Commissioner of Income-Tax, Bombay Vs. Ahmedbhai Umarbhai & Co., Bombay [1950] INSC 8 (4 May 1950)
1950 Latest Caselaw 8 SC

Commissioner of Income-Tax, Bombay Vs. Ahmedbhai Umarbhai & Co., Bombay [1950] Insc 8 (4 May 1950)

KANIA, HIRALAL J. (CJ) FAZAL ALI, SAIYID SASTRI, M. PATANJALI MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN MUKHERJEA, B.K.

CITATION: 1950 AIR 134 1950 SCR 335

CITATOR INFO :

F 1953 SC 105 (6A) F 1954 SC 155 (13) RF 1954 SC 198 (10) R 1954 SC 470 (33) R 1955 SC 661 (152) E&D 1957 SC 49 (37,38) R 1959 SC 586 (7) R 1960 SC1162 (10) RF 1963 SC 577 (24) OPN 1967 SC1626 (10) RF 1972 SC 151 (4) F 1977 SC 560 (7) R 1979 SC 289 (24) D 1987 SC2140 (18)

ACT:

Excess Profits Tax Act (XV of 1940), s. 5, Third Proviso-Indian Income-tax Act (XI of 1922), s.42 (3)--Article manufactured outside British India--Sale in British India--Whether whole profits accrue or arise in British India--Liability to excess profits tax-Manufacturing operations, whether "part of business "-Apportionment of profits between place of manufacture and place of sate-permissibility--Applicability of s. 42 (3).

HEADNOTE:

Section 5 of the Excess Profits Tax Act, 1940, provided that "the Act shall apply to every business of which any part of the profits made during the chargeable accounting period was chargeable to income-tax." There was also a proviso to the effect that "the Act shall not apply to any business, the whole of the profits of which accrued or arose in an Indian State and that where the profits of a part of a business accrued or arose in an Indian State, such part shall for the purpose of this provision be deemed to be a separate business, the whole of the profits of which accrued or arose in an Indian State, and the other part of the business shall be deemed to be a separate business." 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 business, 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 portion 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 principles or practice in the absence of any statutory requirement to that effect to cut business operations arbitrarily into two or more portions and to apportion as between them the profits resulting from one continuous process ending in a sale 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 manufactured 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 manufacture only at the time of sale; but in an inchoate shape a portion of the profits does accrue at the p]ace of manufacture, 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.

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 Judgments :-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 Raichur 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 manufacture 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 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 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 business, 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, 49F, 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 arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India, or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent ....

(2) Where a person not resident or not ordinarily resident 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 there from or which may reasonably be deemed to have been derived there from, 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 respect of such income-tax.

(3) 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." 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 section 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 manufacture 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 necessarily become one indissoluble business of which the profits cannot be separately ascertained. Because a man is a manufacturer, 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 proviso 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 interpretation 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 activities 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 appellant it was pointed out that under section 42"(3) of the Indian Income-tax Act the legislature had made a provision for allocation of profits inspect 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 Incometax 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 liability 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.

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 assessee 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 received 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 manufacturing 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 AttorneyGeneral 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 distinction, 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 Ahmedbhai 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 groundnuts, 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, including a sum of Rs. 2,49,615 which was said to have accrued or arisen from sales in Bombay of oil manufactured at Raichur. Part of such oil was also sold at Raichur, but the profits derived from such sales were not included in the assessment, and no question now arises in regard to such profits. For the succeeding period commencing from 21st October, 1941, and ending on 8th November, 1942, a tax of Rs. 2,55,485-1-0 computed on the same basis, was also imposed on the assessees. The assessees contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur which are an essential part of their business, and that such profits must be excluded from the assessment, under the third proviso to section 5 of the Excess Profits Tax Act, as having accrued or arisen in the Hyderabad State. The contention was rejected and the whole of the profits arising out of the sales in British India of the oil produced in Raichur were included in the assessments.

