dedol-hf/india-case-legal-rag huggingface dataset:
ing his own periodical.  The publishing
(1) [1919] 1 K.B. 647.
   367
business should be debited with a fair and reasonable allow-
ance  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  profes-
sional  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   appo-
sitely   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 v. The Secretary of  State  for
India(1). 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 and so much of it as  was  ob-
tained  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(2).   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  Saskatche-
wan, and no apportionment was necessary.  This contention
(1) I.L.R. 48 Cal. 161.                (2) A.I.R. 1949  P.O.
72.
368
was  described by their Lordships as fallacious and  untena-
ble.    Their Lordships quoted with approval  the  following
observations  from the minority judgment of Sir  Lyman  Duff
C.J.  The quotation is in these terms :--
    "Nowhere  does the statute authorise the  Province  Sas-
katchewan  to tax a manufacturing company, situated  as  the
appellant company is, in respect of the whole of the profits
received  by  the company in Saskatchewan.  It  is  not  the
profits received in Saskatchewan that are taxable, it is the
profits  arising from its business in Saskatchewan  not  the
profits arising from the company's manufacturing business in
Ontario  and from the company's operations  in  Saskatchewan
taken  together, but the profits arising from the  company's
operations in Saskatchewan."
The  question in the present case in whether in  respect
of  the  manufacturing business of the assessee  in  Raichur
profits accure or arise and if so, at what place. My  answer
unhesitatingly  is that the manufacturing profits  arise  at
the  place of manufacture.   They could arise nowhere  else.
The  sale profits arise at the place of sale and  apportion-
ment  has  to be made between the two, though the  place  of
receipts  and realization of the profits is the place  where
the sales. are made. The manufacturing 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, The Board of Revenue  v.  The
Madras  Export Company (1), Jiwan Das v. Income-tax  Commis-
sioner, Lahore (2), 1n rePort Said Salt Association  Limited
(s),  and Sudalaimani Nadar v. Income-tax Commissioner  (4).
All these cases fall in one category.  These are cases where
raw materials
  (1) I.L.R. 46 Mad. 360.                (2) I.L.R. 10  Lah.
657.
  I.L.R.  59  Cal. 1226.                   (4)  A.I.R.  1941
Mad. 229.
369
were  purchased at one place and sold 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  pur-
chase and sale, it may be said that the business of a person
is  one operation and the nature and character of the  busi-
ness 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  diffi-
cult   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 (x). 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  con-
tracts  were not received in fact in British India,  and  it
was  held that the contracts having been neither framed  nor
carried  out in British India, the profits derived from  the
contracts  did not accrue or arise in British  India  within
the  meaning  of section 4, sub-section (1)  of  the  Indian
Income-tax Act, 1922.  The contention raised in that case on
behalf  of the Commissioner was that these profits  resulted
from  the  exercise of skill and judgment in Bombay  by  the
assessee and by the giving of directions
(1) 65  I. A. 33.
370
from  Bombay.   This  contention was negatived  and  it  was
observed that to determine the place at which such a  profit
arises  not  by  reference to the transactions,  or  to  any
feature of the transactions, but by reference to a place  in
India  at which the. instructions therefor      were  deter-
mined  on and cabled to New York is, in   'their  Lordships'
view,  to proceed in a manner which cannot be  supported  if
the  transactions  are to be looked at  separately  and  the
profits  of each transaction considered by  themselves.   It
was said that there is a distinct paradox in the  contention
that the profits. resulting from an order placed in New York
would have accrued or arisen in the same place (Bombay)  had
the  order been sent to' Liverpool with a like  result,  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  busi-
ness. 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  be-
cause 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 only on condition
that  they are profits 'accruing or 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 sections 4, 6 or 10.  Not only
    371
do  they lay no stress upon the place at which the  business
is carried on, they make no mention of it. In these  circum-
stances  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 concep-
tion  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  have a result-not as if the profits  need  to  be
disintegrated with difficulty, but as if they were an aggre-
gate  of the particular results.  It was said that  the  as-
sessment 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 they accrue
or arise was a plain dictate of the statute, other discrimi-
nation was involved  in the exemptions, and in such sections
as section 42.  In the concluding part of the judgment their
Lordships said as follows :--
    "These  considerations lead their Lordships to the  con-
clusion  that  under  the Indian Act a  person  resident  in
British  India, carrying on business  there and  controlling
transactions  abroad In the course of such business, is  not
by  these  mere facTs liable to tax on the profits  of  such
transactions.  If such profits have not been received in  or
brought into British India, it becomes, or may become neces-
sary to consider on the facts of the case where they accrued
or arose.   Their Lordships are not laying down any rule  of
general application to all classes of foreign  transactions,
or even with respect to the sale of goods. To do so would be
nearly  impossible, and wholly unwise. They are  not  saying
that the place of formation of the contract prevails against
everything  else.  In some circumstances it may be  so,  but
other   matters--acts   done   under   the   contract,   for
example--cannot  be ruled out a priori. In the  case  before
the  Board the contracts were
372
neither  framed nor carried 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 receivabili-
ty.    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  busi-
ness  during the year and can only be ascertained by a  com-
parison of the assets of the 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  appor-
tioned 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  in-
crease  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.
