1925 (8) TMI 3 - HC - Income Tax

Summary

Issues: Jurisdiction of the Income Tax Officer over income earned in a Native State under the Indian Income Tax Act II of 1886.

Analysis:
1. The case involved a dispute regarding the Income Tax Officer's authority to levy tax on the income earned by shops in the Baroda State. The plaintiffs, residents of Gondal State, challenged the assessment of income by the Income Tax Collector of Broach City, arguing that the tax on income from shops in the Baroda State was ultra vires. The main issue was whether the plaintiffs were barred from bringing suits under section 39 of the Indian Income Tax Act II of 1886, which restricts civil courts from setting aside or modifying assessments under the Act.

2. The Judge examined whether the profits accrued or arose in British India, as contended by the Income Tax Collector. The Judge's conclusion, based on the argument that profits indirectly arose in British India due to the growth of crops and purchase activities, was deemed fallacious. The Judge highlighted that the location where the actual profit is earned, exceeding the expenses, determines where the profits arise. The decision referenced the case of In re Aurangabad Mills, Ltd. (1921) 45 Bom. 1986 : 23 Bom. L.R. 570, to support this interpretation.

3. The Judge further clarified the concept of profit arising in a specific location by providing an example of a branch manager in Baroda sending orders to a commission agent in Bombay for goods sold in Baroda. The Judge emphasized that the ultimate location where the profit is made, in this case, the Baroda State, determines the jurisdiction of the Income Tax authority to levy tax on profits. The judgment rejected the notion that profits arise in British India merely because goods may have originated from there.

4. Ultimately, the Court held that the ultimate profits were made in the Baroda State, establishing that the profits arose in the Baroda State. Consequently, the Court reversed the decrees in all three suits, allowing the appeal with costs. The plaintiffs were entitled to a refund of the tax paid, except in one instance where the refund was limited to the amount claimed in the appeal.