# Deputy CDmmi.ssioner, Hardoi · v. Rama Jlrishna JVarain ·and Ot"4rs

- **Citation:** [1954] 1 S.C.R. 523
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/deputy-cdmmi-ssioner-hardoi-v-rama-jlrishna-jvarain-and-ot-4rs-309
- **Pages:** 14

## Headnote

S.C.R.
SUPREME COURT REPORTS
523
section 10 or took no active part in the proceedings
under section 11(2). In the view that we have taken
it is not necessary to decide the question whether the
High Court was right in not exercising its powers under
Order XLI, rule 20, in impleading the creditors as respondents to 'the appeal.
For the reasons given above we allow this appeal,
set aside the judgment of the High Court and remand
the case to that court for hearing the appeal in accordance with law on its merits. If the High Court
thinks fit that the presence of any creditors would
help the court in arriving at a true decision of the
matter it in its
discretion may give notice
to the
creditors of the date of hearing. We leave the parties
to bear their own costs of this appeal.
Appeal allowed.
Agent for the appellant : C. P. Lal.
Agent for respondent No. 5 : S. S. Shukla.
' ANGLO-FRENCH TEXTILE CO. LTD.
ti.
COMMISSIONER OF INCOME-TAX, MADRAS.
!MEHR CHAND MAHAJAN, S. R. DAs,
VIVIAN BosE and BHAGWATI JJ.]
Income-tax Act, 1922, ss. 4 (1) (a), 4A (c) (b), 42 (1) and (3)
-Foreign cornpany-A1anufacture of goods outside British
India
--Sale of goods and receipt of sale proceeds in British lndiaAssessment
under
s. 4 (1) (a)-Applicability
of s.
42 (1)-
Determinatiotz
of residence
of company-Allocation
of inconie
between operations carried on toithin and outside
British
lndiaW hether permissible.
The assessee, a con1pany incorporated in the United King<lom
:111d having its
registered office
in London, nlanufactured yarn and
.cloth in their mill at Pondicherry.
The
assessee
had
appointed
anorher company in
Madras as their agents. The manufactureo.
goods \Vere sold inostly
in British India and partly
outside British
India.
All the contracts
in resoect of the
sales in
British India
\Vere entered into in
British I~dia and deliveries were n1:1de and
paytnents were received in
British India.
In regard to sales ollt-
:side
British
[ndia
also,
pay1nents
\\Tre
received
in
.iVfadras
1953
Deputy
CDmmi.ssioner,
Hardoi ·
v.
Rama Jlrishna
JVarain ·and
Ot"4rs.
Mahaja•J.
1953
Dec. 8
1953
Anl{lo.J<rench
Textile Co. Ltd.
v.
Commissiorln' of
lncCJtne-Jax,
Madras.
524
SUPREME COURT REPORTS
[19541
through the agents
and it
was found as a fact that
the entirr
profits were received in India :
Held, (i) that in view of the finding of fact that the entire
profits were
received in India
and the assessec
v.·as
liable to tax
under s. 4 (!)(a), the provisions of s. 42 (1) had no relevancy;
(ii) that the income received in British India could not be s::iid
to
v.•holly
arise
in
British
India
within
the
meaning of
s.
4A (c) (b) and that there should be allocation of the income
between the
various
business
operations
of the
assessce den1arcating the income arising in the taxable
territories
in
the
particular year from the income arising without
the taxable territories
in that year for the purposes of s. 4A ( c) ( b) of the Act.
Commissioner
of Income-tax,
Bombay v. Ahmedbhai Un1arbhai & Co.
((1950) S.C.R. 335), Pondicherry Railway Company v.
Commissioner of Income-tax, Madrar (1931) (58 I.A. 239), Turner
Morriron and Co. v. Commissioner of Income-tax [1951) ( 19 l.T.R.
451 ; [ 1953] 23 l.T.R. 152), referred to.
CtvIL
APPELLATE
JurusoICTION : Appeal No. 11 of
1952.