After unsuccessful appeals to the Appellate346 Assistant Commissioner, Bombay, the assessees carried the matter to the Income-tax Appellate Tribunal, Bombay, but with no better result. The assessees thereupon applied to the Tribunal requiring them to draw up a statement of the case and refer it to the High Court at Bombay for decision of the question of law involved, and the Tribunal accordingly stated the case and referred the following question:

"Whether on the facts stated above income accruing or arising to the assessees on sales made in British India of goods manufactured in Raichur situated outside British India has been rightly held by the Tribunal as income accruing or arising in British India and was liable to excess profits tax." In the letter of reference they indicated their view on the question referred by stating that the manufactured article received or brought into British India did not include any income, profits or gains, and that such profits and gains, having accrued only after the sale had taken place, accrued or arose in British India.

The reference was heard by Chagla C.J. and Tendolkar J.

and they were of opinion that the question as framed by the Tribunal "did not reallybring out the controversy between the parties." The learned Judges, after stating the facts of the case, framed the question thus: "Whether on the facts stated above the profits of a part of the business of the assessees accrued or arose in an Indian State." The question as reframed is also open to similar criticism, for, it assumes that the manufacture of oil at Raichur is "a part of the business" of the assessees, whereas the Commissioner of Income-tax has been seriously contesting that position as the judgment under appeal itself shows.

Excess profits tax is a charge on the profits arising out of a business in excess of its normal or standard profits, a business being regarded as the unit of assessment.

"Business" is defined in section 2 (5) of the Excess Profits Tax Act as including, among other things, "manufacture," and a proviso to the clause says that "all businesses to which this Act applies 347 carried out by the same person shall be treated as one business for the purposes of this Act." Section 4 provides for the charge of tax in respect of any business to which the Act applies on the amount by which the profits during any chargeable accounting period exceed the standard profits. Section 5, on the true interpretation of which the question for determination in this appeal turns, runs thus:

"5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the 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:

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 resident in British India unless the business is controlled in British India:

Provided further that where the profits of a part only of a business carried on by a person who is not resident in British India or not ordinarily so resident accrue or arise in British India or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then, except where the business, being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply only to such part of the business, and such part shall, for all the purposes of this Act, be deemed to be a separate business:

Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of business accrue or arise in an Indian State, such part shall, for, the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business." 44 348 As the assessees are resident in British India and the profits of their business in the Hyderabad State made during the relevant periods were charged to income-tax under section 4 (1 ) (b) (ii) of the Incometax Act, that business was brought under charge to excess profits tax by section 5 of the Excess Profits Tax Act, and the duty would be leviable on the profits of the said business unless proviso (3) excluded the application of the Act to that business, in which case the proviso to section 2 (5) which operates to consolidate only those businesses to which the Act applies would also not take effect. It appears to have been conceded by the taxing authority that no excess profits tax was leviable on the profits derived from the sales in the Hyderabad State as they were profits of a part of the assessees' business accruing or arising in an Indian State and as such were exempted under proviso (3) to section 5, for these profits, as already stated, were not subjected to tax for the two chargeable accounting periods in question. But it was contended on their behalf by the Attorney-General that the proviso had no such operation in respect of the profits made by sales of the oil in British India, and that for two reasons: Firstly, because the manufacturing operations carried on in the Hyderabad State did not constitute a "part" of the assessees business within the meaning of the proviso, and, secondly, because even if such operations could be regarded as a part of the business, the profits derived from the sales of the oil in Bombay could not be said to have accrued or arisen in that State. Both these propositions were held to be untenable by the learned Judges of the High Court and were contested before us by Mr. Munshi on behalf of the assessees.

