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Issues Involved:
1. Accrual of Income, Profits, or Gains within an Indian State. 2. Applicability of Section 42(3) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Accrual of Income, Profits, or Gains within an Indian State: The primary question was whether any portion of the profits from the business activities of the assessee, which involved the purchase of raw materials in Orissa States and their sale in British India, could be said to "accrue" or "arise" within an Indian State. The Tribunal found that the raw materials were not subjected to any manufacturing process in Orissa States and were sold in British India through commission agents, with the proceeds remitted to the head office in Cuttack. The assessee argued that, under the mercantile system of accounting, a portion of the profits should be considered to have accrued in the States, particularly the value of stock-in-trade remaining unexported at the end of the year. He also contended that buying is a crucial part of the business operation and that a portion of the profits should be estimated to have accrued in the States, invoking Section 42(3) of the Indian Income-tax Act. The Tribunal, however, relied on the case of Mohanpura Tea Company Ltd. and held that the profits accrued at the place of sale, which was in British India. The court noted that the mere act of buying did not constitute the exercise of a trade in the place of purchase. The court cited several precedents, including Sulley v. Attorney-General and Smith & Co. v. Greenwood, which supported the view that profits accrue at the place of sale. The court concluded that no part of the income or profit accrued or arose within an Indian State, as the raw materials were exported in their raw state and sold at higher prices in British India. The argument that the assessee could have sold the materials at a profit in the States due to a monopoly license was dismissed due to lack of evidence and findings by the Tribunal. 2. Applicability of Section 42(3) of the Income-tax Act: Given the conclusion that no part of the profit accrued or arose in an Indian State, the court found that Section 42(3) of the Income-tax Act was not applicable to the case. This section pertains to the apportionment of income from business operations carried out in multiple locations, but since all profits were deemed to have accrued in British India, there was no need for apportionment. Separate Judgments: Ray, C.J.: While agreeing with the conclusions, Ray, C.J., added that the question of where income accrues in a trade of buying and selling is complex and not free from difficulty. He emphasized that the legislative changes in Section 42, particularly the insertion of sub-section (3) by the Amendment Act of 1939, suggest that buying operations should not be disregarded in determining where income accrues. He noted that the sub-section allows for apportionment of income when business operations are carried out in multiple locations. However, he acknowledged that in the present case, the buying operations were negligible and did not significantly affect the apportionment of income. Conclusion: The court answered the first part of the first question in the negative, concluding that no part of the income or profit accrued or arose within an Indian State. Consequently, the second part of the first question and the second question regarding the applicability of Section 42(3) did not arise. The assessee was ordered to pay the costs of the reference, with the Standing Counsel's fee fixed at Rs. 100.
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