Appeal from the Judgment and Order dated January
18, 1950, of the High Court of Judicature at Madras
(Satyanarayana Rao and Viswanatha Sastri JJ.) in Case
Referred No. 25 of 1947.
O.T.G. Nambiar (Samarendra Nath Mukherjee, with
him) for the appellant.
M. C. Setalvad, Attorney-General for India, and C. K.
Daphtary, Solicitor-General for India ( G. N. Joshi and
P. A. Mehta, with them) for the respondent.
1952. December 22. The Judgment of the Court w:»
delivered by.
BHAGWATI J.-This is an appeal from the judgment
and order of the High Court of Judicature at Madras
upon a reference made by the Income-tax _\ppellate
Tribunal under section 66(t) of the Indian Incometax Act, 1922. The appellant company, the assessee, is

## Text

S.C.R.
SUPREME COURT REPORTS
523
section 10 or took no active part in the proceedings
under section 11(2). In the view that we have taken
it is not necessary to decide the question whether the
High Court was right in not exercising its powers under
Order XLI, rule 20, in impleading the creditors as respondents to 'the appeal.
For the reasons given above we allow this appeal,
set aside the judgment of the High Court and remand
the case to that court for hearing the appeal in accordance with law on its merits. If the High Court
thinks fit that the presence of any creditors would
help the court in arriving at a true decision of the
matter it in its
discretion may give notice
to the
creditors of the date of hearing. We leave the parties
to bear their own costs of this appeal.
Appeal allowed.
Agent for the appellant : C. P. Lal.
Agent for respondent No. 5 : S. S. Shukla.
' ANGLO-FRENCH TEXTILE CO. LTD.
ti.
COMMISSIONER OF INCOME-TAX, MADRAS.
!MEHR CHAND MAHAJAN, S. R. DAs,
VIVIAN BosE and BHAGWATI JJ.]
Income-tax Act, 1922, ss. 4 (1) (a), 4A (c) (b), 42 (1) and (3)
-Foreign cornpany-A1anufacture of goods outside British
India
--Sale of goods and receipt of sale proceeds in British lndiaAssessment
under
s. 4 (1) (a)-Applicability
of s.
42 (1)-
Determinatiotz
of residence
of company-Allocation
of inconie
between operations carried on toithin and outside
British
lndiaW hether permissible.
The assessee, a con1pany incorporated in the United King<lom
:111d having its
registered office
in London, nlanufactured yarn and
.cloth in their mill at Pondicherry.
The
assessee
had
appointed
anorher company in
Madras as their agents. The manufactureo.
goods \Vere sold inostly
in British India and partly
outside British
India.
All the contracts
in resoect of the
sales in
British India
\Vere entered into in
British I~dia and deliveries were n1:1de and
paytnents were received in
British India.
In regard to sales ollt-
:side
British
[ndia
also,
pay1nents
\\Tre
received
in
.iVfadras
1953
Deputy
CDmmi.ssioner,
Hardoi ·
v.
Rama Jlrishna
JVarain ·and
Ot"4rs.
Mahaja•J.
1953
Dec. 8
1953
Anl{lo.J<rench
Textile Co. Ltd.
v.
Commissiorln' of
lncCJtne-Jax,
Madras.
524
SUPREME COURT REPORTS
[19541
through the agents
and it
was found as a fact that
the entirr
profits were received in India :
Held, (i) that in view of the finding of fact that the entire
profits were
received in India
and the assessec
v.·as
liable to tax
under s. 4 (!)(a), the provisions of s. 42 (1) had no relevancy;
(ii) that the income received in British India could not be s::iid
to
v.•holly
arise
in
British
India
within
the
meaning of
s.
4A (c) (b) and that there should be allocation of the income
between the
various
business
operations
of the
assessce den1arcating the income arising in the taxable
territories
in
the
particular year from the income arising without
the taxable territories
in that year for the purposes of s. 4A ( c) ( b) of the Act.
Commissioner
of Income-tax,
Bombay v. Ahmedbhai Un1arbhai & Co.
((1950) S.C.R. 335), Pondicherry Railway Company v.
