TMI Blog1950 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... o Section 5 of the Excess Profits Tax Act. For these reasons the conclusion of the High Court is correct and the appeal is dismissed with costs. - - - - - Dated:- 4-5-1950 - Judge(s) : MUKHERJEE., KANIA., FAZL ALI., PATANJALI SASTRI., MEHR CHAND MAHAJAN., DAS JUDGMENT KANIA, C. J.--This is an appeal from a decision of the High Court of Judicature at Bombay upon a reference made by the Income-tax Appellate Tribunal, Bombay, under Section 66(1) of the Indian Income-tax Act. The respondent firm, the assessees, carried on business of manufacturing and dealing in oil during the relevant accounting periods. They are a registered firm under the Income-tax Act and are residents in Bombay. They own three mills it Bombay and one at Raichur for manufacturing oil from groundnuts. The oil produced at Raichur is sold partly at Raichur and partly in Bombay. Their liability to pay income-tax in respect of their whole profits is not disputed under the Income-tax Act. The question is in respect of their liability under the Excess Profits Tax Act for the oil manufactured at Raichur, but sold in Bombay. The assessees contend that in respect of such oil a portion of the profits earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole of the profits of which accrue or arise in an Indian State, and the other part of the busi. ness shall, for all the purposes of this Act, be deemed to be a separate business." Section 21 of the Act, which was not referred to in the course of the arguments before us, runs as follows :-- " 21. The provisions of Sections 4-A, 4-B, 10, 13, 24-B, 29, 36 to 44-C (inclusive), 45 to 48 (inclusive), 49-E, 49-F, 50, 54, 61 to 63 (inclusive), 65 to 67-A (inclusive) of the Indian Income-tax Act, 1922, shall apply with such modifications, if any, as may be prescribed, as if the said provisions were provisions of this Act and referred to excess profits tax instead of to income-tax, and every officer exercising powers under the said provisions in regard to income-tax may exercise the like powers under this Act in regard to excess profits tax in respect of cases assigned to him under sub-section (3) of Section 3 as he exercises in relation to income-tax under the said Act : Provided that references in the said provisions to the assessee shall be construed as references to a person to whose business this Act applies." The relevant portion of Section 42 of tine Indian Income-tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried on at Raichur, did not accrue or arise in the Hyderabad State because the profits arose on the sale of the oil in Bombay and therefore the assessee's contention was incorrect. Proviso 3 to Section 5 of the Excess Profits Tax Act requires the assessee to fulfil three conditions to secure the exemption. They are : (1) there should be a part of a business ; (2) that must be in an Indian State ; and (3) profits in respect of which exemption is claimed must accrue or arise from that part of the business. The appellant's contention is that the part of the business must be a complete unit or as described on his behalf a complete cross-section of the business. It is argued that inasmuch as the sale of the oil in question took place in Bombay the cross-section composed of manufacture and sale did not take place at Raichur in the Hyderabad State and therefore the assessee's contention must fail. In my opinion this contention is unsound. The definition of business in the Excess Profits Tax Act clearly envisages manufacture as a business by itself. It is not necessary that a manufacturer must be a trader in the commodity he manufactures. Similarly because he is a manufacturer and a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crued or arose only on the sale of the oil in Bombay and no part of the profits of manufacture therefore arose in an Indian State. In my opinion this argument is also unsound. On the sale of goods the assessee receives money. While the receipt of the price is thus in Bombay it is an entirely different thing to say that therefore the whole profits of the manufacture and sale arose in Bombay. This argument overlooks the distinction between accruing or arising on the one hand and receipt on the other. Again, the question of profits has to be determined not on receipt of the price of each lot sold by the assessee but the result of all the operations in connection with the manufacture and sale of oil during the accounting year. An individual transaction may result in profit but that will not make the assessee liable if the result of his accounting year's activities is a loss. It is therefore improper in a case of this kind to consider the sale of oil as the deciding factor either to ascertain profits or to determine the place of the accrual of profits. Several cases were cited at the Bar dealing with a trader's business where he bought and sold goods. In my opinion those are not relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Canada v. Provincial Tax Commission. In that case the question was of the liability to tax of a resident outside the province of ' S ' under the Income-tax Act of S, in respect of profits arising from the sale in that province of agricultural implements which were manufactured outside the province. Under the relevant Act the tax was leviable on a person residing outside ' S ' who was carrying on business in ' S ' on the net profit or gain arising from the business of such person in ' S '. The Board held that although the profits were all received in ' S ', where the goods were sold, the profits liable to taxation were only the net profits arising from the business in ' S ' and therefore the manufacturing profits should be excluded from the assessment. They referred to Sections 23 and 24 of the Taxing Act, under which a non-resident person was charged to tax on an apportioned part of profit, which although it might be received outside the province of ' S ' could fairly be regarded as having been partially earned inside that province. In my opinion that case substantially helps the contention of the respondents and negatives the appellant's contention. It shows that when the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and