dedol-hf/india-case-legal-rag huggingface dataset:
Referring  to Kirk's case(1) their Lordships remarked  "that
although the sections under consideration in Kirk's case (1)
differed :in their language from the provisions which  their
Lordships were considering', the reasoning which appears  in
the  judgment  in that case was helpful to  the  appellants'
contention  in  the  present case."  This  was,  presumably,
because  chargeability  in both cases depended not   on  the
income  accruing  or  arising in the country,  but,  on  the
source of the income being in the country. The decision  was
based  on  the  language of the statute and  the  scheme  of
taxation  disclosed  thereby,  and what I  have  said  about
Kirk's case(1) equally applies to it.  The other cases cited
by Mr. Munshi do not call for any special notice.
I  agree  with  the conclusion reached by  the  High  Court,
though  on  different grounds, and dismiss the  appeal  with
costs.
    MAHAJAN  J.--This  is an appeal by the  Commissioner  of
Income-tax,  Bombay  City, from the judgment   of  the  High
Court  of  Judicature at Bombay upon a  case stated  by  the
Income-tax  Appellate  Tribunal  under   the  provisions  of
section  66 (1) of the Indian Income- tax Act, 1922, and  it
raises  a question as to the  liability of  the  respondent,
Messrs. Ahmedbhai Umar bhai & Co., for excess profits tax.
    Excess  profits  tax is levied under section  4  of  the
Excess  Profits  Tax Act, XV of 1940, "in  respect  of   any
business  to which the Act applies on the amount   by  which
the profit during any chargeable accounting  period  exceeds
the standard profits........   "  The respondent is a regis-
tered  firm  resident in British India 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 wheth-
er  the profits which were received or realized by  the  re-
spondent on the sale of
(1) [1900] A.c. 588.
357
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 the Raichur branch. Both the  assessment  orders
were appealed against to the Appellate Assistant Commission-
er but without any success.  The Incometax Appellate  Tribu-
nal  on appeal drew up a statement of case and referred  the
following question of law to the High Court :--
    "Whether on the facts as stated above income accruing or
arising  to the assessee on sales made in British  India  of
goods manufactured in Raichur situated outside British India
has been rightly held by the Tribunal as income accruing and
arising  in British India and was liable to  excess  profits
tax ?"
    The   High  Court re-framed  the  question   as  follows
:--
"Whether on the facts as stated above profits of a  part
of  the  business  of the assessee accrued or  arose  in  an
Indian State"
    and  answered it in the affirmative.  It held  that  the
activity  which the respondent carried on at Raichur  was  a
part of its business within the meaning of the third proviso
to  section  5 of the Excess Profits Tax Act  and  that  the
profits  of  a part of the business accrued or arose  in  an
Indian State and that
358
the said profits were not assessable to excess profits  tax.
This  order  of  the High Court is being  contested  in  the
present appeal and it has been urged that as regards the oil
manufactured in Raichur but sold in British India, no  prof-
its  accrued or arose in the Indian State, but  the  profits
accrued or arose in British India and are subject to  excess
profits tax.  It was further contended that the construction
put by the High Court on the third proviso to section 5  and
on  the phrase "part of a business" is erroneous and is  not
justified on the language of the proviso and the context. It
was  suggested  that in order to constitute "a part  of  the
business"  within the meaning of that proviso it must  be  a
complete cross-section of the whole business and not  merely
one or more of the operations of that business.
    Section  5 of the Act on the true construction of  which
depends the decision of the appeal is in these terms :--
"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,
or  of clause (c) of that  sub-section
    In  other  words, the Act brings within  its  ambit  all
income  in  the case 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
359
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
behalf of a person who is resident but not ordinarily  resi-
dent  in British India unless the business is controlled  in
British India."
    This  exception  has  no bearing to  the  facts  of  the
present case.  The second proviso is in these terms :--
    "Provided further that where the profits of a part  only
of a business carried on by a person who is not resident  in
British India or not ordinarily so resident accrue or  arise
in  British India or are deemed under the Indian  Income-tax
Act,  1922,  so to accrue or arise, then, except  where  the
business being the business of a person who is resident  but
not  ordinarily resident in British India is  controlled  in
India,  this Act shall apply only to such part of the  busi-
ness, and such part shall for all the purposes of this  Act'
be deemed to be a separate business."
    This  proviso  also concerns a person  not  resident  in
British India and does not touch the present case. It howev-
er furnishes a clue to the meaning of the following  proviso
inasmuch as it attracts the application of section 42 of the
Indian  Income-tax  Act to the case of  a  non-resident  and
contemplates  the apportionment of income between part of  a
business  controlled  in  British India and a  part  not  so
controlled.  Sub-section (3)of section 42 of the  Income-tax
Act enacts thus:
    "In  the case of a business of which all the  operations
are not carried out in British India, the 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."
