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PETITIONER: ANGLO-FRENCH TEXTILE CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS,

DATE OF JUDGMENT: 22/12/1952

BENCH: MAHAJAN, MEHR CHAND BENCH: MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN BOSE, VIVIAN BHAGWATI, NATWARLAL H.

CITATION:  1953 AIR  105            1953 SCR  454  CITATOR INFO :  C          1954 SC 198  (10,10A)  R          1958 SC 269  (14)  R          1958 SC 861  (15)  RF         1965 SC1526  (15)

ACT:  Income-tax Act, 1922, ss. 4 (1) (a), 4A (c) (b), 42 (1)  and  (3)  -Foreign company-Manufacture of goods  outside  British  India -Sale of goods and receipt of sale proceeds in British  India  Assessment under s. 4 (1) (a)-Applicability of s.  42  (1)Determination  of  residence  of  company-Allocation   of  income  between  operations carried on  within  and  outside  British India Whether permissible.

HEADNOTE: The  assessee, a company incorporated in the United  Kingdom and  having  its registered office in  London,  manufactured yarn  and cloth in their,mill at Pondicherry.  The  assessee had  appointed  another company in Madras as  their  agents. The manufactured goods were sold mostly in British India and partly outside British India.  All the contracts in  respect of the sales in British India: were entered into in  British India and deliveries were made and payments were received in British  India.   In regard to sales outside  British  India also, payments were received in Madras 69 524 through  the  agents and it was found as a  fact  that,  the entire profits were received in India: Held,  (i)  that  in view of the finding of  fact  that  the entire  profits were received in India and the assessee  was liable  to tax under s. 4 (1) (a), the provisions of  s.  42 (1) had no relevancy ; (ii)that  the income received in British India could not  be said to wholly arise in British India within the meaning  of s.  4A  (c) (b) and that there should be allocation  of  the income  between  the  various  business  operations  of  the assessee  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

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purposes of s. 4A (c) (b) of the Act. Commissioner  of Income-tax, Bombay v. Ahmedbhai Umarbhai  & Co.  ([1950]  S.C.R. 335), Pondicherry  Railway  Company  v. Commissioner  of  Income-tax, Madras [1931] (58  I.A.  239), Turner Morrison and Co. v. Commissioner of Income-tax [1951] (19 I.T.R. 451 ; [1953] 23 I.T.R. 152), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Appeal No. 1 1 of 1952. Appeal  from the Judgment and Order dated January 18,  1950, of the High Court of Judicature at Madras (Satyanarayana Rao and Viswanatha Sastri JJ.) in Case Referred No. 25 of 1947. O.T.G.  Nambiar (Samarendra Nath Mukherjee, with him  I  for the appellant. M.   C.  Setalvad,  Attorney-General  for India,  and  C.  K Daphtary, Solicitor-General for India (G.  N. Joshi and P.A. Mehta, with them) for the respondent. 1952.  December 22.  The Judgment of the Court was delivered by BHAGWATI J.-This is an appeal from the judgment and order of the High Court of Judicature at Madras upon a reference made by the Income-tax Appellate Tribunal under section 66(1)  of the Indian Incometax Act, 1922.  The appellant company,  the assessee,  is incorporated in the United Kingdom  under  the English  Companies  Act  and has  it  registered  office  in London.  It owns a spinning and weaving mill at  Pondicherry in  French  India  where it  manufactures  yarn  and  cloth. Messrs.  Best and Co. Ltd., Madras, have been appointed 525 the  agents  of the assessee under an agreement  dated,  the 11th July, 1939, and have been invested with full powers  in connection  with the business of the assessee in the  matter of  purchasing  stock, signing bills  and  other  negotiable instruments  and  receipts  and  settling,  compounding   or compromising any claim by or against the assessee.  The yarn and  cotton manufactured in Pondicherry were sold mostly  in British  India  and partly outside British  India.   In  the accounting  year 1941 and 1942 all the contracts in  respect of  the sales in British India were entered into in  British India and the deliveries were made and payments received  in British India.  In regard to the sales outside British India also,  payments  in respect of such sales were  received  in Madras through the said agents. The total sales of the goods in the assessment year  1942-43 were Rs. 69,69,145 and for the assessment year 1943-44  were Rs.  93,48,822.   The value of the sales  in  British  India amounted  to Rs. 57,07,431 for the assessment  year  1942-43 and  to Rs. 67,98,356 for the assessment year 1943-44.   The value  of the total sales outside British India amounted  to Rs. 12,61,714 for the year 1942-43 and Rs. 25,50,472 for the year  1943-44.  Out of the said amounts received in  respect of  the foreign sales the amounts received in British  India were Rs. 9,62,434 for 1942-43 and Rs. 75,230 for 1943-44 and the amounts received outside British India were Rs. 2,99,280 for 1942-43 and Rs. 24,75,242 for 1943-44. On  these  facts  the  Income-tax  Officer  found  that  the assessee was resident in British India within the meaning of section  4-A  (c)  (b) of the Act by reason  of  its  income arising  in British India in the year of  account  exceeding its  income arising without British India and on that  basis he assessed the company for the two assessment years 1942-43 and  1943-44 as - resident in British India on  the  profits and  gains which had accrued to the company both within  and

