NARASIMHAM, J. - The questions referred to us for opinion by the Income-tax Appellate Tribunal, Calcutta Branch, Patna, are as follows :-
(1) Whether, in the circumstances of the case and on the findings of the Tribunal, the income, profits or gains in question or any part thereof accrued or arose within an Indian State and, if so, whether such income, profits or gains were received or deemed to have been received in or were brought into British India ?
(2) Whether Section 42(3) of the Income-tax Act is applicable to the facts of the case
The assessees headquarters is at Cuttack and he has been assessed to income-tax for the year 1943-44 in respect of his dealings in (a) nux vomica and (b) hides, horns, bones etc., which were gathered by him from several Orissa States and sold at several places in British India through his commission agents known as arhatias. The cash realised by these arhatias from the sales of the aforesaid products were all remitted to the head office at Cuttack. The finding of the Tribunal is that the aforesaids products were not subjected to any manufacturing process but that they were transported in their raw state from varous Orissa States where they were collected to various places in British India for sale. The assessees accounts were maintained on the mercantile system of accounting.
On these facts the main question for decision is whether any portion of the profits of the business can be said to 'accrue' or 'arise' in any Orissa State. Mr. Patnaik, on behalf of the assessee, argued that inasmuch as the mercantile system of accounting was followed by the assessee, a portion of the profits included the value of the stock-in-trade that might have remained unexported in the States at the end of the year in question and that consequently a portion of the profits should be held to have accrued or arisen in the States. He further contended that buying is an important part of operation in the business of trade and that the Income-tax authorities should have estimated that portion of the profits which accrued or arose in the States and applied the provisions of sub-section (3) of Section 42 of the Indian Income-tax Act for calculating the profits that might be deemed to have accrued in British India. He relied on the provisions of sub-section (2 of Section 14 and claimed exemption in respect of that portion of the profits which accrued in the States was not brought into British India.
Though the expression 'British India' is now absolate in view of the adaptations made by the India (Adaptation of Existing Indian Laws) Order, 1947, it is convenient to retain that expression in this judgment because during the period of assessment the said expression remained in the Indian Acts.
The Tribunal relied on the case of Mohanpura Tea Company Ltd. and held that the profits accrued or arose at the place of sale of the commodities which admittedly was in British India, that this case came within the scope of sub-clause (i) of clause (b) of sub-section (1) of Section 4, and that neither Section 14(2) nor Section 42(3) was applicable.
The main point for consideration is whether in a business of this type which consists in the purchase of raw materials in Orissa States, export of those materials to British India and the sale of those articles in British India at a profit, it can be held that a portion of the profit accrued or arose outside British India. This is a case of simple trade, viz., buying of the commodities at a cheap price at one place and selling the same at a high price elsewhere. The operation of buying is doubtedly an essential part in the business of trade, but on that account can it be held that a portion of the profits of the business accrued or arose at the place of buying ?
The expressions 'accrue' and 'arise' occuring in Section 4 of the Indian Income-tax Act have been the subject of much judicial interpretation but for the purpose of this judgment it may be judicial interpretation but for the purpose of this judgment it may be assumed that they both denote the same idea or ideas very similar. There are two conflicting views as to the place where income or profit accrues or arises. One view is that the place which is the origin or source for growth of income or profit or the place where the income or profit is earned is the place where it accrues. The leading decisions in support of this view are :-
(1) Commissioners of Taxation v. Kick, Bansilal Motilals case and (3) Commissioner of Income-tax, Madras v. Dewan Bahadur S. L. Mathias
The opposite view is that the place where the right to demand payment of the income or profit or the place where it is actually received is the place of accrual and that the place of accrual may not necessarily by the place where it originates or is earned.
(1) Mohanpura Tea Company Ltd., 148. (2) Sir T. Vijayaraghavacharyas case and (3) Phra Phraison Salarak.
