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PETITIONER: COMMISSIONER  OF INCOME-TAX,  BANGALORE

       Vs.

RESPONDENT: THE UNION OF TILE EXPORTS, BANGALORE

DATE OF JUDGMENT: 10/09/1968

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR  299            1969 SCR  (2)  55

ACT: Indian  Income-tax  Act  1922 s.  4(1)(a)-Place  of  accrual of  income-Contracts entered into Bangalore in Part B  State and profits received there-Subsequent operations in  British India  and Ceylon-Concession under Part B States  (Taxation, concessions)   Order,   1950  whether could  be  claimed  in respect  of business activity at Bangalore-Apportionment  of profits under Indian Income-tax Act, 1922 s. 42(3).

HEADNOTE: The  assessee firm carried on business at Bangalore  in  the State  of  Mysore, which at the relevant time was a  Part  B State.   It  was  appointed as the sole  selling  agent  for certain  areas  in  Ceylon in respect of  tiles  and  ridges manufactured  by the principal at  Feroke in British  India. According  to the agreement between the parties  all  prices quoted  by the manufacturer were to be F.O.B.  Beypore  Port situated  in  taxable territory. Chartering and  loading  of vessels  was  done  by one of  the  employees  stationed  at Calicut.    The  bills  of  lading  were  obtained  by   the assessee’s  representative at Beypore and sent to  Bangalore when   the  hundis together with the invoices  and  shipping documents  were  handed over by the assessee to  a  bank  at Bangalore.  Pursuant to the letter of credit opened’ by  the purchaser  in  Ceylon, payments were made by  the  aforesaid bank  to  the assessee.  In income tax proceedings  for  the assessment years 1951-52, 1952-53, and 1953-54 the  assessee claimed  that since its registered office was  in  Bangalore and  as the agency agreement with the purchaser  at  Colombo was  entered  into in Bangalore the entire  come  should  be treated  as income accruing or ’arising in Part B State  and concession  regarding  rates and allowances as  provided  in Part  States  (Taxation Concessions) Order, 1950  should  be allowed to it.  The income tax authorities and the  Tribunal decided  against the assessee. The High Court  however  held that  since  the  profits were received  in  Part  State  at Bangalore,  it  could  not be said that  the  entire  profit accrued or arose within the meaning of el. (a) of sub-s. (1) of  s.  4  of  the  Income-tax  Act,  1922  in  the  taxable territories other than Part B State.  According to the  High Court   the profits arose at Bangalore, Feroke, and  Ceylon,

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of  which  only Feroke was in the taxable  territories,  and therefore, the assessee was entitled to the concession under the  order  in  respect  of  the  profits  that  could    be apportioned  under  s.  42(3) of the  Act  to  the  business operations  conducted in Bangalore and Ceylon.  The  Revenue appealed  to this Court contending that hardly any  activity took place of such a nature as could be said to give rise to accrual of profits at Bangalore.     HELD:  The  conclusion which the High Court  arrived  at must be upheld.     The  making  of  contracts pursuant  to  which  all  the subsequent  activity in respect of the execution  of  those. contracts  took place resulting in profits to  the  assessee was  an integral part of the entire selling operations.  The contracts  in the present case having been  entered into  at Bangalore it could not be said that no part of the  business activity which produced the profits took place there. [53 H] 56

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1769 to 1771 of 1967.     Appeals  from the judgment and order dated December  17, 1963 of the Mysore High Court in I.T.R.C. Nos. 6 of 1959 and 3 of 1960. C.K.  Daphtary, Attorney-General, V.A. Seyid Muhammad,  R.N. Sachthey  and  B.D. Sharma, for the appellant  (in  all  the appeals ).     S.T.  Desai, Bhuvanesh Kumari and Ravinder  Narain,  for the respondent (in all the appeals). The Judgment of the Court was delivered by Grover, J. These appeals are by certificate from the  common judgment of the Mysore High Court on the following questions of  law  which  were referred by the  Income  tax  Appellate Tribunal  under  s.  66(1)  of the  Income  tax  Act,  1922, hereinafter called the Act.                     "(  1  )  Whether,  on  the  facts   and               circumstances of the case, the income  of  the               assessee  did not arise in  Bangalore  (Mysore               State)  in  respect of sales effected  by  the               assessee to the Burma Teak Trading Co.,  Ltd.,               Colombo ?                   (2)  If the answer to. the above  question               is in favour of the assessee, then whether,               on  the facts and circumstances of  the  case,               the  assessee  is entitled to  the  concession               under  Part B States  (Taxation   Concessions)               Order, 1950 ? and                     (3   )   Whether,  on  the   facts   and               circumstances  of the case, the  apportionment               of profits of business is called for  pursuant               to assessee’s trading activities in  Bangalore               (Mysore State) ?"     The  assessee  is  a  firm  carrying  on  business    in Bangalore  in  Mysore State.  It was appointed as  the  sole selling  agent  for Ceylon except Jaffina Peninsula and  the town  of Trincomalee for the purpose of  marketing,  selling or  distributing  Lotus Brand tiles and ridges  manufactured by M/s. Modern Tile & Clay Works of Feroke.     According to. an agreement dated August 10, 1949 between the parties all prices quoted by the manufacturer  were   to Be F.O.B. Beypore Fort and for loading into country  crafts; the  right to charter or engage vessels was to be with   the