at Bombay which, during the relevant period, was part of what was then known as British India. The assessees are resident in Bombay and are registered for income-tax purposes, under Section 26A of the Income-tax Act, under the name of Ahmedbhai Umarbbai Co., while their branch at Raichur is run under the name of Ahmed Sons. They own three mills at Bombay and one at Raichur for manufacturing oil from groundnuts, and they sell the oil partly at Raichur and partly at Bombay. For the chargeable accounting period commencing from 31st October, 1940, and ending on 20th October, 1941, the assessees were assessed to excess profits tax in a sum of Rs. 1,61,807 on their business income of Rs. 6,08,761, including a sum of Rs. 2,49,615 which was said to have accrued or arisen from sales in Bombay of oil manufactured at Raichur. Part of such oil was also sold at Raichur, but the profits derived from such sales were not included in the assessment, and no question now arises in regard to such profits. For the succeeding period commencing from 21st October, 1941, and ending on 8th November, 1942, a tax of Rs. 2,55,485-1-0 computed on the same basis was also imposed on the assessees. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising out of a business in excess of its normal or standard profits, a business being regarded as the unit of assessment. " Business " is defined in Section 2(5) of the Excess Profits Tax Act as including, among other things, " manufacture ", and a proviso to the clause says 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 provides for the charge of tax in respect of any business to which the Act applies on the amount by which the profits during any chargeable accounting period exceed the standard profits. Section 5, on the true interpretation of which the question for determination in this appeal turns, runs thus :-- " 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-section (1) of Section 4 of the Indian Income-tax Act, 1922, or of clause (c) of that sub-section : Provided that this Act shall not apply to any business the whole of the profits of which accrue or arise without British India w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales of the oil in British India, and that for two reasons : Firstly, because the manufacturing operations carried on in the Hyderabad State did not constitute a " part " of the assessees' business within the meaning of the proviso, and, secondly, because even if such operations could be regarded as a part of the business, the profits derived from the sales of the oil in Bombay could not be said to have accrued or arisen in that State. Both these propositions were held to be untenable by the learned Judges of the High Court and were contested before us by Mr. Munshi on behalf of the assessees. On the first point, the Attorney-General insisted that a " part " of a business meant a fraction of the aggregate of all the constituent activities of the business or, as it has been put during the argument, " a cross-section " of the entire business operations, and not one or more of such operations, however essential for the production of the resulting profits. It is difficult to see how this construction will assist the taxing authority in the present case, for, as already stated, the assessees were selling at Raichur part of the oil manufactured there, and there was thus at that place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of a business part only of whose " operations " are carried out in British India where such part could be regarded as either " a business connection in British India " or " a source of income in British India ". They also provide machinery for facilitating collection of the tax from the resident agent where the person entitled to such income is a non-resident. Now, these provisions are obviously complementary to Section 5, proviso (2), of the Excess Profits Tax Act, and unless we read " part of a business " in that proviso as meaning one or more " operations " of the business referred to in sub-section (3) of Section 42, the machinery provided in the latter section for collection of the tax leviable on a non-resident person by virtue of proviso (2) will not be applicable, and the scheme of charge and collection in such cases will be rendered incoherent. A harmonious interpretation of the scheme requires that the words " part of a business " in proviso (2) must be taken to signify one or more of the operations of the business, and, if so, the same expression used in proviso (3), with which we are here concerned, must also have the same connotation. It follows that the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute, tax was leviable in respect of income " arising or accruing from any. . .trade. . .carried on " in a the Colony or " derived from lands ", or " arising or accruing from any kind of property. . .or from any other source whatsoever ", in the Colony, but no tax was payable in respect of income " earned " outside the Colony. The Board held that the profits, having been produced by the combined operations of extraction, manufacture and sale, were assessable to tax in the Colony either as derived from land by reason of the extraction or as " arising or accruing ", if not from a " trade ", certainly from a " source ", by reason of the manufacture in the Colony, and were therefore " earned " in the Colony, though the profits were received outside the Colony. While it may well be a " fallacy ", while in applying a taxing statute which directs attention to the situation of the source of income as the test of chargeability, to ignore the initial stages in the production of the income and fasten attention on the last stage when it is realised in money, it may be open to question whether it is in consonance with business principles or practice, in the absence of any statutory requirement " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jagatpal Singh, marginal notes in an Indian statute, as in an Act of Parliament, cannot be referred to for the purpose of construing the statute, and it may be mentioned in this connection that the marginal note relied on has since been replaced by the words " Income deemed to accrue