1948 (3) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Liability to Excess Profits Tax for sales of goods manufactured in Raichur and sold in British India.
2. Interpretation of the third proviso to Section 5 of the Excess Profits Tax Act.
3. Determination of whether manufacturing oil constitutes a separate part of the business.
4. Accrual of profits from manufacturing and selling oil.

Comprehensive, Issue-Wise Detailed Analysis:

1. Liability to Excess Profits Tax for Sales of Goods Manufactured in Raichur and Sold in British India:
The primary issue is whether the assessee, a firm resident in British India, is liable to pay excess profits tax on the sales of oil manufactured in Raichur, Hyderabad State, and sold in British India. The Excess Profits Tax Act (XV of 1940) is applicable to businesses where any part of the profits is chargeable to income-tax under Section 4(1)(b)(i) and (ii) of the Income-tax Act. However, the third proviso to Section 5 exempts businesses where the whole of the profits accrue or arise in a Native State. The assessee contends that profits from the Raichur mill should be treated as arising in Hyderabad State and thus exempt from excess profits tax.

2. Interpretation of the Third Proviso to Section 5 of the Excess Profits Tax Act:
The third proviso to Section 5 states, "Where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business." The court needed to determine whether manufacturing oil in Raichur constitutes a separate part of the business. The proviso implies that if any part of the business generates profits in an Indian State, it should be treated as a separate business, and the profits from that part should be considered as arising in that State.

3. Determination of Whether Manufacturing Oil Constitutes a Separate Part of the Business:
The court examined whether the manufacturing of oil in Raichur is a distinct part of the assessee's business. The Advocate-General argued that manufacturing alone does not constitute a part of the business; both manufacturing and selling must occur for it to be considered a part. However, the court disagreed, stating that manufacturing oil is a significant part of the business. Profits accrue not only from the sale but also from the manufacturing process. The court emphasized that the business operations should not be arbitrarily divided, and manufacturing oil is an integral part of the business.

4. Accrual of Profits from Manufacturing and Selling Oil:
The court considered whether profits from manufacturing oil in Raichur accrue or arise in Hyderabad State. It was argued that profits only arise when the oil is sold in British India. However, the court referred to the Privy Council decision in Commissioners of Taxation v. Kirk, which held that profits accrue at each stage of the business process, including manufacturing. The court concluded that profits attributable to manufacturing oil in Raichur accrue in Hyderabad State, even if the final sale occurs in British India.

Conclusion:
The court concluded that the activity of manufacturing oil in Raichur is a part of the assessee's business and that profits attributable to this part accrue in Hyderabad State. Therefore, the third proviso to Section 5 of the Excess Profits Tax Act applies, and the profits from the Raichur mill should be treated as arising in Hyderabad State, exempting them from excess profits tax. The question was re-framed as "Whether on the facts as stated above profits of a part of the business of the assessee accrued or arose in an Indian State," and answered in the affirmative. The Commissioner was ordered to pay the costs of the reference.