Commissioner of Income-tax, Madrar (1931) (58 I.A. 239), Turner
Morriron and Co. v. Commissioner of Income-tax [1951) ( 19 l.T.R.
451 ; [ 1953] 23 l.T.R. 152), referred to.
CtvIL
APPELLATE
JurusoICTION : Appeal No. 11 of
1952.
Appeal from the Judgment and Order dated January
18, 1950, of the High Court of Judicature at Madras
(Satyanarayana Rao and Viswanatha Sastri JJ.) in Case
Referred No. 25 of 1947.
O.T.G. Nambiar (Samarendra Nath Mukherjee, with
him) for the appellant.
M. C. Setalvad, Attorney-General for India, and C. K.
Daphtary, Solicitor-General for India ( G. N. Joshi and
P. A. Mehta, with them) for the respondent.
1952. December 22. The Judgment of the Court w:»
delivered by.
BHAGWATI J.-This is an appeal from the judgment
and order of the High Court of Judicature at Madras
upon a reference made by the Income-tax _\ppellate
Tribunal under section 66(t) of the Indian Incometax Act, 1922. The appellant company, the assessee, is
incorporated in the United Kingdom under the Englis!-
Companies Act and has it registered office in London
It owns a spinning and weaving mill at Pondicherry
in French India where it manufactures yarn and clothMessrs. Best and Co. Ltd., Madras, have bten appoint~d
S.C.R.
SUPREME COURT REPORTS
525
the agents of the assessee under an agreement dated
the 11th July, 1939, and have been invested with full
powers in connection with the business of the assessee
in' the matter of purchasing stock,
signing bills
and
other negotiable · instruments and receipts and settling,
compounding or compromising any claim by or against
the assessee.
The yarn and cotton
manufactured in
Pondicherry were sold mostly in British India and
partly outside British India. In the accounting year
1941 and 1942 all the contracts in respect of the sales
in British India were entered into in British India
and the deliveries were made and payments received
in British India. In regard to the sales outside British
India also, payments in respect of such sales were
received in Madras through the said agents.
The total sales of the goods in tlle assessment year
1942-43 were
Rs .. 69,69,145
and
for
the assessment
year
1943-44 were Rs. 93.48.822. The value of the
sales in British India amounted to Rs. 57,07,431 for
the assessment year 1942-43 and to Rs. 67,98,356 for
the assessment year 1943-44. The value of the total
s~les .outside British India amounted to Rs.
12,61,714
for the year
1942-43 and Rs. 25,50,472 for the year
1943-44. Out of the said amounts received in respect
of the foreign
sales the amounts received in British
India were Rs. 9,62,434 for
1942-43 and Rs. 75,230 for
1943-44 and the amounts received outside British India
were Rs. 2,99,280 for 1942-43 and Rs. 24,75,242 for
1943-44.
On these facts the Income-tax Officer found that
the assessee was resident in British India within the
meaning of section 4-A ( c) (b) of the Act by reason of
its income arising in British India in ilie year of
account exceeding its income arising without British
India and on that basis he assessed the company for the
two assessment years 1942-43 and 1943-44 as resident
in British India on the profits and gains which had
accrued to the company both
within and without
British India under section 4(1) (b) (i) and (ii) of the Act.
The order of the Income-tax Officer was confirmed by
the Appellate Assistant Commissioner and the order
1953
.A.nglo-.French
Textile Co. Ltd.
v.
Comrnis.s ioner of
lrnorr.e-tax.
Madras'.
BhagwatiJ.
1953
~nglo-French
Ttxlilt Co. Lld.
v.
Commi.s.si<mer of
lmome-ta.x,
Madras.
EhagwatiJ.
526
SUPREME COURT REPORTS
{1954}
of the Appellate Assistant Commissioner was confirmed by the Appellate Tribunal on the 15th May, 1946.
The assessee applied to the Appellate Tribunal under
section 66 ( 1) of the Act for reference to the High Coun
of certain questions of Jaw arising out of its order. The
Commissioner of Income-tax in his
reply
suggested
the following two questions for reference :-
" ( 1) Whether on the facts and in the circumstances
of the case, the Appellate. Tribunal was right in holding
that section 42(1) and (3) of the Income-tax Act has
no application to income accruing or arising to the
assessee company in British India or to income received by it in British India during the previous year ?"
