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PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: AHMEDBHAI UMARBHAI & CO., BOMBAY.

DATE OF JUDGMENT: 04/05/1950

BENCH: KANIA, HIRALAL J. (CJ) BENCH: KANIA, HIRALAL J. (CJ) FAZAL ALI, SAIYID SASTRI, M. PATANJALI MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN MUKHERJEA, B.K.

CITATION:  1950 AIR  134            1950 SCR  335  CITATOR INFO :  F          1953 SC 105  (6A)  F          1954 SC 155  (13)  RF         1954 SC 198  (10)  R          1954 SC 470  (33)  R          1955 SC 661  (152)  E&D        1957 SC  49  (37,38)  R          1959 SC 586  (7)  R          1960 SC1162  (10)  RF         1963 SC 577  (24)  OPN        1967 SC1626  (10)  RF         1972 SC 151  (4)  F          1977 SC 560  (7)  R          1979 SC 289  (24)  D          1987 SC2140  (18)

ACT:     Excess Profits Tax Act (XV of 1940), s. 5, Third  Provi- so-Indian  Income-tax  Act (XI of 1922),  s.42  (3)--Article manufactured   outside   British  India--Sale   in   British India--Whether  whole  profits accrue or  arise  in  British India--Liability to excess profits tax-Manufacturing  opera- tions, whether "part of business "-- Apportionment of  prof- its between place of manufacture and place of sate-permissi- bility--Applicability of s. 42 (3).

HEADNOTE:     Section 5 of the Excess Profits Tax Act, 1940,  provided that  "the  Act shall apply to every business of  which  any part  of the profits made during the  chargeable  accounting period  was  chargeable to income-tax."  There  was  also  a proviso  to the effect that "the Act shall not apply to  any business, the whole of the profits of which accrued or arose in an Indian State and that where the profits of a part of a business  accrued  or arose in an Indian  State,  such  part shall  for the purpose of this provision be deemed to  be  a separate business, the whole of the profits of which accrued or  arose  in  an Indian State, and the other  part  of  the business shall be deemed to be a separate business."

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   A  firm which was resident in British India and  carried on the business of manufacturing and selling groundnut  oil, owned  some  oil mills within British India and  a  mill  in Raichur  in  the Hyderabad State where oil was manufactured. The  oil manufactured in Raichur was sold partly within  the State of Hyderabad and partly in Bombay:     Held, by the Full Court (KANIA C. J., PATANJALI  SASTRI, FAZL  ALI,  MEHR CHAND MAHAJAN, MUKHERJEA and  DAS  JJ.)-The expression "part of a business" in the proviso to section  5 does  not necessarily mean a separate composite unit of  all the  constituent  activities of the business or  a  complete cross-section of the entire business operations but is  wide enough  to mean one or more of the operations of  the  busi- ness,  and that the manufacturing operations which the  firm carried  on at Raichur were "a part of the business" of  the assessees within the meaning of the proviso.to section 5  of the Act.     Held also per KANIA C.J., FAZL ALI, MEHR CHAND  MAHAJAN, MUKHERJEA and DAS JJ.--that the profits of that part of  the business,  namely,  the manufacture of oil at  the  mill  in Raichur  accrued or arose in Raichur within the  meaning  of the said proviso, even though the manufactured oil was  sold in Bombay and the price was received there, and accordingly, that part of the profits derived from sales in Bombay  which was  attributable to the manufacture of the oil  in  Raichur was  exempt  from excess profits tax under  the  proviso  to section 5 of the Act. 42--A 336     Per  PATANJALI SASTRI J.--The first part of  sub-section (1)  of section 42 of the Income-tax Act was  applicable  to the  assessees,  the  expressions  "business  connection  in British  India"  and "asset or source of income  in  British India" being wide enough to cover their selling organisation at  Bombay; and as a result, the profits received in  Bombay from  the sale of the oil manufactured in Raichur had to  be apportioned under sub-section (3) of section 42 between  the two  operations of manufacture and sale, and only such  por- tion  of  the  profits as was attributable to  the  sale  in Bombay should be deemed to have accrued or arisen in British India.  It  followed  as a corollary that the  rest  of  the profits  attributable to the manufacture at Raichur must  be regarded  as accruing or arising in the Hyderabad State  and was therefore exempt under the proviso to s. 5 of the Act.     Quaere: Whether it is in consonance with business  prin- ciples or practice in the absence of any statutory  require- ment  to that effect to cut business operations  arbitrarily into  two or more portions and to apportion as between  them the profits resulting from one continuous process ending  in a sale and whether Kirk’s case is applicable to  assessments under  the Indian Acts as laying down any general  principle of apportionment.     Per MAHAJAN J.--Though profits may not be realised until manufactured article is sold, profits are not wholly made by the  act of sale and do not necessarily accrue at the  place of  sale and to the extent profits are attributable  to  the manufacturing operations, profits accrue at the place  where the operations are carried on.     Per  MUKHERJEA J.--Where raw material is worked up  into it  new  product  by process of  manufacture,  it  obviously increases  in value and this  increase in  value  represents the income or profit which is the result of the manufacture, and  as this profit accrues by reason of the manufacture  it cannot  but be located at the place where the  manufacturing process is gone through.  It is immaterial that the manufac-

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tured  goods  are sold later on at various  places.  If  the manufacturer  is  himself the seller, it might  be  that  he receives  the entire profits including that of the  manufac- ture  only at the time of sale; but in an inchoate  shape  a portion of the profits does accrue at the p]ace of  manufac- ture,  the exact amount of which is only  ascertained  after the  sale takes place.  Fox purposes of computation the  two parts  of the business may be conceived of as being  carried on by two different sets of persons.

JUDGMENT: APPEAL [Civil Appeal No. LXVIII of 1949] from a Judgment  of the High Court of Bombay dated 18th -March ]948 (Chagla C.J. and  Tendolkar J.) in a Reference under the  Excess  Profits Tax Act, 1940.     M.C. Setalvad, Attorney-General for India, (B. Sen  with him) for the appellant.     K.M. Munshi (S. K. Aiyar and N. K. Gamadia with him) for the respondents.     1950.  May 4.  The Court delivered the  following  Judg- ments :-- 337     KANIA  C.J.--This  is an appeal from a decision  of  the High Court of Judicature at Bombay upon a reference made  by the Income-tax Appellate Tribunal, Bombay, under section  66 (1)of  the Indian Income-tax Act.  The respondent firm,  the assessees, carried on business of manufacturing and  dealing in  oil during the relevant accounting periods. They  are  a registered  firm under the Income-tax Act and are  residents in  Bombay.  They own three mills at Bombay and one at  Rai- chur for manufacturing oil from groundnuts. The oil produced at  Raichur is sold partly at Raichur and partly in  Bombay. Their liability to pay income-tax in respect of their  whole profits  is  not  disputed under the  Income-tax  Act.   The question  is in respect of their liability under the  Excess Profits  Tax  Act for the oil manufactured at  Raichur,  but sold in Bombay.     The  assessees  contend that 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. The taxing authorities  rejected the  contention of the assessees.  The  Income-tax  Tribunal agreed  with them. On a reference the High  Court  disagreed with  the view of the Tribunal and held that the  assessees’ contention  was correct. The Commissioner of Income-tax  has come  in appeal from that decision.  In the  Excess  Profits Tax Act, section 2 (5) defines "business" as follows     "’Business’  includes  any  trade,’ commerce or manufac- ture  or any adventure in the nature of trade,  commerce  or manufacture  ......     Provided  further that all businesses to which this  Act applies  carried on by the same person shall be  treated  as one business for the purposes of this Act." Section 5 of the Act runs as follows :--     "5. This Act shall apply to every business of which  any part  of the profits made during the  chargeable  accounting period  is chargeable to income-tax by virtue of the  provi- sions of sub-clause (i) or sub-clause (ii) of clause (b)  of sub-section  (1) of section 4 of the Indian Income-tax  Act, 1922, or of clause (c) of that subsection:     Provided  that this Act shall not apply to any  business the whole of-the profits of which accrue or

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338 arise  without British India where such business is  carried on  by  or  on behalf of a person who is  resident  but  not ordinarily resident in British India unless the business  is controlled in India:      Provided further that where the profits of a part  only of a business carried on by a person who is not resident  in British India or not ordinarily so resident accrue or  arise in  British India or are deemed under the Indian  Income-tax Act,  1922,  so to accrue or arise, then  except  where  the business being the business of a person who is resident  but not  ordinarily resident in British India is  controlled  in India,  this Act shall apply only to such part of the  busi- ness,  and such part shall for all the purposes of this  Act be deemed to be a separate business:     Provided  further that this Act shall not apply  to  any business  the whole of the profits of which accrue or  arise in  an  Indian State; and where the profits of a part  of  a business  accrue  or  arise in an Indian  State,  such  part shall, for the purposes of this provision, be deemed to be a separate  business the whole of the profits of which  accrue or  arise  in  an Indian State, and the other  part  of  the business  shall for all the purposes of this Act, be  deemed to be a separate business."     Section 21 of the Act, which was not referred to in  the course of the arguments before us, runs as follows :--     "21. The ’provisions of sections 4-A, 4-B, 10, 13, 24-B, 29, 36 to 44-C (inclusive), 45 to 48 (inclusive), 49-E,  49- F,  50, 54, 61 to 63 (inclusive), 65 to 67-A (inclusive)  of the  Indian  Income-tax Act, 1929,, shall  apply  with  such modifications,  if any, as may be prescribed as if the  said provisions  were  provisions  of this Act  and  referred  to excess  profits  tax  instead of to  income-tax,  and  every officer  exercising  powers under the  said   provisions  in regard to income-tax may exercise the like powers under this Act  in  regard to excess profits tax in  respect  of  cases assigned  to  him under sub-section (3)of section  3  as  he exercises in relation to income-tax under the said Act:     Provided  that references in the said provisions to  the assessee  shall  be construed as references to a  person  to whose business this Act applies." 339     The  relevant  portion  of  section  42  of  the  Indian Income-tax Act is in these terms :--     "42. (1) All income, profits or gains accruing or  aris- ing,  whether  directly or indirectly, through or  from  any business  connection  in British  India, or  through or from any property  in British India, or through or from any asset or source of income in British India, or through or from any money  lent  at interest and brought into British  India  in cash  or in kind, shall be deemed to be income  accruing  or arising within British India, and where the person  entitled to  the income, profits or gains is not resident in  British India, shall be chargeable to income-tax either in his  name or in the name of his agent  ....     (2) Where a person not resident or not ordinarily  resi- dent  in  British India, carries on business with  a  person resident in British India, and it appears to the  Income-tax Officer  that  owing to the close  connection  between  such persons  the  course  of business is so  arranged  that  the business  done  by the resident person with the  person  not resident or not ordinarily resident produces to the resident either  no profits or less than the ordinary  profits  which might  be  expected to arise in that business,  the  profits derived therefrom or which may reasonably be deemed to  have

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been   derived therefrom, shall be chargeable to  income-tax in  the name of the resident person who shall be  deemed  to be,  for all the purposes of this Act, the assessee  in  re- spect of such income-tax.     (3)  In the case of a business of which all  the  opera- tions 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  opera- tions. carried out in British India."     On behalf  of  the   appellant  it  was  contended  that in  order to get exemption. from the Excess Profits Tax  Act the  assessee has to show that his case  is covered by  sec- tion  5 proviso 3. It was argued on behalf of the  appellant that in the 43 340 present  case  the  business of the  assessee  consisted  of manufacturing  and  selling  oil and unless  each  of  those operations took place at Raichur "a part of the business" of the  assessee was not at Raichur in the Hyderabad State  and therefore  he was not entitled to the exemption  claimed  by him.  It waS secondly contended that even assuming that this was  not correct the profits of that part of  the  business, which  was  carried on at Raichur, did not accrue  or  arise in’the Hyderabad State because the profits arose the sale of the  oil in Bombay and therefore the  assessee’s  contention was incorrect.  Proviso 3 to section 5 of the Excess Profits Tax Act requiring the assessee to fulfil three conditions to secure  the exemption.  They are (1) there should be a  part of  a  business;  (2) that part in an Indian  State;  and  3 profits in respect of which exemption is  claimed  must  accure or arise from that that part  of  the business. The appellant’s contention is that the part of the business  must  be a complete unit or as  described  on  his behalf  a  complete cross section of the  business.   It  is argued  that   inasmuch as the sale of the oil  in  question took place in Bombay the cross section composed of  manufac- ture and sale did not take place at Raichur if the Hyderabad State  and therefore the assessee’s contention must fail  In my  opinion  this contention is unsound. The  definition  of business  in  the Excess Profits Tax Act  clearly  envisages manufacture  as a business by itself.  It is  not  necessary that  a  manufacturer must be a trader in the  commodity  he manufactures.  Similarly because he is a manufacturer and  a trader it does not follow that the two activities necessari- ly  become  one indissoluble business of which  the  profits cannot  be separately ascertained. Because a man is a  manu- facturer, a trader and even an exporter it is not correct to say  that unless all the three activities take  place  in:an Indian State he is not entitled to the benefit of the provi- so  because  a  part of his business is not  in  the  Indian State.   The argument of the appellant is that there  should not  be  only a separate composite unit  of  the  assessee’s business  in an Indian State but that each operation  making up  the  assessee’s business must take place  in  an  Indian State. I find no 341 justification for putting such construction on  proviso 3 to section 5,- No authority is cited to support such  interpre- tation  of the proviso.  It is not contended in the  present case that the activities  of the assessee as a  manufacturer are so spread out as to be incapable of being ascertained as one                   unit of business in an ’Indian  State. for instance                       difficulties may arise if