    Under the second proviso by reason of the application of
section  42 (3) of the Income-tax Act, if the  manufacturing
business of the assessee was in British
360
India  and all his sales took place in Raichur, then  excess
profits  tax  could only be chargeable on  such  profits  as
would really be attributable to his manufacturing operations
in  British India and the manufacturing operations would  be
treated  as part of the business of the assessee  under  the
proviso.   It is the third proviso to which the  controversy
in  the case is limited and this proviso is in  these  terms
:--
    "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.
    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  sepa-
rately.  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 of trade, commerce or   manu-
facture or  any profession or vocation....  "
    It  means  any  continued activity  of  a  person  which
yields profits and which is in the nature of trade, commerce
or manufacture.  It may even be any adventure in the  nature
of trade, commerce  or
361
manufacture.  A proviso was added to this definition in  the
year 1940 in these terms :--
    "Provided further that all businesses to which this  Act
applies  carried on by the same person shall be  treated  as
one business for the purposes of this Act."
    The  effect of the proviso is that if a man is  carrying
on  a number of activities, whether of the same or  of  dif-
ferent natures, all these various businesses are treated  as
one.   The  same person, if engaged in  the  manufacture  of
hardware,  oils, textiles, motor tyres, bicycles and  owning
mills  for  his diverse activities in different  places  and
also trading in merchandise and doing contract business,  is
deemed  to carry on a single business.  All  the  businesses
that  he carries on are lumped together and treated  as  one
business for the purpose of levying the tax and  calculating
the  profits.  The proviso has made an amalgam  of  all  the
businesses  of  one  individual and it is in  view  of  this
amalgam that proviso 3 of section 5 has to be considered. It
seems to me that what has been amalgamated by the definition
has again been made separate by the proviso to section 5. If
a  number of businesses carried Ion by a person are  situate
in  different places, then the  effect of the proviso is  to
again treat them as separate business under the  description
of  the phrase "part of a business."  In other words,  if  a
man is carrying on manufacture in textiles in Bombay, a shop
at Mysore, has a distillery in Allahabad and has an oil mill
in Gwalior, then for the purpose of section 5 all these four
trades are part of the business within the meaning of provi-
so 3 to section 5,  one part situate in one place and anoth-
er  part situate at another place and if any of these  parts
produce profits at the place of the  business,  that   place
being   in an Indian State, then  proviso  (3)  would   have
application.  I  think that the effect of  the  language  of
proviso (2) of section 5 is to give colour to proviso (3) as
being  complementary to it and providing for converse  cases
to  those  arising under this proviso  concerning  non-resi-
dents. Illustratively it may be said that proviso (2)  would
cover the case if the manufacturing business of the
362
respondent  was situate in  Bombay and his  sales exclusive-
ly 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  attributa-
ble  to  that  part of the business out of  the  total  sale
proceeds could only be said to accrue at the place of  manu-
facture.
    The  present assessee has three mills in  British  India
and a mill at Raichur. He has also a sales depot at  Bombay.
In his case but for the proviso to the definition of  "busi-
ness"  it could be said that he was carrying on  five  busi-
nesses,  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  defini-
tion,  all these businesses become a single  business.   But
for  the purposes of provisos (2) and (3) of section  5  all
these  are  part  of a business and have to  be  treated  as
separate businesses. The theory of cross-section of a  busi-
ness  contended by the appellant is not  very  intelligible.
It was contended that if a man is a manufacturer as well  as
a seller of goods and also an importer of goods, then in his
case the term "part of a business" means the carrying on  of
all the three activities together and that unless he carries
on  all the three activities, it cannot constitute "part  of
business"  under the proviso. This contention to my mind  is
untenable. The only construction which in the context of the
Act can be reasonably placed on the proviso to section 5 and
on  the  words  "part of a business" is  the  one  suggested
above.  I am therefore of the opinion that-the learned Chief
Justice was right when he held that the activities which the
assesseecarried  on at Raichur are certainly a part  of  the
business  of the assessee.  Mr. Justice Tendolkar  on  this,
part of the case observed as follows :--
363
    "The  normal  meaning  of the word is a  'portion  '  in
whatever way carved out and I have no doubt in ray mind that
any  of the operations that go towards a  complete  business
are a part of that business.
