dedol-hf/india-case-legal-rag huggingface dataset:
A  firm which was resident in British India and  carried
on the business of manufacturing and selling groundnut  oil,
owned  some  oil mills within British India and  a  mill  in
Raichur  in  the Hyderabad State where oil was manufactured.
The  oil manufactured in Raichur was sold partly within  the
State of Hyderabad and partly in Bombay:
    Held, by the Full Court (KANIA C. J., PATANJALI  SASTRI,
FAZL  ALI,  MEHR CHAND MAHAJAN, MUKHERJEA and  DAS  JJ.)-The
expression "part of a business" in the proviso to section  5
does  not necessarily mean a separate composite unit of  all
the  constituent  activities of the business or  a  complete
cross-section of the entire business operations but is  wide
enough  to mean one or more of the operations of  the  busi-
ness,  and that the manufacturing operations which the  firm
carried  on at Raichur were "a part of the business" of  the
assessees within the meaning of the proviso.to section 5  of
the Act.
    Held also per KANIA C.J., FAZL ALI, MEHR CHAND  MAHAJAN,
MUKHERJEA and DAS JJ.--that the profits of that part of  the
business,  namely,  the manufacture of oil at  the  mill  in
Raichur  accrued or arose in Raichur within the  meaning  of
the said proviso, even though the manufactured oil was  sold
in Bombay and the price was received there, and accordingly,
that part of the profits derived from sales in Bombay  which
was  attributable to the manufacture of the oil  in  Raichur
was  exempt  from excess profits tax under  the  proviso  to
section 5 of the Act.
42--A
336
    Per  PATANJALI SASTRI J.--The first part of  sub-section
(1)  of section 42 of the Income-tax Act was  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; and as a result, the profits received in  Bombay
from  the sale of the oil manufactured in Raichur had to  be
apportioned under sub-section (3) of section 42 between  the
two  operations of manufacture and sale, and only such  por-
tion  of  the  profits as was attributable to  the  sale  in
Bombay should be deemed to have accrued or arisen in British
India.  It  followed  as a corollary that the  rest  of  the
profits  attributable to the manufacture at Raichur must  be
regarded  as accruing or arising in the Hyderabad State  and
was therefore exempt under the proviso to s. 5 of the Act.
    Quaere: Whether it is in consonance with business  prin-
ciples or practice in the absence of any statutory  require-
ment  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 and whether Kirk's case is applicable to  assessments
under  the Indian Acts as laying down any general  principle
of apportionment.
    Per MAHAJAN J.--Though profits may not be realised until
manufactured article is sold, profits are not wholly made by
the  act of sale and do not necessarily accrue at the  place
of  sale and to the extent profits are attributable  to  the
manufacturing operations, profits accrue at the place  where
the operations are carried on.
    Per  MUKHERJEA J.--Where raw material is worked up  into
it  new  product  by process of  manufacture,  it  obviously
increases  in value and this  increase in  value  represents
the income or profit which is the result of the manufacture,
and  as this profit accrues by reason of the manufacture  it
cannot  but be located at the place where the  manufacturing
process is gone through.  It is immaterial that the manufac-
tured  goods  are sold later on at various  places.  If  the
manufacturer  is  himself the seller, it might  be  that  he
receives  the entire profits including that of the  manufac-
ture  only at the time of sale; but in an inchoate  shape  a
portion of the profits does accrue at the p]ace of  manufac-
ture,  the exact amount of which is only  ascertained  after
the  sale takes place.  Fox purposes of computation the  two
parts  of the business may be conceived of as being  carried
on by two different sets of persons.
JUDGMENT:
APPEAL [Civil Appeal No. LXVIII of 1949] from a Judgment  of
the High Court of Bombay dated 18th -March ]948 (Chagla C.J.
and  Tendolkar J.) in a Reference under the  Excess  Profits
Tax Act, 1940.
    M.C. Setalvad, Attorney-General for India, (B. Sen  with
him) for the appellant.
    K.M. Munshi (S. K. Aiyar and N. K. Gamadia with him) for
the respondents.
1950.  May 4.  The Court delivered the  following  Judg-
ments :--
337
    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 at Bombay and one at  Rai-
chur 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 by them is  attributable  to
their  business  of manufacturing oil at  Raichur  and  that
portion  of the profits should not be assessed to tax  under
the Excess Profits Tax Act. The taxing authorities  rejected
the  contention of the assessees.  The  Income-tax  Tribunal
agreed  with them. On a reference the High  Court  disagreed
with  the view of the Tribunal and held that the  assessees'
contention  was correct. The Commissioner of Income-tax  has
come  in appeal from that decision.  In the  Excess  Profits
Tax Act, section 2 (5) defines "business" as follows
    "'Business'  includes  any  trade,' commerce or manufac-
ture  or any adventure in the nature of trade,  commerce  or
manufacture  ......