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a  manufacturer buys groundnuts               in one  place, has a crushing mill in another                         place has  a  refinery in the third place and packing  etc.  in  a fourth           place.   It is not disputed here  that  the assesse’s               activities as a manufacturer are all in Raichur                       if so, that set of  activi- ties under the defination of                    "  business" in   the   Excess   Profits   Tax   Act   is   a    complete unit.   I  have no doubt that on the facts  of  the  present case   the   manufacturing  operations   of   the   assessee are  "a  part  of his business in and  Indian  State.  Those conditions of the proviso are therefore fulfilled.     On  behalf of the the appellant it was pointed out  that under section 42"(3) of the Indian Income-tax Act the legis- lature  had made a provision for allocation of  profits  in- spect  of different operations of a business, but there  was no  such corresponding provision in the Excess  Profits  Tax Act.  This  contention overlooks section 21  of  the  Excess Profits  Fax  ’Act which expressly  makes,  amongst  others; section  42  (3) a part of the Excess Profits  Tax  Act  for assessing the profits of an assessee. If, therefore; profits can  be  allocated to the manufacture of oil in  Raichur  it seems to me clear that the manufacturing activity will be  a part of the assessee’s business in an Indian State.    The next contention of the appellant was that even if  a part  of  the business. was in an Indian State  the  profits accrued  or arose only on the sale of the oil in Bombay  and no part of the profits of manufacture therefore arose in  an Indian State.  In my opinion this argument is also  unsound. On the sale of goods the assessee receives money.  While the receipt  of  the price is thus in Bombay it is  an  entirely different  thing to say that therefore the whole profits  of the  manufacture  and sale arose in Bombay.   This  argument overlooks the distinction between accruing or arising on the one 342 hand  and  receipt  on the other.  Again,  the  question  of profits has to be determined not on receipt of the price  of each  lot  sold by the assessee but the result  of  all  the operations  in connection with the manufacture and  sale  of oil  during the accounting year.  An individual  transaction may  result  in profit but that will not make  the  assessee liable if the result of his accounting year’s activities  is a loss.  It is therefore improper in a case of this kind  to consider  the sale of oil as the deciding factor  either  to ascertain  profits or to determine the place of the  accrual of  profits.   Several cases were cited at the  Bar  dealing with a trader’s business where he bought and sold goods.  In my opinion those are not relevant to determine the  question before  us because in the present case the business is of  a different  nature.  In The Commissioner of Taxation v.  Kirk (1),  Lord  Davey distinguished Sulley  v.  Attorney-General ("’)  and  Grainger & Son v. Gough (3) on this  ground.  The place of sale was not considered the test when the  business was  of manufacturing and sale.  Similarly cases which  deal with the liability of the assessee under the Indian  Income- tax  Act  because the profits were received  (and  not  only accrued or arose) in India are also  unhelpful.  The  Judges of  the High Court strongly  relied on The  Commissioner  of Taxation v. Kirk (’)  for their conclusion in favour of  the assessee. It was a case of mining operations where the mines were in one colony and the sale of the ore in another. Under the  Taxing  Act in that case, it was observed that  it  was wholly immaterial whether the person to be taxed resided  in the  colony or not. Nor was it material whether  the  income

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was received in the colony or not, if it was earned  outside the  colony.  The Board attached no importance  to:the  word "derived"  which was treated as synonymous with  arising  or accruing.  The real question was :what income was arising or accruing  to  the’  assessee from  the  business  operations carried  on  by’ him in the colony.  This was  considered  a question of fact.  Under the New South Wales Act the liabil- ity to tax has to be decided on the existence of the  source of the income in the particular colony and [1900] A.C. 588.  (2) [1860] 5 H. & N; 711.  (3) I18961 A.C. 325. 343 to that extent the liability to tax is based on a  different basis.   While  accepting  this distinction,  I  am  however unable  to accept the contention that the source  of  income can  never be the place where the income accrues or  arises. In my opinion there is nothing to prevent income accruing or arising  at the place of the source. The question where  the income  accrued  has to be determined on the facts  of  each case.  The  income may accrue or arise at the place  of  the source  or  may accrue or arise elsewhere, but it  does  not follow  that the income cannot accrue or arise at the  place where  the  source  exists.  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  asses- see  to  be exempted from taxation in the present  case.  On behalf  of  the respondents our attention was drawn  to  the International Harvester Company of Canada v. The  Provincial Tax Commissioner (1).  In that case the question was of  the liability  to tax of a resident outside the province  of  S, under the Incometax Act of S, in respect of profits  arising from  the sale in that province of  agricultural  implements which  were  manufactured outside the  province.  Under  the relevant  Act  the  tax was leviable on  a  person  residing outside  S  who  was carrying on business in S  on  the  net profit  or gain arising from the business of such person  in S.  The  Board held that although the profits were  all  re- ceived  in S, where the goods were sold, the profits  liable to  taxation  were  only the net profits  arising  from  the business in S and therefore the manufacturing profits should be excluded from the assessment.  They referred to  sections 23  and  24 of the Taxing Act, under  which  a  non-resident person was charged to tax on an apportioned part of  profit, which although it might be received outside the province  of S  could fairly be regarded as having been partially  earned inside that province.  In my opinion that case substantially helps  the contention of the respondents and  negatives  the appellant’s contention.  It shows that when the  manufactur- ing portion of the activity of the assessee is in (1) [1919] A,C. 36. 344 one province and the sale is in another province, the  whole profits  are not necessarily considered as arising from  the sale or at the place of sale although they may be treated as received  on sale of the products. Secondly, it  shows  that profits  could be apportioned between the manufacturing  and trading  activities, particularly when the assessee  carried on the business of a manufacturer and trader together.  This decision  was  sought to be distinguished by  the  Attorney- General on the ground that sections 23 and 24 of the  Taxing Act of that colony made it a completely different scheme  of taxation.   I do not think that is a good point of  distinc- tion,  because proviso 2 to section 5 of the  Indian  Excess Profits  Tax Act, read with section 21, prescribes   also  a

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scheme in respect of a non-resident although not in the same details or with the same results under the Indian Act.   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.  I am  also 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.  In  my opinion, 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, in my opinion, the conclusion of the High  Court  is  correct and the appeal  is  dismissed  with costs.     FAZL ALl J.--1 agree fully with the judgment of  Mahajan J. PATANJALI SASTRI J.--This is an appeal from ajudgment of the High  Court of.’ Judicature at Bombay upon a reference  made by the Income-tax Appellate 345 ’Tribunal,  Bombay’,  under  section 66 (1)  of  the  Indian Income-tax  Act,  1922, read with section 21 of  the  Excess Profits Tax Act, 1940.      The  respondent  firm (hereinafter referred to  as  the "assessees ") are carrying on the business of  manufacturing and dealing in oil at Raichur in the Hyderabad State and  at Bombay  which, during the relevant period, was part of  what was then known as British India.  The assessees are resident in Bombay and are registered for income-tax purposes,  under section  26-A of the Income-tax Act, under the name  of  Ah- medbhai Umarbhai & Co., while their branch at Raichur is run under  the  name of Ahmed & Sons.  They own three  mills  at Bombay and one at Raichur for manufacturing oil from ground- nuts, and they sell the oil partly at Raichur and partly  at Bombay.   For  the chargeable accounting  period  commencing from  31st October, 1940, and ending on 20th October,  1941, the  assessees were assessed to excess profits tax in a  sum of  Rs. 1,61,807 on their business income of  Rs.  6,08,761, including  a  sum  of Rs. 2,49,615 which was  said  to  have accrued  or arisen from sales in Bombay of oil  manufactured at  Raichur.  Part of such oil was also sold at Raichur, but the  profits derived from such sales were not  included   in the   assessment,  and no question now arises in  regard  to such  profits.   For the succeeding period  commencing  from 21st October, 1941, and ending on 8th November, 1942, a  tax of  Rs.  2,55,485-1-0 computed on the same basis,  was  also imposed  on the assessees.  The assessees contended  that  a part  of the profits derived from sales in British India  of the  oil  manufactured at Raichur was  attributable  to  the manufacturing  operations at Raichur which are an  essential part  of their business, and that such profits must  be  ex- cluded  from  the  assessment, under the  third  proviso  to section  5 of the Excess Profits Tax Act, as having  accrued or  arisen in the Hyderabad State.  The contention  was  re- jected and the whole of the profits arising out of the sales in British India of the oil produced in Raichur were includ- ed in the assessments. After  unsuccessful  appeals to the Appellate- 346 Assistant  Commissioner, Bombay, the assessees  carried  the

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matter  to  the Income-tax Appellate Tribunal,  Bombay,  but with  no better result.  The assessees thereupon applied  to the  Tribunal requiring them to draw up a statement  of  the case  and refer it to the High Court at Bombay for  decision of the question of law involved, and the Tribunal according- ly  stated  the case and referred  the  following  question: "Whether on the facts stated above income accruing or  aris- ing to the assessees on sales made in British India of goods manufactured in Raichur situated  outside British India  has been  rightly  held by the Tribunal as  income  accruing  or arising  in British India and was liable to  excess  profits tax."  In the letter of reference they indicated their  view on  the question referred by stating that the   manufactured article  received  or  brought into British  India  did  not include any income, profits or gains, and that such  profits and  gains,  having accrued only after the  sale  had  taken place, accrued or arose in British India.     The reference was heard by Chagla C.J. and Tendolkar  J. and  they  were  of opinion that the question as  framed  by the  Tribunal "did not reallybring out the  controversy  be- tween  the parties."  The learned Judges, after stating  the facts of the   case, framed the question thus:  "Whether  on the        facts stated above the profits of a part  of  the business  of  the assessees accrued or arose  in  an  Indian State."   The question as reframed is also open  to  similar criticism,  for, it assumes that the manufacture of  oil  at Raichur is "a part of the business" of the assessees, where- as  the Commissioner of Income-tax has been  seriously  con- testing  that position as the judgment under  appeal  itself shows.     Excess  profits tax is a charge on the  profits  arising out of a business in excess of its normal or standard  prof- its,  a business being regarded as the unit  of  assessment. "Business" is defined in section 2 (5) of the Excess Profits Tax Act as including, among other things, "manufacture," and a  proviso to the clause says that "all businesses to  which this Act applies 347 carried  out  by  the same person shall be  treated  as  one business for the purposes of this Act."  Section 4  provides for  the charge of tax in respect of any business  to  which the  Act applies on the amount by which the  profits  during any  chargeable accounting period exceed the standard  prof- its.   Section  5, on the true interpretation of  which  the question for determination in this appeal turns, runs thus:     "5. This Act shall apply to every business of which  any part  of the profits made during the  chargeable  accounting period  is chargeable to income-tax by virtue of the  provi- sions of sub-clause (i) or sub-clause (ii) of clause (b)  of sub-section  (1) of section 4 of the Indian Income-tax  Act, 1922, or of clause (c) of that sub-section:     Provided  that this Act shall not apply to any  business the  whole of the profits of which accrue or  arise  without British  India  where such business is carried on by  or  on behalf of a person who is resident but not ordinarily  resi- dent  in British India unless the business is controlled  in British India:     Provided  further that where the profits of a part  only of a business carried on by a person who is not resident  in British India or not ordinarily so resident accrue or  arise in  British India or are deemed under the Indian  Income-tax Act,  1922,  so to accrue or arise, then, except  where  the business, being the business of a person who is resident but not  ordinarily resident in British India is  controlled  in India,  this Act shall apply only to such part of the  busi-