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agents.  Beypore is in the taxable territory as also  Feroke where  the  tiles manufacturers carried on  their  business. One of the employees 57 of  the  assessee  stayed at Calicut during  the  season  to supervise  the  operation of delivery of  articles  and  to. engage  vessels.  The bills of lading were obtained  by  the assessee’s  representative at Beypore and sent to  Bangalore where  the  hundis together with the invoices  and  shipping documents  were  handed over by the assessee to  the  Indian Overseas  Bank Ltd., Bangalore.  Pursuant to the  letter  of credit  opened by the Burma Teak Trading Co. Ltd.,  Colombo, which was the purchaser, payments were made by the aforesaid bank  to  the  assessee.  It is  unnecessary  to  state  the details about the profits which the assessee made during the relevant  assessment years 1951-52, 1952-53 & 1953-54.   The assessee  claimed  that since its registered office  was  in Bangalore  and as  the  agency agreement with the  purchaser at Colombo was entered  into  in Bangalore the entire income should  be treated as income accruing or arising in  Part  B State  and  concession regarding  rates  and  allowances  as provided  in  Part B States  (Taxation  Concessions)  Order, 1950,  hereinafter called the "Order", should be allowed  to it.    The  income-tax  authorities as  also  the  Appellate Tribunal  decided  against the assessee.  It was  held  that hardly any activity took place at Bangalore in the matter of earning the profits from the transactions in question.     The  High Court was of the view that since  the  profits were  received in Part B State, namely, Bangalore, it  could not  be said that the entire profit accrued or arose  within the  meaning of cl. (a) of sub-s. (1) of’s. 4 of the Act  in the  taxable  territories other than Part  B  State.   After referring  to s. 42(3) of the Act and certain  decisions  of this  Court  it was observed that  the  business  operations which  produced profits were carried out at three  different places  i.e., Bangalore, Feroke and Ceylon.  Therefore   the portion of these profits must be held to have accrued in all these  places.   The only profits which could be  deemed  to have  accrued in the taxable territories other than  Part  B State  were  those  that could be said to  have  accrued  at Feroke.   The  profits  that  could  be  attributed  to  the business  operations  at  Bangalore could not be  deemed  to have accrued in the taxable territories other than the  Part B  State  nor  could it be said that the  profits  that  had accrued  at  Ceylon could be deemed to have accrued  in  the taxable  territories other than Part B State.   The  answers which were ’returned to the questions were as follows: --                      "(1)  The  profits of the  assessee  in               respect of sales effected by it to Burma  Teak               Trading Co., Colombo did not entirely arise in               Bangalore (then a  Part  B State), it arose in               Bangalore, Feroke and. Ceylon.                         (2) The assessee was entitled to the               concession     under the Order in  respect  of               the profits that could be Sup. CI/69-5 58               attributed   towards    business    operations               conducted in Bangalore and Ceylon.’                       (4)   Apportionment  of   profits   of               business was called               for   pursuant  to  the   assessee’s   trading               profits.     The  sole point which has been raised before us  by  the learned  Attorney General who appears for the  appellant  is

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that  hardly  any activity took place of such  a  nature  as could  be  said  to  give rise  to  accrual  of  profits  in Bangalore.    It   is  pointed  out  that   admittedly   the manufacturing concern from where the tiles had to be sent to Colombo  was in Feroke in British India and that  the  goods were  also  delivered F.O.R., Beypore which was  in  British India.   The assessee’s agent resided in British  India  and supervised all the operations there.     Our  attention has been invited to the findings  of  the tribunal  which inter alia were that the assessee  purchased the   goods at places outside Bangalore and the  sales  were also  effected in Ceylon; the assessee continued  to  retain its  title  to  the goods till they were  delivered  to  the Ceylonese buyers on theft accepting the documents and  bills of exchange forwarded through the Bank in that country.  The sale  operations were carried out in Ceylon and the  profits attributable to those transactions accrued and arose only in Ceylon  which  was  outside the  taxable  territories.   The essential  question,  according  to  the  learned   Attorney General  is, whether any part 0 income accrued or  arose  at Bangalore.   According  to  the  learned  counsel  for   the respondent  it  was  clear  that  the  profits  accrued   at Bangalore where the assessee’s registered office was situate and  where the contracts were entered into by  the  assessee for the sale and purchase of the goods and where moneys were received.  At any rate the profit producing operations could not  be  said to have been confined only to  places  in  the taxable territories because without the contracts no further steps  could be taken in carrying out the  transactions  and the    contracts   indisputably  were   entered    into   at Bangalore.   It  is  urged  that  the  assessee’s   business activity came within the scope and  ambit of paragraph  4(1) (iii)  of  the Order and therefore it was  entitled  to  the concessions  provided  in  paragraphs 6, 6A and  7  of  that Order. Section 42(3) of the Act lays. down that when profits accrue or arise from a business all the operations of  which are  not  carried out within the taxable  territories  those profits must be deemed to have accrued or arisen in  several places  where the business operations were carried  out  and the  total  profits earned will have to  be  apportioned  on reasonable  basis  amongst the several  operations  and  tax should  be levied only on that portion of the profits  which are  deemed  to have accrued or arisen  within  the  taxable territories.       If  it  be held, as indeed it must be held,  that  the making  of  contracts pursuant to which all  the  subsequent activity in respect 59 of the execution of those contracts took place resulting  in profits  to the assessee, is an integral part of the  entire selling  operations,  there  can  be  no  escape  from   the conclusion  at  which the High Court arrived.   The  appeals consequently  fail and they are dismissed with costs.   (one hearing fee). Y.P.                                    Appeals dismissed. 60