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without  British India under section 4 (1) (b) (i) and  (ii) of  the  Act.   The  order of  the  Income-tax  Officer  was confirmed  by the Appellate Assistant Commissioner and,  the order 526 of the Appellate Assistant Commissioner was confirmed by the Appellate Tribunal on the 15th May, 1946. The assessee applied to the Appellate Tribunal under section 66 (1) of the Act for reference to the High Court of certain questions   of   law  arising  out  of  its   order.    The, Commissioner  of  Income-tax  in  his  reply  suggested  the following two questions for reference (1)Whether  on  the facts and in the  circumstances  of  the case,  the  Appellate  Tribunal was right  in  holding  that section  42  (1)  and  (3) of  the  Income-tax  Act  has  no application  to income accruing or arising to  the  assessee company  in  British India or to income received  by  it  in British India during the previous year?" " (2) Whether, on the facts and in the circumstances of  the case,  the Appellate Tribunal was right in holding that  the entire income of the assessee company during the  accounting year ended 31st December, 1941, was assessable under section 4(1) of the Incometax Act, and that no portion of such -  in come was entitled to be exempted under section 42(3) of  the Act ? The  Appellate  Tribunal  however  referred  the   following questions to the High Court:- "  (1) Whether on the facts and in the circumstances of  the case,  section  42  (1) and (3) of the  Act  alone  and  not section 4 of the Act have application 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 during the previous year?" " (2) Whether on the facts and in the circumstances of  this case  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 4-A (c)  (b)  or only that part of the profits which  should  be determined  after the application of sectioin 42(3)  of  the Act  as  reasonably  be attributable to  that  part  of  the operations carried on in British India ?" and " (3) Whether on the facts and in the circumstances’ of  the case, the provisions. of the Indian Income-tax                             527 Act  contained  in section 4 (1) with  the  subsections  and section  4-A (c) (b) are not ultra vires in so far  as  they seek  to  assess foreign income of  the  company  registered outside British India ?" The  third question was concluded by the decision  of  their Lordships of the Privy Council in the case of Wallace  Bros. & Co. Ltd. (1) and was therefore not argued before the  High Court  and  the High Court answered it by stating  that  the provisions  of section 4 (1) and section 4-A (c) (b) of  the Act  were  not  ultra vires  the  Indian  Legislature.   The question  No. (1) was further amended by  agreement  between the  learned  counsel  for the  revenue  authority  and  the assessee and it was reframed as under: "  (1) Whether on the facts and in the circumstances of  the case section 42 (1) and (3) of the Act alone and not section 4  of  the Act have application to the  income  accruing  or arising by reason of sales in British India of  manufactured goods  where  the manufacturing process took  place  outside British India?" The  question (2) was retained in the form in which  it  had been  referred  by  the  Appellate  Tribunal.   Both   these