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ness, and such part shall, for all the purposes of this Act, be deemed to be a separate business:     Provided  further that this Act shall not apply  to  any business  the whole of the profits of which accrue or  arise in  an  Indian  State, and where the profits of  a  part  of business  accrue  or  arise in an Indian  State,  such  part shall, for, the purposes of this provision, be deemed to  be a separate business the whole of the profits of which accrue or  arise  in  an Indian State, and the other  part  of  the business shall, for all the purposes of this Act, be  deemed to be a separate business." 44 348     As  the assessees are resident in British India and  the profits of their business in the Hyderabad State made during the  relevant periods were charged to income-tax under  sec- tion 4 (1 ) (b) (ii) of the Incometax Act, that business was brought  under charge to excess profits tax by section 5  of the  Excess Profits Tax Act, and the duty would be  leviable on the profits  of  the said  business  unless   proviso (3) excluded  the  application of the Act to that  business,  in which  case the proviso to section 2 (5) which  operates  to consolidate  only those businesses to which the Act  applies would also not take effect.  It appears to have been conced- ed  by the taxing authority that no excess profits  tax  was leviable  on the profits derived from the sales in the  Hyd- erabad  State as they were profits of a part of  the  asses- sees’ business accruing or arising in an Indian State and as such were exempted under proviso (3) to section 5, for these profits,  as already stated, were not subjected to  tax  for the  two chargeable accounting periods in question.  But  it was  contended on their behalf by the Attorney-General  that the proviso had no such operation in respect of the  profits made by sales of the oil in British India, and that for  two reasons:  Firstly,  because  the  manufacturing   operations carried  on  in  the Hyderabad State did  not  constitute  a "part"  of the assessees business within the meaning of  the proviso,  and,  secondly, because even  if  such  operations could  be  regarded as a part of the business,  the  profits derived  from  the sales of the oil in Bombay could  not  be said  to have accrued or arisen in that State.   Both  these propositions were held to be untenable by the learned Judges of the High Court and were contested before us by Mr. Munshi on behalf of the assessees.     On the first point, the Attorney-General insisted that a "part"  of a business meant a fraction of the  aggregate  of all the constituent activities of the business or, as it has been  put  during  the argument, a  "cross-section"  of  the entire  business  operations, and not one or  more  of  such operations,  however  essential for the  production  of  the resulting profits. It is difficult to see how this construc- tion will assist the 349 taxing authority in the present case, for, as already  stat- ed,  the assessees were selling at Raichur, part of the  oil manufactured  there,  and  there was thus at  that  place  a complete  cross-section of their business which consists  of manufacturing  and selling oil.  Apart from this  considera- tion,  I  can find nothing in the context of  section  5  to exclude  the ordinary meaning of the words "part of a  busi- ness"  and to compel the somewhat  strained  and  artificial interpretation  sought to be put upon them which, it may  be observed in passing, seems inconsistent with the view  which left untaxed the profits derived from the sales at  Raichur. Furthermore, section 5 is to be read with the provisions  of

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section 42 of the Indian  Income-tax Act which has been made applicable,  with certain modifications not  material  here, to excess  profits  tax  by  section 21 of the Excess  Prof- its Tax Act "as if the said provisions  were  provisions  of this  Act  and refer to excess  profits tax  instead  of  to income-tax."  That section has, in my opinion, an  important bearing  on the issues involved in this appeal and  deserves careful  consideration.  So far as material  here  it  reads thus:     "42.   (1)  All  income, profits or  gains  accruing  or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property  in British India, or through or from any asset  or source  of  income in British India or through or  from  any money  lent  at interest and brought into British  India  in cash  or in kind, shall be deemed to be income  accruing  or arising within British India, and where the person  entitled to  the income, profits or gains is not resident in  British India, shall be chargeable to income-tax either in his  name or  in  the name of his agent, and in the latter  case  such agent  shall be deemed to be, for all tile purposes of  this Act, the assessee in respect of such income-tax.     Provided  that where the person entitled to the  income, profits  or  gains  is not resident in  British  India,  the income-tax so chargeable may be recovered by deduction under any of the provisions of section 18  ......     (3)  In the case of a business of which all  the  opera- tions are not carried out in British India, the 350 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."     It  will be seen that these provisions,  read  together, ’lay  down  a  rule of apportionment  for  ascertaining  the profits  of a business part only of whose "operations"  "are carried  out in British India where such part could  be  re- garded as either "a business connection in British India" or "a  source of income in British India."  They  also  provide machinery  for facilitating collection of the tax  from  the resident agent where the person entitled to such income is a non-resident. Now, these provisions are obviously complemen- tary to section 5 proviso (2) of the Excess Profits Tax Act, and  unless we read "part of a business" in that proviso  as meaning one or more "operations" of the business referred to in sub-section (3) of section 42, the machinery provided  in the  latter section for collection of the tax leviable on  a non-resident  person  by virtue of proviso (2) will  not  be applicable, and the scheme of charge and collection in  such cases will be rendered incoherent. A harmonious  interpreta- tion of the scheme requires that the words "part of a  busi- ness" in’  proviso (2) must be taken to signify one or  more of  the  operations of the business, and, if  so,  the  same expression  used  in  proviso (3), with which  we  are  here concerned, must also have the same connotation.  It  follows that the manufacture of oil in the mill at Raichur is a part of the assessees’ business.     The  question  next arises whether the  profits  derived from  such manufacture, other than those arising from  sales at  Raichur  which are    not now in  question,  accrued  or arose  in Raichur, so  as to bring the case  within  proviso (3).   It  is clear  that the oil  manufactured  at  Raichur cannot  itself  be   regarded as income,  profits  or  gains within  the  meaning  of the Indian Income-tax  Act  or  the Excess  Profits  Tax Act any more than the green  coffee  in

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Mathias case(1) which the Privy Council held could not be so regarded. (1) I.L.R. [1939] Mad. 178. 351 The  oil is manufactured for purposes of sale in order  that profits  may be earned, and such profits are  realised  only when the commodity is sold and not before. But, as-the  test of  non-liability under proviso (3) is the accruing  or  the arising  of the profits in an Indian State, the question  is whether  the profits, when they do arise from the  sales  at Bombay of the product of the mill at Raichur, arose in whole or in part at Raichur ?  As pointed out by the Privy Council in Chunilal Mehta’s case(1), the words "profits accruing  or arising  in" (a country) require a place to be  assigned  as that at which the trading operations come, whether gradually or  suddenly,  into  existence, and they  involve  a  notion difficult  to  apply to particular transactions.  The  words "ac.. crue or arise," too, have been variously  interpreted, and no conclusive or clear test of when or where income  can be said to accrue has been formulated in the decided  cases. The learned Judges in the Court below solved the problem  by invoking  what  they conceived to be the  general  principle underlying  the  decision in Kirk’s case  ("),  namely,  the principle  of apportioning profits as between the  different processes  employed in producing those profits and the  dif- ferent  places where they are employed. The  learned  Judges disagreed  with  the view of the Calcutta High Court  in  Re Mohanpura Tea Co. (3)  that the profits accrue or arise only when  the  goods are sold and at the place  where  they  are sold, and that the decision in Kirk’s case (2) laid down  no principle  of general application but proceeded on the  lan- guage of an Australian statute. The question in Kirk’s  case (2)  related  to the assessment of the profits of  a  mining company  which  extracted ore and converted it into  a  mer- chantable  product  in one colony and sold  it  in  another. Under  the relevant statute, tax was leviable in respect  of income  "arising or accruing  from  any..................... trade........................     carried   on"    in    the colony   or "derived from lands,"  or  "arising or  accruing from  any  kind  of  property...................   or   from any  other  source whatsoever," in the colony,  but  no  tax was payable in respect of income "earned" outside the     I.L.R.  [2938] Bom. 752.               (2)  [1900]  A.C. 588. (3) [1937] I.L.R. 2 C,aI, 201. 352 colony.  The Board held that the profits, having  been  pro- duced by the combined operations of extraction,  manufacture and  sale,  were assessable to tax in the colony  either  as derived from land by reason of the extraction or as "arising "trade,"  certainly from or accruirng, " if not from  a  the manufacture   in   the   colon     and     by   reason    of were  therefore "earned" in the colony, though the   profits were  received outside the colony.   While it may well be  a "fallacy," while in applying a taxing statute which  directs attention  to the situation of the source of income  as  the test  of chargeability, to ignore the initial stages in  the production  of the income and fasten attention on  the  last stage when it is realised in money, it may be open to  ques- tion  whether it is in ’consonance with business  principles or practice, in the absence of any statutory requirement  to that effect, to cut business operations arbitrarily into two or  more  portions and to apportion, as  between  them,  the profits  resulting from one continuous process ending  in  a sale.   It  appears, however, unnecessary,  in  the  present case,  to  consider  the applicability of  the  decision  in

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Kirk’s case(1) to  assessments arising under the Indian  Act which  makes the place at which the profits accrue or  arise the test of liability or non-liability, as the case may  be, as  I  am of opinion that section 42 of the  Income-tax  Act which,  as  already  stated, has been  incorporated  in  the Excess  Profits  Tax Act, is applicable here  and  sanctions such apportionment. It  is noteworthy that the first part of sub-section (1)  of section  42 providing that certain classes of income are  to be  deemed to accrue or arise in British India is  not  con- fined in its application to non-residents ,but is in general terms  so  as to be applicable to both  residents  and  non- residents.   Before  its amendment in 1939  the  sub-section began with the words "in the case of any person residing out of British India" which obviously restricted the application of the provision to non-resident persons, but in its amended form the subsection has been recast into two distinct parts, the first of which is not so restricted, and the second part (1) 1900] A.C. 588. 353 alone,  which begins with the words "and where,  the  person entitled to the income, profits and gains is not resident in British India,"  is made applicable to non-resident persons, thereby  showing that the former part applies to both  resi- dents  and  non-residents.  The opening words of  the  first proviso  also point to the same conclusion, for these  words would  be surplusage if the sub-section as a  whole  applied only  to non-residents. A contrary view has, no doubt,  been expressed  by a Division Bench of the Bombay High  Court  in Commissioner  of Income-tax v. Western India Life  Insurance Co. Ltd. (i). Though reference was made in that ,case to the alteration in the structure of sub-section (1) its  signifi- cance, as it seems to me was not properly appreciated.   The facts that the marginal note to the, whole section refers to "non-residents" and that the section itself finds a place in Chapter  V headed "Liability in Special Cases"  were  relied upon as supporting the view that sub-section (1) as a  whole applies only to non-residents.  As pointed out by the  Privy Council  in  Balraj Kunwar v.  Jagatpal  Singh(2),  marginal notes  in  an Indian statute, as in an Act  ,of  Parliament, cannot  be  referred to for the purpose  of  construing  the statute,  and it may be mentioned in this  ,connection  that the  marginal note relied on has since been replaced by  the words  "Income  deemed  to accrue or  arise  within  British India,"  which makes it clear that the main object  of  sub- section  (1) was to define that expression [see  section  12 (a) of Act XXII of 1947]. Nor can the title be a chapter  be legitimately  used to restrict the plain terms of an  enact- ment. I am therefore of opinion that the first part of  sub- section (1) is applicable to the assessees, the  expressions "business connection in British India" and "asset or  source of income in British India" being wide enough to cover their selling  organisation  at Bombay.  The result  is  that  the profits received at Bombay from the sale of the oil manufac- tured  at Raichur have to be apportioned  under  sub-section (3) between the two operations of manufacture and sale,  and only  such  portion  of the profits as  is  reasonably  ,at- tributable to the sale should (1) [1945] 13 I.T.R. 405.             (2) I.L.R. 26 All. 393 at 40G. 354 be  deemed  to accrue or arise in British  India.   It  must follow,  as a corollary, that the rest of the  profits,  at- tributable to the manufacture at Raichur, must be.  regarded as  accruing or arising in the Hyderabad  State.   Therefore

