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TMI Blog1951 (3) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... in British India as a guarantee for the due performance of his obligations under the contract under which deliveries had to be effected over a considerable period of time. The contract was entered into in British India. The goats and sheep were purchased by the assessee in large quantities in Mysore. They were transported to Cochin State and put on board a ship provided by the military authorities at Ernakulam, the cost of these operations being borne by the assessee and included in the price contracted to be paid. The Tribunal found, and this finding of fact is binding upon us, that the assessee maintained an establishment and an office at Ernakulam for attending to the transport and loading of goats and sheep on ships. The assessee sent his bills for the goats and sheep supplied by him, to the military authorities at Poona who paid the price by cheques drawn in favour of the assessee on the Imperial Bank at Vellore. No payment was made to the assessee outside British India in respect of the contract. The Income of the assessee computed for the chargeable accounting period included a sum of ₹ 50639 as profits derived from the supply of goats and sheep. The revenue authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be determined. Section 42 (3) of the Income Tax Act ran thus: In the case of a business of which all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India. These were the relevant statutory provisions governing the liability to tax and the claim for exemption from tax, at the time when the assessment was made in this case. 3. We had occasion to examine the effect of these provisions in our judgments in 'Commissioner of Excess Profits Tax v. Goculdoss Jamnadass Co.', [1950] 18 ITR 277 (Mad) and 'Commissioner of Income Tax v. Parasuram Jethanand [1950] 18 ITR 302 (Mad) , but we had not then the benefit of the exposition of the law by the Supreme Court In 'Commissioner of Income Tax v. Ahmedhbhai Umarbhai Co. [1950] 18 ITR 472 (SC) , which has substantially affirmed our decision. The case before the Supreme Court was comparatively simple on the facts. There the assessee firm, a resident in Bombay, owned an oil mill at Raichur in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proviso to Section 5 of the Excess Profits Tax Act as signifying one or more operations of the business contemplated by Section 42 (3) of the Income Tax Act. His Lordship after adverting to the difficulty of cutting business, operations arbitrarily into two or more operations, apportioning as between them the profits resulting from one continuous process ending in a sale, nevertheless held that the third proviso to Section 5 of the Excess Profits Tax Act demanded such an apportionment. How far is this process of dissection of business operations and the apportionment of profits among the several operations of a business to go? Kania, C.J., was alive to this difficulty when he said: It is not contended in the present case that the activities of the assessee as a manufacturer are 60 spread out as to be Incapable of being ascertained as one unit of business in an Indian State. For instance, difficulties may arise if a manufacturer buys groundnuts in one place, has a crushing mill in another place, has a refinery in a third place and packing, etc,, in a fourth place. It is not disputed that the assessee's activities as a manufacturer are all in Raichur and if GO, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of these parts produce profits at the place of the business, that place being in Indian State, then proviso 3 would have application. In the light of the foregoing statement of the law we hold that the purchase of goats and sheep in Mysore, their transport to Cochin and the loading of the goods on board the ship provided by the military authorities at Ernakulam form a separate section or part of the business of the assessee, a part separable from the rest of the business. These operations together constituted a part of the business and a part which was carried on outside British India in Mysore and Cochin State. The assessee's office at Ernakulam was in charge of these operations. The buying of goats and sheep at Mysore and their sale at Ernakulam might itself produce a profit without reference to the contract entered into in British India. Entering into the contract with the military authorities in British India, supervision of the performance of the contract from British India and the realisation of the price payable for the goods delivered at Katpadi In British India where the head office of the firm was situate, could be treated - as constituting a separate part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se was a plain dictate of the Income Tax Act. Their Lordships, however, refrained from laying down a general rate applicable to concrete cases and said: If such profits have not been received in or brought into British India it becomes or may become necessary to consider on the facts of the case where they accrued or arose. Their Lordships are not laying down any rule of general application to all classes of foreign transactions, or even with respect to the sale of goods. To do so would be nearly impossible and wholly unwise. They are not saying that the place of formation of the contract prevails against everything else. In some circumstances it may be so, but other matters -- acts done under the contract, for example -- cannot be ruled out 'a priori.' In the case before the Board, the contracts were neither framed nor carried out in British India; the High Court's conclusion that the profits accrued or arose outside British India is well-founded. 6. Shortly, after this decision came the 'Commissioner of Income Tax v. Govindram Seksaria', [1938] 6 ITR 584 (Bom), where the only differentiating feature was that the assessee, a resident of Bombay, instruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source or may accrue or arise elsewhere. But it does not follow that income cannot accrue or arise at the place where the source existed. Therefore, it is necessary to ascertain whether that part of the business which is capable of being treated as one separate unit in the Hyderabad State has given rise to the income or profit sought by the assessee to be exempted from taxation in the present case. (8) Mahajan, J., (with whom Fazl Ali, J., agreed) also said that it will be doing no violence to the meaning of the words accrue' 'or arise If the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of the sale are said to arise at the place where the sales are made. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the accrual of profits. Patanjali Sastri, J., referred to 'Commissioner of Income Tax v. Chunilal B. Mehta', ILR (1938) Bom 752, and struck a somewhat different note when he said: It is with reference to such transactions which individually contribute to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax v. Steel Bros.', 3 Rang 614 and Webb Sons Co. v. Commissioner of Income Tax. Some of the judgments above cited, were referred to in the judgment of Mukherjea, J., in 'Commissioner of Income Tax v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) . 9. in the present case it cannot be said that the entire profits of the assessee derived from the military contract accrued or arose in an Indian State. The contract for sale was entered into in British India, the business was supervised from British India and the price payable under the contract was also realised in British India. A substantial portion of the business operations such as buying of goats and sheep, their transport and loading on ships had to be conducted in Mysore and Cochin. These operations constitute a separable and separate part or unit of the business of the assessee conducted by a separate establishment maintained at Ernakulam in the Cochin State. Profits attributable to this part of the business of the assessee must be apportioned and held to be exempt from excess profits tax, as having accrued in an Indian State within the meaning of the third proviso to Section 5 of the Excess Profits Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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