"(2) Whether, on the facts and in the circumstances
of the case, the Appellate Tribunal was right in holding that the entire income of the
assessee company
during
the
accounting year
ended
31st December,
1941, was assessable under section 4(1) of the Incometax Act, and that no portion of such income was
entitled to be exempted under section 42(3) of the
Act ?"
The Appellate Tribunal however referred the following questions to the High Court :-
" ( 1) Whether on the facts and in the circumstances
of the case, section 42(1) and (3) of the Act alone and
not section 4 of the Act have application to the income
accruing or arising to the assessee company in British
India and to
the income
attributable to the sale
proceeds received
by it in British India during the
previous year ?"
"(2) Whether on the facts and in the circumstances
of this case the entire profits and gains arising to the
assessee company in British India should be taken into
account for the purpose of applying the test laid down
under section 4-A ( c) (b) or only that part of the profits which should be determined after the application
of section 42(3) of the Act as reasonably be attributable to that part of the operations carried on in British
India ?" and
"'(3) Whether on the facts and in the circumstances
of the case, the provisions of the Indian Income-tax
S.C.R.
SUPREME COURT REPORTS
5T/
Act contained in section 4(1) with the sub-sections
and section 4-A(c), (b) are not ultra vires in so far as
they seek to assess foreign income of the company
registered outside British India ?"
The third question was concluded by the decision
of their Lordships of the Privy Council in the case of
Wallace Bros. & Co. Ltd.(') and was therefore not argued
before the High Court and the High Court answered
it by stating that the provisions of sectio.ri 4 ( 1) and
section 4-A ( c) (b) of the Act were not ultra vires the
Indian Legislature. The question No. (1) was further
amended by agreement between the learned counsel
for the revenue authority and the assessee and it was
reframed as under :
" ( 1) Whether on the facts and in the circumstances
of the case section 42 (1) and (3) of the Act alone and
not section 4 of the Act have application to the income
accruing or arising by reason of sales in British India
of manufactured goods where the manufacturing process took place outside British India ?"
The question (2) was retained in the form in which
it had been referred by the Appellate Tribunal. Both
these questions were answered against the assessee by
the High Court. The assessee obtained the necessary
certificate from the High Court for leave to appeal to
this court and hence this appeal.
It may be observed that in reply to the notice
under sections 22(2) and 38 of the Act for the asessment year 1942-43 the agents of the assessee
had on
the 1st June, 1943, submitted a return under protest
and had claimed that the income shown in the return
should be apportioned under section 42(3) of the Act
as between the operations carried on in British India
and operations carried on outside British India. They
had further declared that the company was non-resident in British India during .the previous year for which
the return was made.
In the statement
enclosed
therewith the total world income for the year ended
31st December,
1941, had been shown at Rs. 10,23,907.
Profit at 10 per cent. on British India sales which
1953
Angla.Frtnclt
T 1xtil1 Co. /..Jd.
v.
Cormni.uionet" of
lncom1-tax,
MadrAS.
BM.gwati].
1953
Anglo-French
Textilt Co. Ud.
v.
Commissioner of
lncomt-lax,
Madras
Bhagwati].
528
SUPREME COURT REPORTS
[1954]
aggregated to Rs. 57,07,431
was shown at
Rs. 5,70,743
and after
deduction of
the proportionate· expenses
relating to sales in British India and sundry charges
was put down at the net figure of Rs. 4,58,026 which
was shown as the British Indian income. It was thus
contended that the income arising in British India in
the year of account did not exceed its income arising
without British India and that therefore the assessee
was non-resident
in British India. This calculation of
profits at the rate of 10 per cent. on British Indian
sales did not make any allocation between manufacturing profits and merchanting profits and all the profits
arising out of British Indian sales were shown in one
lump sum. The Income-tax Officer took it as settled
law that the profits arose in the country in which the
sales took place and as the bulk. of the sales had taken
place in British India the bulk of the profits accrued
or arose in British India. He held that the provisions
of section 42(3) would apply only where the profits
arose outside British India but which by virtue of
section 42(1) were deemed to accrue or arise in British
India, and that it did not apply where the profits
actually arose in British India by the sale of goods in
British
India.
