1950 (5) TMI 1 - SC - Income Tax

Whether in respect of such oil a portion of the profits earned by them is attributable to their business of manufacturing oil at Raichur and that portion of the profits should not be assessed to tax under the Excess Profits Tax Act? Held that - The expression part of a business must in my opinion be read with the same meaning and implication in provisos (2) and (3) to Section 5 of the Excess Profits Tax Act. Unable to accept the contention of the Attorney-General that under our Act there is no scheme of apportionment. That overlooks, as pointed out above, the provisions of Section 21 of the Act, which incorporates by reference amongst others Section 42(3) of the Indian Income-tax Act. Therefore, proceeding on the footing that there can arise or accrue profits of the manufacturing activity of the assessee, profits have accrued to the assessee of a part of the business in an Indian State and they having accrued out of such business carried on in such State are exempted under the third proviso to Section 5 of the Excess Profits Tax Act. For these reasons the conclusion of the High Court is correct and the appeal is dismissed with costs.

Issues Involved:
1. Liability under the Excess Profits Tax Act.
2. Definition and scope of "business" under the Excess Profits Tax Act.
3. Application of Section 5 and its provisos of the Excess Profits Tax Act.
4. Allocation of profits between different operations of a business.
5. Place of accrual or arising of profits.

Detailed Analysis:

1. Liability under the Excess Profits Tax Act:
The primary issue was whether the respondent firm's profits from oil manufactured at Raichur but sold in Bombay were liable for assessment under the Excess Profits Tax Act. The High Court ruled in favor of the assessees, stating that a portion of the profits attributable to manufacturing operations at Raichur should not be taxed under the Excess Profits Tax Act. The Supreme Court upheld this decision, emphasizing that manufacturing operations constitute a part of the business and can be treated separately for tax purposes.

2. Definition and Scope of "Business" under the Excess Profits Tax Act:
The Excess Profits Tax Act defines "business" to include any trade, commerce, or manufacture. The Court clarified that manufacturing is a distinct business activity and does not need to be combined with trading activities to be considered a business. The Court rejected the appellant's argument that all operations making up the business must take place in an Indian State to qualify for exemption.

3. Application of Section 5 and its Provisos of the Excess Profits Tax Act:
Section 5 of the Excess Profits Tax Act applies to businesses with profits chargeable to income-tax. The third proviso to Section 5 states that the Act does not apply to any business where the whole of the profits accrue or arise in an Indian State. The Court held that the manufacturing operations at Raichur constituted a "part of the business" and the profits from these operations accrued in an Indian State, thus qualifying for exemption under the third proviso to Section 5.

4. Allocation of Profits between Different Operations of a Business:
The Court emphasized the need for apportioning profits between different operations of a business. Section 42(3) of the Indian Income-tax Act, which is applicable to the Excess Profits Tax Act through Section 21, allows for such allocation. The Court ruled that the manufacturing profits from Raichur could be separately ascertained and should be exempt from taxation under the Excess Profits Tax Act.

5. Place of Accrual or Arising of Profits:
The Court distinguished between the place of receipt of profits and the place where profits accrue or arise. It held that while the sale of goods results in the receipt of profits, the profits attributable to manufacturing operations accrue at the place of manufacture. The Court rejected the argument that profits only arise at the place of sale, emphasizing that profits from manufacturing operations accrue where the manufacturing activity takes place.

Conclusion:
The Supreme Court upheld the High Court's decision that the manufacturing operations at Raichur constituted a separate part of the business, and the profits from these operations accrued in an Indian State. Therefore, these profits were exempt from taxation under the Excess Profits Tax Act. The Court emphasized the need for apportioning profits between different business operations and clarified that profits from manufacturing operations accrue at the place of manufacture.

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