dedol-hf/india-case-legal-rag huggingface dataset:
process was by no means an easy one.  The same principle was
applied  by  the  Calcutta High Court in a  case  where  the
growing  of  tea as an agricultural produce, which  was  not
liable to income-tax was carried on along with the  business
of manufacturing tea [vide Killing Valley Tea Co. v.  Secre-
tary  of State (2)]  It is true that these are  cases  where
several businesses were amalgamated and carried on together,
or  more of which were not liable to tax or  excess  profits
duty;  but the principle of apportionment upon  which  these
cases  were decided ,could, in my opinion, be  applied  with
equal  propriety to cases where one part of the business  is
distinct and separate from the other parts and is capable of
earning profits separately.
That profits could and should be allotted to and
(1) [1919] 1. K.B. 647.                (2) I.L.R. 4,8 Cal.
378
apportioned  between  different  parts of a  business  of  a
composite character is fully illustrated by the decision  of
the  Privy  Council  in  the  Commissioner  of  Taxation  v.
Kirk(1).   In that case the assessees were a mining  company
who had mines in the colony of New South Wales.  The ore was
extracted  in New South Wales and was converted  there  into
merchantable product. The product, however, was sold not  in
New  South Wales but in Victoria.  Under section 15  of  the
New  South  Wales Land and Income Tax  Assessment  Act,  the
following incomes 'were liable to be taxed :--
"Sub-section  (1).   Arising or accruing to  any  person
wheresoever residing from any profession, trade,  employment
or vocation carried on in New South Wales, whether the  same
be  carried on by such person or on his behalf wholly or  in
part  by any other person......  (3) Derived from  lands  of
the Crown held under lease or licence issued by or on behalf
of the Crown. (4) Arising or accruing to any person whereso-
ever  residing  from any kind of property except  from  land
subject to land tax as hereinafter specifically excepted, or
from  any  other source whatsoever in New  South  Wales  not
included in the preceding sub-sections."
    It was held by the New South Wales Court that the asses-
see was not liable to tax under any of the above provisions.
This decision was reversed by the Judicial Committee.
    "It appears to their Lordships," so runs the judgment of
the  Judicial Committee, "that there are four  processes  in
the earning or production of this income-(1) the  extraction
of  the ore from the soil; (2) the conversion of  the  crude
ore  into a merchantable product, which is  a  manufacturing
process;  (3) the sale of the merchantable product; (4)  the
receipt  of  the  moneys arising from the  sale.  All  these
processes are necessary stages wihch terminate in money, and
the income is the money resulting less the expenses  attend-
ant on all the stages......  The fallacy of the judgment  of
the Supreme Court in this and in Tindal's case is in leaving
out of sight the initial stages, and fastening their  atten-
tion [1930] A.C. 588.
   379
Income. ' '
    Thus according to the Judicial Committee it was a falla-
cy  to regard the profits as arising solely at the place  of
sale. It is to be noted that under the provisions of the New
South  Wales  Act referred to above, the  liability  to  tax
depended  not  whether the income arose or  accrued  in  New
South  Wales  but whether it accrued from a  source  in  New
South  Wales. This distinction is undoubtedly important  and
the learned Chief Justice of the Bombay High Court was  not,
it seems, right in laying no stress upon it and in observing
in course of his judgment that income accrues or arises only
at  the place where its source is situated.  This aspect  of
the  case  I will discuss later on in  connection  with  the
second point that arises for consideration in this case.  It
is enough to state at the present stage that on the authori-
ty of Kirk's case it would be quite legitimate to hold  that
a  portion  of  the net profit that  the  assessees  in  the
present  case  made out of their total  business  could  and
should  be  allotted to the manufacturing process  that  was
carried  on  at Raichur.  The view is  strengthened  by  two
recent pronouncements of the Judicial Committee, the earlier
of  which  reported in International Harvester   Company  of
Canada v. Provincial Tax Commission (1) discusses the  point
in  great  details and was followed in its entirety  in  the
later decision in Provincial Treasurer of Manitoba v.  Wrig-
ley  Jr. Co. Ltd. (2).   In International Harvester  Co.  of
Canada  v. Provincial Tax Commission (1), the  question  for
decision  turned upon the construction of section 21 (a)  of
the Income Tax Act, 1932 of Saskatchewan which after  amend-
ment was in the same terms as section 23 of the later Act of
1936.    The  section provides that "the  income  liable  to
taxation under this Act of every person residing outside  of
Saskatchewan  who  is carrying on business  in  Saskatchewan
either  directly  or  through or in the name  of  any  other
person  shall  be the net profit or gain  arising  from  the
business  of such person in Saskatchewan."    The  appellant
company had its Head Office in Hamilton,
(1) [1949] A.C. 36.          (2) (1950) A.I.R. 1950 P.O. 53.