So far as the present case concerned, the decision of this vexed question is not very difficult chiefly because the finding on facts is that the raw materials do not undergo any manufacturing process in Orissa States but that they are exported in their raw state from the States to British India where they are solds at higher prices. Consequently the decision in Commissioners of Taxation v. Kirk or the recent decision of the Bombay High Court in Ahmedbhai Umarbhai & Co. v. Excess Profits Tax Officer which dealt with cases where raw materials underwent some sort of manufacturing process before export from the place of purchase, are distinguishable on facts. In Sulley v. Attorney-General. it was held that the mere purchase of goods in England for the purpose of enabling a person to trades in America did not constitute the exercise of a trades in England. Though this case was considered and distinguished in Commissioners of Taxation v. Kirk, no dissenting opinion was expressed. On the other hand, in Smith & Co. v. Greenwood it was held that a trade is exercised in the place where the business transactions are closed, i.e., in the case of a selling business the place where the sales are effected and the profit thereby realised. These decisions have been followed in Secretary, Board of Revenue v. Madras Export Company where the question for decision was whether a firm with its headquarters at Paris purchasing raw skins in British India. exporting them to Paris and making profits from the sales there can be said to be carrying on trade or business in British India. This question was answered in the negative. This decision has been followed in a later Full Bench decision of the Lahore High Court in Jiwan Das v. Income-tax Commissioner. In that case the question for decision was whether a person residing and carrying on the ground that a part of the profit of such sales accrued in British India. The Lahore High Court observed that 'the profits actually accrue or arise at the place where the goods are sold, and not at the place where they are merely purchased for export.' To a similar effect is the observation of Rankin, C.J., in In re Port Saids Salt Association Ltd. : 'But profit, though it may be anticipated by valuation or otherwise, is not realised before price, and when the article is sold the whole profit is realised for the first time.' There is also a recent Special Bench decision of the Madras High Court in Sudalaimani Nadsar v. Commissioner of Income-tax where it was observed : 'When a business of those simple nature-the business we have here is the buying in one place of animals for human consumption and the selling of them in another place-the profit arises only at the place of sale.' The aforesaids decisions are directly applicable to the present case. In Orissa States nothing is done apart from the buying of raw materials and exporting them to British India. There could be no question of profit accruing in the States soon after the purchase of these raw materials. Mr. Patnaik argued that the assessee obtained a monopoly license from the Rulers of the States to purchase these articles at very low prices in the State and that consequently had he sold them in the States at the market price prevailing there he would have obtained some profit and that profit should be seemed to have accrueds in the States at the market price prevailing there he would have obtained some profit and that profit should be deemed to have accrued in the States. This argument, however, does not appeal to us. The mere fact that the raw materials were purchased at concessional prices in the States because of the monopoly granted to the assessee does not necessarily leads to the inference that if the assessee had attempted to sell them in the States he would have obtained higher prices for those articles. At any rate, there is absolutely no finding on this point by the Tribunal and it is therefore unnecessary to speculate as to whether there was any market for these articles in the States or else whether the assessee would have been lable to sell these raw materials in those States. The applicability of the aforesaid decisions to the present case is not in any way affecteds by the fact that the purchases were made at reduced prices due to the monopoly granted by the Rulers.
I may norwt refer to Commissioner of Income-tax v. Dewan Bahadur S. L. Mathias on which Mr. Patnaik has relied. In that case the facts found were that the assessee who owned coffee plantations in Mysore State exported the coffee seeds in their raw state from Mysore State to British India and sold them at a profit there. A Full Bench of the Madras High Court helds that a portion of the profits accrued in the State. This case went up to the Privy Council. But their Lordships disposed of the appeal on other grounds and left this question open. With great respect I would prefer to follow the later Special Bench decision of the Madras High Court in Sudalaimani Nadar v. Commissioner of Income-tax, which on facts is almost identical with the present case.
I would therefore answer the first part of the first question of the Appellate Tribunal in the negative. No part of the income or profit of the business accrued or arose with in an Indian State. The answer to the second part of the first question does not arise in view of the answer to the first part. As regards the second question of the Tribunal sub-section (3) of Section 42 of the Indian Income-tax Acd will not be applicable to the present case in view of my opinion to the effect that no part of the profit of the business accrued or arose in an Indian State.
The assessee should pay the cost of this reference, Standing Counsels fee is fixed at Rs. 100.
RAY, C.J. - I agree with the conclusions arrived art by my learned brother. I feel the necessity, however, of adding a few words.