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questions  were  answered against the assessee by  the  High Court.  The assessee obtained the necessary certificate from the  High Court for leave to appeal to this court and  hence this appeal. It  may  be  observed that in reply  to  the.  notice  under sections  22(2)  and 38 of the Act for the  assessment  year 1942-43  the  agents of the assessee had on  the  1st  June, 1943, submitted a return under protest and had claimed  that the  income shown in the return should be apportioned  under section  42(3) of the Act as between the operations  carried on  in  British  India and  operations  carried  on  outside British  India.  They had further declared that the  company was  non-resident in British India during the previous  year for  which the return was made.  In the  statement  enclosed -therewith  the total world income for the year  ended  31st December, 1941, had been shown at Rs. 10,23,907.  Profit  at 10 per cent. on British Indian sales which (1)  (1948) 76 I.A. 86. 528 aggregated  to Rs. 57,07,431 was shown at Rs.  5,70,743  and after  deduction of the proportionate expenses  relating  to sales  in British India and sundry charges was put  down  at the  net  figure  of Rs. 4,58,026 which  was  shown  as  the British  Indian  income.   It was thus  contended  that  the income  arising in British India in the year of account  did not exceed its income arising without British India and that therefore  the assessee was non-resident in  British  India. This  calculation of profits at the rate of 10 per cent.  on British  Indian  sales did not make any  allocation  between manufacturing  profits and merchanting profits and  all  the profits  arising out of British Indian sales were  shown  in one lump sum.  The Income-tax Officer took it as settled law that  the  profits arose in the country in which  the  sales took  place and as the bulk of the sales had taken place  in British  India the bulk of the profits accrued or  arose  in British India.  He held that the provisions of section 42(3) would  apply  only where the profits arose  outside  British India  but which by virtue of section 42(1) were  deemed  to accrue or arise in British India, and that it did not  apply where  the  profits actually arose in British India  by  the sale of goods in British- India.  He therefore held that the entire  profits  on "Sales made in  British  India  actually arose in British India and were liable to tax under  section 4  (1) (c).  On a calculation of the figures he came to  the conclusion  that  the  income of  the  assessee  arising  in British  India  in the accounting year exceeded  its  income arising  without  British India and that  the  assessee  was resident  in  British  India  under  section  4-A(c).    The assessee was also held ordinarily resident in British  India under section 4-B(c) and he assessed the company accordingly on  that basis.  The Appellate Assistant  Commissioner  also proceeded  on  that  basis and confirmed the  order  of  the Income-tax  Officer.  He was however further of the  opinion that  the entire profits were received where the  sale  pro- ceeds  were received and the assessee was therefore.  liable to  tax  under section 4(1)(a) also.   This  conclusion  was arrived  at  by  him relying upon  two  decisions  of  their Lordships of the Privy Council: (1)                             529 Pondicherry  Railway Company V. Commissioner of  Income-tax, Madras(1)  and Commissioner of Income-tax, Madras  v.  Diwan Bahadur  Mathias(2), in the first of which at page 369  Lord Macmillan observed as follows : Their Lordships  accordingly are   of  the  opinion  that  the  income  derived  by   the Pondicherry Railway Company from the payment made to them by