On the first point, the Attorney-General insisted that a "part" of a business meant a fraction of the aggregate of all the constituent activities of the business or, as it has been put during the argument, a "cross-section" of the entire business operations, and not one or more of such operations, however essential for the production of the resulting profits. It is difficult to see how this construction will assist the 349 taxing authority in the present case, for, as already stated, the assessees were selling at Raichur, part of the oil manufactured there, and there was thus at that place a complete cross-section of their business which consists of manufacturing and selling oil. Apart from this consideration, I can find nothing in the context of section 5 to exclude the ordinary meaning of the words "part of a business" and to compel the somewhat strained and artificial interpretation sought to be put upon them which, it may be observed in passing, seems inconsistent with the view which left untaxed the profits derived from the sales at Raichur.

Furthermore, section 5 is to be read with the provisions of section 42 of the Indian Income-tax Act which has been made applicable, with certain modifications not material here, to excess profits tax by section 21 of the Excess Profits Tax Act "as if the said provisions were provisions of this Act and refer to excess profits tax instead of to income-tax." That section has, in my opinion, an important bearing on the issues involved in this appeal and deserves careful consideration. So far as material here it reads thus:

"42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all tile purposes of this Act, the assessee in respect of such income-tax.

Provided that where the person entitled to the income, profits or gains is not resident in British India, the income-tax so chargeable may be recovered by deduction under any of the provisions of section 18 ......

(3) In the case of a business of which all the operations are not carried out in British India, the 350 profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India." It will be seen that these provisions, read together, 'lay down a rule of apportionment for ascertaining the profits of a business part only of whose "operations" "are carried out in British India where such part could be regarded as either "a business connection in British India" or "a source of income in British India." They also provide machinery for facilitating collection of the tax from the resident agent where the person entitled to such income is a non-resident. Now, these provisions are obviously complementary to section 5 proviso (2) of the Excess Profits Tax Act, and unless we read "part of a business" in that proviso as meaning one or more "operations" of the business referred to in sub-section (3) of section 42, the machinery provided in the latter section for collection of the tax leviable on a non-resident person by virtue of proviso (2) will not be applicable, and the scheme of charge and collection in such cases will be rendered incoherent. A harmonious interpretation of the scheme requires that the words "part of a business" in' proviso (2) must be taken to signify one or more of the operations of the business, and, if so, the same expression used in proviso (3), with which we are here concerned, must also have the same connotation. It follows that the manufacture of oil in the mill at Raichur is a part of the assessees' business.

The question next arises whether the profits derived from such manufacture, other than those arising from sales at Raichur which are not now in question, accrued or arose in Raichur, so as to bring the case within proviso (3). It is clear that the oil manufactured at Raichur cannot itself be regarded as income, profits or gains within the meaning of the Indian Income-tax Act or the Excess Profits Tax Act any more than the green coffee in Mathias case(1) which the Privy Council held could not be so regarded.

(1) I.L.R. [1939] Mad. 178.

351 The oil is manufactured for purposes of sale in order that profits may be earned, and such profits are realised only when the commodity is sold and not before. But, as-the test of non-liability under proviso (3) is the accruing or the arising of the profits in an Indian State, the question is whether the profits, when they do arise from the sales at Bombay of the product of the mill at Raichur, arose in whole or in part at Raichur ? As pointed out by the Privy Council in Chunilal Mehta's case(1), the words "profits accruing or arising in" (a country) require a place to be assigned as that at which the trading operations come, whether gradually or suddenly, into existence, and they involve a notion difficult to apply to particular transactions. The words "ac.. crue or arise," too, have been variously interpreted, and no conclusive or clear test of when or where income can be said to accrue has been formulated in the decided cases.

The learned Judges in the Court below solved the problem by invoking what they conceived to be the general principle underlying the decision in Kirk's case ("), namely, the principle of apportioning profits as between the different processes employed in producing those profits and the different places where they are employed. The learned Judges disagreed with the view of the Calcutta High Court in Re Mohanpura Tea Co. (3) that the profits accrue or arise only when the goods are sold and at the place where they are sold, and that the decision in Kirk's case (2) laid down no principle of general application but proceeded on the language of an Australian statute. The question in Kirk's case (2) related to the assessment of the profits of a mining company which extracted ore and converted it into a merchantable product in one colony and sold it in another.

