1949 (7) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Is mere purchase of a raw material an operation within the meaning of Section 42(3) of the Income-tax Act?
2. Can any profit arise out of mere purchase of raw material?
3. Whether there was any material before the Tribunal to hold what proportion of the profits could be reasonably attributable to the acts of purchase of the assessee in British India?

Detailed Analysis:

Issue 1: Is mere purchase of a raw material an operation within the meaning of Section 42(3) of the Income-tax Act?
The court addressed whether the purchase of wool as raw material for manufacturing carpets constitutes an "operation" under Section 42(3) of the Income-tax Act. The court concluded that purchasing wool, a crucial raw material for carpet manufacturing, is indeed an operation within the meaning of the Act. The court cited the case Rahim v. CIT [1949] 17 ITR 256, which supported this view, and referred to observations from the Privy Council in International Harvester Company of Canada, Ltd. v. Provincial Tax Commissioner [1949] 17 ITR Suppl. 58, which emphasized that profit-making involves a series of operations, including the purchase of raw materials. Thus, the court answered the first question in the affirmative.

Issue 2: Can any profit arise out of mere purchase of raw material?
The court acknowledged that, in isolation, the purchase of raw material does not generate profit. However, in the context of the entire business operation, the purchase of raw material is a critical stage that ultimately leads to profit generation. The court referenced the Privy Council case International Harvester Company of Canada Ltd. v. Provincial Tax Commissioner and Others [1949] 17 ITR Suppl. 58, which highlighted that profit arises from a series of operations, including the purchase of raw materials. The court also cited Commissioners of Taxation v. Kirk [1900] AC 588, which outlined the various stages in the production of income, including the purchase of raw materials. Therefore, the court concluded that the purchase of raw materials contributes to the ultimate profit and answered the second question in the affirmative.

Issue 3: Whether there was any material before the Tribunal to hold what proportion of the profits could be reasonably attributable to the acts of purchase of the assessee in British India?
The court examined whether there was sufficient material to determine the proportion of profits attributable to the purchase operations in British India. The Income-tax Officer had used the figures of actual purchases of wool made by the company's agent in India, as the company had not provided its profit and loss accounts or balance sheets. The court noted that the Income-tax Officer acted under Rule 33, which allows the calculation of income based on a reasonable percentage of turnover when actual profits cannot be ascertained. The court found that the method used by the Income-tax Officer, which involved estimating the gross profit margin a wool merchant in India would make, was reasonable. The court concluded that the purchase figures did constitute material for attributing profits to the acts of purchase in British India and answered the third question in the affirmative.

Conclusion:
The court answered all three questions referred by the Tribunal in the affirmative. The purchase of raw material is an operation under Section 42(3) of the Income-tax Act, profits can arise from such purchases as part of the overall business operations, and there was sufficient material to attribute a proportion of the profits to the purchase operations in British India. The court allowed the costs of the proceedings to the respondent.