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PETITIONER: HUKAM CHAND MILLS LTD. INDORE

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BOMBAY

DATE OF JUDGMENT19/03/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ GOSWAMI, P.K.

CITATION:  1976 AIR 2078            1976 SCR  (3) 712  1976 SCC  (3)  10

ACT:      Income Tax  Act 1922-Sales  effected by  a  Company  in erstwhile  state   in  British  India-Determination  of  the quantum of  profits on  the sales  effected in British India and the basis of apportionment of the profits in the absence of any  statutory  or  fixed  formula  should  be  based  on relevant material.

HEADNOTE:      The assessee  appellant is  a  public  limited  company owning textile  Mills at Indore and carrying on the business of manufacture  and sale  of textiles. During the assessment year 1942-43,  it effected  in British  India the  following categories  of   sales  viz.  (a)  sales  canvassed  by  the company’s representatives  amounting to  Rs.  6,46,028,  (b) sales canvassed  through brokers and agents in British India Merchants and  their brokers  during their  visit at  Indore amounting to  Rs. 2,86,224  and (iv) Sales to British Indian Merchants at the time of their own or their brokers visit at Indore amounting to Rs. 2,55,916/-.      In 1968(1) S.C.R. 47, on an appeal, by Revenue, arising out of  a reference  u/s 66(1)  of the  Income Tax Act, this court held  that the  income by  way of  the  Sales  of  Rs. 14,80,059/- in  respect of  the appellant company was income "accrued or  arose" within British India and a proportionate part of  it was  assessable to Indian Income Tax. This court remitted the  case to the High Court to answer the reference regarding  the  correctness  of  the  determination  of  the profits on the sales computed by the Tribunal by application of Rule 33 and also whether 1/3 of the profits so determined could be said to accrue or arise in British India, which the High Court answered in favour of the Revenue. In the appeals before this  Court it  was found that the High Court had not taken into  account the relevant circumstances for answering the reference  since it  was contended  by both  the parties that Rule 33 was not applicable to the facts of the case. As per the  directions, the  Tribunal submitted a supplementary statement of  the case  wherein it found (1) that in respect of the  sales canvassed by the companies representatives and through brokers  and agents amounting to Rs. 9,37,919 it was just and  equitable to  apportion 15% of the profits said to have arisen  and accrued  in British  India and (ii) that in

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respect of  the sales  to British  Indian  Merchants  and/or their brokers  during their visit at Indore amounting to Rs. 5,42,140/-. 7  1/2 per  cent of the profits could be said to have accrued  and arisen  in British  India. As  the profits were found  to represent 31.12 per cent of the turnover, the profits in  respect of  the turnover  of Rs.  9,37,919  were calculated at  the rate of 4 1/2 per cent (i.e. 15% of 31.12 per cent)  which amounted  to Rs.  42,200/-.  Similarly  the profits in  respect of the turnover of 5,42,140/- @ the rate of 2 1/4% (7 1/2 per cent of 31.12 per cent) amounted to Rs. 12,200. The  total profits  for the  year  1942-43  was  Rs. 54,400 (Rs. 42,200+12,200), according to the Tribunal.      Accepting the appeals, the Court, ^      HELD: (i)  The question  as to  what proportion  of the profits of the sales in the four categories arose or accrued in British  India is  essentially one of fact depending upon the circumstances  of the  case.  In  the  absence  of  some statutory  or  other  fixed  formula;  any  finding  on  the question of  proportion involves same element of guess work. The endeavour can only be to be approximate and there cannot in  the  very  nature  of  things  be  great  precision  and exactness in  the matter. As long as the proportion fixed by the Tribunal  is based upon the relevant material, it should not be disturbed. [716C-D]      (ii) In  the instant  case, the  profit which arose and accrued in  British India  to the assessee-appellant for the assessment year 1942-43 was Rs. 54,400. It 713 is just  and equitable  to apportion  15% of  the profits of sales in  categories (a)  and (b)  and 7 1/2 per cent of the profits of  sales in  categories (c)  and (d) as accruing or arising in British India. [716D-E]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos. 1062- 1066 (NT) of 1970.      From the  Judgment and Order dated the 31st January/1st February 1968  of the  High Court of Judicature at Bombay in Income-Tax Reference No. 5 of 1961.      S. T.  Desai, A.  K. Verma  (Mrs), and J. B. Dadachanji for the Appellant.      B. Sen and S. P. Nayar; for the Respondent.      The Judgment of the Court was delivered by      KHANNA, J.-This  judgment would  dispose of  five civil appeals No. 1062 to 1066 which arise out of references under section 66(1) of the Indian Income-tax Act, 1922 made at the instance of the assessee-appellant.      The assessee-appellant,  Hukam Chand Mills Ltd. Indore, is a  public limited  company. It  owns a  textile  mill  at Indore and  carries on  the business of manufacture and sale of textiles.  These appeals  have a  long  history  and  are concerned with  the  income  of  the  appellant  during  the calendar years 1941, 1942, 1944, 1945 and 1946, the relevant assessment years  for which  were 1942-43, 1943-44, 1945-46, 1946-47 and  1947-48. In  those years  the assessee effected sales of  textiles to  merchants in  the then British India. Question which  arose for  consideration was as to what part of the income arising out of those sale transactions accrued or arose  in British India. As the questions of law involved in each of the appeals were identical, the facts relating to the  assessment   year  1942-43   only   were   taken   into consideration. According  to the  finding of  the Income-tax