48
380
Ontario, and was for income-tax purposes resident outside of
Saskatchewan.    Its business was that of manufacturing  and
selling  agricultural implements, the  manufacturing  opera-
tions  being  carried on entirely outside  the  province  of
Saskatchewan  and  the  selling operations  partly  in  that
province and partly in other  provinces and countries.   The
selling  business in Saskatchewan was carried on  at  Branch
Offices, all moneys received by the appellant in  Saskatche-
wan being  deposited in separate bank accounts  and remitted
in  full to the Head Office which sent to  the  Saskatchewan
branches  such  moneys as were required  for  operating  and
incidental expenses.  It was held by the Judicial  Committee
that  any  part of the appellant's net  profit  which  might
fairly be attributed to its manufacturing operations outside
the,province of Saskatchewan was not profit arising from the
business of the appellant in Saskatchewan within the meaning
of  section 21 (a) of the Income Tax Act, 1932, as  amended,
and  must  be  excluded in ascertaining the  income  of  the
appellant  liable to taxation under that section. The  Judi-
cial  Committee  in course of its judgment referred  to  the
following passage occurring in the judgment  of Duff C.J. in
the  Supreme Court of Canada.
      "The profits of the company are derived from a  series
of  operations, including the purchase of raw  materials  or
partly  manufactured articles, completely manufacturing  its
products  and  transporting and selling them, and  receiving
the proceeds of such sales The essence of its  profit-making
business is a series of operations as a whole.  That part of
the  proceeds of sales in Saskatchewan which is  profits  is
received in Saskatchewan, but it does not follow, of course,
that  the whole of such profit ' arises from' that  part  of
the  company's  business which is carried  on  there  within
contemplation of section 21 (a)."
      Their  Lordships  agreed  with the  appellant  that  a
portion  of the money received in Saskatchewan which  repre-
sents net profit should be sub-divided and part of it should
be treated as a manufacturing profit'
381
arising  from the  manufacturing business of  the  appellant
outside  Saskatchewan.   There was  no insuperable difficul-
ty  according to their Lordships in making  this  apportion-
ment.
   This reasoning applies fully to the facts of  the present
case, though here again I should point         out that  the
scheme  of the Saskatchewan Act was to          tax  profits
arising  from a business in a particular place  and to  that
extent the language of the Indian Act is undoubtedly differ-
ent.  Like the Kirk's case, it can, however, be taken as  an
authority for the proposition that in cases like the one  we
have  before  us, there could be apportionment  of  the  net
profits that accrue to the business of the assessee and  one
portion of it could be allotted to that part of the business
which  relates to the manufacture of commodities  which  are
ultimately  sold in the market.  The later decision  of  the
Judicial  Committee  referred to above  simply  follows  the
International  Harvester Company's case without any  further
discussion.
