1953 (12) TMI 1 - SC - Income Tax

Whether in view of the finding of fact in this case that the entire profits were received in India and the company is liable to tax under Section 4(1)(a) of the Act the provisions of Section 42(1) have any relevancy ? Can the income received in India be said to arise in India within the meaning of Section 4A(c)(b) of the Act ? If not should only those profits determined under Section 42(3) as attributable to the operations carried out in India be taken into account for applying the test laid down in Section 4A(c)(b) ? Held that - Answer to question No. 1 in the negative. Answer to question No. 2 - The income received in British India cannot be said to wholly arise in India within the meaning of Section 4A(c)(b) of the Act and that there should be allocation of the income between the various business operations of the assessee company demarcating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year for the purposes of Section 4A(c)(b) of the Act. Appeal allowed.

Issues Involved:
1. Applicability of Section 42(1) and (3) of the Indian Income-tax Act, 1922.
2. Interpretation of Section 4A(c)(b) regarding the residence of the company.
3. Apportionment of income between operations inside and outside British India.
4. Relevance of income received in India for tax purposes.

Issue-wise Detailed Analysis:

1. Applicability of Section 42(1) and (3) of the Indian Income-tax Act, 1922:
The primary issue was whether Section 42(1) and (3) of the Act applied to the income accruing or arising to the assessee company in British India and to the income attributable to the sale proceeds received by it in British India. The High Court initially held that Section 42(1) and (3) did not apply as the income was actually received in British India, making Section 4(1)(a) applicable. The Supreme Court confirmed this view, stating that Section 42 dealt with "deemed" income, whereas Section 4A(c) dealt with income that actually arose in British India. The Supreme Court reiterated that Section 42(1) was irrelevant when the income was actually received in British India.

2. Interpretation of Section 4A(c)(b) regarding the residence of the company:
The second issue concerned whether the entire profits and gains arising to the assessee company in British India should be taken into account for the purpose of applying the test laid down under Section 4A(c)(b) or only that part of the profits which could be determined after the application of Section 42(3). The High Court and the Supreme Court held that the income received in British India could not be said to wholly arise in India within the meaning of Section 4A(c)(b). There should be an allocation of the income between the various profit-producing operations of the business of the company, considering the principles of apportionment of income between operations carried out inside and outside British India.

3. Apportionment of income between operations inside and outside British India:
The High Court and the Supreme Court emphasized the need for apportionment of income between manufacturing operations carried out outside British India and merchanting operations within British India. The principle established in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, was applied, which stated that profits attributable to manufacturing operations accrue at the place of manufacture, and profits from sales accrue at the place of sale. This principle was upheld, requiring an allocation of profits based on the location of the different business operations.

4. Relevance of income received in India for tax purposes:
The final issue was whether the income received in India could be said to arise in India within the meaning of Section 4A(c)(b). The Supreme Court held that the income received in British India could not be wholly attributed to operations in British India. The income must be apportioned between the operations carried out in British India and those outside, based on the established principles of apportionment. The Court concluded that the entire income received in British India could not be taxed without considering the operations outside British India that contributed to the profits.

Judgment Summary:
The Supreme Court allowed the appeal, holding that the income received in British India could not be said to wholly arise in India within the meaning of Section 4A(c)(b) of the Act. There should be an allocation of the income between the various business operations of the assessee company, distinguishing the income arising in the taxable territories from the income arising outside for the purposes of Section 4A(c)(b). The Court directed that each party bears its own costs of the appeal, including the costs of the remand before the High Court.

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