He
therefore
held that the entire
profits on sales made in British India actually arose in
British India and were liable to tax under section 4
( 1) ( c). On a calculation of the figures he came to
the conclusion that the income of the assessee arising
in British
India in the accounting year
exceeded its
income arising without British India and
that the
assessee was
resident in British
India under
section 4-A( c).
The assessee was also held ordinarily
resident in British India under section 4-B(c) and he
assessed the company accordingly on that basis. The
Appellate Assistant Commissioner also proceeded on
that basis and confirmed the order of the Income-tax
Officer. He was however further of the opinion that
the entire profits were received where the sale proceeds
were
received
and the assessee
was thereforn
liable to tax under section 4(1) (a) also. This conclusion
was
arrived at by
him relying upon two
decisions of their Lordships of the Privy Council : (1)
S.C.R.
SUPREME COURT REPORTS
529
Pondicherry
Railway
Company
v.
Commissioner of
Income-tax, Madras(') and Commissioner of Income-tax.
Madras v. Diwan Bahadur Mathias('), in the first of
'which at page 369 Lord Macmillan observed as follows :
"Their Lordships accordingly are of the opinion that
the income derived by the Pondicherry Railway Company from the payment made to them by the South
Indian
Railway
Company
is
on
the
facts
stated
received in British India within the meaning of the
Act by the Agent .of the Pondicherry Railway Company
there on their behalf" ...... "It is unnecessary to go on
to consider whether the
business
is
carried on in
British India, which is the form which question ( c)
takes, for it is enough if the profits of a business
carried on by the assessee are received in British India
and the place where the business is carried on is not
material." The
Appellate Tribunal adverted
to
the
fact that the whole income of the company so far as
1942-43 is concerned was received in British India and
so far as 1943-44 is concerned a major part ot 1t m
.this way was
received in British India. but did not
base its decision on this aspect of the case. It held
that the scope of section 42(3) was circumscribed by
confinement to those cases where profits were deemed
to accrue or arise under section 42 alone and there was
no warrant for extending the principle of apportionment to
other cases
where the profits and gains were
made taxable under other sections of the Act. It also
held
that section 42
dealt with "deemed" income
whereas section 4-A( c)
dealt with income that arose
in British India. Therefore, it could not be said that
for
the purpose of section
4-A(c) a
proportionate
"deemed" income
should be taken as income that
arose
in
British
India.
When the
application
for
reference was
made to the Appellate Tribunal the
Commissioner of Income-tax in the question ( l) which
he suggested included within its ambit this aspect of
the income having been received by the assessee in
British India during the previous year. But when the
Appellate Tribunal reframed the question (1) it merely
(1\ [1931] 5 l.T.C. 363.
(2) [1939] 7 l.T.R. 48.
1953
An:lo-French
T1-xtilt Co. Ltd.
v.
CommiJsioner of
[111;orrlt-t11X
Madrs.
Bhagwati].
1953
.A.n~lo-Fr1ftl:h
Textile Co. Ltd.
v.
Conunissiontr of
lncomt-lllJt,
Ma&as.
Bh•za1141i]
530
SUPREME COURT REPORTS
[1954}
confined it to income accruing and arising to the assessee in British India and to the income attributable to
the sale proceeds received by it in British India during
the previous year. The question (1) as finally framed
by the High Court adverted to the income accruing or
arising by reason of sales
in British India on manufactured
goods
where manufacturing
process took
place outside British India and the aspect of the income having been received by the assessee in British
India was absolutely ignored.
When the questions were originally referred to the
High Court the position in law as then understood was
that profits arose in the country in which the sales
took
place.