    Mr.  Munshi in course of his arguments has  referred  to
the provisions of section 42 (3) of the Indian Incometax Act
and  he   contends that  the language  of  this  sub-section
clearly indicates that in the contemplation of the  legisla-
ture certain operations of a business could be regarded as a
part  of  tim business and the  principle  of  apportionment
which  this sub-section provides can very properly  be  made
applicable  to  a  case coming under the  third  proviso  to
section  5 of the Excess Profits Tax Act.  Section 42,  sub-
section  (1),  provides  inter alia that the  whole  of  the
income  and profits accruing or arising whether directly  or
indirectly  through  business connection  in  British  India
would  be deemed to be income accruing within British  India
so  as  to  be liable to tax in  this  country.   The  scope
this  provision is narrowed down by sub-rule (3) which  pro-
vides that where all the operations of the business are  not
carried  on in British India, the profits and gains  of  the
business  deemed  to  accrue or arise in  this  country  are
limited  to such profits or gains as can reasonably  be  at-
tributed to the part of the
382
operations carried on in this country.  The Raichur  factory
certainly  has  business connection in British India  for  a
part  of  the  oil manufactured by it is  sold  through  the
Bombay establishment of the assessees. It is clear also that
all  the operations of the Raichur business are not  carried
on  in Bombay.  Therefore, the profits that would be  deemed
under this section to accrue or arise in Bombay will only be
the profits which may reasonably be attributed to that  part
of  the operations carried on in Bombay, that is to say,  to
sale of part of its oil in Bombay.  As section 42 applies to
an  assessee who is a resident in India, there is no  reason
why  this principle of apportionment should not apply  to  a
case  falling within the third proviso to section 5  of  the
Excess  Profits Tax Act.  Mr. Setalvad points out that  sec-
tion 42 contemplates income or profits not actually  arising
or  accruing  in British India but only deemed to  arise  or
accrue in this country under the circumstances specified  in
the section, and therefore no such question can arise  under
proviso (3) to section 5 of the Excess Profits Tax Act.   It
appears, however, that in enacting proviso (2) to section  5
of  the  Excess Profits Tax Act which  relates  to  business
carried  on by a non-resident, the legislature had  in  mind
the  provision  of section 42 of the  Income-tax  Act.   The
expression "part of a business" occurring in proviso (2)  to
section  5  can, there fore, be taken legitimately  to  mean
such  operations of the business to which  separate  profits
are attributable as laid down in sub-section (3) of  section
42.   Although proviso (3) is applicable to a different  set
of circumstances, the words "part of a business" as used  in
that  proviso  must be taken to have been used in  the  same
sense  as in the earlier proviso and to this extent, at  any
rate,  it favours the contention of the respondents that  no
cross-section  of  the  entire business was  meant  by  that
expression.
    Again  it is quite true that there is no express  direc-
tion  as to apportionment in the third proviso to section  5
of the Excess Profits Tax Act as there is in sub-section (3)
of  section 42 of the Income-tax Act. However,  profits  can
accrue  in respect to a part of a business only when  appor-
tionment is possible and it is
    383
on  this  assumption  that this proviso is  based.   If  no
apportionment  can  be made in respect of the  processes  or
activities  of a particular business, they will not be  con-
sidered to be a part of the business at all and the  proviso
will not apply.  The principle of apportionment,  therefore,
is  implied in the third proviso to section 5 of the  Excess
Profits Tax Act.
    I  now  come  to the other question as  to  whether  the
profits of the manufacturing part of the assessees' business
did  arise or accrue at Raichur within the Hyderabad  State.
The  point  is not altogether free from difficulty  and  al-
though  a  large  number of decided  authorities  have  been
placed  before us in this connection by the learned  counsel
on  both sides, none of them seems to be directly in  point.
The cases cited relate mostly to different provisions of the
Income-tax  Act  which  make income taxable  if  it  arises,
accrues  or is received in British India or is deemed  under
the provisions of law to arise, accrue or to be received  in
British India.  So far as the third proviso to section 5  of
the  Excess Profits Tax Act is concerned, it is to be  noted
that  it  uses the expression "accrue" and" arise"  but  not
,the word "received" and further there is no provision  here
under  which income could be deemed to arise or accrue at  a
particular place even if it does not actually do so.   Prof-
its  of a business are undoubtedly not "received"  till  the
commodities are sold and they are ascertained only when  the
sale takes place, but the question is that if a part of  the
business  which consists of manufacturing goods and is  car-
ried on prior to the sale, yields profits, do these  profits
accrue  or  arise only at the place where  the  manufactured
goods  are  sold  ?  We have been referred to  a  number  of
decided  authorities,  where  the assessee  carried  on  the
business of buying and selling and the goods and raw materi-
als were purchased in one place and sold in another and  the
question  arose whether for purposes of taxation portion  of
the  profits could be held to arise at the place  of  buying
also.
