1949 (12) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the profits made on sales in British India were 'income arising in British India' under Section 4A(c)(b) of the Income-tax Act.
2. Interpretation of Section 42(3) and its applicability to the case.
3. Apportionment of profits between manufacturing and sales operations.

Issue-wise Detailed Analysis:

1. Whether the profits made on sales in British India were 'income arising in British India' under Section 4A(c)(b) of the Income-tax Act:
The court examined whether the income from sales conducted in British India should be considered as arising in British India. The assessee company, which had shifted its operations to Mysore during the war scare of 1942, argued that the profits from sales in British India should be treated as "deemed profits" rather than actual profits arising in British India. The court rejected this argument, emphasizing that the language of Section 4A(c)(b) is clear and unambiguous, requiring actual accrual of profits in British India. The court held that the profits from sales in British India indeed arose in British India and were not merely "deemed" to arise there.

2. Interpretation of Section 42(3) and its applicability to the case:
The court discussed the changes in Section 42(3) made in 1939, which altered the language to focus on the profits reasonably attributable to operations carried out in British India. The court noted that the previous version of Section 42(3) deemed profits from sales in British India as arising in British India, but the amended section required actual accrual. The court concluded that Section 42(3) applies only to profits deemed to accrue or arise in British India and does not affect profits that actually arose there. The court referenced previous cases, including Burugu Nagayya v. Commissioner of Income-tax and Hira Mills Ltd. v. Income-tax Officer, to support this interpretation.

3. Apportionment of profits between manufacturing and sales operations:
The assessee argued that the profits should be apportioned between manufacturing operations in Mysore and sales operations in British India, suggesting that only the merchanting profits should be considered as arising in British India. The court rejected this argument, stating that profits and gains are the difference between the gross cost to the seller and the net price received. The court emphasized that the entire profit from sales in British India should be considered as arising there, without apportioning it to manufacturing operations outside British India. The court referenced the decision in Hira Mills' case and other relevant cases to support this view.

Conclusion:
The court held that the profits from sales in British India constituted "income arising in British India" under Section 4A(c)(b) of the Income-tax Act. The court rejected the arguments for treating the profits as "deemed profits" and for apportioning the profits between manufacturing and sales operations. The court answered the question in the affirmative, in favor of the Commissioner of Income-tax, and awarded costs to the Commissioner.