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Interpretation of Section 42 of the Income Tax Act in relation to profits earned by a business involving manufacturing in a foreign country and sale in British India. Analysis: The judgment revolves around the interpretation of Section 42 of the Income Tax Act concerning the taxation of profits earned by a business that involves manufacturing in a foreign country and sale in British India. The assessees, a salt manufacturing company based in Egypt, questioned whether they are entitled to a deduction representing the proportion of profits earned by manufacturing in the country of origin. The Commissioner disallowed this deduction, asserting that the tax is charged on profits accruing or arising in British India. The court agreed with the Commissioner, emphasizing that profits realized from the sale of goods in British India are taxable, regardless of where the manufacturing took place. The court highlighted that while expenses incurred in production must be deducted, the entire profit is realized upon sale in British India. The judgment clarifies that Section 10 of the Act allows deductions for actual expenditures incurred in earning profits but does not exempt part of the profits based on their origin. The court analyzed Section 42, noting that all profits through business connections in British India are taxable under Section 4. The judgment highlighted that profits from the sale of merchandise exported to British India fall within the taxable category. The court rejected the assessees' argument, stating that allowing deductions based on the proportion of receipts arising from manufacturing abroad would significantly alter the computation method. The judgment emphasized that while international conventions might consider such arguments, the Indian Act does not provide for such exemptions. Consequently, the court answered the question in the negative and held that profits realized from the sale in British India are taxable, irrespective of their origin. The judges unanimously agreed with this interpretation, and the assessees were directed to bear the costs associated with the proceedings. In conclusion, the judgment provides a comprehensive analysis of the taxation of profits earned by a business involving manufacturing in a foreign country and sale in British India under Section 42 of the Income Tax Act. It clarifies that profits realized from the sale in British India are taxable, and no deductions based on the proportion of profits earned from manufacturing abroad are permissible. The decision underscores the principle that taxation is based on profits accruing or arising in British India, regardless of the production location.
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