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proviso  (3)  to section 5 of the Excess.  Profits  Tax  Act becomes applicable to the case and exempts the manufacturing part  of the assessees’ business from the operation  of  the Act.     On behalf of the respondent, Mr. Munshi called attention to  certain  observations of the Privy Council  in  Chunilal Mehta’s case(1) as supporting his contention that,  although all  the operations of a business must be  completed  before profit  is received, the accrual of the profits begins  with the  first  operation and continues  cumulatively  till  the goods are finally sold, and that, therefore, the  expression "accruing  or arising in" a place must be applied  distribu- tively to the different operations and the places where such operations are carried out.  The observations relied on  are as follows: "But the legislature has chosen a different test and  applied it to all kinds of profits accruing or  arising in  British  India.  It may even have chosen  it  as  fairer because it can be applied distributively to the profits of a single  source" (p. 765), and again, "no doubt if it can  be held  that  under  the Indian Act profit in the  case  of  a business  must  be taken so strictly that it is  not  to  be understood  distributively at all the profit of  the  asses- see’s  business would become an ultimate and  single  figure irreducible  and referable only to Bombay, but such  a  high doctrine  cannot  be read into the  Indian  statute  without violence  not only to its language but to its  scheme:"  (p. 767).   These passages may, at first sight, appear  to  lend some support to Mr. Munshi’s thesis.  But on closer examina- tion  in their context they do not, in my  opinion,  warrant any such general theory.  Their Lordships were dealing  with a  case  where  the assessee, resident  in  Bombay,  derived profits from speculative contracts for purchase and sale  of commodities  carried out through brokers in various  foreign markets such as Liverpool,  London and New York.  The asses- see- (1) I.L.R. [1938] Bom. 752.    355 contended that he was not liable to pay Indian income-tax in respect of such profits, which were not received in  British India, on the ground-that they were not profits accruing  or arising  in British India, and their Lordships  upheld  that contention.  It is with  reference  to   such   transactions which  individually contributed to the  surplus  arising  in the various places abroad, that their Lordships spoke p,  of the profits  accruing  or  arising distributively and not in a  single place. That-they were not thinking of the  profits resulting  from  a single composite process such as manufac- ture and sale, and their disintegration and apportionment as between  the different operations is shown by their  further observation that "profits are frequently, if not ordinarily, regarded  as arising’ from many transactions each  of  which has a result not as if the profits need to be  disintegrated with  difficulty  but as if they were an  aggregate  of  the particular results:" (p. 767).     Reference was also made to a recent decision of the same Tribunal  in  International Harvester Co. of Canada  v.  The Provincial  Tax  Commission(1 ). The case arose out  of  the assessment  of the profits of a non-resident to  income-tax, under a provincial Income-tax Act in respect of the  profits arising from the sale within the  province  of  goods  manu- factured  outside  the province.   The tax was leviable,  in the  case  of a non-resident person, on the "net  profit  or gain  arising from  the  business of such  person   in"  the province.   Their Lordships held that, although the  profits sought  to  be assessed were all received  in  the  province

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where  the  goods were sold, as the  profits  brought  under charge  under the Act was only the net profit  arising  from the  business  in the province,  the  manufacturing  profits should  be  excluded from the  assessment.  Their  Lordships referred  to other provisions of the Act which, in the  con- verse  case,  sought to charge a proportionate part  of  any profit  derived  from  sale outside the  province  of  goods produced in the province as being "earned" within the  prov- ince, and inferred from those provisions that the  intention of the legislature in the (I) [1949] A.C. 36. 356 charging  section was to bring within the ambit of  taxation only  an apportioned part of the profit.   Such a  construc- tion, they thought, would ’ ’result in a fair and reasonable scheme  of  taxation in accordance with  that  comity  which naturally  prevails  between  one  province  and   another." Referring  to Kirk’s case(1) their Lordships remarked  "that although the sections under consideration in Kirk’s case (1) differed :in their language from the provisions which  their Lordships were considering’, the reasoning which appears  in the  judgment  in that case was helpful to  the  appellants’ contention  in  the  present case."  This  was,  presumably, because  chargeability  in both cases depended not   on  the income  accruing  or  arising in the country,  but,  on  the source of the income being in the country. The decision  was based  on  the  language of the statute and  the  scheme  of taxation  disclosed  thereby,  and what I  have  said  about Kirk’s case(1) equally applies to it.  The other cases cited by Mr. Munshi do not call for any special notice. I  agree  with  the conclusion reached by  the  High  Court, though  on  different grounds, and dismiss the  appeal  with costs.     MAHAJAN  J.--This  is an appeal by the  Commissioner  of Income-tax,  Bombay  City, from the judgment   of  the  High Court  of  Judicature at Bombay upon a  case stated  by  the Income-tax  Appellate  Tribunal  under   the  provisions  of section  66 (1) of the Indian Income- tax Act, 1922, and  it raises  a question as to the  liability of  the  respondent, Messrs. Ahmedbhai Umar bhai & Co., for excess profits tax.     Excess  profits  tax is levied under section  4  of  the Excess  Profits  Tax Act, XV of 1940, "in  respect  of   any business  to which the Act applies on the amount   by  which the profit during any chargeable accounting  period  exceeds the standard profits........   "  The respondent is a regis- tered  firm  resident in British India and  owns  three  oil mills  in  Bombay and one oil mill in Raichur  in  Hyderabad State and the question to be decided in the appeal is wheth- er  the profits which were received or realized by  the  re- spondent on the sale of (1) [1900] A.c. 588. 357 manufactured in Raichur and sold in British India are liable to excess profits tax.     By  an order dated 27th March, 1944, the Excess  Profits Tax Officer,  Circle III, Bombay, assessed the respondent to excess  profits  tax in the sum of Rs.  1,61,807   for   the chargeable  accounting period commencing from 31st  October, 1940 and ending on 20th October, 1941 on the business income of Rs. 6,08,761, which included a sum of Rs. 2,49,615, being profits  accruing or arising in British India in respect  of the  respondent’s branch at Raichur in Hyderabad  State  and run  in the name of Messrs. Ahmed & Sons.  By another  order dated 28th March, 1944 the same officer assessed the firm to excess  profits  tax in a sum of Rs.  2,55,485-1-0  for  the

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chargeable  accounting period commencing from 21st  October, 1941 and ending on 8th November, 1942 On the business income of  Rs. 7,46,561,  which  included a sum of   Rs.  2,34,785, being  the profits accruing or arising in British  India  in respect  of the Raichur branch. Both the  assessment  orders were appealed against to the Appellate Assistant Commission- er but without any success.  The Incometax Appellate  Tribu- nal  on appeal drew up a statement of case and referred  the following question of law to the High Court :--     "Whether on the facts as stated above income accruing or arising  to the assessee on sales made in British  India  of goods manufactured in Raichur situated outside British India has been rightly held by the Tribunal as income accruing and arising  in British India and was liable to  excess  profits tax ?"     The   High  Court re-framed  the  question   as  follows :--     "Whether on the facts as stated above profits of a  part of  the  business  of the assessee accrued or  arose  in  an Indian State"     and  answered it in the affirmative.  It held  that  the activity  which the respondent carried on at Raichur  was  a part of its business within the meaning of the third proviso to  section  5 of the Excess Profits Tax Act  and  that  the profits  of  a part of the business accrued or arose  in  an Indian State and that 358 the said profits were not assessable to excess profits  tax. This  order  of  the High Court is being  contested  in  the present appeal and it has been urged that as regards the oil manufactured in Raichur but sold in British India, no  prof- its  accrued or arose in the Indian State, but  the  profits accrued or arose in British India and are subject to  excess profits tax.  It was further contended that the construction put by the High Court on the third proviso to section 5  and on  the phrase "part of a business" is erroneous and is  not justified on the language of the proviso and the context. It was  suggested  that in order to constitute "a part  of  the business"  within the meaning of that proviso it must  be  a complete cross-section of the whole business and not  merely one or more of the operations of that business.     Section  5 of the Act on the true construction of  which depends the decision of the appeal is in these terms :--     "This  Act  shall apply to every business of  which  any part  of the profits made during the  chargeable  accounting period is chargeable -to income-tax by virtue of the  provi- sions of sub-clause (i) or sUb-clause (ii) of clause (b)  of sub-section  (1) of section 4 of the Indian Income-tax  Act, or  of clause (c) of that  sub-section     In  other  words, the Act brings within  its  ambit  all income  in  the case of a person resident in  British  India which  accrues  or arises or which is deemed  to  accrue  or arise to him in British India during the accounting year, as also  all  income  which accrues or arises  to  him  without British  India during such year; and if such person  is  not resident in British India during that year, then all  income which  accrues or arises or is deemed to accrue or arise  in British  India  during such year.’ If section 5 of  the  Act stopped  short  at that stage, it is undoubted that  in  the case  of the respondent who is a resident in  British  India all  his  income, no matter where it arose,  within  British India  or  without  British India, would  be  chargeable  to excess profits tax just in the same way as it is  chargeable to income-tax under the Indian Income-tax Act. The whole  of his income arising

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359 in Raichur has legitimately been taxed under that Act.     Section  5  however has three provisos which  limit  its scope and take certain incomes outside its ambit. The  first proviso is to the following effect:     "Provided that this Act shall not apply to any  business the  whole of the profits of which accrue or  arise  without British  India  where such business is carried on by  or  on behalf of a person who is resident but not ordinarily  resi- dent  in British India unless the business is controlled  in British India."     This  exception  has  no bearing to  the  facts  of  the present case.  The second proviso is in these terms :--     "Provided further that where the profits of a part  only of a business carried on by a person who is not resident  in British India or not ordinarily so resident accrue or  arise in  British India or are deemed under the Indian  Income-tax Act,  1922,  so to accrue or arise, then, except  where  the business being the business of a person who is resident  but not  ordinarily resident in British India is  controlled  in India,  this Act shall apply only to such part of the  busi- ness, and such part shall for all the purposes of this  Act’ be deemed to be a separate business."     This  proviso  also concerns a person  not  resident  in British India and does not touch the present case. It howev- er furnishes a clue to the meaning of the following  proviso inasmuch as it attracts the application of section 42 of the Indian  Income-tax  Act to the case of  a  non-resident  and contemplates  the apportionment of income between part of  a business  controlled  in  British India and a  part  not  so controlled.  Sub-section (3)of section 42 of the  Income-tax Act enacts 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."     Under the second proviso by reason of the application of section  42 (3) of the Income-tax Act, if the  manufacturing business of the assessee was in British 360 India  and all his sales took place in Raichur, then  excess profits  tax  could only be chargeable on  such  profits  as would really be attributable to his manufacturing operations in  British India and the manufacturing operations would  be treated  as part of the business of the assessee  under  the proviso.   It is the third proviso to which the  controversy in  the case is limited and this proviso is in  these  terms :--     "Provided further that this Act shall not  apply to  any business  the whole of the profits of which accrue or  arise in  an  Indian  State, and where the profits of  a  part  of business  accrue  or  arise in an Indian  State,  such  part shall, for the purposes of this provision, be deemed to be a separate  business the whole of the profits of which  accrue or  arise  in  an Indian State, and the other  part  of  the business shall, for all the purposes of this Act, be  deemed to be a separate business.     We  have firstly to determine the meaning of  the  words "part  of  a  business "in this proviso; does  it  mean,  as argued on behalf of the Commissioner, that the business must be  a complete cross-section of the whole business  and  not merely  one or more of the operations of that business,  or, does  it mean, as contended by the learned counsel  for  the

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respondent,  a continued and severable business activity  of which the profits could be apportioned or ascertained  sepa- rately.  Secondly,  we are called upon to determine at  what place do the profits accrue or arise in respect of the  part of  such business.  Do they arise at the place where in  the case  of a manufacturer his goods are sold, or can  they  be said to accrue or arise at the place of manufacture ?     The  word  "business"  has been defined by  the  Act  in section 2 (5) as follows :--     "’Business’ includes any trade, commerce or  manufacture or any adventure in the nature of trade, commerce or   manu- facture or  any profession or vocation....  "     It  means  any  continued activity  of  a  person  which yields profits and which is in the nature of trade, commerce or manufacture.  It may even be any adventure in the  nature of trade, commerce  or 361 manufacture.  A proviso was added to this definition in  the year 1940 in these terms :--     "Provided further that all businesses to which this  Act applies  carried on by the same person shall be  treated  as one business for the purposes of this Act."     The  effect of the proviso is that if a man is  carrying on  a number of activities, whether of the same or  of  dif- ferent natures, all these various businesses are treated  as one.   The  same person, if engaged in  the  manufacture  of hardware,  oils, textiles, motor tyres, bicycles and  owning mills  for  his diverse activities in different  places  and also trading in merchandise and doing contract business,  is deemed  to carry on a single business.  All  the  businesses that  he carries on are lumped together and treated  as  one business for the purpose of levying the tax and  calculating the  profits.  The proviso has made an amalgam  of  all  the businesses  of  one  individual and it is in  view  of  this amalgam that proviso 3 of section 5 has to be considered. It seems to me that what has been amalgamated by the definition has again been made separate by the proviso to section 5. If a  number of businesses carried Ion by a person are  situate in  different places, then the  effect of the proviso is  to again treat them as separate business under the  description of  the phrase "part of a business."  In other words,  if  a man is carrying on manufacture in textiles in Bombay, a shop at Mysore, has a distillery in Allahabad and has an oil mill in Gwalior, then for the purpose of section 5 all these four trades are part of the business within the meaning of provi- so 3 to section 5,  one part situate in one place and anoth- er  part situate at another place and if any of these  parts produce profits at the place of the  business,  that   place being   in an Indian State, then  proviso  (3)  would   have application.  I  think that the effect of  the  language  of proviso (2) of section 5 is to give colour to proviso (3) as being  complementary to it and providing for converse  cases to  those  arising under this proviso  concerning  non-resi- dents. Illustratively it may be said that proviso (2)  would cover the case if the manufacturing business of the 362 respondent  was situate in  Bombay and his  sales exclusive- ly were made at Raichur provided he was a non-resident.   In that event excess profits duty would be chargeable on a part of  the profits attributable to the part of the business  in Bombay, or in other words, to those business operations that were  being carried on in Bombay.  The converse  case  where the manufacturing operations are being carried on in Raichur by a resident in India and the sales are made exclusively in Bombay  is apparently covered by proviso (3) because a  part

