dedol-hf/india-case-legal-rag huggingface dataset:
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 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  ex-
cluded  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  re-
jected and the whole of the profits arising out of the sales
in British India of the oil produced in Raichur were includ-
ed in the assessments.
After  unsuccessful  appeals to the Appellate-
346
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 according-
ly  stated  the case and referred  the  following  question:
"Whether on the facts stated above income accruing or  aris-
ing to the assessees 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  or
arising  in British India and was liable to  excess  profits
tax."  In the letter of reference they indicated their  view
on  the question referred by stating that the   manufactured
article  received  or  brought into British  India  did  not
include any income, profits or gains, and that such  profits
and  gains,  having accrued only after the  sale  had  taken
place, accrued or arose in British India.
    The reference was heard by Chagla C.J. and Tendolkar  J.
and  they  were  of opinion that the question as  framed  by
the  Tribunal "did not reallybring out the  controversy  be-
tween  the parties."  The learned Judges, after stating  the
facts of the   case, framed the question thus:  "Whether  on
the        facts stated above the profits of a part  of  the
business  of  the assessees accrued or arose  in  an  Indian
State."   The question as reframed is also open  to  similar
criticism,  for, it assumes that the manufacture of  oil  at
Raichur is "a part of the business" of the assessees, where-
as  the Commissioner of Income-tax has been  seriously  con-
testing  that position as the judgment under  appeal  itself
shows.
    Excess  profits tax is a charge on the  profits  arising
out of a business in excess of its normal or standard  prof-
its,  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
347
carried  out  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  prof-
its.   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  provi-
sions 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  where such business is carried on by  or  on
behalf of a person who is resident but not ordinarily  resi-
dent  in British India unless the business is controlled  in
British India:
    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  busi-
ness, 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, for all the purposes of this Act, be  deemed
to be a separate business."
44
348
    As  the assessees are resident in British India and  the
profits of their business in the Hyderabad State made during
the  relevant periods were charged to income-tax under  sec-
tion 4 (1 ) (b) (ii) of the Incometax Act, that business was
brought  under charge to excess profits tax by section 5  of
the  Excess Profits Tax Act, and the duty would be  leviable
on the profits  of  the said  business  unless   proviso (3)
excluded  the  application of the Act to that  business,  in
which  case the proviso to section 2 (5) which  operates  to
consolidate  only those businesses to which the Act  applies
would also not take effect.  It appears to have been conced-
ed  by the taxing authority that no excess profits  tax  was
leviable  on the profits derived from the sales in the  Hyd-
erabad  State as they were profits of a part of  the  asses-
sees' business accruing or arising in an Indian State and as
such were exempted under proviso (3) to section 5, for these
profits,  as already stated, were not subjected to  tax  for
the  two chargeable accounting periods in question.  But  it
was  contended on their behalf by the Attorney-General  that
the proviso had no such operation in respect of the  profits
made by sales 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 construc-
tion will assist the
349
taxing authority in the present case, for, as already  stat-
ed,  the assessees were selling at Raichur, part of the  oil
manufactured  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  considera-
tion,  I  can find nothing in the context of  section  5  to
exclude  the ordinary meaning of the words "part of a  busi-
ness"  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  Prof-
its 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 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, and in the latter  case  such
agent  shall be deemed to be, for all tile purposes of  this
Act, the assessee in respect of such income-tax.
    Provided  that where the person entitled to the  income,
profits  or  gains  is not resident in  British  India,  the
income-tax so chargeable may be recovered by deduction under
any of the provisions of section 18  ......
    (3)  In the case of a business of which all  the  opera-
tions are not carried out in British India, the
350
profits and gains of the business deemed under this  section
to  accrue  or  arise in British India shall  be  only  such
profits  and  gains as are reasonably attributable  to  that
part of the operations carried out in British India."
It  will be seen that these provisions,  read  together,
'lay  down  a  rule of apportionment  for  ascertaining  the
profits  of a business part only of whose "operations"  "are
carried  out in British India where such part could  be  re-
garded 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 complemen-
tary 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  interpreta-
tion of the scheme requires that the words "part of a  busi-
ness" 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 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(1) which the Privy Council held could not be so
regarded.
(1) I.L.R. [1939] Mad. 178.
351
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(1), the words "profits accruing  or
arising  in" (a country) require a place to be  assigned  as
that at which the trading operations come, whether gradually
or  suddenly,  into  existence, and they  involve  a  notion
difficult  to  apply to particular transactions.  The  words
"ac.. crue or arise," too, have been variously  interpreted,
and no conclusive or clear test of when or where income  can
be said to accrue has been formulated in the decided  cases.