or arise within British India ", which makes it clear that the main object of sub-section (1) was to define that expression [see Section 12(a) of Act XXII of 1947]. Nor can the title of a chapter be legimately used to restrict the plain terms of an enactment. I am therefore of opinion that the first part of sub-section (1) is applicable to the assessees, the expressions " business connection in British India " and asset or source of income in British India" being wide enough to cover their selling organisation at Bombay. The result is that the profits received at Bombay from the sale of the oil manufactured at Raichur have to be apportioned under sub-section (3) between the two operations of manufacture and sale, and only such portion of the profits as is reasonably attributable to the sale should be deemed to accrue or arise in British India. It must follow, as a corollary, that the rest of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abroad, that their Lordships spoke of the profits accruing or arising distributively and not in a single place. That they were not thinking of the profits resulting from a single composite process such as manufacture and sale, and their disintegration and apportionment as between the different operations is shown by their further observation 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". Reference was also made to a recent decision of the same Tribunal in International Harvester Co. of Canada v. Provincial Tax Commission. The case arose out of the assessment of the profits of a non-resident to income-tax, under a provincial Income-tax Act in respect of the profits arising from the sale within the province of goods manufactured outside the province. The tax was leviable, in the case of a non-resident person, on the " net profit or gain arising from the business of such person in " the province. Their Lordships held that, although the profits sought to be assessed were all received in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and owns three oil mills in Bombay and one oil mill in Raichur in Hyderabad State and the question to be decided in the appeal is whether the profits which were received or realized by the respondent on the sale of oil manufactured in Raichur and sold in British India are liable to excess profits tax. By an order dated 27th March, 1944, the Excess Profits Tax Officer, Circle III, Bombay, assessed the respondent to excess profits tax in the sum of Rs. 1,61,807 for the chargeable accounting period commencing from 31st October, 1940, and ending on 20th October, 1941, on the business income of Rs. 6,08,761, which included a sum of Rs. 2,49,615, being profits accruing or arising in British India in respect of the respondent's branch at Raichur in Hyderabad State and run in the name of Messrs. Ahmed Sons. By another order dated 28th March, 1944, the same officer assessed the firm to excess profits tax in a sum of Rs. 2,55,485-1-0 for the chargeable accounting period commencing from 21st October, 1941, and ending on 8th November, 1942, on the business income of Rs. 7,46,561, which included a sum of Rs. 2,34,785, being the profits accruing or arising in British India in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a person resident in British India which accrues or arises or which is deemed to accrue or arise to him in British India during the accounting year, as also all income which accrues or arises to him without British India during such year ; and if such person is not resident in British India during that year, then all income which accrues or arises or is deemed to accrue or arise in British India during such year. If Section 5 of the Act stopped short at that stage, it is undoubted that in the case of the respondent who is a resident in British India all his income, no matter where it arose, within British India or without British India, would be chargeable to excess profits tax just in the same way as it is chargeable to income-tax under the Indian Income-tax Act. The whole of his income arising in Raichur has legitimately been taxed under that Act. Section 5 however has three provisos which limit its scope and take certain incomes outside its ambit. The first, proviso is to the following effect :-- "Provided that this Act shall not apply to any business the whole of the profits of which accrue or arise without British India where such business is carried on by or on beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, for all the purposes of this Act, be deemed to be a separate business." We have firstly to determine the meaning of the words, " part of a business " in this proviso ; does it mean, as argued on behalf of the Commissioner, that the business must be a complete cross-section of the whole business and not merely one or more of the operations of that business, or, does it mean, as contended by the learned counsel for the respondent, a continued and severable business activity of which the profits could be apportioned or ascertained separately. Secondly, we are called upon to determine at what place do the profits accrue or arise in respect of the part of such business. Do they arise at the place where in the case of a manufacturer his goods are sold, or can they be said to accrue or arise at the place of manufacture ? The word " business " has been defined by the Act in Section 2(5) as follows :-- " 'Business' includes any trade, commerce or manufacture or any adventure in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing business of the respondent was situate in Bombay and his sales exclusively were made at Raichur provided he was a non-resident. In that event excess profits duty would be chargeable on a part of the profits attributable to the part of the business in Bombay, or in other words, to those business operations that were being carried on in Bombay. The converse case where the manufacturing operations are being carried on in Raichur by a resident in India and the sales are made exclusively in Bombay is apparently covered by proviso 3 because a part of the business being situate in Raichur profits attributable to that Fart of the business out of the total sale proceeds could only be said to accrue at the place of manufacture. The present assessee has three mills in British India, a mill at Raichur. He has also a sales depot at Bombay. In his case but for the proviso to the definition of " business " it could be said that he was carrying on five businesses, three of manufacture of oil in India and one of manufacture of oil in Hyderabad and a fifth business as trader at Bombay. By reason of the proviso to the definition, all these businesses become a single business. But for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner it was contended that the place where the profits accure or arise is not ordinarily the place where the source that produces the profits is situate and that the High Court had erred in taking the view that in respect of sales of oil in British India produced by the mill at Raichur any profits accrued at the place of manufacture. 