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Officer in  that year  the price of the textiles sold by the assessee in  British India aggregated to Rs. 14,80,059. This amount consisted of the following four categories:      (a) Sales in pursuance of business          canvassed by company’s represen          tatives in British India, also          described as item          (3)                                    Rs. 6,46,028      (b) Sales to British Indian merchants          through brokers and agents in British          India, also described as item          (4)                                    Rs. 2,91,891      (c) Sales to British Indian merchants and          brokers during their visit to Indore,          also described as item          (5)                                    Rs. 2,86,224      (d) Sales to British Indian merchants at          the time of their own or their          broker’s visit at Indore, also          described as item          (9)                                    Rs. 2,55,916                                                _____________                             TOTAL              Rs. 14,80,059 Profits from  those sales  were held  at 31.12  per cent  to amount to  Rs. 4,60,560.  Profits attributable to operations carried out  in British  India were  held by  the  Appellate Assistant Commissioner to be one-third of Rs. 4,60,560, i.e. Rs.  1,53,520.   In  doing   so  the   Appellate   Assistant Commissioner acted upon the analogy of rule 33 of the 714 Indian Income-tax  Rules, 1922.  We need  not  set  out  the finding   of    the   Income-tax   Officer.   The   Tribunal substantially   agreed    with   the   Appellate   Assistant Commissioner. At  the instance of the assessee the following two questions were inter alia referred to the High Court:           "(2) Whether on the facts and in the circumstances                of the  applicants’ case,  the  Tribunal  was                right in  holding that in respect of sales of                Rs.  14,80,059/-  the  profit  was  correctly                determined by application of rule 33 and one-                third of  the profits  so determined could be                said to accrue or arise in British India ?           (3)  Whether on the facts and in the circumstances                of the  applicants’ case,  the  Tribunal  was                right in holding that a proportionate part of                the profits determined on sales grouped under                items 3,  4, 5  and 9 in the assessment order                by the  application of rule 33 was assessable                to income-tax?" The High  Court answered  question No.  (3) in favour of the assessee. In  view of  its finding  on question No. (3), the High Court did not answer question No. (2). The Commissioner of Income-tax  then came up in appeal to this Court, and the decision of  this Court is reported in 67 I.T.R. 79 = [1968] (1) S.C.R.  47. This  Court held that the answer to question No. (3)  should be  in the negative as the property in goods passed to  the purchaser  in British India and proportionate part of  the profits of these sales accrued in British India and as  such was  assessable to  Indian income-tax. The case was remitted to the High Court to answer question No. (2) in accordance with  law. On remand the High Court held that the profits were correctly determined by the application of rule 33 and  one-third of the profits so determined could be said to arise or accrue in British India. When the matter came up in appeal  before this  Court, it  was found  that the  High