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of the business being situate in Raichur profits  attributa- ble  to  that  part of the business out of  the  total  sale proceeds could only be said to accrue at the place of  manu- facture.     The  present assessee has three mills in  British  India and a mill at Raichur. He has also a sales depot at  Bombay. In his case but for the proviso to the definition of  "busi- ness"  it could be said that he was carrying on  five  busi- nesses,  three  of manufacture of oil in India  and  one  of manufacture  of  oil in Hyderabad and a  fifth  business  as trader  at Bombay.  By reason of the proviso to the  defini- tion,  all these businesses become a single  business.   But for  the purposes of provisos (2) and (3) of section  5  all these  are  part  of a business and have to  be  treated  as separate businesses. The theory of cross-section of a  busi- ness  contended by the appellant is not  very  intelligible. It was contended that if a man is a manufacturer as well  as a seller of goods and also an importer of goods, then in his case the term "part of a business" means the carrying on  of all the three activities together and that unless he carries on  all the three activities, it cannot constitute "part  of business"  under the proviso. This contention to my mind  is untenable. The only construction which in the context of the Act can be reasonably placed on the proviso to section 5 and on  the  words  "part of a business" is  the  one  suggested above.  I am therefore of the opinion that-the learned Chief Justice was right when he held that the activities which the assesseecarried  on at Raichur are certainly a part  of  the business  of the assessee.  Mr. Justice Tendolkar  on  this, part of the case observed as follows :-- 363     "The  normal  meaning  of the word is a  ’portion  ’  in whatever way carved out and I have no doubt in ray mind that any  of the operations that go towards a  complete  business are a part of that business.     The contention of the Advocate-Genera]. becomes the more untenable when one looks at the second proviso to section  2 (5) of the Excess Profits Tax     Now, under this proviso you may have several  businesses of  a  totally different character carried on  by  the  same person and they all together constitute one business for the purposes of the Excess Profits Tax Act, if the contention of the Advocate-General is right, even if one of these  differ- ent businesses in the ordinary sense of the term was  wholly carried out in a Native State, it would still not be a  part of the whole business in the sense of being a  cross-section of all the businesses which together constitute one business under  the  Excess  Profits Tax Act.  I  am,  therefore,  of Opinion that the manufacture of oil was part of the business of the assessee firm."     I  am in complete agreement with the observations  cited above.     The next question for consideration is whether that part of  the business situate in Hyderabad gives any profits,  in other words, whether any profits of the manufacturing  busi- ness  of the assessee at Hyderabad accrue or arise  in  that State.     On behalf of the Commissioner it was contended that  the place  where comminissioner it was arise is  not  Ordinarily the  place  where the source that produces  the  profits  is situate and that the High Court had erred in taking the view that in respect of sales of oil in British India produced by the  mill  at Raichur any profits accrued at  the  place  of manufacture.   It was said that profits in such a case  only accrue at the place of sale and not at the place of manufac-

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ture.  I am unable to accede to this contention.  It is true that  no profits are realized until the oil is sold but  the act  of sale merely fixes the time and place of  receipt  of profits, profits are not wholly made by the act of sale  and do not necessarily accrue at the place of sale. :364 A.Act  of sale is the culminating process in the earning  of profits  but  it goes without saying that the  act  of  sale could  not  be performed unless the goods were  produced  at Raichur  and it would be wrong from a business point to  say that  all the profits resulted from that operation.  It  was the  operation  of manufacture at Raichur that  enabled  the assessee  to sell oil and some portion of the  profits  must necessarily  be attributable to the  manufacturing  process. To  the  extent  that the profits are  attributable  to  the manufacture  of  oil  it is not possible to  say  that  they accrue or arise at any place different from the place  where the manufactured article came into existence.     It  was not denied that the business of  manufacture  at Raichur may produce profits or it may even earn profits  and it  was conceded that it may also be said that  profits  are derived from that process of manufacture but it was  strenu- ously  argued that earning of profits is not the same  thing as  the accrual of profits and no profits could be  said  to accrue  or arise at a place where the profits may well  have been  earned  or produced and that the place of  accrual  of profits  must necessarily be the place where the  sale  pro- ceeds  are received or realized.  On behalf of the  assessee it  was urged that the words   "derived,"    "earn,"    "ac- crue"  or "arise" are synonymous and it is immaterial  which word  is  used indicating the result of  the  activities  of various  business operations.  The totality of profits  that accrues to a business or is earned by it may be ascribed  to a  number  of operations; though it is  ascertained  at  the place  where the produce is sold, it accrues where   it   is earned.  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  synony- mous and are used in the sense of "bringing in as a  natural result."   Strictly speaking, the word "accrue" is not  syn- onymous with "arise," the former connoting idea of growth or accumulation  and the latter of the growth  or  accumulation with  a tangible shape so as to be receivable.  There  is  a distinction in the dictionary 365 meaning of these words, but throughout the Act they seem  to denote  the same idea or ideas very similar and the  differ- ence  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  manufac- ture,  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  busi- ness 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  prin- ciples  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

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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  con- ducted.   This apportionment of profits between a number  of businesses  which are carried on by the same person at  dif- ferent  places determines also the place of the  accrual  of profits.   To  hold that though a businessman  has  invested millions in establishing a business of manufacture,  whether in  the nature of a textile mill or in the nature  of  steel works,  yet no profits are attributable to this business  or can  accrue or arise to the business of manufacture  because the  produce of his mills is sold at a different  place  and that it is only the act of sale by which profits accrue  and they  arise  only at that place is to confuse  the  idea  of receipt  of income and realization of profits with the  idea of  the accrual of profits.  The act of sale is the mode  of realizing  the  profits.  If the goods are sold to  a  third person  at  the mill premises no one could  have  said  that these profits arose merely by reason of 366 the sale.  Profits would only be ascribed to the business of manufacture  and would arise at the mill  premises.   Merely because the mill owner has started another business  organi- zation in the nature of a sales depot or a shop, that cannot wholly  deprive the business of manufacture of its  profits, though  there  may have to be apportionment in such  a  case between  the business of manufacture and business  of  shop- keeping. In a number of cases such apportionment is made and is  also  suggested by the provisions of section 42  of  the Indian  Income-tax  Act, reference to which ,has  also  been made  in proviso (2) of section 5 of the Excess Profits  Tax Act.     In  Commissioners of Inland Revenue v. Maxse (1),  Maxse purchased  a  monthly magazine for 1,500 and  was  the  sole proprietor, editor and publisher thereof. The earnings  were derived from sales of the magazine, from advertisements  and from reprints of articles mostly written by him.  Before the war  Maxse  wrote a large part of each number,  and,  though some of the matter was contributed by others, the sales were largely due to the popularity of his own writings. When  war broke  out, he increased his personal contributions and  did most  of the writing.  At that time he required  practically no capital.  Having been assessed to excess profits duty for the  year  ending May 31, 1915, he appealed to  the  General Income Tax Commissioners and contended that the profits were earned  by reason of his personal qualifications,  that  the capital expenditure was small in comparison with the person- al qualifications required to earn the profits, and that  he was exempt from duty by virtue of para (c) of section 39  of the  Finance  (No. 2) Act, 1915. The  General  Commissioners having  discharged  the assessment, their decision  was  re- versed  by  Sankey L who held that Maxse was carrying  on  a commercial business and not a profession within para (c) and therefore  he was liable to duty.  The Court of appeal  held that  Maxse was carrying on the profession of a  journalist, author or man of letters, and also the business of  publish- ing his own periodical.  The publishing (1) [1919] 1 K.B. 647.    367 business should be debited with a fair and reasonable allow- ance  in respect of Maxse’s contributions, and a proper  sum for his remuneration as editor, and on that footing he would be  liable  to duty in respect of his  business  but  exempt therefrom in respect of his profession.   This is a case  of

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a  combination of a profession with a business.   Under  the law  no excess profits duty could be levied on  his  profes- sional  income  but his business income was liable  to  such duty and the duty was so levied by making the apportionment. The  rule  laid  down in this case, though  it  has  special reference to the scheme of the English statute,  can   appo- sitely   be  laid  down  for  the apportionment  of  profits qua  parts of a business of an assessee.    A  similar  view was  expressed  by  a Bench of the Calcutta  High  Court  in Killing  Valley  Tea Company v. The Secretary of  State  for India(1). There the question arose whether the income from a tea garden where tea was grown and made ready for the market by mechanical process, was assessable.  It was held that the income  was to be apportioned and so much of it as  was  ob- tained  by  the manufacturing process was  assessable.   The principle  of  Maxse’s case and of other English  cases  was applied to the facts of that particular case. In cases where a  person  is  carrying on composite  businesses  which  for purposes  of section 5 are regarded as one business and  for purposes  of the proviso as several parts of a business,  it may  be said that there are two stages in the production  of the net profit, (1) the manufacture of the article, and  (2) the  sale  of the article and that part of  the  net  profit should  be attributed to each stage, the part-attributed  to the earlier stage being described as a manufacturing profit. Reference  in  this connection may be made to  the  case  of International Harvester Co. of Canada Ltd. v. Provincial Tax Commission(2).   In that case it was argued that when  money was received by the appellant in Saskatchewan as a result of a  sale in Saskatchewan the whole of the net profit  on  the sale arose from the business of the appellant in  Saskatche- wan, and no apportionment was necessary.  This contention (1) I.L.R. 48 Cal. 161.                (2) A.I.R. 1949  P.O. 72. 368 was  described by their Lordships as fallacious and  untena- ble.    Their Lordships quoted with approval  the  following observations  from the minority judgment of Sir  Lyman  Duff C.J.  The quotation is in these terms :--     "Nowhere  does the statute authorise the  Province  Sas- katchewan  to tax a manufacturing company, situated  as  the appellant company is, in respect of the whole of the profits received  by  the company in Saskatchewan.  It  is  not  the profits received in Saskatchewan that are taxable, it is the profits  arising from its business in Saskatchewan  not  the profits arising from the company’s manufacturing business in Ontario  and from the company’s operations  in  Saskatchewan taken  together, but the profits arising from the  company’s operations in Saskatchewan."     The  question in the present case in whether in  respect of  the  manufacturing business of the assessee  in  Raichur profits accure or arise and if so, at what place. My  answer unhesitatingly  is that the manufacturing profits  arise  at the  place of manufacture.   They could arise nowhere  else. The  sale profits arise at the place of sale and  apportion- ment  has  to be made between the two, though the  place  of receipts  and realization of the profits is the place  where the sales. are made. The manufacturing profits could not  be said to have. accrued or arisen at that place because  there was nothing done from  which  they could accrue or arise  as natural  accrual or as an increase. The increase  only  took place  at  the  place of manufacture and if  there  was  any accrual  over the production cost, that accrual was  at  the place of the production itself.  Mr.  Setalvad for the Commissioner placed reliance on  a