The question whether in a trade of buying and selling any part of the income, profits or gains accrued or arose at the place or places of buying the commodities is not free from difficulty. Authorities on the point are not unanimous. The reason for absence of unanimity is not for to seek. One of the reasons for such diversity of opinion must be the various verbal changes introduced into the relevant sections bearing upon the subject from time to time. I shall not however, be understood to say that I entertain, in the least, doubt with regard to the exactitude and correctness of the answers given by my learned brother. I should not, however, accept it as an abstract proposition of law that in all cases without any exception or a trade of buying and selling, the principle as enunciated will necessarily apply. The bulwark of the theory that the place of sale of commodities where the prices are either realisable or realised is the place where the profits or gains accrue or arise, is, to quote the words of Sir George Rankin in the case of Commissioner of Income-tax, Madras v. S. L. Mathias, 'the business operations cannot be arbitrarily cut into two portions but must be regarded as a whole,' Notwithstanding these observations, however, which seem to be the ratio of the decision, his Lordship had to concede that the fact that the commodities were purchased at particular place was not without its significance. In making this concession, his Lordship observed :-
'On the other hand, upon the question whether profits and gains accrueds or arose in British India, it may be that the fact that the coffee was grown in Mysore is by no means to be disregarded not withstandsing that it was sold in British India, especially if it be true that it was sold without further process of manufacturing character. For the moment, it is enough to say that it may be so, without examining the matter and without prejudice to either view................ that it is unnecessary to determine whether the income in question accrueds or arose within or without British India.'
The case of Commissioners of Taxation v. Kirk may prove not an inapropriate precedent in the particular facts of some cases of buying and selling. In this connexion, it may be noticed that the object of the Legislature in effecting certain changes in Section 42, particularly insertion of sub-section (3) of the section by the Amendment Act of 1939, is not without significance. In none of the rulings discussed at the Bar. The significance of the legislative change has been discussed, to my mind, it appears that reading sub-sections (1) and (3) of Section 42 together it would be difficult to rule out the operation of buying as irrelevant in determining the question whether any part of the income accrues or arises at the place of buying. Sub-section (1) would create liability to assessment as income in British India in respect of incomes earned outside Births India on account of any business connection therein. Side by side. Sub-section (3) in very flexible and wide terms makes the same apportionable between the different places in or through which some operations of a business are carried out. In the case of a business of buying and selling, it cannot be predicateds always with any amount of definitions, that all operations thereof are carrieds out at the place of sale. The sub-section is worded in a manner so as to widen its acetones in the matter of apportionment of the income by expressing its meaning in the negative form, such as, 'a business of which all the operations are not carrieds out in British India.' Where purchase takes place outside British India and sale inside, does not the case come within the purview of the sub-section as all the operations of the business are not carried out in British India This sub-section can be construced as a definition section of the meaning of the words 'accrue or arise' in British India whenever used in reference to 'a business of which all the operations are not carried out in British India.' Mr. Patnaik wanted to argue that on account of acquisition of monopoly right of purchasing hides, skins and bones etc., he has acquired special privilege in relation to his right of purchase in the States which must have contributed largely to the income actually earned. It can be envisaged that the purchase of raw skins can in certain circumstances be parallelled to the extraction of ores and bringing them into merchantable condition in the New South Wales case. According to the custom of the country, carcasses of animals are thrown into jungle and land out of the way places without skinning. The work of collecting skins from such abandoned carcasses is limited to the class of untouchables to collect them not without some difficulties. The bones and horns are seldom found stored either in heaps or in appreciable quantity in any particular place. By employment of special agents of a particular class of people, they are collected from over a wide field scattered as they lie. The monopolist has to pay sometimes in advanced by way of encouraging the people to go about the country and collect the commodities sometimes after unearthing them. These operations with the addition of certain others, however minor, in order to bring them into merchantable condition cannot be disregarded as unconnected with the operation of buying. Buying operations cannot be, without difficulty, held as no part of the operations of the business or trade of selling skins, hides, bones and horns etc.
Let by these considerations, I have taken care to add as much, so that our answers to the questions submitted may not be considered as laying down an absolute proposition of law applicable to all cases of buying and selling under all circumstances. What we say here is without prejudice to any other view that may be taken on the particular facts of a case. The questions put to us are limited by the words 'in the circumstance of the case and on the findings of the Tribunal.' As the contention had never been raised before the Income-tax Officer we do not know the nature and extent of the operations that was carried out in the States for the purpose of buying. According to the authorities cited by my learned brother, the mere act of buying may in certain cases, as in the present one, be so negligible a part of the operation of the business as not to make any appreciable difference in apportionment of the amount that accrued or arose in British India.
I believe in the truism that actual circumstances are of more weight in law cases, as in politics, than abstract theories, however conformable to the demands of reason these latter might be.
Reference answered accordingly.