1949 (9) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 42 of the Income Tax Act to residents of British India.
2. Proportion of profits attributable to business operations carried out in British India.

Detailed Analysis:

1. Applicability of Section 42 of the Income Tax Act to Residents of British India:
The primary issue in this case was whether Section 42 of the Income Tax Act could be applied to a company that is resident in British India. The assessee, a limited liability company with its head office in Calcutta and a factory in Okara, argued that Section 42(3) only applied to non-residents. The Income Tax Officer, however, applied Section 42(3) to allocate 50% of the profits from sales effected outside British India to the business operations carried on within British India.

The court examined the language of Section 42, particularly the amendments made in 1939, which eliminated the words "in the case of any person residing out of British India" and replaced them with more general terms. The court noted that the opening words of Section 42(1) now read: "All income, profits or gains accruing or arising whether directly or indirectly, through or from any business connection in British India, etc." This change indicated that the section was not limited to non-residents.

The court also considered the first proviso to Section 42(1), which deals with persons not resident in British India, and concluded that this proviso implied that the main section applied to both residents and non-residents. The court found support for this interpretation in Section 14(2)(c) of the Income Tax Act, which exempts residents from tax on income accruing in Indian States unless it is assessable under Section 42.

The court ultimately held that Section 42(3) applies to both residents and non-residents. This interpretation was necessary to avoid anomalous results, as there was no other provision in the Act for apportioning profits for a resident whose operations were partly outside British India.

2. Proportion of Profits Attributable to Business Operations in British India:
The second issue was whether the proportion of profits allocated to business operations in British India was too great. The Appellate Tribunal had dismissed the assessee's appeal, holding that Section 42(3) had been correctly applied by the Income Tax authorities. The Tribunal was asked to state a case on the proportion of profits attributable to operations in India, but it refused, considering it a pure question of fact.

The court did not delve deeply into this issue, as it was primarily a question of fact already decided by the lower authorities. The court's main focus was on the legal applicability of Section 42 to residents, and having resolved that in the affirmative, it upheld the allocation of profits as determined by the Income Tax authorities.

Conclusion:
The court concluded that Section 42(3) of the Income Tax Act applies to both residents and non-residents. Therefore, it was properly applied in this case to assess the profits of the assessee, who had operations both within and outside British India. The question submitted to the court was answered in the affirmative, and the Commissioner of Income Tax was awarded the costs of the reference.