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number  of  cases, inter alia, The Board of Revenue  v.  The Madras  Export Company (1), Jiwan Das v. Income-tax  Commis- sioner, Lahore (2), 1n rePort Said Salt Association  Limited (s),  and Sudalaimani Nadar v. Income-tax Commissioner  (4). All these cases fall in one category.  These are cases where raw materials   (1) I.L.R. 46 Mad. 360.                (2) I.L.R. 10  Lah. 657.   I.L.R.  59  Cal. 1226.                   (4)  A.I.R.  1941 Mad. 229. 369 were  purchased at one place and sold at another and it  was held  that in such cases it was the act of sale  from  which the  profits accrued or arose.  In most of these  cases  the goods  as  purchased  were sold without  going  through  any manufacturing  process.  It was observed that  mere  act  of purchase  produces  no profit.  This  proposition  has  been doubted  in a later case.  But it is unnecessary to go  into this  matter.  In the case of a trading business, like  pur- chase and sale, it may be said that the business of a person is  one operation and the nature and character of the  busi- ness is such that the profits arise at the place of sale and that  in  such a case it is not possible  to   ascribe   any profits to  the act of purchase and it is still more  diffi- cult   to apportion them.  These cases are no guide for  the decision of cases of manufacturing business or business of a like  nature.   Observations  made in these  cases  must  be limited  to the facts of each particular case. A  number  of cases  were cited for the proposition that under the  Indian Act  it is not the place where a person carries on  business (as  it is under the English law) where necessarily  profits can  be said to arise, because the Indian Act  takes  notice only of the place of accrual of profits and not of the place where  the business is carried on or where the source  which produces  profit  is situate.  The matter was  discussed  by their  Lordships  of the Privy Council  in  Commissioner  of Income-tax, Bombay v. Chunilal B. Mehta (x). The assessee in that  case was carrying on buying and selling operations  in commodities  in  various foreign markets.  No  delivery  was ever  given  or taken and the profits of such  forward  con- tracts  were not received in fact in British India,  and  it was  held that the contracts having been neither framed  nor carried  out in British India, the profits derived from  the contracts  did not accrue or arise in British  India  within the  meaning  of section 4, sub-section (1)  of  the  Indian Income-tax Act, 1922.  The contention raised in that case on behalf  of the Commissioner was that these profits  resulted from  the  exercise of skill and judgment in Bombay  by  the assessee and by the giving of directions (1) 65  I. A. 33. 370 from  Bombay.   This  contention was negatived  and  it  was observed that to determine the place at which such a  profit arises  not  by  reference to the transactions,  or  to  any feature of the transactions, but by reference to a place  in India  at which the. instructions therefor      were  deter- mined  on and cabled to New York is, in   ’their  Lordships’ view,  to proceed in a manner which cannot be  supported  if the  transactions  are to be looked at  separately  and  the profits  of each transaction considered by  themselves.   It was said that there is a distinct paradox in the  contention that the profits. resulting from an order placed in New York would have accrued or arisen in the same place (Bombay)  had the  order been sent to’ Liverpool with a like  result,  but that  had the assessee decided on and directed the same  New

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York  transaction when in Hyderabad the same  profits  would have  arisen  in a different place (Hyderabad).  It  may  be observed that the business of the forward contracts was  not being  conducted in Bombay at all in this case.   The  whole argument  was based on the ground that the assessee,  a  big business  magnate, was directing and controlling that  busi- ness. Such direction and control could hardly be said to  be the place of the accrual of profits on the transactions done elsewhere.   It  was  next argued in that  case  that  these foreign transactions were part of the profits of the  Bombay business  carried on by the assessee and all the profits  of the  business must be computed as a whole.  Their  Lordships negatived this contention and observed as follows :--      "But  the legislature has chosen a different test,  and applied it to all kinds of profits--’ accruing or arising in British  India.’  It may even have chosen it as  fairer  be- cause it could be applied distributively to the profits of a single  source.   However that may be, the profits  of  each particular  business  are  to be computed  wherever  and  by whomsoever the business is carried on, but only on condition that  they are profits ’accruing or arising or  received  in British India,’ etc. What connection exists, if any, between place of direction and place at which the profits arise is a matter not touched by sections 4, 6 or 10.  Not only     371 do  they lay no stress upon the place at which the  business is carried on, they make no mention of it. In these  circum- stances  it  cannot be held that it is itself  the  test  of chargeability  by  virtue of a rule, not  mentioned  either, that profits arise or accrue at the place where the business is carried on."     Later  in the same judgment it was observed  that  there seemed to be no necessity arising out of the general concep- tion  of a business as an organization that  profits  should arise only at one place, that profits are frequently, if not ordinarily, regarded as arising from many transactions, each of  which  have a result-not as if the profits  need  to  be disintegrated with difficulty, but as if they were an aggre- gate  of the particular results.  It was said that  the  as- sessment order had discriminated between the Bombay and  the foreign business income and that to discriminate between all kinds of profits according to the place at which they accrue or arise was a plain dictate of the statute, other discrimi- nation was involved  in the exemptions, and in such sections as section 42.  In the concluding part of the judgment their Lordships said as follows :--     "These  considerations lead their Lordships to the  con- clusion  that  under  the Indian Act a  person  resident  in British  India, carrying on business  there and  controlling transactions  abroad In the course of such business, is  not by  these  mere facTs liable to tax on the profits  of  such transactions.  If such profits have not been received in  or brought into British India, it becomes, or may become neces- sary 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 372 neither  framed nor carried out in British India,  the  High

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Court’s conclusion that the profits accrued or arose outside British India is well founded."     In my view this decision does not make us any the  wiser for  the decision of the present case.  It is true that  the Indian  Act  does not lay down  that  profits    necessarily arise or accrue at the place  where the business is  carried on  or  that they necessarily arise at the place  where  the source which produces the profit is situate but at the  same time the Act does not lay, down that the profits necessarily accrue  or  arise  at the place where  only  one  operation, namely  of sale is performed.  Place of accrual  of  profits cannot necessarily be determined on the test of receivabili- ty.    In certain cases the place of origin of  the  profits may  be the determining factor while in others the  test  of receivability  may have application.  Profits of a trade  or business  are  what is gained by the  business.    The  term implies  a comparison between the state of business  at  two specific  dates separated by an interval of an year and  the fundamental meaning is the amount of gain made by the  busi- ness  during the year and can only be ascertained by a  com- parison of the assets of the business at the two dates,  the increase shown at a later date compared to the earlier  date represents  the profits of the business. In this concept  of the term the place of business or the source from which they originate  would  in the case of-certain businesses  be  the place  where  they can be said to accrue or arise.  In  this situation  the  profits realized at sale have to  be  appor- tioned between the different business operations which  have produced them and those apportioned to the part of  business of  manufacture at Raichur can only be said to arise at  the place of manufacture as no other activity has produced those profits.   No  other place can be suggested where  this  in- crease  can be said to have arisen. In the view that I  have taken it is unnecessary to refer to all the cases that  were cited  at  the Bar, for most of these  cases  concerned  the interpretation  of  the  various  sections  of  the   Indian Income-tax Act and none of them concerned the interpretation placed on the Act with which we are concerned.    373     The  result  therefore is that in my  opinion  the  High Court  was right in answering the question in favour of  the assessee and no grounds exist for reversing that decision in appeal, which is therefore dismissed with costs.     MUKHERJEA  J.--I agree that this appeal should  be  dis- missed  and I would indicate briefly the reasons which  have weighed with me in affirming the judgment of the High Court.     The question which was referred by the Incometax Commis- sioner,  Bombay,  to the High Court under the  provision  of section  66 (1) of the Indian Incometax Act, 1922 and  which the latter refrained for the purpose of bringing out clearly the  real  controversy between the parties, turns  upon  the applicability  of  the  third proviso to section  5  of  the Excess Profits Tax Act (Act XV of 1940) to the facts of  the present  case. The facts are not in controversy and  may  be shortly stated as follows:     The respondents assessees are a firm, resident in  Brit- ish  India and they are registered for  income-tax  purposes under  section  26A of the income-tax  Act,  Their  business consists in manufacturing and selling groundnut oil and they have three mills in Bombay and one at Raichur in the Hydera- bad State where oil is manufactured.  During the  chargeable accounting period, the oil that was manufactured at  Raichur was sold partly in Raichur itself and partly in Bombay,  and what   the  Income-tax  Officer did was to   ascertain   the income   arising  to   the assessees  out  of  the   Raichur

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business  and apportion the same on the basis of sales  made in Raichur and Bombay respectively. The profits arising  out of sales made in Bombay were held by the income-tax  Officer to be assessable both to income-tax and excess profits  tax. There is no doubt as to the propriety of his decision so far as  income-tax  is  concerned.  The only  question  that  is raised  relates to the liability of the firm to  pay  excess profits  tax in respect of income arising out of  the  sales made  in  Bombay  of the oil manufactured  at  Raichur.  The contention put forward 374 by  the assessees is that although the oil was sold in  Bom- bay,  it  was manufactured at Raichur and a portion  of  the profits ultimately made must be allotted to the  manufactur- ing process that was carried on at Raichur. -The manufacture of  the  oil, therefore, must be regarded as a part  of  the business  and  as  the profits   "of this  part  accrued  at Raichur,  it  has to be treated as a separate  business  for purposes  of excess profits tax under the third  proviso  to section  5  of the Excess Profits Tax Act.  The  High  Court answered  this question in favour of the assessees  and  the Commissioner of Income-tax, Bombay, has come up on appeal to this Court.      With  a  view to appreciate the contentions  that  have been raised by the learned counsel on both sides, it will be convenient, first of all, to advert to the provisions of the Excess  Profits Tax Act which have a bearing on  the  point. Section 2, sub-section (5), of the Act defines "business" as including  any trade, commerce or manufacture or any  adven- ture in the nature of trade, commerce or manufacture or  any profession  or  vocation but does not include  a  profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly  on his  or their personal qualifications.........  One  of  the provisos  attached  to  this definition  provides  that  all businesses to which this Act applies carried on by the  same person shall be treated as one business for the purposes  of this  Act.  Section 4 is the charging section and  under  it any business to which this Act applies is subject to payment of excess profits tax in the manner and to the extent  indi- cated in the section.  Section 5 lays down to what business- es the Act will apply.      "This  Act shall apply" so runs the section, "to  every business  of which any part of the profits made  during  the chargeable accounting period is chargeable to income-tax  by virtue  of the provisions of sub-clause ’ (i) or  sub-clause (ii)  of clause (b) of sub-section (1) of section 4  of  the Indian  Income-tax Act, 1922, or of clause (c) of that  sub- section." There are three provisos attached to this section;    375 we  are  concerned for our present purposes with  the  third proviso which is worded as follows:     "Provided  further that this Act shall not apply to  any business  the whole of the profits of which accrue or  arise in  an  Indian State, and where the profits of a part  of  a business  accrue  or  arise in an Indian  State,  such  part shall, for the purposes of this provision, be deemed to be a separate  business the whole of the profits of which  accrue or  arise  in  an Indian State, and the other  part  of  the business shall, for all the purposes of this Act, be  deemed to be a separate business."     The  point for consideration is whether on the facts  of this  case which have been stated above, this third  proviso to section 5 can be invoked by the assessees and it is  open

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to  them to claim that the work of manufacture of  groundnut oil  carried  on by them at Raichur should be treated  as  a separate  business within the meaning of this  proviso.   To succeed  in their claim, it is incumbent upon the  assessees to  show that there was in fact a part of a business in  the present  case and that profit accrued or arose to this  part in  an  Indian State.  If both these elements are  found  to exist  then and then only the part of the business could  be treated as a separate business for purposes of the Act.     It is contended by the assessees that though they  carry on the business of manufacturing and selling oil, the  proc- ess of manufacture apart from the sale is itself a  business and can be treated as a separate part of the trade that  the assessees are carrying on. As the profits of this part arose or  accrued at Raichur, both the conditions of  the  proviso are  fulfilled  in the present case. The  learned  Attorney- General appearing for the Commissioner of Income-tax has, on the  other  hand, argue. d that the expression  "part  of  a business"  occurring  m  the proviso does not  refer  to  or contemplate one of the many activities or processes that are comprised in a business. It can only mean a cross-section of the entire business, complete in itself and including  parts of each of the processes that are comprised in the same.  It is  next  said  that even assuming  that  the  manufacturing operation can be treated as a part of the business, the 376 profits  of the same could and did accrue only at the  place of sale and hence the proviso could not be attracted to  the facts of the present case.     ’     As regards the first part of Mr. Setalvad’s  contention, I  do not think that it can be accepted as sound  "Business" is  defined  in the Act to include any  trade,  commerce  or manufacture.   A man may carry on the trade of a  seller  or purchaser of goods; he may be a manufacturer of goods or  an exporter or importer of the same.  Each of these would be  a business within the meaning of the Act.  Suppose, for  exam- ple, that he combines all these activities and carries on  a business  which  includes manufacturing, selling.  and  also exporting and importing of goods.   Can it not be said  that each one of these activities is a part of the business which he carries on ?  I agree with Mr. Munshi that if a  particu- lar  process  or activity of a continuous character  can  be distinguished from other processes and if a separate  profit can  be  ascertained and allotted in respect  to  the  same, there  is no reason why it should not be regarded as a  part of the business which yields income or profits.     The question has been raised in several cases in English Courts  regarding  liability to excess profits duty  when  a person  carries  on a trade or business liable  to  duty  in connection with another business which is not so liable.  It has  been held that if separation is possible in such  cases the  proper course to follow is to sever the profits of  the two businesses and assess accordingly.     In  the  case  of Commissioners of  Inland  Revenue’  v. Ransom(1)  the respondents carried on the business as  manu- facturing  chemists  and growers of  medicinal  herbs;  they owned  a factory where the manufacture and  distillation  of herbs were carried on and they also occupied a farm on which they grew herbs for treatment in the factory.  The  respond- ents  were  assessed to excess profits duty  and  on  appeal against the assessment, the General Commissioners held  that although  the respondents occupied the farm mainly  for  the purpose of the factory, which was excluded from excess (1) [1918] 2 K.B. 709.     377