This position
was
however
negatived,
particularly
in the
case
of manufacturing businesses,
in
a
decision
of
this
court in
commissioner of
Income-tax,
Bombay v. Ahmedbhai Umarbhai & Co .•
Bombay(').
After hearing at considerable length the arguments
urged before us on behalf of the assessee as well as the
Income-tax authorities we feel that in view of that
decision the questions framed by the Tribunal and the
High Court do not bring out the real point in controversy between .the parties and it is
agreed that the
following two questions truly represent and bring out
the matter on which the parties are
at iisue. We
therefore resettle the questions originally frnmed aml
reframe them as below :
(I) Whether in view of the finding of fact in this
case that the entire profits were received in India and
the company is liable to tax under section 4(1) (a) of
the
Act,
the
provisions
of section
42(1) have
any
relevancy ?
(2) Can the income received in India be said to arise
in India within the meaning of section 4-A(c) (b) of
the Act ? If not, should only those profits determined·
under section 42(3)
as attributable to the operations
carried out in India be taken into account for applying
the test laid down in section 4-A(c) (b) ?
I I •950] S.C.R. '.l35·
in T.T.R. 472.
.,
S~C.R.
SUPREME COURT REPORTS
.531
The case is remanded to the High Court with the
direction that it should give its opinion on these two
questions and submit the
case to this court within
three months.
S. N. Mukherjee, for the appellant.
Porus A. Mehta, for the respondent.
1953. December 8.
BHAGWATI J.-By our judgment dated
the 22nd December,
1952, we refram.ed
the questions as below :
( l) Whether in view of the finding of fact, in this
case that the entire profits were received in India and
the company is liable t,o tax under section 4(1) (a) of
the
Act,
the
provisions of section 42 ( 1)
have any
relevancy ;
(2) Can the income received in India be said to
arise in India within the meaning of section 4-A ( c)
(b) of the Act ? If not, should only those profits
determined under section 42 (3) as attributable to the
operations carried out in India
be taken into account
for applying the test laid down in section 4A (c) (b),
and remanded the case to the High Court with the
direction that it should give its opinion on these two
questions. The High Court has accordingly considered these two questions which were referred to it for
opinion and has answered the question No. l in· the
negative and against the assessee and question No. 2
in the manner following, i.e., the income received in
British India cannot be said to wholly arise in India
within the meaning of section 4-A ( c) (b) of the Act
and
that
there should be allocation of the income
between
the
various
profit
producing
operations
of the business of · the company in the light of the
principle contained in the judgments in Ahmedbhai
Umarbhai's case(') and in Anglo-French Textile Company v. Income-tax Commissioner(') relating to the same
assessee.
When the matter came up for
further arguments
before us on this opinion of the High Court, Shri
S. N. Mukherjee, the learned counsel for the appellant
(1) 1'1. cO] t8 !.T.R 472.
(2) ,:.l.R. 1953 S.C. 105.
1953
Anglo-Frtfttk
Textile Co. Ltd .
••
C&mmi.uioner of
lncBm1-twt,
Macbas.
Bhagwati J.
1953
Anglo-French
Textile Co. Ltd.
••
Commissioner of
J11come~lax,
Madras.
Bhagwali].
532
SUPREME COURT REPORTS
(1954]
did not
contest
the
correctness of
the answer
to
question No. 1 in view of the decision of this court in
Turner Morrison & Co., Ltd v. Commissioner of lncometax, West Bengal(').
It may be noted that even before
the High Court the learned counsel appearing 'for both
the parties agreed that the matter was concluded by
this decision against the assessee and question No. 1
was answered accordingly by the High Court.
In regard
to the question
No. 2 however Shri
Porus A.
Mehta, learned counsel for the respondent,
contended before us that the matter was not concluded by the
judgment of
the
majority
in
Commissioner o,f Income-tax, Bombay v. Ahmedbhai Umarbhai
& Co., Bombay(') and that the High Court was wrong
in
the answer which it gave
to this question. He
contended that the decision in the case of Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai
& Co., Bombay('), turned on the statutory provisions of
the Excess Profits Tax Act read with section 42 (3) of
the
Indian
Income-tax
Act
which
was
expressly
incorporated
therein by
virtue
of section
21 of
the
Act and not on any general
principles
of apportionment of income, profits or gains enunciated
therein.