    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." Section 5 of the
Act runs as follows :--
"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 subsection:
    Provided  that this Act shall not apply to any  business
the whole of-the profits of which accrue or
338
arise  without British India where such business is  carried
on  by  or  on behalf of a person who is  resident  but  not
ordinarily resident in British India unless the business  is
controlled in 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  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."
    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, 1929,, 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."
339
    The  relevant  portion  of  section  42  of  the  Indian
Income-tax Act is in these terms :--
"42. (1) All income, profits or gains accruing or  aris-
ing,  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  ....
    (2) Where a person not resident or not ordinarily  resi-
dent  in  British India, carries on business with  a  person
resident in British India, and it appears to the  Income-tax
Officer  that  owing to the close  connection  between  such
persons  the  course  of business is so  arranged  that  the
business  done  by the resident person with the  person  not
resident or not ordinarily resident produces to the resident
either  no profits or less than the ordinary  profits  which
might  be  expected to arise in that business,  the  profits
derived therefrom or which may reasonably be deemed to  have
been   derived therefrom, shall be chargeable to  income-tax
in  the name of the resident person who shall be  deemed  to
be,  for all the purposes of this Act, the assessee  in  re-
spect of such income-tax.
    (3)  In the case of a business of which all  the  opera-
tions 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  opera-
tions. carried out in British India."
    On behalf  of  the   appellant  it  was  contended  that
in  order to get exemption. from the Excess Profits Tax  Act
the  assessee has to show that his case  is covered by  sec-
tion  5 proviso 3. It was argued on behalf of the  appellant
that in the
43
340
present  case  the  business of the  assessee  consisted  of
manufacturing  and  selling  oil and unless  each  of  those
operations took place at Raichur "a part of the business" of
the  assessee was not at Raichur in the Hyderabad State  and
therefore  he was not entitled to the exemption  claimed  by
him.  It waS secondly contended that even assuming that this
was  not correct the profits of that part of  the  business,
which  was  carried on at Raichur, did not accrue  or  arise
in'the Hyderabad State because the profits arose 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 requiring the assessee to fulfil three conditions to
secure  the exemption.  They are (1) there should be a  part
of  a  business;  (2) that part in an Indian  State;  and  3
profits in respect of which exemption is
 claimed  must  accure or arise from that 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  manufac-
ture and sale did not take place at Raichur if 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
trader it does not follow that the two activities necessari-
ly  become  one indissoluble business of which  the  profits
cannot  be separately ascertained. Because a man is a  manu-
facturer, a trader and even an exporter it is not correct to
say  that unless all the three activities take  place  in:an
Indian State he is not entitled to the benefit of the provi-
so  because  a  part of his business is not  in  the  Indian
State.   The argument of the appellant is that there  should
not  be  only a separate composite unit  of  the  assessee's
business  in an Indian State but that each operation  making
up  the  assessee's business must take place  in  an  Indian
State. I find no
341
justification for putting such construction on  proviso 3 to
section 5,- No authority is cited to support such  interpre-
tation  of the proviso.  It is not contended in the  present
case that the activities  of the assessee as a  manufacturer
are so spread out as to be incapable of being ascertained as
one                   unit of business in an 'Indian  State.
for instance                       difficulties may arise if
a  manufacturer buys groundnuts               in one  place,
has a crushing mill in another                         place
has  a  refinery in the third place and packing  etc.  in  a
fourth           place.   It is not disputed here  that  the
assesse's               activities as a manufacturer are all
in Raichur                       if so, that set of  activi-
ties under the defination of                    "  business"
in   the   Excess   Profits   Tax   Act   is   a    complete
unit.   I  have no doubt that on the facts  of  the  present
case   the   manufacturing  operations   of   the   assessee
are  "a  part  of his business in and  Indian  State.  Those
conditions of the proviso are therefore fulfilled.
    On  behalf of the the appellant it was pointed out  that
under section 42"(3) of the Indian Income-tax Act the legis-
lature  had made a provision for allocation of  profits  in-
spect  of different operations of a business, but there  was
no  such corresponding provision in the Excess  Profits  Tax
Act.  This  contention overlooks section 21  of  the  Excess
Profits  Fax  'Act which expressly  makes,  amongst  others;
section  42  (3) a part of the Excess Profits  Tax  Act  for
assessing the profits of an assessee. If, therefore; profits
can  be  allocated to the manufacture of oil in  Raichur  it
seems to me clear that the manufacturing activity will be  a
part of the assessee's business in an Indian State.
