Case: Anglo-French Textile Co. Ltd Vs. Commissioner Of Income-Tax, Madras,

the Indian Income-tax Act has no relevance to the determination of this question because it is mainly concerned with income which is deemed to have arisen or accrued and not with income which actually arises or accrues within taxable territories. Section 42 (3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question, before us. As a matter of fact the use of the words "under Section 42(3)" used in the Question No. 2 as reframed by us was not appropriate and the only question which should have been sent to the High Court was"If not, should only those profits determined as attributable to the operations carried out in India be taken into account for applying the test laid down in Section 4-A(c)(b)".12. If therefore Section 42(3) has nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without the taxable territories as understood in Section 4-A (c)(b) of the Act what we have got to consider is whether there is anything in the Act which prevents the application of the general principle of apportionment of income, profits or gains between those which are derived from business operations carried on within taxable territories and those which are derived from business operations carried on without taxable territories. The contention which was advanced by Shri Porus A. Mehta on behalf of the Respondents in this behalf, viz., that the word "arise" was the only word used in Section 4-A (c)(b) and the word "accrue" did not find any place therein, that there was a distinction between the conception of arising and the conception of accrual and that the apportionment of the income was appropriate only in cases where the income arose and was inappropriate in cases where the income accrued, was sufficiently repelled in the judgment in - AIR 1950 SC 134 at p. 145 (D), where it was observed:"Whether the words "derive" and "produce" are or are not synonymous with the words "accrue" or "arise", it can be said without hesitation that the words "accrue" or "arise" though not defined in the Act are certainly synonymous and are used in the Act are certainly synonymous and are used in the sense of "bringing in as a natural result". Strictly speaking, the word "accrue" is not synonymous with "arise", the former connoting idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is 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 business in a business like 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 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".The phraseology of Section 42 (3) of the Act also repels the contention in so far as the profits and gains of the business which are referred to therein and which are capable of apportionment as therein mentioned are deemed to accrue or arise in the taxable territories thus using the words "accrue" and "arise" as synonymous with each other.13. The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the Act but on general principles of apportionment of income, profit or gains. That was really the ratio of the judgment of the majority in the - Commr. of Income-tax, Bombay v. Ahmedbhai Umarbhai and Co., Bombay (D) and any attempt to distinguish that case from the present one by having resort to the statutory provisions of the Excess profits Tax Act is really futile. We are accordingly of the opinion that the answer given by the High Court to the Question No. 2 also was correct.14. The appeal before us will accordingly be allowed and the answers to the Questions Nos. 1 and 2 reframed by us will be as under.15. Question No. - In the negative;and Question No. 2 - The income received in British India cannot be said to wholly arise in India within the meaning of Section 4-A (c)(b) of the Act and that there should be allocation of the income between the various business operations of the assessee company demarcating the income arising in the taxable territories in the particular year from the income arising without taxable territories in that year for the purposes of Section 4-A (c) (b) of the Act.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 wasin 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. TheOfficer 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 tax under Section 4 (1) (c). On a conclusion that the income of the assessee arising in British India in the accounting year exceeded its income arising without British India under Section(c). The assessee was also held ordinarily resident in British India under Section(c) and he assessed the Company accordingly on that basis. That appellate Assistant Commissioner also proceeded on that basis and confirmed the order of theOfficer. He was however further of the opinion that the entire profits were received where the sale proceeds were received and the assessee was therefore liable to tax under Section 4 (1) (a) also.This conclusion was arrived at by him relying upon two decisions of their Lordships of the PrivyRailway Co. v. Commr. ofMadras, 5 ITC 363 (PC) (A) andx, Madras v. S. L. Mathias, AIR 1939 PCdo not accept this contention of the Respondent. Section(c) (b) is concerned with the income arising in the taxable territories in a particular year exceeding the income arising without the taxable territories in that year and the very words of the section are capable of being construed as also contemplating a state of affairs where there may have to be a division or apportionment between the income arising in taxable territories and the income arising without the taxable territories in the particular year.The whole of the argument urged before us on behalf of the Respondent was aimed at establishing that the scheme of the IndianAct was not to tax the source of income but the income profits or gains from whatever source derived which were received or were deemed to be received in the taxable territories during the particular year and that it was immaterial whether the income, profits or gains were derived from business operations carried on in taxable territories or without the taxable territories. This argument was possible when the decisions which held that income, profits or gains arose or accrued at the place 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 taxable territories and income, profits or gains arising from business operations carried on without taxable territories.The moment however it was held, as it was done in thex, Bombay v. Ahmedbhai Umarbhai and Co., Bombay (D) 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, those decisions went by the board. The question whether a particular part of the income, profits or gains arose or accrued within taxable territories or without 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 IndianAct has no relevance to the determination of this question because it is mainly concerned with income which is deemed to have arisen or accrued and not with income which actually arises or accrues within taxable territories. Section 42 (3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question, before us. As a matter of fact the use of the words "under Section 42(3)" used in the Question No. 2 as reframed by us was not appropriate and the only question which should have been sent to the High Courtnot, should only those profits determined as attributable to the operations carried out in India be taken into account for applying the test laid down in Sectionphraseology of Section 42 (3) of the Act also repels the contention in so far as the profits and gains of the business which are referred to therein and which are capable of apportionment as therein mentioned are deemed to accrue or arise in the taxable territories thus using the words "accrue" and "arise" as synonymous with each other.13. The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the Act but on general principles of apportionment of income, profit or gains. That was really the ratio of the judgment of the majority in thex, Bombay v. Ahmedbhai Umarbhai and Co., Bombay (D) and any attempt to distinguish that case from the present one by having resort to the statutory provisions of the Excess profits Tax Act is really futile. We are accordingly of the opinion that the answer given by the High Court to the Question No. 2 also was correct.14. The appeal before us will accordingly be allowed and the answers to the Questions Nos. 1 and 2 reframed by us will be as under.15. Question No.In the negative;and Question No. 2The income received in British India cannot be said to wholly arise in India within the meaning of Section(c)(b) of the Act and that there should be allocation of the income between the various business operations of the assessee company demarcating the income arising in the taxable territories in the particular year from the income arising without taxable territories in that year for the purposes of Section(c) (b) of the Act.