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Court had  not taken into account the relevant circumstances for answering  question No.  (2).  It  was  also  stated  by counsel for both the parties that rule 33 was not applicable to the  facts of  the case.  This Court accordingly directed the Appellate  Tribunal to  submit a supplementary statement of the  case to  this Court.  Supplementary statement of the case has now been received.      The Tribunal  found that  in respect  of the  sales  in categories (a)  and (b)  amounting to  Rs. 9,37,919,  it was just and  equitable to  apportion 15 per cent of the profits said to  have arisen and accrued in British India. Regarding sales in  categories (c)  and (d)  for a total amount of Rs. 5,42,140, the  Tribunal held  that 7  1/2 per  cent  of  the profits could  be said to have accrued and arisen in British India. As the profits were found to represent 31.12 per cent of the  turnover, the  profits in respect of the turnover of Rs. 9,37,919  comprised  in  categories  (a)  and  (b)  were calculated at  the rate  of 4 1/2 per cent (i.e. 15 per cent of 31.12  per cent).  The profits in British India were thus found to be Rs. 42,200. Profits accuring 715 and arising in British India in respect of sales turnover of Rs. 5,42,140 comprised in categories (c) and (d) at the rate of 2  1/4 per  cent (7  1/2 per cent of 31.12 per cent) were found to  be Rs.  12,200.  The  total  profits  accruing  or arising in  British India  to the  assessee company  in  the assessment year  1942-43 were  thus worked  out  to  be  Rs. 54,400. The  above finding  of the Tribunal has been arrived at on  consideration of  the facts  of the  case. The  modus operandi in  respect of  the sales of various categories was found by the Tribunal to be as under:      "(a) Sales of Rs. 6,46,028           (i)  The assessee’s paid representatives at Bombay                canvassed  the   sales,  on   behalf  of  the                assessee, to merchants in British India.           (ii) The  orders   were  sent  by  British  Indian                merchants to the assessee at Indore.           (iii)The assessee  accepted the  orders at Indore,                prepared the  contracts and  signed  them  at                Indore and forwarded the same to customers in                British India.           (iv) The customers signed the contracts in British                India.           (v)  The contracts were signed on company’s forms.           (vi) The contracts bore British Indian stamps.      (b)  Sales of Rs. 2,91,891           (i)  The brokers  in British  India, described  as                freelance brokers,  transmitted the offers to                the company at Indore.           (ii) The offers  were made  to the  company on the                brokers’ own forms.           (iii)The brokers were not engaged by the assessee-                company and  such orders  were placed  by the                brokers  in   the  normal   course  of  their                business.           (iv) The customers signed the contracts in British                India.      (c)  Sales of Rs. 2,86,224           (i)  These  sales  were  made  to  British  Indian                merchants who went to Indore to negotiate and                place orders.           (ii) The orders were accepted at Indore.           (iii)The contracts bore British Indian stamps.           (iv) The customers signed the contracts in British                India.

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    (d)  Sales of Rs. 2,55,916           (i)  These  sales  were  made  to  British  Indian                merchants on their or their brokers’ personal                visits to Indore. 716           (ii) The offers were taken direct at Indore.           (iii)Contracts for  such sales  were made  in  the                same manner as stated hereinbefore." The  Tribunal   also  gave   a  finding  that  the  assessee maintained an  organisation  in  British  India,  that  that organisation was interested in bringing to the notice of the British Indian  merchants, brokers  and consuming public the goods manufactured  by the  assessee-company  and  that  the ground-work for  sales effected  in these groups was done in British India.      Nothing has  been urged  before us  either on behalf of the  assessee   appellant  or  on  behalf  of  the  revenue- respondent to  assail the  finding of  the Tribunal  in  the supplementary statement  of case.  The question  as to  what proportion of  the profits  of the  sales in categories (a), (b), (c)  and (d)  arose or  accrued  in  British  India  is essentially one  of fact depending upon the circumstances of the case.  In the  absence of  some statutory or other fixed formula, any  finding on the question of proportion involves some element  of guess work. The endeavour can only be to be approximate and there cannot in the very nature of things be great precision  and exactness in the matter. As long as the proportion fixed  by the Tribunal is based upon the relevant material, it should not be disturbed.      We accordingly accept the appeals, discharge the answer given to  question No.  (2) by  the High Court and hold that the profit  which arose  and accrued in British India to the assessee-appellant for  the assessment  year 1942-43 was Rs. 54,400. We  also hold  that it  is  just  and  equitable  to apportion 15  per cent of the profits of sales in categories (a) and  (b) as  accruing or  arising in British India and 7 1/2 per  cent of  the profits of sales in categories (c) and (d) as  accruing or arising in British India. The parties in the circumstances shall bear their own costs. S.R.                                        Appeals allowed. 717