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Issues:
1. Whether profits from a business carried on outside British India can be taxed as if they accrued or arose in British India due to the presence of the Head Office in British India. 2. Whether the profits of a Company, derived from manufacturing activities at a specific location, can be said to accrue or arise in British India solely based on the control exercised by the Head Office located in British India. 3. Whether the Income Tax Act of 1918 intended to alter the taxation of profits derived from businesses outside British India, where the control is managed from a Head Office within British India. Analysis: 1. The judgment revolves around the interpretation of Section 3, Sub-section 1, of the Indian Income Tax Act (VII of 1918), which states that the Act applies to all income derived from any source if it accrues, arises, or is received in British India. The dispute arises from whether profits made by a Company from manufacturing activities at a specific location outside British India can be taxed in British India due to the presence of the Head Office and control in British India. The Chief Revenue Authority argued that the Act intended to tax profits from businesses controlled by entities with a Head Office in British India, irrespective of where the actual business operations took place. 2. The Court analyzed the legislative intent behind the Income Tax Act and compared it to the provisions of the previous Act of 1886. It was highlighted that the current Act did not significantly change the scope of taxable income compared to the previous Act. The Court emphasized that the mere control of business affairs from a specific location does not automatically deem the profits to accrue or arise at that location. The judgment referenced a case law to illustrate the concept of where income is "derived" and concluded that in the present case, all essential processes leading to income generation occurred outside British India, thus the profits could not be deemed to accrue in British India. 3. The Court further delved into the distinction between where a Company carries out its business operations and where its profits are derived. It was noted that under English law, the focus is on the location of business operations, not profit derivation. The judgment emphasized that if the Legislature intended to tax profits derived outside British India, specific provisions would have been included in the Act. The Court rejected the argument that profits could be taxed in British India solely based on the location of the Head Office and control, stating that no substantial change in taxation laws had occurred with the enactment of the 1918 Act. 4. In conclusion, the Court answered the questions raised in the negative, asserting that the profits from manufacturing activities carried out outside British India could not be taxed in British India solely based on the location of the Head Office. The judgment clarified that while the question of whether income accrues in British India is a factual matter, the taxation of income derived outside British India due to registration in British India falls within the purview of the Income Tax Act. The assesses were granted costs of the reference, and the judgment specified that costs should be taxed as on the Original Side due to the nature of the reference.
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