He took us in extenso over the portions of the majority
judgments and tried to demonstrate that the decision
there was based purely on the applicability of section
42(3) of the Indiaq Income-tax Act, but for the applicability of which, according to his submission,
there
was no room for the apportionment of the income,
profits or gains of the business in the manner contended by the appellant. We
do not
accept
this
contention of the respondent. Section 4A ( c) (b) is
concerned with the income arising in the taxable territories
in
a particular year exceeding
the income
arising without the taxable territories in that year and
the very
words of the section are
capable of being
construed
as
also
contemplating a state
of affairs
where there may have to be a division or apportionment
between the income arising in the taxable territories
and the income arising without the taxable territories
(r) [1953) S.C.R. 520.
(2) [1950) S.C.R. 335.
S.C.R.
SUPREME COURT REPORTS
533
in the particular year. The whole of the argument
urged before.
us on behalf of the respondent was
aimed at establishing that the scheme of the Indian
Income-tax Act was not to tax the source of income
but the ·income, profits or gains from whatever source
derived which were received or were deemed to be
received in the taxable territories or which accrued or
arose or were deemed to accrue or arise in the taxable
territories during the particular year and that it was
immaterial whether the income, profits or gains were
derived from business operations carried on in the
taxable
territories
or without the taxable territories.
This argument was possible when the decisions which
held that income, profits or gains arose or accrued at
the places where the sales took place were good law,
because
then there was no question of apportionment
of. income, profits or gains arising from the business
operations carried on in the taxable territories and
income, profits or gains arising from the business
operations carried on without the taxable territories.
The moment however it was held, as it was done in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai
& Co., Bombay('), that though profits may not be realised
until a manufactured article was sold profits were not
wholly made by the act of sale and did not necessarily
accrue at the place of sale and to the extent profits
were attributable to
the manufacturing
Dperations
profits accrued at the place where business operations
were carried on, these decisions went by the board.
The question whether a particular part of the income,
profits or gains arose or accrued within the taxable terri,
tories or without the taxable territories would have to
be decided having regard to the general principles as to
where the income, profits or gains could be said to
arise or accrue. Section 42
of the Indian Income-tax
Act has no relevance to the determination of this
question because it is mainly concerned with income
which is deemed
to have arisen
or accrued and not
with income which actually arises
o~ accrues within the
taxable territories.
Section 42 (3) also
is a part of the
scheme which is enacted in section 42 and cannot hel1»
(!) (1950] S.C.R. 335·
1953
Angl0-French
Textile Co. Lt<l.
y,
Commissioner of
Inamtt·lax,
Madras.
Bbagr.uati j.
1953
.Anglo-Frtnch
T1xtil1 Co. Ltd.
v,
Commissio11er of
Income-tax,
Madras.
Bhagwati ].
534
SUPREME COURT REPORTS
[1954]
in the determination of the question before us. As
a matter of fact the use of the words "under section
42(3)" used in the question No. 2 as reframed by us
was not appropriate and the only question which
should have been sent to the High Court was "if not,
should only those
profits
determined
as
attributable
to the operations carried out in India be taken into
account for applying the test laid down in section
4A (c) (b)."
If, therefore, section 42(3)
has nothing to do with
the determination of the income arising in the taxable
territories as
distinguished from the income arising
without the taxable territories as understood in section
4A ( c) (b) of the Act what we have got to consider is
whether there
is anything in the Act which prevents
the application of the general
principle of
apportionment of income, profits or gains between those which
are derived from business operations carried on within
the taxable territories and those which are derived from
business operations carried on without the taxable territories. The contention which was advanced by Shri
Porus A. Mehta on behalf of the respondents in this
behalf,
viz., that
the
word
"arise"
was
the
only
word used in section 4A ( c) (b) and the word "accrue"
did not find any place therein, that there was a distinction l\etween the conception of arising and the conception of accrual
and that
the
apportionment of
the
income was appropriate only in cases where the income
arose and was inappropriate in cases where the income
accrued, was sufficiently
repelled in the judgment in
. Commissioner of Income-tax, Bombay
v.