The learned Judges in the Court below solved the problem  by
invoking  what  they conceived to be the  general  principle
underlying  the  decision in Kirk's case  ("),  namely,  the
principle  of apportioning profits as between the  different
processes  employed in producing those profits and the  dif-
ferent  places where they are employed. The  learned  Judges
disagreed  with  the view of the Calcutta High Court  in  Re
Mohanpura Tea Co. (3)  that the profits accrue or arise only
when  the  goods are sold and at the place  where  they  are
sold, and that the decision in Kirk's case (2) laid down  no
principle  of general application but proceeded on the  lan-
guage of an Australian statute. The question in Kirk's  case
(2)  related  to the assessment of the profits of  a  mining
company  which  extracted ore and converted it into  a  mer-
chantable  product  in one colony and sold  it  in  another.
Under  the relevant statute, tax was leviable in respect  of
income  "arising or accruing  from  any.....................
trade........................     carried   on"    in    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
    I.L.R.  [2938] Bom. 752.               (2)  [1900]  A.C.
588. (3) [1937] I.L.R. 2 C,aI, 201.
352
colony.  The Board held that the profits, having  been  pro-
duced 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
"trade,"  certainly from or accruirng, " if not from  a  the
manufacture   in   the   colon     and     by   reason    of
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  ques-
tion  whether it is in 'consonance with business  principles
or practice, in 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(1) 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  con-
fined 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-resident persons, but in its amended
form the subsection has been recast into two distinct parts,
the first of which is not so restricted, and the second part
(1) 1900] A.C. 588.
353
alone,  which begins with the words "and where,  the  person
entitled to the income, profits and gains is not resident in
British India,"  is made applicable to non-resident persons,
thereby  showing that the former part applies to both  resi-
dents  and  non-residents.  The opening words of  the  first
proviso  also point to the same conclusion, for these  words
would  be surplusage if the sub-section as a  whole  applied
only  to non-residents. A contrary view has, no doubt,  been
expressed  by a Division Bench of the Bombay High  Court  in
Commissioner  of Income-tax v. Western India Life  Insurance
Co. Ltd. (i). Though reference was made in that ,case to the
alteration in the structure of sub-section (1) its  signifi-
cance, as it seems to me was not properly appreciated.   The
facts that the marginal note to the, whole section refers to
"non-residents" and that the section itself finds a place in
Chapter  V headed "Liability in Special Cases"  were  relied
upon as supporting the view that sub-section (1) as a  whole
applies only to non-residents.  As pointed out by the  Privy
Council  in  Balraj Kunwar v.  Jagatpal  Singh(2),  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 be a chapter  be
legitimately  used to restrict the plain terms of an  enact-
ment. 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 manufac-
tured  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  ,at-
tributable to the sale should
(1) [1945] 13 I.T.R. 405.             (2) I.L.R. 26 All. 393
at 40G.
354
be  deemed  to accrue or arise in British  India.   It  must
follow,  as a corollary, that the rest of the  profits,  at-
tributable 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(1) as supporting his contention that,  although
all  the operations of a business must be  completed  before
profit  is received, the accrual of the profits 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  distribu-
tively 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 profits 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" (p. 765), and again, "no doubt if it can  be
held  that  under  the Indian Act profit in the  case  of  a
business  must  be taken so strictly that it is  not  to  be
understood  distributively at all the profit of  the  asses-
see's  business would become an ultimate and  single  figure
irreducible  and referable only to Bombay, but such  a  high
doctrine  cannot  be read into the  Indian  statute  without
violence  not only to its language but to its  scheme:"  (p.
767).   These passages may, at first sight, appear  to  lend
some support to Mr. Munshi's thesis.  But on closer examina-
tion  in their context they do not, in my  opinion,  warrant
any such general theory.  Their Lordships were dealing  with
a  case  where  the assessee, resident  in  Bombay,  derived
profits from speculative contracts for purchase and sale  of
commodities  carried out through brokers in various  foreign
markets such as Liverpool,  London and New York.  The asses-
see-
(1) I.L.R. [1938] Bom. 752.
   355
contended that he was not liable to pay Indian income-tax in
respect of such profits, which were not received in  British
India, on the ground-that they were not profits accruing  or
arising  in British India, and their Lordships  upheld  that
contention.  It is with  reference  to   such   transactions
which  individually contributed to the  surplus  arising  in
the various places abroad, that their Lordships spoke p,  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 manufac-
ture 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:" (p. 767).
    Reference was also made to a recent decision of the same
Tribunal  in  International Harvester Co. of Canada  v.  The
Provincial  Tax  Commission(1 ). 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  manu-
factured  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  the  province
where  the  goods were sold, as the  profits  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  assessment.  Their  Lordships
referred  to other provisions of the Act which, in the  con-
verse  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  prov-
ince, and inferred from those provisions that the  intention
of the legislature in the
(I) [1949] A.C. 36.
356
charging  section was to bring within the ambit of  taxation
only  an apportioned part of the profit.   Such a  construc-
tion, 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."