Under the relevant statute, tax was leviable in respect of income "arising or accruing from any.....................

trade........................ carried on" in the colony or "derived from lands," or "arising or accruing from any kind of property................... or from any other source whatsoever," in the colony, but no tax was payable in respect of income "earned" outside the I.L.R. [2938] Bom. 752. (2) [1900] A.C.

588. (3) [1937] I.L.R. 2 C,aI, 201.

352 colony. The Board held that the profits, having been produced by the combined operations of extraction, manufacture and sale, were assessable to tax in the colony either as derived from land by reason of the extraction or as "arising "trade," certainly from or accruirng, " if not from a the manufacture in the colon and by reason of were therefore "earned" in the colony, though the profits were received outside the colony. While it may well be a "fallacy," while in applying a taxing statute which directs attention to the situation of the source of income as the test of chargeability, to ignore the initial stages in the production of the income and fasten attention on the last stage when it is realised in money, it may be open to question whether it is in 'consonance with business principles or practice, in the absence of any statutory requirement to that effect, to cut business operations arbitrarily into two or more portions and to apportion, as between them, the profits resulting from one continuous process ending in a sale. It appears, however, unnecessary, in the present case, to consider the applicability of the decision in Kirk's case(1) to assessments arising under the Indian Act which makes the place at which the profits accrue or arise the test of liability or non-liability, as the case may be, as I am of opinion that section 42 of the Income-tax Act which, as already stated, has been incorporated in the Excess Profits Tax Act, is applicable here and sanctions such apportionment.

It is noteworthy that the first part of sub-section (1) of section 42 providing that certain classes of income are to be deemed to accrue or arise in British India is not confined in its application to non-residents ,but is in general terms so as to be applicable to both residents and nonresidents. Before its amendment in 1939 the sub-section began with the words "in the case of any person residing out of British India" which obviously restricted the application of the provision to non-resident persons, but in its amended form the subsection has been recast into two distinct parts, the first of which is not so restricted, and the second part (1) 1900] A.C. 588.

353 alone, which begins with the words "and where, the person entitled to the income, profits and gains is not resident in British India," is made applicable to non-resident persons, thereby showing that the former part applies to both residents and non-residents. The opening words of the first proviso also point to the same conclusion, for these words would be surplus age if the sub-section as a whole applied only to non-residents. A contrary view has, no doubt, been expressed by a Division Bench of the Bombay High Court in Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. (i). Though reference was made in that ,case to the alteration in the structure of sub-section (1) its significance, as it seems to me was not properly appreciated. The facts that the marginal note to the, whole section refers to "non-residents" and that the section itself finds a place in Chapter V headed "Liability in Special Cases" were relied upon as supporting the view that sub-section (1) as a whole applies only to non-residents. As pointed out by the Privy Council in Balraj Kunwar v. Jagatpal Singh(2), marginal notes in an Indian statute, as in an Act ,of Parliament, cannot be referred to for the purpose of construing the statute, and it may be mentioned in this ,connection that the marginal note relied on has since been replaced by the words "Income deemed to accrue or arise within British India," which makes it clear that the main object of subsection (1) was to define that expression [see section 12 (a) of Act XXII of 1947]. Nor can the title be a chapter be legitimately used to restrict the plain terms of an enactment. I am therefore of opinion that the first part of subsection (1) is applicable to the assessees, the expressions "business connection in British India" and "asset or source of income in British India" being wide enough to cover their selling organisation at Bombay. The result is that the profits received at Bombay from the sale of the oil manufactured at Raichur have to be apportioned under sub-section (3) between the two operations of manufacture and sale, and only such portion of the profits as is reasonably ,attributable to the sale should (1) [1945] 13 I.T.R. 405. (2) I.L.R. 26 All. 393 at 40G.