    The  decision  of the Madras High  Court  in  Secretary,
Board of Revenue, Madras v. Madras Export
384
Company  (1)  is one of the leading pronouncements  in  this
line  of  authorities.  The question for decision  in.  that
case  was whether the profits of a firm which had its  head-
quarters  in Paris and purchased raw skins through an  Agent
in  Madras  which were exported to and sold  in  Paris  were
taxable in British India under section 33 (1)of the  Income-
tax Act of 1918 which corresponded, though not  identically,
to section 42 of the present Act.  The question was answered
in  the negative.  The learned Judges held that  section  33
was not a charging but a machinery section and relied on the
decision  of  the English Court in Greenwood  v.  Smdth  and
Company  (2), which laid down that a trade is  exercised  in
the place where the business transactions are closed; and in
the  case of a selling business, that place would  be  where
the  sales are effected and the profits realised.  The  pro-
priety of the Madras decision was questioned by the Calcutta
High Court in Rogers Pyatt Shellac and Company v.  Secretary
of  State  for India (8), and it was pointed  out  that  the
Judges  of the Madras Court wholly overlooked a  vital  dis-
tinction between Indian and English Income Tax Law in so far
as  the  former lays down that certain profits,  though  not
actually  arising  or accruing in British India,  should  be
deemed  to arise or accrue in this country. Under' the  Eng-
lish law, the essential thing for purposes. of taxation  was
that  profit should accrue from trade exercised  within  the
United Kingdom and there was* no provision there correspond-
ing to that contained in section 42 of the Indian Income-tax
Act.   The  decision  in the Secretary,  Board  of  Revenue,
Madras v. Madras Export Company (1) was, however,  followed,
by  a  Full Bench of the Lahore High Court  in  Jiwandas  v.
Income-tax  Commissioner,  Lahore (4).  In  that  case,  the
question arose as to whether a person residing and  carrying
on  business  in British India and  purchasing  goods  there
which  were sold in Kashmir was liable to assessment on  the
ground  that a part of the, profits accrued  within  British
India.  The Full Bench gave a negative answer to this  ques-
tion and the basis.
  (1) I.L.R. 46 Mad. 360.                 (2) [1922] 1  A.C.
417.
  (.3) I.L.R. 52 Cal. 1.                  (4) I.L.R. 10 Lab.
657.
385
 of the decision was that mere purchase of goods in  British
India had too remote a connection to justify the  conclusion
that a part of the profits should be held to have  "accrued"
in  this  country.  As the business was one  of  buying  and
selling,  it  was  held that the profits  accrued  or  arose
actually  at the place where the goods were sold and not  at
the  place where they were merely purchased for export.   It
should be noted that this case was decided prior to 1939 and
the  changes  that were introduced into section  42  of  the
Income-tax  Act  by  the Amending Act of 1939  were  not  in
existence  at  that time.  The assessee was  a  resident  of
British  India  and the only question for decision  in  that
case was whether the profits did actually arise or accrue in
British  India.  It was held that they did not.  Both  these
cases were followed with approval by a Madras Special  Bench
in  the subsequent case of S.V.P. Sudalaimani Nadar v.  Com-
missioner  of Income-tax,  Madras(1).  That was also a  case
where  the-assessee  was  a resident of  British  India  and
having  purchased animals in British India exported them  to
foreign  countries  for sale. It was held that  he  was  not
assessable  to income-tax, as the profits were not  received
or  brought  into British India.  All these cases  were  re-
viewed  by  a  Division Bench of  the  Orissa  High   Court,
consisting  of Chief Justice Ray and Narasimham J. in  Rahim
v. Commissioner of Incometax (").  Here the assessee used to
buy hides, horns, etc. in the Orissa State and sell them  in
British  India and the question was whether any part of  the
profits accrued or arose within an Indian State.  The answer
given  by  the Court was in the negative, though  the  Chief
justice  in  a separate judgment observed that  he  was  not
prepared  to  lay down as a proposition of law that  in  all
businesses of buying and selling, the entire profits  neces-
sarily accrue at the place where the sales take place.  Each
case  would depend upon its own circumstances and there  may
be cases where the place where the commodities are purchased
has  an  importance of its own.  On the facts  of  the  case
which  they were actually deciding it was said that the  act
of buying
(1)   A.I.R.  [1941] Mad. 229.          (2)   A.I.R.  [19491
Orissa 60.
386
was  so negligible a part of the operation of the  business.
as not to make any appreciable difference in the  apportion-
ment of the amount that accrued or arose in British India.