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profits  duty,  as separation was possible, the  profits  of the  farm were excluded and they were only assessed  on  the profits  of the factory.  This view of the  General  Commis- sioners was  upheld by  Sankey J. on appeal.     The same question arose in Commissioners of land Revenue v. Maxse(1), where the Court of appeal reversed the decision of  San  key  J.  In that case the appellant  was  the  sole proprietor,  editor and publisher of the  "National  Review" and  was  assessed on the profits of  the  publication.  The General  Commissioners  held that the appellant  was  exempt from  duty as he carried on the profession of a  journalist, the  profits  of  which depended mainly  upon  his  personal qualifications  within the meaning of the Finance  Act.   On appeal,  Sankey  J.  reversed the decision  of  the  General Commissioners  and  held that the assessee was  not  in  the position  of an ordinary journalist but derived his  profits by the sale of a commodity, thereby carrying on an  ordinary commercial  business.  The Court of appeal upset this  deci- sion  of  Sankey J. and held that the  assessee  was  really carrying on two businesses, one that of a journalist, author and  a man of letters and the other that of  publishing  his periodical.   The  result was that the profits  of  the  two businesses  were  directed  to be  apportioned,  though  the process was by no means an easy one.  The same principle was applied  by  the  Calcutta High Court in a  case  where  the growing  of  tea as an agricultural produce, which  was  not liable to income-tax was carried on along with the  business of manufacturing tea [vide Killing Valley Tea Co. v.  Secre- tary  of State (2)]  It is true that these are  cases  where several businesses were amalgamated and carried on together, or  more of which were not liable to tax or  excess  profits duty;  but the principle of apportionment upon  which  these cases  were decided ,could, in my opinion, be  applied  with equal  propriety to cases where one part of the business  is distinct and separate from the other parts and is capable of earning profits separately. That profits could and should be allotted to and (1) [1919] 1. K.B. 647.                (2) I.L.R. 4,8 Cal. 378 apportioned  between  different  parts of a  business  of  a composite character is fully illustrated by the decision  of the  Privy  Council  in  the  Commissioner  of  Taxation  v. Kirk(1).   In that case the assessees were a mining  company who had mines in the colony of New South Wales.  The ore was extracted  in New South Wales and was converted  there  into merchantable product. The product, however, was sold not  in New  South Wales but in Victoria.  Under section 15  of  the New  South  Wales Land and Income Tax  Assessment  Act,  the following incomes ’were liable to be taxed :--     "Sub-section  (1).   Arising or accruing to  any  person wheresoever residing from any profession, trade,  employment or vocation carried on in New South Wales, whether the  same be  carried on by such person or on his behalf wholly or  in part  by any other person......  (3) Derived from  lands  of the Crown held under lease or licence issued by or on behalf of the Crown. (4) Arising or accruing to any person whereso- ever  residing  from any kind of property except  from  land subject to land tax as hereinafter specifically excepted, or from  any  other source whatsoever in New  South  Wales  not included in the preceding sub-sections."     It was held by the New South Wales Court that the asses- see was not liable to tax under any of the above provisions. This decision was reversed by the Judicial Committee.     "It appears to their Lordships," so runs the judgment of the  Judicial Committee, "that there are four  processes  in

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the earning or production of this income-(1) the  extraction of  the ore from the soil; (2) the conversion of  the  crude ore  into a merchantable product, which is  a  manufacturing process;  (3) the sale of the merchantable product; (4)  the receipt  of  the  moneys arising from the  sale.  All  these processes are necessary stages wihch terminate in money, and the income is the money resulting less the expenses  attend- ant on all the stages......  The fallacy of the judgment  of the Supreme Court in this and in Tindal’s case is in leaving out of sight the initial stages, and fastening their  atten- tion [1930] A.C. 588.    379 Income. ’ ’     Thus according to the Judicial Committee it was a falla- cy  to regard the profits as arising solely at the place  of sale. It is to be noted that under the provisions of the New South  Wales  Act referred to above, the  liability  to  tax depended  not  whether the income arose or  accrued  in  New South  Wales  but whether it accrued from a  source  in  New South  Wales. This distinction is undoubtedly important  and the learned Chief Justice of the Bombay High Court was  not, it seems, right in laying no stress upon it and in observing in course of his judgment that income accrues or arises only at  the place where its source is situated.  This aspect  of the  case  I will discuss later on in  connection  with  the second point that arises for consideration in this case.  It is enough to state at the present stage that on the authori- ty of Kirk’s case it would be quite legitimate to hold  that a  portion  of  the net profit that  the  assessees  in  the present  case  made out of their total  business  could  and should  be  allotted to the manufacturing process  that  was carried  on  at Raichur.  The view is  strengthened  by  two recent pronouncements of the Judicial Committee, the earlier of  which  reported in International Harvester   Company  of Canada v. Provincial Tax Commission (1) discusses the  point in  great  details and was followed in its entirety  in  the later decision in Provincial Treasurer of Manitoba v.  Wrig- ley  Jr. Co. Ltd. (2).   In International Harvester  Co.  of Canada  v. Provincial Tax Commission (1), the  question  for decision  turned upon the construction of section 21 (a)  of the Income Tax Act, 1932 of Saskatchewan which after  amend- ment was in the same terms as section 23 of the later Act of 1936.    The  section provides that "the  income  liable  to taxation under this Act of every person residing outside  of Saskatchewan  who  is carrying on business  in  Saskatchewan either  directly  or  through or in the name  of  any  other person  shall  be the net profit or gain  arising  from  the business  of such person in Saskatchewan."    The  appellant company had its Head Office in Hamilton, (1) [1949] A.C. 36.          (2) (1950) A.I.R. 1950 P.O. 53. 48 380 Ontario, and was for income-tax purposes resident outside of Saskatchewan.    Its business was that of manufacturing  and selling  agricultural implements, the  manufacturing  opera- tions  being  carried on entirely outside  the  province  of Saskatchewan  and  the  selling operations  partly  in  that province and partly in other  provinces and countries.   The selling  business in Saskatchewan was carried on  at  Branch Offices, all moneys received by the appellant in  Saskatche- wan being  deposited in separate bank accounts  and remitted in  full to the Head Office which sent to  the  Saskatchewan branches  such  moneys as were required  for  operating  and incidental expenses.  It was held by the Judicial  Committee that  any  part of the appellant’s net  profit  which  might

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fairly be attributed to its manufacturing operations outside the,province of Saskatchewan was not profit arising from the business of the appellant in Saskatchewan within the meaning of  section 21 (a) of the Income Tax Act, 1932, as  amended, and  must  be  excluded in ascertaining the  income  of  the appellant  liable to taxation under that section. The  Judi- cial  Committee  in course of its judgment referred  to  the following passage occurring in the judgment  of Duff C.J. in the  Supreme Court of Canada.       "The profits of the company are derived from a  series of  operations, including the purchase of raw  materials  or partly  manufactured articles, completely manufacturing  its products  and  transporting and selling them, and  receiving the proceeds of such sales The essence of its  profit-making business is a series of operations as a whole.  That part of the  proceeds of sales in Saskatchewan which is  profits  is received in Saskatchewan, but it does not follow, of course, that  the whole of such profit ’ arises from’ that  part  of the  company’s  business which is carried  on  there  within contemplation of section 21 (a)."       Their  Lordships  agreed  with the  appellant  that  a portion  of the money received in Saskatchewan which  repre- sents net profit should be sub-divided and part of it should be treated as a manufacturing profit’ 381 arising  from the  manufacturing business of  the  appellant outside  Saskatchewan.   There was  no insuperable difficul- ty  according to their Lordships in making  this  apportion- ment.    This reasoning applies fully to the facts of  the present case, though here again I should point         out that  the scheme  of the Saskatchewan Act was to          tax  profits arising  from a business in a particular place  and to  that extent the language of the Indian Act is undoubtedly differ- ent.  Like the Kirk’s case, it can, however, be taken as  an authority for the proposition that in cases like the one  we have  before  us, there could be apportionment  of  the  net profits that accrue to the business of the assessee and  one portion of it could be allotted to that part of the business which  relates to the manufacture of commodities  which  are ultimately  sold in the market.  The later decision  of  the Judicial  Committee  referred to above  simply  follows  the International  Harvester Company’s case without any  further discussion.     Mr.  Munshi in course of his arguments has  referred  to the provisions of section 42 (3) of the Indian Incometax Act and  he   contends that  the language  of  this  sub-section clearly indicates that in the contemplation of the  legisla- ture certain operations of a business could be regarded as a part  of  tim business and the  principle  of  apportionment which  this sub-section provides can very properly  be  made applicable  to  a  case coming under the  third  proviso  to section  5 of the Excess Profits Tax Act.  Section 42,  sub- section  (1),  provides  inter alia that the  whole  of  the income  and profits accruing or arising whether directly  or indirectly  through  business connection  in  British  India would  be deemed to be income accruing within British  India so  as  to  be liable to tax in  this  country.   The  scope this  provision is narrowed down by sub-rule (3) which  pro- vides that where all the operations of the business are  not carried  on in British India, the profits and gains  of  the business  deemed  to  accrue or arise in  this  country  are limited  to such profits or gains as can reasonably  be  at- tributed to the part of the 382

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operations carried on in this country.  The Raichur  factory certainly  has  business connection in British India  for  a part  of  the  oil manufactured by it is  sold  through  the Bombay establishment of the assessees. It is clear also that all  the operations of the Raichur business are not  carried on  in Bombay.  Therefore, the profits that would be  deemed under this section to accrue or arise in Bombay will only be the profits which may reasonably be attributed to that  part of  the operations carried on in Bombay, that is to say,  to sale of part of its oil in Bombay.  As section 42 applies to an  assessee who is a resident in India, there is no  reason why  this principle of apportionment should not apply  to  a case  falling within the third proviso to section 5  of  the Excess  Profits Tax Act.  Mr. Setalvad points out that  sec- tion 42 contemplates income or profits not actually  arising or  accruing  in British India but only deemed to  arise  or accrue in this country under the circumstances specified  in the section, and therefore no such question can arise  under proviso (3) to section 5 of the Excess Profits Tax Act.   It appears, however, that in enacting proviso (2) to section  5 of  the  Excess Profits Tax Act which  relates  to  business carried  on by a non-resident, the legislature had  in  mind the  provision  of section 42 of the  Income-tax  Act.   The expression "part of a business" occurring in proviso (2)  to section  5  can, there fore, be taken legitimately  to  mean such  operations of the business to which  separate  profits are attributable as laid down in sub-section (3) of  section 42.   Although proviso (3) is applicable to a different  set of circumstances, the words "part of a business" as used  in that  proviso  must be taken to have been used in  the  same sense  as in the earlier proviso and to this extent, at  any rate,  it favours the contention of the respondents that  no cross-section  of  the  entire business was  meant  by  that expression.     Again  it is quite true that there is no express  direc- tion  as to apportionment in the third proviso to section  5 of the Excess Profits Tax Act as there is in sub-section (3) of  section 42 of the Income-tax Act. However,  profits  can accrue  in respect to a part of a business only when  appor- tionment is possible and it is     383  on  this  assumption  that this proviso is  based.   If  no apportionment  can  be made in respect of the  processes  or activities  of a particular business, they will not be  con- sidered to be a part of the business at all and the  proviso will not apply.  The principle of apportionment,  therefore, is  implied in the third proviso to section 5 of the  Excess Profits Tax Act.     I  now  come  to the other question as  to  whether  the profits of the manufacturing part of the assessees’ business did  arise or accrue at Raichur within the Hyderabad  State. The  point  is not altogether free from difficulty  and  al- though  a  large  number of decided  authorities  have  been placed  before us in this connection by the learned  counsel on  both sides, none of them seems to be directly in  point. The cases cited relate mostly to different provisions of the Income-tax  Act  which  make income taxable  if  it  arises, accrues  or is received in British India or is deemed  under the provisions of law to arise, accrue or to be received  in British India.  So far as the third proviso to section 5  of the  Excess Profits Tax Act is concerned, it is to be  noted that  it  uses the expression "accrue" and" arise"  but  not ,the word "received" and further there is no provision  here under  which income could be deemed to arise or accrue at  a particular place even if it does not actually do so.   Prof-