354 be deemed to accrue or arise in British India. It must follow, as a corollary, that the rest of the profits, attributable to the manufacture at Raichur, must be. regarded as accruing or arising in the Hyderabad State. Therefore proviso (3) to section 5 of the Excess. Profits Tax Act becomes applicable to the case and exempts the manufacturing part of the assessees' business from the operation of the Act.

On behalf of the respondent, Mr. Munshi called attention to certain observations of the Privy Council in Chunilal Mehta's case(1) as supporting his contention that, although all the operations of a business must be completed before profit is received, the accrual of the profits begins with the first operation and continues cumulatively till the goods are finally sold, and that, therefore, the expression "accruing or arising in" a place must be applied distributively to the different operations and the places where such operations are carried out. The observations relied on are as follows: "But the legislature has chosen a different test and applied it to all kinds of profits accruing or arising in British India. It may even have chosen it as fairer because it can be applied distributively to the profits of a single source" (p. 765), and again, "no doubt if it can be held that under the Indian Act profit in the case of a business must be taken so strictly that it is not to be understood distributively at all the profit of the assessee's business would become an ultimate and single figure irreducible and referable only to Bombay, but such a high doctrine cannot be read into the Indian statute without violence not only to its language but to its scheme:" (p.

767). These passages may, at first sight, appear to lend some support to Mr. Munshi's thesis. But on closer examination in their context they do not, in my opinion, warrant any such general theory. Their Lordships were dealing with a case where the assessee, resident in Bombay, derived profits from speculative contracts for purchase and sale of commodities carried out through brokers in various foreign markets such as Liverpool, London and New York. The assessee(1) I.L.R. [1938] Bom. 752.

355 contended that he was not liable to pay Indian income-tax in respect of such profits, which were not received in British India, on the ground-that they were not profits accruing or arising in British India, and their Lordships upheld that contention. It is with reference to such transactions which individually contributed to the surplus arising in the various places abroad, that their Lordships spoke p, of the profits accruing or arising distributive and not in a single place. That-they were not thinking of the profits resulting from a single composite process such as manufacture and sale, and their disintegration and apportionment as between the different operations is shown by their further observation that "profits are frequently, if not ordinarily, regarded as arising' from many transactions each of which has a result not as if the profits need to be disintegrated with difficulty but as if they were an aggregate of the particular results:" (p. 767).

Reference was also made to a recent decision of the same Tribunal in International Harvester Co. of Canada v. The Provincial Tax Commission(1 ). The case arose out of the assessment of the profits of a non-resident to income-tax, under a provincial Income-tax Act in respect of the profits arising from the sale within the province of goods manufactured outside the province. The tax was leviable, in the case of a non-resident person, on the "net profit or gain arising from the business of such person in" the province. Their Lordships held that, although the profits sought to be assessed were all received in the province where the goods were sold, as the profits brought under charge under the Act was only the net profit arising from the business in the province, the manufacturing profits should be excluded from the assessment. Their Lordships referred to other provisions of the Act which, in the converse case, sought to charge a proportionate part of any profit derived from sale outside the province of goods produced in the province as being "earned" within the province, and inferred from those provisions that the intention of the legislature in the (I) [1949] A.C. 36.

356 charging section was to bring within the ambit of taxation only an apportioned part of the profit. Such a construction, they thought, would ' 'result in a fair and reasonable scheme of taxation in accordance with that comity which naturally prevails between one province and another." 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 registered 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 whether the profits which were received or realized by the respondent 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 Commissioner but without any success. The Incometax Appellate Tribunal 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 profits 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 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, 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 resident 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 business, 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 however 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 separately. 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 manufacture 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 different 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 proviso 3 to section 5, one part situate in one place and another 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-residents. 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 exclusively 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 attributable to that part of the business out of the total sale proceeds could only be said to accrue at the place of manufacture.

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 "business" it could be said that he was carrying on five businesses, 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 definition, 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 business 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 cha