Ahmedbhai
Umarbhai & Co., Bombay('), where it was observed:-
"Whether the words 'derive' and 'produce' are or
are not synonymous with the words 'accrue' or 'arise',
it can be said without hesitation that the words 'accrue'
or 'arise' though not defined in the Act are certainly
synonymous and are used in the sense of 'bringing in
as
a natural result'.
Strictly
speaking,
the word
"accrue'
is not synonymous with 'arise', the former
.connoting idea of growth or accumulation and
the
(1) [1950] S.C.R. 335 at p. 364.
•
S.C.R.
SUPREME COURT REPORTS
535
latter of the growth or accumulation with a tangible
shape so as to be receivable. There is a distinction in
the dictionary meaning of these words, but throughout
the Act they seem to denote the same idea or ideas
very similar and the difference only lies in this that
one is more appropriate when applied to a particular
case.
In the case of a composite
business, i.e., in the
case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of
the accrual of profits and their apportionment inter se.
For instance, .where a person carries on manufacture,
sale, export and import, it is not possible to say that
the place where the profits accrue to him is the place
of sale.
The profits received relate firstly
to
his
business
as
a
manufacture, secondly
to his
trading
operations, and thirdly to his business of import and
export. Profits or loss has to be apportioned between
these businesses in a businesslike manner and according to well-established principles of accountancy.
In
such cases it will be doing no violence to the meaning
of the words 'accrue'
or 'arise'
if the profits attributable to the manufacturing business are said to arise or
accrue at the place where the manufacture is being
done and the profits which arise by reason of the sale
are said to arise at the place where the sales are made
and the profits in respect of the import and export
business are said to arise at the place where the business
is
conducted.
This apportionment of profits
between a number of businesses which are carried on
by the same person at different places determines also
the place of the accrual of profits."
The phraseology of section 42(3) of the Act also
repels the contention in so far as the profits and gains
of the business which are referred to therein and which
are capable of apportionment as therein mentioned
are deemed to accrue or arise in the taxable territories
thus using the words "accrue'' and "arise"
as synonymous with each other.
The above passage is also sufficient in our opm1on
to establish that the apportionment of income, profits
or gains between th:i,;e
~rising from business operations
1953
~~nglo-French
Textile Co. ltd .
•.
Commi1sioner of
Income lax,
Madras.
Blr.agwati .7·
Anglo-French
Textile Co. /..Jd.
v.
Commissioner of
Income-tax,
Madras
Bhatw.Ui ].
536
SUPREME COURT REPORTS
[1954]
carried on in the taxable territories and those arising
from business operations carried on without the taxable
territories is based not on the applicability of section
42(3) of the Act but on general principles of apportionment of income, profits or gains. That was really the
ratio of the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai
& ·Co., Bombay('), and any attempt to distinguish that
case from the present one by having resort to the
statutory provisions of the Excess Profits Tax Act is
really futile. We are accordingly of the opinion that
the answer given by the High Court to the question
No. 2 also was correct.
The appeal before us will accordingly be allowed and
the answers to the questions Nos. 1 and 2 reframed by
us will be as under :-
Question No. 1-In the nagative ; and
Question No. 2-The income received in British
India cannot be said to wholly arise in India within
the meaning of section 4A ( c) (b)
of the Act and that
there should be allocation of the income between the
various business operations of the assessee
company
demarcating the income arising in the taxable territories in the particular year from the income arising
without the taxable territories in that year for the purposes of section 4A ( c) (b) of the Act.
In so far as the appellant has failed in one part of
the case and succeeded in another part we think that
the proper order for cost should
be . that each party
bears and pays his own costs of this appeal including
the costs of the remand before the High Court.
Appeal allowed.
Agent for the appellant: P. K. Mukherjee.
Agent for the respondent : G. H. Rajadhyakslta.
(1) [i950] S. C. R 335.
•