1929 (6) TMI 2 - HC - Income Tax

Summary

Issues Involved:
1. Liability to Income Tax on profits derived from sales in a foreign country.
2. Interpretation of Section 4, Sub-section (1) of the Income Tax Act, 1922.
3. Place of accrual of profits for tax purposes.
4. Relevance of legal fictions in determining tax liability.
5. Applicability of previous judgments and legal principles.

Detailed Analysis:

1. Liability to Income Tax on profits derived from sales in a foreign country:
The core issue is whether a person residing in British India, who purchases goods in British India and sells them in Kashmir, is liable to be assessed for Income Tax under the Income Tax Act, 1922, on any part of the profits derived from such sales. The judgment clarifies that the profits from the business carried on in British India or profits received in or brought into British India are taxable. The focus is on whether profits derived from sales outside British India, not received or brought into British India, are taxable.

2. Interpretation of Section 4, Sub-section (1) of the Income Tax Act, 1922:
Section 4, Sub-section (1) states, "Save as hereinafter provided, this Act shall apply to all income, profits or gains accruing, or received in British India." The judgment emphasizes that the liability to taxation is based on where the income accrues, arises, or is received, not on the place of residence. The court must determine if any part of the profits accrued or arose in British India.

3. Place of accrual of profits for tax purposes:
The judgment discusses that profits from a sale transaction consist of the difference between the sale price and the cost of procuring and selling the goods. The place where the sale is effected and the price realized is considered the principal place of accrual of profits. The court concludes that the mere purchase of goods in British India does not imply that profits accrue there.

4. Relevance of legal fictions in determining tax liability:
The judgment refers to previous cases where legal fictions were applied to deem profits as accruing in British India. However, it is conceded that the current question is not influenced by such legal fictions. The court highlights that legal fictions in statutes, such as Section 42, Sub-section (1), apply to non-residents with business connections in British India, deeming their profits as accruing in British India. There is no corresponding provision for residents deriving income from foreign sales of goods purchased in British India.

5. Applicability of previous judgments and legal principles:
The court examines various judgments, including those of the Calcutta High Court and the Privy Council, to determine their relevance. It distinguishes the present case from others where legal fictions were applied. The judgment notes that the principle laid down in the Madras High Court case, where profits from goods purchased in British India and sold abroad were held to accrue wholly outside British India, is applicable. The court also refers to English cases to support the view that mere purchase of goods does not amount to exercising trade in the country of purchase.

Conclusion:
The judgment concludes that the mere purchase of goods in British India has too remote a connection to justify the conclusion that a part of the profits should be held to have accrued in British India. Therefore, no part of the profits realized by the assessee from the sale of goods in the foreign country is taxable under the Income Tax Act of 1922. All judges concurred with this conclusion.