   The next contention of the appellant was that even if  a
part  of  the business. was in an Indian State  the  profits
accrued  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
342
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 relevant to determine the  question
before  us because in the present case the business is of  a
different  nature.  In The Commissioner of Taxation v.  Kirk
(1),  Lord  Davey distinguished Sulley  v.  Attorney-General
("')  and  Grainger & Son v. Gough (3) on this  ground.  The
place of sale was not considered the test when the  business
was  of manufacturing and sale.  Similarly cases which  deal
with the liability of the assessee under the Indian  Income-
tax  Act  because the profits were received  (and  not  only
accrued or arose) in India are also  unhelpful.  The  Judges
of  the High Court strongly  relied on The  Commissioner  of
Taxation v. Kirk (')  for their conclusion in favour of  the
assessee. It was a case of mining operations where the mines
were in one colony and the sale of the ore in another. Under
the  Taxing  Act in that case, it was observed that  it  was
wholly immaterial whether the person to be taxed resided  in
the  colony or not. Nor was it material whether  the  income
was received in the colony or not, if it was earned  outside
the  colony.  The Board attached no importance  to:the  word
"derived"  which was treated as synonymous with  arising  or
accruing.  The real question was :what income was arising or
accruing  to  the'  assessee from  the  business  operations
carried  on  by' him in the colony.  This was  considered  a
question of fact.  Under the New South Wales Act the liabil-
ity to tax has to be decided on the existence of the  source
of the income in the particular colony and
[1900] A.C. 588.  (2) [1860] 5 H. & N; 711.  (3) I18961 A.C.
325.
343
to that extent the liability to tax is based on a  different
basis.   While  accepting  this distinction,  I  am  however
unable  to accept the contention that the source  of  income
can  never be the place where the income accrues or  arises.
In my opinion there is nothing to prevent income accruing or
arising  at the place of the source. The question where  the
income  accrued  has to be determined on the facts  of  each
case.  The  income may accrue or arise at the place  of  the
source  or  may accrue or arise elsewhere, but it  does  not
follow  that the income cannot accrue or arise at the  place
where  the  source  exists.  Therefore it  is  necessary  to
ascertain whether that part of the business which is capable
of being treated as one separate unit in the Hyderabad State
has given rise to the income or profit sought by the  asses-
see  to  be exempted from taxation in the present  case.  On
behalf  of  the respondents our attention was drawn  to  the
International Harvester Company of Canada v. The  Provincial
Tax Commissioner (1).  In that case the question was of  the
liability  to tax of a resident outside the province  of  S,
under the Incometax 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  re-
ceived  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  manufactur-
ing portion of the activity of the assessee is in
(1) [1919] A,C. 36.
344
one province and the sale is in another province, the  whole
profits  are not necessarily considered as arising from  the
sale or at the place of sale although they may be treated as
received  on sale of the products. Secondly, it  shows  that
profits  could be apportioned between the manufacturing  and
trading  activities, particularly when the assessee  carried
on the business of a manufacturer and trader together.  This
decision  was  sought to be distinguished by  the  Attorney-
General on the ground that sections 23 and 24 of the  Taxing
Act of that colony made it a completely different scheme  of
taxation.   I do not think that is a good point of  distinc-
tion,  because proviso 2 to section 5 of the  Indian  Excess
Profits  Tax Act, read with section 21, prescribes   also  a
scheme in respect of a non-resident although not in the same
details or with the same results under the Indian Act.   The
expression  "part of a business" must in my opinion be  read
with  the same meaning and implication in provisos  (2)  and
(3) to section 5 of' the Excess Profits Tax Act.  I am  also
unable to accept the contention of the Attorney-General that
under  our  Act there is no scheme  of  apportionment.  That
overlooks,  as pointed out above, the provisions of  section
21  of  the Act, which incorporates  by  reference.  amongst
others  section 42 (3) of the Indian Income-tax Act.  In  my
opinion, therefore, proceeding on the footing that there can
arise or accrue profits of the manufacturing activity of the
assessee, profits have accrued to the assessee of a part  of
the business in an Indian State and they having accrued  out
of such business carried on in such State are exempted under
the  third  proviso to section 5 of the Excess  Profits  Tax
Act. For these reasons, in my opinion, the conclusion of the
High  Court  is  correct and the appeal  is  dismissed  with
costs.
    FAZL ALl J.--1 agree fully with the judgment of  Mahajan
J.
PATANJALI SASTRI J.--This is an appeal from ajudgment of the
High  Court of.' Judicature at Bombay upon a reference  made
by the Income-tax Appellate
345
'Tribunal,  Bombay',  under  section 66 (1)  of  the  Indian
Income-tax  Act,  1922, read with section 21 of  the  Excess
Profits Tax Act, 1940.
     The  respondent  firm (hereinafter referred to  as  the
"assessees ") are carrying on the business of  manufacturing
and dealing in oil at Raichur in the Hyderabad State 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  26-A of the Income-tax Act, under the name  of  Ah-
medbhai Umarbhai & 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 ground-
nuts, 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,