    It will be seen that none of these decisions are. really
of any assistance to the appellant in the present case.  All
of them proceeded on the footing that no appreciable  profit
resulted  from the operation of buying when the  goods  were
purchased at one place and exported in a raw state to anoth-
er  place for sale.  In the Orissa case referred  to  above,
Narasimham  J. expressly observed in course of his  judgment
that  the position might be different if the materials  pur-
chased underwent any manufacturing process before they  were
exported.  If no profits really resulted from the purchasing
part  of the business, obviously the question of  the  place
where such profits arise or accrue does not become  material
at all.
    As  against these cases, several authorities  have  been
cited  to us which have proceeded on the footing  that  even
purchase  of raw materials could be an operation in  connec-
tion  with  a business and if it was carried on  in  British
India, it might make the profits attributable to such opera-
tion taxable under section 42 of the Indian Income-tax  Act.
The case of Rogers Pyatt Shellac and Company v. Secretary of
State for lndia (1) is one of the leading decisions on  this
point.   In that case, a company incorporated in U.S.A.  and
having  its  Head  Office in New York  and  Branch  Offices,
Agencies and factories in Calcutta, London, etc.   purchased
goods in India for sale in America. It had also a factory in
the  United Provinces where raw produce was  bought  locally
and  worked up into a form suitable for exports to  America.
It was held that the company was not exempt from  assessment
to income-tax or super-tax in India.   This case was decided
under  section  33  of the Income-tax Act of  1918  and  the
judgment  shows that the principle followed in the case  was
similar to that which was subsequently embodied n section 42
(3) of the Income-tax Act of 1922.  The same line of reason-
ing was adopted by the Rangoon (1) I.L.R. 52  cal. 1.
    387
High  Court  in Commissioner of  Income-tax,  Burma  Messrs.
Steel Brothers and Company (1). Among recent cases, on  this
point, which were decided under section 42 of the Income-tax
Act of 1922, can be mentioned the case of Motor Union Insur-
ance  Co. Ltd. v. Commissioner of  Income-tax.  Bombay(2)and
that of Webb Sons and Company v. Commissioner of Income-tax,
East  Punjab  (3).  In the last case, the  assessee  company
which was incorporated in the United States of America,  was
carrying  on in America the business of  manufacturing  car-
pets.   Its only business in India was the purchase of  wool
as  raw  material  for the carpets.  It was  held  that  the
purchase  was an operation within the meaning of section  42
(3)  of the Income-tax Act  and profits from such  purchases
could  he  deemed to arise in British India and  was  conse-
quently  assessable under section' 42 (3) of the  Income-tax
Act.
    These  cases, it must be admitted, are not of  much  as-
sistance to the respondents in this case, though they do not
help the appellant either.  They were decided on the express
language  of section  42 of the Incometax Act, 1922,  as  it
then stood or the section corresponding to it in the earlier
Act.   There remains for me to refer to tile other  line  of
authorities upon which the judgment of the High Court  seems
to  be primarily based.  [n my opinion, they cannot also  be
regarded  as direct authorities on the point requiring  con-
sideration in the present case.  In Commissioner of  Income-
Tax  v.  Kirk (4), the profits derived from  extraction  ore
from the soil and also from the conversion of the crude  ore
into  merchantable product were held to be taxable,  as  the
source of these profits was situated in New South Wales  and
that  was  the basis of taxation under the New  South  Wales
Act.   The  High Court was not right in holding  that  as  a
matter  of law, profits must be held to arise at  the  place
where  the  source  of the profit is  situated.   The  Privy
Council clearly laid down in the case of the Commissioner of
Incometax v. Chunilal(5) that income from business does not
(1)  I.L.R.  3  Rang.  614.                      (2)  A.I.R.
[1945] Born.
(3) [1950] 18 I.T R. 33.  (4) [1900] A.C. 588.   (5) 65 I.A.
332.
   49
388
necessarily  arise or accrue at the place from which  direc-
tions  are given or skill and judgment  exercised,  although
the  operations may take place elsewhere; and it is not  the
scheme of the Income-tax Act that the profits in the case of
a  business cannot be taken distributably but must be  taken
as a single indivisible result accruing at one place.
    The  learned Chief Justice of Bombay in support  of  his
judgment  relied  strongly upon the decision of  the  Madras
High Court in Commissioner of Income-tax v. Mathias(1).   In
that case, the assessee, who was a resident of Mangalore  in
British  India,  owned coffee plantations  in  Mysore.   The