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the  South  Indian Railway Company is on  the  facts  stated received  in British India within the meaning of the Act  by the Agent of the Pondicherry Railway Company there on  their behalf " It is unnecessary to go on to consider whether  the business  is carried on in British India, which is the  form which question (c) takes, for it is enough if the profits of a  business  carried  on by the  assessee  are  received  in British India and the place where the business is carried on is  not  material." The Appellate Tribunal adverted  to  the fact that the whole income of the company, so far as 1942-43 is  concerned  was received in British India and so  far  as 1943-44  is  concerned a major part of it in  this  way  was received in British India, but did not base its decision  on this aspect of the case.  It held that the scope of  section 42(3) was circumscribed by confinement to those cases  where profits  were  deemed to accrue or arise  under  section  42 alone  and there was no warrant for extending the  principle of apportionment to other cases where the profits and  gains were made taxable under other sections of the Act.  It  also held  that section 42 dealt with " deemed "  income  whereas section  4-A  (c) dealt with income that  arose  in  British India.  Therefore, it could not be said that for the purpose of  section 4-A (c) a proportionate "deemed " income  should be  taken as income that arose in British India.   When  the application for reference was made to the Appellate Tribunal the Commissioner of Income-tax in the question (1) which  he suggested  included  within  its ambit this  aspect  of  the income having been received by the assessee in British India during  the previous year.  But when the Appellate  Tribunal refrained the question (1) it merely (1)  (1931) 5 I.T.C. 363- (2)  [1939] 7 I.T.R- 48. 530 confined  it to income accruing and arising to the  assessee in British India and to the income attributable to the  sale proceeds received by it in British India during the previous year.   The  question (1) as finally framed    by  the  High Court  adverted to the income accruing or arising by  reason of  sales  in  British India  on  manufactured  goods  where manufacturing  process took place outside British India  and the  aspect  of  the  income having  been  received  by  the assessee in British India was absolutely ignored. When  the  questions were originally referred  to  the  High Court  the  position  in law as  then  understood  was  that profits arose in the country in which the sales took  place. This  position  was however negatived, particularly  in  the case  of  manufacturing businesses, in a  decision  of  this court.  in Commissioner of Income-tax, Bombay  v.  Ahmedbhai Umarbhai & Co., Bombay(1). After  hearing  at considerable length the  arguments  urged before  us on behalf of the assessee as well as the  Income- tax  authorities we feel that in view of that  decision  the questions  framed by the Tribunal and the High Court do  not bring out the real point in controversy between the  parties and  it  is agreed that the following  two  questions  truly represent  I and bring out the matter on which  the  parties are   at  issue.   We  therefore  resettle   the   questions originally framed and reframe them as below: (1)  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 ? (2)  Can  the income received in India be said to  arise  in India  within the meaning of section 4-A(c)(b) of the Act  ? If  not, should only those profits determined under  section

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42(3) as attributable to the operations carried out in India be  taken  into account for applying the test laid  down  in section 4-A (c) (b) ? (1)  [1950] S.C.R. 335; 18 I.T.R. 472. 531 The  case is remanded to the High Court with  the  direction that it should give its opinion on, these two questions  and submit the case to this court within three months. S. N. Mukherjee, for the appellant. Porus A. Mehta, for the respondent. 1953.   December  8. BHAGWATI J.-By our judgment  dated  the 22nd December, 1952, we reframed the questions as below: (1)  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; (2)  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), and  remanded the case to the High Court with the  direction that it should give its opinion on these two questions.  The High  Court has accordingly considered these  two  questions which  were referred to it for opinion and has answered  the question No. I in the negative and against the assessee  and question  No.  2 in the manner following, i.e.,  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 profit producing operations of the business  of the  company in the light of the principle contained in  the judgments  in  Ahmedbhai Umarbhai’s case(1)  and  in  Anglo- French   Textile  Company  v.   Income-tax   Commissioner(2) relating to the same assessee. When  the matter came up for further arguments before us  on this opinion of the High Court,Shri S.  N.  Mukherjee,   the learned counsel for the appellant (1)  (1950] 18 I.T.R. 472, (2) A.I.R, 1953 SCR 105 70 532 did  not contest the correctness of the answer  to  question No.  I  in  view of the decision of  this  court  in  Turner Morrison  &  Co., Ltd. v. Commissioner  of  Incometax,  West Bengal(1).  It may be noted that even before the High  Court the  learned counsel appearing for both the  parties  agreed that  the matter was concluded by this decision against  the assessee and question No. I was answered accordingly by  the High Court. In regard to the question No. 2 however Shri Porus A. Mehta, learned counsel for the respondent, contended before us that the matter was not concluded by the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai  Umarbhai &  Co., Bombay(1) and that the High Court was wrong  in  the answer  which it gave to this question.  He  contended  that the  decision  in the case of  Commissioner  of  Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay("), turned on the statutory provisions of the Excess Profits Tax Act read with section  42  (3)  of the Indian  Income-tax  Act  which  was expressly  incorporated therein by virtue of section  21  of the Act and not on any general principles of apportion. ment of income, profits or gains enunciated therein.  He took  us in  extensover  the portions of the majority  judgments  and