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its  of a business are undoubtedly not "received"  till  the commodities are sold and they are ascertained only when  the sale takes place, but the question is that if a part of  the business  which consists of manufacturing goods and is  car- ried on prior to the sale, yields profits, do these  profits accrue  or  arise only at the place where  the  manufactured goods  are  sold  ?  We have been referred to  a  number  of decided  authorities,  where  the assessee  carried  on  the business of buying and selling and the goods and raw materi- als were purchased in one place and sold in another and  the question  arose whether for purposes of taxation portion  of the  profits could be held to arise at the place  of  buying also.     The  decision  of the Madras High  Court  in  Secretary, Board of Revenue, Madras v. Madras Export 384 Company  (1)  is one of the leading pronouncements  in  this line  of  authorities.  The question for decision  in.  that case  was whether the profits of a firm which had its  head- quarters  in Paris and purchased raw skins through an  Agent in  Madras  which were exported to and sold  in  Paris  were taxable in British India under section 33 (1)of the  Income- tax Act of 1918 which corresponded, though not  identically, to section 42 of the present Act.  The question was answered in  the negative.  The learned Judges held that  section  33 was not a charging but a machinery section and relied on the decision  of  the English Court in Greenwood  v.  Smdth  and Company  (2), which laid down that a trade is  exercised  in the place where the business transactions are closed; and in the  case of a selling business, that place would  be  where the  sales are effected and the profits realised.  The  pro- priety of the Madras decision was questioned by the Calcutta High Court in Rogers Pyatt Shellac and Company v.  Secretary of  State  for India (8), and it was pointed  out  that  the Judges  of the Madras Court wholly overlooked a  vital  dis- tinction between Indian and English Income Tax Law in so far as  the  former lays down that certain profits,  though  not actually  arising  or accruing in British India,  should  be deemed  to arise or accrue in this country. Under’ the  Eng- lish law, the essential thing for purposes. of taxation  was that  profit should accrue from trade exercised  within  the United Kingdom and there was* no provision there correspond- ing to that contained in section 42 of the Indian Income-tax Act.   The  decision  in the Secretary,  Board  of  Revenue, Madras v. Madras Export Company (1) was, however,  followed, by  a  Full Bench of the Lahore High Court  in  Jiwandas  v. Income-tax  Commissioner,  Lahore (4).  In  that  case,  the question arose as to whether a person residing and  carrying on  business  in British India and  purchasing  goods  there which  were sold in Kashmir was liable to assessment on  the ground  that a part of the, profits accrued  within  British India.  The Full Bench gave a negative answer to this  ques- tion and the basis.   (1) I.L.R. 46 Mad. 360.                 (2) [1922] 1  A.C. 417.   (.3) I.L.R. 52 Cal. 1.                  (4) I.L.R. 10 Lab. 657. 385  of the decision was that mere purchase of goods in  British India had too remote a connection to justify the  conclusion that a part of the profits should be held to have  "accrued" in  this  country.  As the business was one  of  buying  and selling,  it  was  held that the profits  accrued  or  arose actually  at the place where the goods were sold and not  at the  place where they were merely purchased for export.   It

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should be noted that this case was decided prior to 1939 and the  changes  that were introduced into section  42  of  the Income-tax  Act  by  the Amending Act of 1939  were  not  in existence  at  that time.  The assessee was  a  resident  of British  India  and the only question for decision  in  that case was whether the profits did actually arise or accrue in British  India.  It was held that they did not.  Both  these cases were followed with approval by a Madras Special  Bench in  the subsequent case of S.V.P. Sudalaimani Nadar v.  Com- missioner  of Income-tax,  Madras(1).  That was also a  case where  the-assessee  was  a resident of  British  India  and having  purchased animals in British India exported them  to foreign  countries  for sale. It was held that  he  was  not assessable  to income-tax, as the profits were not  received or  brought  into British India.  All these cases  were  re- viewed  by  a  Division Bench of  the  Orissa  High   Court, consisting  of Chief Justice Ray and Narasimham J. in  Rahim v. Commissioner of Incometax (").  Here the assessee used to buy hides, horns, etc. in the Orissa State and sell them  in British  India and the question was whether any part of  the profits accrued or arose within an Indian State.  The answer given  by  the Court was in the negative, though  the  Chief justice  in  a separate judgment observed that  he  was  not prepared  to  lay down as a proposition of law that  in  all businesses of buying and selling, the entire profits  neces- sarily accrue at the place where the sales take place.  Each case  would depend upon its own circumstances and there  may be cases where the place where the commodities are purchased has  an  importance of its own.  On the facts  of  the  case which  they were actually deciding it was said that the  act of buying (1)   A.I.R.  [1941] Mad. 229.          (2)   A.I.R.  [19491 Orissa 60. 386 was  so negligible a part of the operation of the  business. as not to make any appreciable difference in the  apportion- ment of the amount that accrued or arose in British India.     It will be seen that none of these decisions are. really of any assistance to the appellant in the present case.  All of them proceeded on the footing that no appreciable  profit resulted  from the operation of buying when the  goods  were purchased at one place and exported in a raw state to anoth- er  place for sale.  In the Orissa case referred  to  above, Narasimham  J. expressly observed in course of his  judgment that  the position might be different if the materials  pur- chased underwent any manufacturing process before they  were exported.  If no profits really resulted from the purchasing part  of the business, obviously the question of  the  place where such profits arise or accrue does not become  material at all.     As  against these cases, several authorities  have  been cited  to us which have proceeded on the footing  that  even purchase  of raw materials could be an operation in  connec- tion  with  a business and if it was carried on  in  British India, it might make the profits attributable to such opera- tion taxable under section 42 of the Indian Income-tax  Act. The case of Rogers Pyatt Shellac and Company v. Secretary of State for lndia (1) is one of the leading decisions on  this point.   In that case, a company incorporated in U.S.A.  and having  its  Head  Office in New York  and  Branch  Offices, Agencies and factories in Calcutta, London, etc.   purchased goods in India for sale in America. It had also a factory in the  United Provinces where raw produce was  bought  locally and  worked up into a form suitable for exports to  America. It was held that the company was not exempt from  assessment

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to income-tax or super-tax in India.   This case was decided under  section  33  of the Income-tax Act of  1918  and  the judgment  shows that the principle followed in the case  was similar to that which was subsequently embodied n section 42 (3) of the Income-tax Act of 1922.  The same line of reason- ing was adopted by the Rangoon (1) I.L.R. 52  cal. 1.     387 High  Court  in Commissioner of  Income-tax,  Burma  Messrs. Steel Brothers and Company (1). Among recent cases, on  this point, which were decided under section 42 of the Income-tax Act of 1922, can be mentioned the case of Motor Union Insur- ance  Co. Ltd. v. Commissioner of  Income-tax.  Bombay(2)and that of Webb Sons and Company v. Commissioner of Income-tax, East  Punjab  (3).  In the last case, the  assessee  company which was incorporated in the United States of America,  was carrying  on in America the business of  manufacturing  car- pets.   Its only business in India was the purchase of  wool as  raw  material  for the carpets.  It was  held  that  the purchase  was an operation within the meaning of section  42 (3)  of the Income-tax Act  and profits from such  purchases could  he  deemed to arise in British India and  was  conse- quently  assessable under section’ 42 (3) of the  Income-tax Act.     These  cases, it must be admitted, are not of  much  as- sistance to the respondents in this case, though they do not help the appellant either.  They were decided on the express language  of section  42 of the Incometax Act, 1922,  as  it then stood or the section corresponding to it in the earlier Act.   There remains for me to refer to tile other  line  of authorities upon which the judgment of the High Court  seems to  be primarily based.  [n my opinion, they cannot also  be regarded  as direct authorities on the point requiring  con- sideration in the present case.  In Commissioner of  Income- Tax  v.  Kirk (4), the profits derived from  extraction  ore from the soil and also from the conversion of the crude  ore into  merchantable product were held to be taxable,  as  the source of these profits was situated in New South Wales  and that  was  the basis of taxation under the New  South  Wales Act.   The  High Court was not right in holding  that  as  a matter  of law, profits must be held to arise at  the  place where  the  source  of the profit is  situated.   The  Privy Council clearly laid down in the case of the Commissioner of Incometax v. Chunilal(5) that income from business does not (1)  I.L.R.  3  Rang.  614.                      (2)  A.I.R. [1945] Born. (3) [1950] 18 I.T R. 33.  (4) [1900] A.C. 588.   (5) 65 I.A. 332.    49 388 necessarily  arise or accrue at the place from which  direc- tions  are given or skill and judgment  exercised,  although the  operations may take place elsewhere; and it is not  the scheme of the Income-tax Act that the profits in the case of a  business cannot be taken distributably but must be  taken as a single indivisible result accruing at one place.     The  learned Chief Justice of Bombay in support  of  his judgment  relied  strongly upon the decision of  the  Madras High Court in Commissioner of Income-tax v. Mathias(1).   In that case, the assessee, who was a resident of Mangalore  in British  India,  owned coffee plantations  in  Mysore.   The harvested  crops were brought to Mangalore to be  dried  and cleansed  there in the factory of the selling agents of  the assessee  and sold there by that company, the sale  proceeds being  received  and retained at Mangalore by  the  assessee himself.  The question was whether the assessee was entitled

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to claim the benefit of the second proviso to section 4  (2) of  the Income-tax Act and if so, to What extent ?   It  was held by the learned Judges that the assessee was entitled to exemption  of  the whole profits earned by the sale  of  the produce at Mangalore, and the ground upon which the decision rested  was  that the agricultural produce itself  could  be taken  to be income in kind which accrued at Mysore  outside British  India.  On appeal to the Privy Council, this  deci- sion  was reversed and the Privy Council took the view  that as the income was received in British India, the proviso  to section 4 (2) had no application (2).  The particular  point upon which the Madras High Court based its decision was  not considered  by  the Judicial Committee and  was  left  open. Obviously  in the case before us the manufactured  oil  that was  produced at Raichur could not be taken to be income  or profits  in  kind.   The  manufactured  products  themselves cannot be regarded as income though the process of  manufac- ture  yields  profits which form a portion  of  the  profits ultimately  realised at the time of the sale.  The  question before (1) I.L.R. [1938] Mad. 25.        Vide  Commissioner of Income-tax V. Mathias--66  I.A. 22.     389 us is, where do the profits resulting from the manufacturing process accrue or arise ?     It  was  pointed out by Mukherji J. in Re  Rogers  Pyatt Shellac  and  Co. v. Secretary of State for India  (1)  that etymologically  the  word "accrues" connotes the idea  of  a growth,  addition or increase by way of accession or  advan- tage, while the word "arises" suggests the idea of growth or accumulation  with a tangible shape so as to be  receivable. The  two  expressions denote almost the same  idea  and  the difference only lies in the fact that one is more  appropri- ate than the -other when applied to particular cases.  It is clear, however, as the learned Judge pointed out that  these words  have  been  used in  contradistinction  to  the  word "received"  and both of them represent a stage  anterior  to the  point of time when the income becomes receivable;  they connote  a character of income which is more or less  incho- ate.  As I have stated already, in proviso (3) to section  5 of the Excess Profits Tax Act, the legislature has  deliber- ately  left out the word "received" and has spoken only  of" accruing" or "arising." This shows that the legislature  had in  mind  cases  where profits could accrue to  parts  of  a business  before  they were actually received.  When  a  raw material  is  worked up into a new product  by   process  of manufacture,  it  obviously increases in  value;   in  other words,  there  is an accretion of profit to it and  the  in- creased value represents this income or profit which is  the result  of manufacture.   As these profits accrue by  reason of  manufacture, the accrual, in my opinion, cannot  but  be located at the place where the manufacturing process is gone through.   It is immaterial that the manufactured goods  are sold  later  on at various places.  If the  manufacturer  is himself the seller, it might be that he receives the  entire profits  including that of the manufacture only at the  time of  the  sale; but in an inchoate shape, a  portion  of  the profits  does accrue at the place of manufacture, the  exact amount  of  which is only ascertained after the  sale  takes place.   For purposes of computation, the two parts  of  the business may be conceived of as being carried on by two I.L.R. 52 Cal. 1. at p. 30. 390 different  sets  of persons. As soon as the  manufacture  is

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complete,  that  part of the business is  finished  and  the profits  that  accrue to that part certainly arises  at  the place where the manufacture is carried on and not where  the sale ultimately takes place. As the principle of section  42 of the Income-tax Act applies to this case the profits to be deemed under that section to accrueor arise in British India would only be the profits that may reasonably be  attributed to one part of the operations,. namely, sales of part of the oil;  and the profits accruing or arising out of  the  other part  of the operation, namely, the manufacture of  the  oil which  takes  place  outside India could not  be  deemed  to accrue  or arise in India.  Where then these  profits  would arise  or accrue or be deemed to arise or accrue  except  at the place of manufacture ?     My  conclusion,  therefore, is that the profits  of  the manufacturing part of the assessees’ business did accrue and arise  at Raichur and the judgment of the High Court  should be affirmed, though I do not concur in all the reasons given by the learned Judges.       J.--I substantially agree with the reasonings given in the judgment just delivered by my learned brother  Mukherjea and concur in dismissing this appeal. Appeal dismissed. Agent for the Appellant: P.A. Mehta. Agent for the Respondents: Ranjit Singh Narula.      391