   373
    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 is therefore dismissed with costs.
    MUKHERJEA  J.--I agree that this appeal should  be  dis-
missed  and I would indicate briefly the reasons which  have
weighed with me in affirming the judgment of the High Court.
    The question which was referred by the Incometax Commis-
sioner,  Bombay,  to the High Court under the  provision  of
section  66 (1) of the Indian Incometax Act, 1922 and  which
the latter refrained for the purpose of bringing out clearly
the  real  controversy between the parties, turns  upon  the
applicability  of  the  third proviso to section  5  of  the
Excess Profits Tax Act (Act XV of 1940) to the facts of  the
present  case. The facts are not in controversy and  may  be
shortly stated as follows:
    The respondents assessees are a firm, resident in  Brit-
ish  India and they are registered for  income-tax  purposes
under  section  26A of the income-tax  Act,  Their  business
consists in manufacturing and selling groundnut oil and they
have three mills in Bombay and one at Raichur in the Hydera-
bad State where oil is manufactured.  During the  chargeable
accounting period, the oil that was manufactured at  Raichur
was sold partly in Raichur itself and partly in Bombay,  and
what   the  Income-tax  Officer 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
374
by  the assessees is that although the oil was sold in  Bom-
bay,  it  was manufactured at Raichur and a portion  of  the
profits ultimately made must be allotted to the  manufactur-
ing 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
Commissioner 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-section (5), of the Act defines "business" as
including  any trade, commerce or manufacture or any  adven-
ture 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  indi-
cated in the section.  Section 5 lays down to what business-
es the Act will apply.
"This  Act shall apply" so runs the section, "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."
There are three provisos attached to this section;
   375
we  are  concerned for our present purposes with  the  third
proviso which is worded as follows:
    "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  a
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."
    The  point for consideration is whether on the facts  of
this  case which have been stated above, this third  proviso
to section 5 can be invoked by the assessees and it is  open
to  them to claim that the work of manufacture of  groundnut
oil  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  proc-
ess 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, argue. d that the expression  "part  of  a
business"  occurring  m  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 itself 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
376
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  exam-
ple, 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  particu-
lar  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  to  the  same,
there  is no reason why it should not be regarded as a  part
of the business which yields income or profits.
    The question has been raised in several cases in English
Courts  regarding  liability to excess profits duty  when  a
person  carries  on a trade or business liable  to  duty  in
connection with another business which is not so liable.  It
has  been held that if separation is possible in such  cases
the  proper course to follow is to sever the profits of  the
two businesses and assess accordingly.
    In  the  case  of Commissioners of  Inland  Revenue'  v.
Ransom(1)  the respondents carried on the business as  manu-
facturing  chemists  and growers of  medicinal  herbs;  they
owned  a factory where the manufacture and  distillation  of
herbs were carried on and they also occupied a farm on which
they grew herbs for treatment in the factory.  The  respond-
ents  were  assessed to excess profits duty  and  on  appeal
against the assessment, the General Commissioners held  that
although  the respondents occupied the farm mainly  for  the
purpose of the factory, which was excluded from excess
(1) [1918] 2 K.B. 709.
    377
profits  duty,  as separation was possible, the  profits  of
the  farm were excluded and they were only assessed  on  the
profits  of the factory.  This view of the  General  Commis-
sioners was  upheld by  Sankey J. on appeal.
    The same question arose in Commissioners of land Revenue
v. Maxse(1), where the Court of appeal reversed the decision
of  San  key  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 as 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  deci-
sion  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