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tried  to  demonstrate  that the decision  there  was  based purely on the applicability of section 42 (3) of the  Indian Income-tax   Act,  but  for  the  applicability  of   which, according  to  his  submission, there was no  room  for  the apportionment  of  the  income,  profits  or  gains  of  the business,  in the manner contended by the appellant.  We  do not accept this contention of the respondent.  Section 4A(c) (b)  is  concerned with the income arising  in  the  taxable territories  in  a  particular  year  exceeding  the  income arising without the taxable territories in that year and the very words of the section are capable of being construed  as also  contemplating a state of affairs where there may  have to be a division or apportionment between the income arising in  the taxable territories and the income  arising  without the taxable territories (1) [1953] S.C.R. 520. (2) [1950] S.C.R 335. 533 in  the  particular year.  The whole of the  argument  urged before  us  on  behalf  of  the  respondent  was  aimed   at establishing  that the scheme of the Indian  Income-tax  Act was not to tax the source of income but the income,  profits or gains from whatever source derived which were received or were  deemed  to be received in the taxable  territories  or which accrued or arose or were deemed to accrue or arise  in the taxable territories during the particular year and  that it was immaterial whether the income, profits or gains  were derived  from business operations carried on in the  taxable territories  or  without  the  taxable  territories.    This argument  was  possible when the decisions which  held  that income,  profits  or gains arose or accrued  at  the  places where the sales took place were good law, because then there was no question of apportionment of income, profits or gains arising  from  the  business operations carried  on  in  the taxable  territories ’and income, profits or  gains  arising from the business operations carried on without the  taxable territories.  The moment however it was held, as it was done in Commissioner of Income-tax, Bombay v. Ahmedbhai  Umarbhai &  Co., Bombay(1), that though profits may not  be  realised until  a  manufactured  article was sold  profits  were  not wholly  made  by  the act of sale and  did  not  necessarily accrue  at the place of sale and to the extent profits  were attributable to the manufacturing operations profits accrued at  the  place where business operations  were  carried  on, these  decisions went by the board.  The question whether  a particular  part  of the income, profits or gains  arose  or accrued  within  the  taxable  territories  or  without  the taxable  territories would have to be decided having  regard to the general principles as to where the income, profits or gains  could be said to arise or accrue.  Section 42 of  the Indian Income-tax Act has no relevance to the  determination of this question because it is mainly concerned with  income Which  is  deemed to have arisen, or accrued  and  not  with income which actually arises or. accrues within the  taxable Territories.   Section 42 (3) also is a part of the’  scheme which is enacted in section 42 and cannot help (1)  (1950)S.C.R. 335. 534 in  the determination of the question before us As a  matter of  fact the use of the words "under section 42(3)" used  in the question No. 2 as reframed by us was not appropriate and the  only question which should have been sent to  the  High Court  was "If not, should only those profits determined  as attributable to the operations carried out in India be taken into  account for applying the test laid down in section  4A

