue to the business of the assessee and one portion of it could be allotted to that part of the business which relates to the manufacture of commodities which are ultimately sold in the market. The later decision of the Judicial Committee referred to above simply follows the International Harvester Company's case without any further discussion. Mr. Munshi in the course of his arguments has referred to the provisions of Section 42(3) of the Indian Income-tax Act and he contends that the language of this sub-section clearly indicates that in the contemplation of the legislature certain operations of a business could be regarded as apart of the business and the principle of apportionment which this sub-section provides can very proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness" as used in that proviso must be taken to have been used in the same sense as in the earlier proviso and to this extent, at any rate, it favours the contention of the respondents that no cross-section of the entire business was meant by that expression. Again it is quite true that there is no express direction as to apportionment in the third proviso to Section 5 of the Excess Profits Tax Act as there is in sub-section (3) of Section 42 of the Income-tax Act. However, profits can accrue in respect to a part of a business only when apportionment is possible and it is on this assumption that this proviso is based. If no apportionment can be made in respect of the processes or activities of a particular business, they will not be considered to be a part of the business at all and the proviso will not apply. The principle of apportionment, therefore, is implied in the third proviso to Section 5 of the Excess Profits Tax Act. I now come to the other question as to whether the profits of the manufacturing part of the assessees' business did arise or accrue at Raichur within the Hyderabad State. The point is not altogether free from difficulty and although a large number of dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriety of the Madras decision was questioned by the Calcutta High Court in Rogers Pyatt Shellac and Company v. Secretary of State for India, and it was pointed out that the Judges of the Madras Court wholly overlooked a vital distinction between Indian and English Income-Tax law in so far as the former lays down that certain profits, though not actually arising or accruing in British India, should be deemed to arise or accrue in this country. Under the English law, the essential thing for purposes of taxation was that profit should accrue from trade exercised within the United Kingdom and there was no provision there corresponding to that contained in Section 42 of the Indian Income-tax Act. The decision in Secretary, Board of Revenue, Madras v. Madras Export Company was, however, followed by a Full Bench of the Lahore High Court in Jiwandas v. Income-tax Commissioner, Lahore. In that case, the question arose as to whether a person residing and carrying on business in British India and purchasing goods there which were sold in Kashmir was liable to assessment on the ground that a part of the profits accrued within British India. The Full Bench gave a negative answer to this questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of any assistance to the appellant in the present case. All of them proceeded on the footing that no appreciable profit resulted from the operation of buying when the goods were purchased at one place and exported in a raw state to another place for sale. In the Orissa case referred to above, Narasimham, J., expressly observed in course of his judgment that the position might be different if the materials purchased underwent any manufacturing process before they were exported. If no profits really resulted from the purchasing part of the business, obviously the question of the place where such profits arise or accrue does not become material at all. As against these cases, several authorities have been cited to us which have proceeded on the footing that even purchase of raw materials could be an operation in connection with a business and if it was carried on in British India, it might make the profits attributable to such operation taxable under Section 42 of the Indian Income-tax Act. The case of Rogers Pyatt Shellac and Company v. Secretary of State for India is one of the leading decisions on this point. In that case, a company incorporated in U. S. A. and having its head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The High Court was not right in holding that as a matter of law, profits must be held to arise at the place where the source of the profit is situated. The Privy Council clearly laid down in the case of Commissioner of Income-tax v. Chunilal that income from business does not necessarily arise or accrue at the place from which directions are given or skill and judgment exercised, although the operations may take place elsewhere ; and it is not the scheme of the Income-tax Act that the profits in the case of a business cannot be taken distributably but must be taken as a single indivisible result accruing at one place. The learned Chief Justice of Bombay in support of his judgment relied strongly upon the decision of the Madras High Court in Commissioner of Income-tax v. Mathias. In that case, the assessee, who was a resident of Mangalore in British India, owned coffee plantations in Mysore. The harvested crops were brought to Mangalore to be dried and cleansed there in the factory of the selling agents of the assessee and sold there by that company, the sale proceeds being received and retained at Mangalore by the assessee himself. The question was whether the assessee was entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. As the principle of Section 42 of the Income-tax Act applies to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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