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 operation of manufacture at Raichur that enabled the assessee to sell oil and some portion of the profits must necessarily be attributable to the manufacturing process. To the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise, by reason of the sale are said to arise at the place where the sales are made and the profits in respect of the import and export business are said to arise at the place where the business is conducted. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the place of the accrual of profits. To hold that though a businessman has Invested millions in establishing a business of manufacture, whether in the nature of a textile mill or in the nature of steel works, yet no profits are attributable to this business or can accrue or arise to the business of manufacture because the produce of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the profession of a journalist, author or man of letters, and also the business of publishing his own periodical. The publishing business should be debited with a fair and reasonable allowance in respect of Maxse's contributions, and a proper sum for his remuneration as editor, and on that footing he would be liable to duty in respect of his business, but exempt therefrom in respect of his profession. This is a case of a combination of a profession with a business. Under the law no excess profits duty could be levied on his professional income but his business income was liable to such duty and the duty was so levied by making the apportionment. The rule laid down in this case, though it has special reference to the scheme of the English statute, can appositely be laid down for the apportionment of profits qua parts of a business of an assessee. A similar view was expressed by a Bench of the Calcutta High Court in Killing Valley Tea Company Ltd. v. Secretary of State for India. There the question arose whether the income from a tea garden, where tea was grown and made ready for the market by mechanical process, was assessable. It was held that the income was to be apportioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits could not be said to have accrued or arisen at that place because there was nothing done from which they could accrue or arise as natural accrual or as an increase. The increase only took place at the place of manufacture and if there was any accrual over the production cost, that accrual was at the place of the production itself. Mr. Setalvad for the Commissioner placed reliance on a number of cases, inter alia, Board of Revenue v. Madras Export Company, Jiwan Das v. Income-tax Commissioner, Lahore, In re Port Said Salt Association Limited, and Sudalaimani Nadar v. Income-tax Commissioner. All these cases fall in one category. These are cases where raw materials were purchased at one place and old at another and it was held that in such cases it was the act of sale from which the profits accrued or arose. In most of these cases the goods as purchased were sold without going through any manufacturing process. It was observed that mere act of purchase produces no profit. This proposition has been doubted in a later case. But it is unnecessary to go into this matter. In the case of a trading business, like purchase and sale, it may be said that the business of a person is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but that had the assessee decided on and directed the same New York transaction when in Hyderabad the same profits would have arisen in a different place (Hyderabad). It may be observed that the business of the forward contracts was not being conducted in Bombay at all in this case. The whole argument was based on the ground that the assessee, a big business magnate, was directing and controlling that business. Such direction and control could hardly be said to be the place of the accrual of profits on the transactions done elsewhere. It was next argued in that case that these foreign transactions were part of the profits of the Bombay business carried on by the assessee and all the profits of the business must be computed as a whole. Their Lordships negatived this contention and observed as follows :-- "But the legislature has chosen a different test and applied it to all kinds of profits--'accruing or arising in British India.' It may even have chosen it as fairer because it could be applied distributively to the profits of a single source. However that may be, the profits of each particular business are to be computed wherever and by whomsoever the business is carried on, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out in British India ; the High Court's conclusion that the profits accrued or arose outside British India is well founded. " In my view this decision does not make us any the wiser for the decision of the present case. It is true that the Indian Act does not lay down that profits necessarily arise or accrue at the place where the business is carried on or that they necessarily arise at the place where the source which produces the profit is situate but at the same time the Act does not lay down that the profits necessarily accrue or arise at the place where only one operation, namely of sale is performed. Place of accrual of profits cannot necessarily be determined on the test of receivability. In certain cases the place of origin of the profits may be the determining factor while in others the test of receivability may have application. Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of business at two specific dates separated by an interval of an year and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by a comparison of the assets of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer did was to ascertain the income arising to the assessees out of the Raichur business and apportion the same on the basis of sales made in Raichur and Bombay respectively. The profits arising out of sales made in Bombay were held by the Income-tax Officer to be assessable both to income-tax and excess profits tax. There is no doubt as to the propriety of his decision so far as income-tax is concerned. The only question that is raised relates to the liability of the firm to pay excess profits tax in respect of income arising out of the sales made in Bombay of the oil manufactured at Raichur. The contention put forward by the assessees is that although the oil was sold in Bombay, it was manufactured at Raichur and a portion of the profits ultimately made must be allotted to the manufacturing process that was carried on at Raichur. The manufacture of the oil, therefore, must be regarded as a part of the business and as the profits of this part accrued at Raichur, it has to be treated as a separate business for purposes of excess profits tax under the third proviso to Section 5 of the Excess Profits Tax Act. The High Court answered this question in favour of the assessees and the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by them at Raichur should be treated as a separate business within the meaning of this proviso. To succeed in their claim, it is incumbent upon the assessees to show that there was in fact a part of a business in the present case and that profit accrued or arose to this part in an Indian State. If both these elements are found to exist then and then only the part of the business could be treated as a separate business for purposes of the Act. It is contended by the assessees that though they carry on the business of manufacturing and selling oil, the process of manufacture apart from the sale is itself a business and can be treated as a separate part of the trade that the assessees are carrying on. As the profits of this part arose or accrued at Raichur, both the conditions of the proviso are fulfilled in the present case. The learned Attorney-General appearing for the Commissioner of Income-tax has, on the other hand, argued that the expression " part of a business " occurring in the proviso does not refer to or contemplate one of the many activities or processes that are comprised in a business. It can only mean a cross-section of the entire business, complete in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the factory. This view of the General Commissioners was upheld by Sankey, J., on appeal. The same question arose in Commissioners of Inland Revenue v. Maxse, where the Court of Appeal reversed the decision of Sankey, J. In that case the appellant was the sole proprietor, editor and publisher of the " National Review " and was assessed on the profits of the publication. The General Commissioners held that the appellant was exempt from duty is he carried on the profession of a journalist, the profits of which depended mainly upon his personal qualifications within the meaning of the Finance Act. On appeal, Sankey, J., reversed the decision of the General Commissioners and held that the assessee was not in the position of an ordinary journalist but derived his profits by the sale of a commodity, thereby carrying on an ordinary commercial business. The Court of Appeal upset this decision of Sankey, J., and held that the assessee was really carrying on two businesses, one that of a journalist, author and a man of letters and the other that of publishing his periodical. The result was that the profits of the two businesses were directed to be apportioned, though the proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 fallacy of the judgment of the Supreme Court in this and in Tindal's case is in leaving out of sight the initial stages, and fastening their attention exclusively on the final stage in the production of the income. Thus according to the Judicial Committee it was a fallacy to regard the profits as arising solely at the place of sale. It is to be noted that under the provisions of the New South Wales Act referred to above, the liability to tax depended not whether the income arose or accrued in New South Wales but whether it accrued from a source in New South Wales. This distinction is undoubtedly important and the learned Chief Justice of the Bombay High Court was not, it seems, right in laying no stress upon it and in observing in course of his judgment that income accrues or arises only at the place where its source is situated. This aspect of the case will discuss later on in connection wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant liable to taxation under that section. The Judicial Committee in course of its judgment referred to the following passage occurring in the judgment of Duff, C.J., in the Supreme Court of Canada : The profits of the company are derived from a series of operations, including the purchase of raw materials or partly manufactured articles, completely manufacturing its products and transporting and selling them, and receiving the proceeds of such sales. The essence of its profit-making business is a series of operations as a whole. That part of the proceeds of sales in Saskatchewan which is profits is received in Saskatchewan, but it does not follow, of course, that the whole of such profit 'arises from' that part of the company's business which is carried on there within the contemplation of Section 21(a)." Their Lordships agreed with the appellant that a portion of the money received in Saskatchewan which represents net profit should be sub-divided and part of it should be treated as a 'manufacturing profit' arising from the manufacturing business of the appellant outside Saskatchewan. There was no insuperable difficulty according to their Lordships in making this apporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat part of the operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. As Section 42 applies to an assessee who is a resident in India, there is no reason why this principle of apportionment should not apply to a case falling within the third proviso to Section 5 of the Excess Profits Tax Act. Mr. Setalvad points out that Section 42 contemplates income or profits not actually arising or accruing in British India but only deemed to arise or accrue in this country under the circumstances specified in the section, and therefore no such question can arise under proviso (3) to Section 5 of the Excess Profits Tax Act. It appears, however, that in enacting proviso (2) to Section 5 of the Excess Profits Tax Act which relates to business carried on by a non-resident, the legislature had in mind the provision of Section 42 of the Income-tax Act. The expression "part of a business" occurring in proviso (2) to Section 5 can, therefore, be taken legitimately to mean such operations of the business to which separate profits are attributable as laid down in sub-section (3) of Section 42. Although proviso (3) is applicable to a different set of circumstances, the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee carried on the business of buying and selling and the goods and raw materials were purchased in one place and sold in another and the question arose whether for purposes of taxation portion of the profits could be held to arise at the place of buying also. The decision of the Madras High Court in Secretary, Board of Revenue, Madras v. Madras Export Company is one of the leading pronouncements in this line of authorities. The question for decision in that case was whether the profits of a firm which had its headquarters in Paris and purchased raw skins through an agent in Madras which were exported to and sold in Paris were taxable in British India under Section 33(1) of the Income-tax Act of 1918 which corresponded, though not identically, to Section 42 of the present Act. The question was answered in the negative. The learned Judges held that Section 33 was not a charging but a machinery section and relied on the decision of the English Court in Greenwood v. Smidth and Company, which laid down that a trade is exercised in the place where the business transactions are closed ; and in the case of a selling business, that place would be where the sales are effected and the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to income-tax, as the profits were not received or brought into British India. All these cases were reviewed by a Division Bench of the Orissa High Court, consisting of Chief Justice Ray and Narasimham, J., in Rahim. v. Commissioner of Income-tax. Here the assesses used to buy hides, horns, etc., in the Orissa State and sell them in British India and the question was whether any part of the profits accrued or arose within an Indian State. The answer given by the Court was in the negative, though the Chief Justice in a separate judgment observed that he was not prepared to lay down as a proposition of law that in all businesses of buying and selling, the entire profits necessarily accrue at the place where the sales take place. Each case would depend upon its own circumstances and there may be cases where the place where the commodities are purchased has an importance of its own. In the facts of the case which they were actually deciding it was said that the act of buying was so negligible a part of the operation of the business as not to make any appreciable difference in the apportionment of the amount that accrued or arose in British India. It will be seen that none of thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpets. Its only business in India was the purchase of wool as raw material for the carpets. It was held that the purchase was an operation within the meaning of Section 42(3) of the Income-tax Act and profits from such purchases could be deemed to arise in British India and was consequently assessable under Section 42(3) of the Income-tax Act. These cases, it must be admitted, are not of much assistance to the respondents in this case, though they, do not help the appellant either. They were decided on the express language of Section 42 of the Income-tax Act, 1922, as it then stood or the section corresponding to it in the earlier Act. There remains for me to refer to the other line of authorities upon which the judgment of the High Court seems to be primarily based. In my opinion, they cannot also be regarded, as direct authorities on the point requiring consideration in the present case. In Commissioner of Taxation v. Kirk, the profits derived from extraction of ore from the soil and also from the conversion of the crude ore into merchantable product were held to be taxable, as the source of these profits was situated in New South Wales and that was the basis of taxation under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accrue or arise ? It was pointed out by Mukherji, J., in Bogers Pyatt Shellac and Co. v. Secretary of State for India that etymologically the word " accrues " connotes the idea of a growth, addition or increase by way of accession or advantage, while the word " arises " suggests the idea of growth or accumulation with a tangible shape so as to be receivable. The two expressions denote almost the same idea and the difference only lies in the fact that one is more appropriate than the other when applied to particular cases. It is clear, however, as the learned Judge pointed out that these words have been used in contradistinction to the word " received " and both of them represent a stage anterior to the point of time when the income becomes receivable ; they connote a character of income which is more or less inchoate. As I have stated already, in proviso (3) to Section 5 of the Excess Profits Tax Act, the Legislature has deliberately left out the word received " and has spoken only of " accruing " or " arising " This shows that the Legislature had in mind cases where profits could accrue to parts of a business before they were actually received. When a raw material is worked u ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