    The contention of the Advocate-Genera]. becomes the more
untenable when one looks at the second proviso to section  2
(5) of the Excess Profits Tax
    Now, under this proviso you may have several  businesses
of  a  totally different character carried on  by  the  same
person and they all together constitute one business for the
purposes of the Excess Profits Tax Act, if the contention of
the Advocate-General is right, even if one of these  differ-
ent businesses in the ordinary sense of the term was  wholly
carried out in a Native State, it would still not be a  part
of the whole business in the sense of being a  cross-section
of all the businesses which together constitute one business
under  the  Excess  Profits Tax Act.  I  am,  therefore,  of
Opinion that the manufacture of oil was part of the business
of the assessee firm."
    I  am in complete agreement with the observations  cited
above.
    The next question for consideration is whether that part
of  the business situate in Hyderabad gives any profits,  in
other words, whether any profits of the manufacturing  busi-
ness  of the assessee at Hyderabad accrue or arise  in  that
State.
    On behalf of the Commissioner it was contended that  the
place  where comminissioner it was 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 manufac-
ture.  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.
:364
A.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  extent  that the profits are  attributable  to  the
manufacture  of  oil  it is not possible to  say  that  they
accrue or arise at any place different from the place  where
the manufactured article came into existence.
    It  was not denied that the business of  manufacture  at
Raichur may produce profits or it may even earn profits  and
it  was conceded that it may also be said that  profits  are
derived from that process of manufacture but it was  strenu-
ously  argued that earning of profits is not the same  thing
as  the accrual of profits and no profits could be  said  to
accrue  or arise at a place where the profits may well  have
been  earned  or produced and that the place of  accrual  of
profits  must necessarily be the place where the  sale  pro-
ceeds  are received or realized.  On behalf of the  assessee
it  was urged that the words   "derived,"    "earn,"    "ac-
crue"  or "arise" are synonymous and it is immaterial  which
word  is  used indicating the result of  the  activities  of
various  business operations.  The totality of profits  that
accrues to a business or is earned by it may be ascribed  to
a  number  of operations; though it is  ascertained  at  the
place  where the produce is sold, it accrues where   it   is
earned.  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  synony-
mous and are used in the sense of "bringing in as a  natural
result."   Strictly speaking, the word "accrue" is not  syn-
onymous 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  a
distinction in the dictionary
365
meaning of these words, but throughout the Act they seem  to
denote  the same idea or ideas very similar and the  differ-
ence  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  manufac-
ture,  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  busi-
ness 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  prin-
ciples  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  con-
ducted.   This apportionment of profits between a number  of
businesses  which are carried on by the same person at  dif-
ferent  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 mills is sold at a different  place  and
that it is only the act of sale by which profits accrue  and
they  arise  only at that place is to confuse  the  idea  of
receipt  of income and realization of profits with the  idea
of  the accrual of profits.  The act of sale is the mode  of
realizing  the  profits.  If the goods are sold to  a  third
person  at  the mill premises no one could  have  said  that
these profits arose merely by reason of
366
the sale.  Profits would only be ascribed to the business of
manufacture  and would arise at the mill  premises.   Merely
because the mill owner has started another business  organi-
zation in the nature of a sales depot or a shop, that cannot
wholly  deprive the business of manufacture of its  profits,
though  there  may have to be apportionment in such  a  case
between  the business of manufacture and business  of  shop-
keeping. In a number of cases such apportionment is made and
is  also  suggested by the provisions of section 42  of  the
Indian  Income-tax  Act, reference to which ,has  also  been
made  in proviso (2) of section 5 of the Excess Profits  Tax
Act.
In  Commissioners of Inland Revenue v. Maxse (1),  Maxse
purchased  a  monthly magazine for 1,500 and  was  the  sole
proprietor, editor and publisher thereof. The earnings  were
derived from sales of the magazine, from advertisements  and
from reprints of articles mostly written by him.  Before the
war  Maxse  wrote a large part of each number,  and,  though
some of the matter was contributed by others, the sales were
largely due to the popularity of his own writings. When  war
broke  out, he increased his personal contributions and  did
most  of the writing.  At that time he required  practically
no capital.  Having been assessed to excess profits duty for
the  year  ending May 31, 1915, he appealed to  the  General
Income Tax Commissioners and contended that the profits were
earned  by reason of his personal qualifications,  that  the
capital expenditure was small in comparison with the person-
al qualifications required to earn the profits, and that  he
was exempt from duty by virtue of para (c) of section 39  of
the  Finance  (No. 2) Act, 1915. The  General  Commissioners
having  discharged  the assessment, their decision  was  re-
versed  by  Sankey L who held that Maxse was carrying  on  a
commercial business and not a profession within para (c) and
therefore  he was liable to duty.  The Court of appeal  held
that  Maxse was carrying on the profession of a  journalist,
author or man of letters, and also the business of  publish-