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(c) (b)." If,  therefore,  section 42(3) has nothing to  do  with  the determination   of  the  income  arising  in   the   taxable territories as distinguished from the income arising without the  taxable territories as understood in section 4A(c)  (b) of the Act what we have got to consider is whether there  is anything  in the Act which prevents the application  of  the general  principle  of apportionment of income,  profits  or gains   between  those  which  are  derived  from   business operations  carried  on within the taxable  territories  and those which are derived from business operations carried  on without  the taxable territories.  The contention which  was advanced by Shri Porus A. Mehta on behalf of the respondents in  this behalf, viz., that the word ,arise " was  the  only word  used in section 4A (c) (b) and the word  "accrue"  did not  find  any place therein, that there was  a  distinction between  the  conception of arising and  the  conception  of accrual  and  that  the  apportionment  of  the  income  was appropriate  only  in cases where the income arose  and  was inappropriate  in  cases  where  the  income  accrued,   was sufficiently  repelled  in the judgment in  Commissioner  of Income-tax,  Bombay v. Ahmedbhai Umarbhai &.Co.,  Bombay(1), where  it  was  observed:  "  Whether the words ’derive’ and ’Produce’ are or are  not synonymous  with the words’accrue’ or arise it can  be  said without  hesitation  that  the words ’accrue’  or  "  arise’ though  not defined in the Act are certainly synonymous  and are used in the sense of ’bridging, in as a natural result’. Strictly speaking, the word ’accrue’ is not synonymous  with ’arise’, the former connoting idea of growth or accumulation and the (1)  [1950] S.C.R. 335 at p. 364.                             535 latter  of the growth or accumulation with a tangible  shape so  as  to  be receivable.  There is a  distinction  in  the dictionary  meaning of these words, but throughout  the  Act they seem to denote the same idea or ideas very similar  and the   difference  only  lies  in  this  that  one  is   more appropriate when applied to a particular case.  In the  case of  a composite business, i.e., in the case of a person  who is  carrying  on  a  number  of  businesses,  it  is  always difficult  to  decide  as to the place  of  the  accrual  of profits  and  their apportionment inter se.   For  instance, where  a  person carries on manufacture,  sale,  export  and import,  it is not possible to say that the place where  the profits  accrue  to him is the place of sale.   The  profits received  relate firstly to his business as a  manufacturer, secondly  to  his  trading operations, and  thirdly  to  his business  of  import and export.  Profit or loss has  to  be apportioned  between  these  businesses  in  a  businesslike manner  and  according  to  well-established  principles  of accountancy.  In such cases 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  and  the profits  in  respect of the import and export  business  are said to arise at the place where the business is  conducted. This apportionment of profits between a number of businesses which are carried on by the same person at different  places determines a so the place of the accrual of profits." The phraseology of section 42(3) of the Act’also repels  the contention  in  so  far  as the profits  and  gains  of  the business which are referred to therein and which are capable

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of  apportionment as therein mentioned are deemed to  accrue or  arise  in the taxable territories thus using  the  words "accrue" and "arise" as synonymous with each other. The  above  passage  is also sufficient in  our  opinion  to establish that the apportionment of income, or gains between those arising from business opinion 536 carried on in the taxable territories and those arising from business   operations   carried  on  without   the   taxable territories  is  based not on the applicability  of  section 42(3) of the Act but on general principles of  apportionment of  income, profits or gains.  That was really the ratio  of the judgment of the majority in Commissioner of  Income-tax, Bombay  v.  Ahmedbhai  Umarbhai & Co.,  Bombay(1),  and  any attempt  to distinguish that ’ease from the present  one  by having  resort  to the statutory provisions  of  the  Excess Profits Tax Act is really futile.  We are accordingly of the opinion  that  the  answer given by the High  Court  to  the question No. 2 also was correct. The  appeal  before us will accordingly be allowed  and  the answers  to the questions Nos. 1 and 2 refrained by us  will be as under:- Question No. 1-In the negative; and 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. In  so  far as the appellant has failed in one part  of  the case and succeeded in another part we think that the  proper order for cost should be that each party bears and pays  his own costs of this appeal including ,the costs of the  remand before the High Court. Appeal allowed. Agent for the appellant: P. K.. Mukherjee. Agent for the respondent: G. H. Rajadhyaksha. 537