1. The question referred for our decision is:
'Whether in the circumstances of the case the whole of the profits from the supply of sheep and goats to the military authorities accrued or arose in an Indian state and hence is exempt from liability to excess profits tax by virtue of the proviso to S. 5 of the Excess Profits Tax Act?'
The facts are these. The assessee is a registered firm carrying on business as manufacturers and sellers of bone meal with their head office at Katpadi near Vellore and depots in many other places in British India. In May 1942, the assessee entered into a contract with the military authorities for the supply of live goats and sheep in weekly instalments at an agreed price. The assessee deposited a sum of Rs. 10,000 with the military authorities in British India as a guarantee for the due performance of his obligations under the contract under which deliveries had to be effected over a considerable period of time. The contract was entered into in British India. The goats and sheep were purchased by the assessee in large quantities in Mysore. They were transported to Cochin State and put on board a ship provided by the military authorities at Ernakulam, the cost of these operations being borne by the assessee and included in the price contracted to be paid. The Tribunal found, and this finding of fact is binding upon us, that the assessee maintained an establishment and an office at Ernakulam for attending to the transport and loading of goats and sheep on ships. The assessee sent his bills for the goats and sheep supplied by him, to the military authorities at Poona who paid the price by cheques drawn in favour of the assessee on the Imperial Bank at Vellore. No payment was made to the assessee outside British India in respect of the contract. The Income of the assessee computed for the chargeable accounting period included a sum of Rs. 50639 as profits derived from the supply of goats and sheep. The revenue authority assessed this sum to excess profits tax on the ground that the whole of the profits arose or accrued to the assessee in British India. According to the assessee the whole of the profits arose out of British India in the State of Mysore where the goods were bought and in Cochin state where they were delivered. In this Court Mr. Rama Rao Sahib, for the Commissioner of Excess Profits Tax, argued that a portion of the profits attributable to the business operations of the assessee outside British India was not taxable but the rest of the profits was liable to excess profits tax. According to him, the business operations outside British India' should be deemed to be a separate business under the third proviso to Section 5 of the Excess Profits Tax Act and its profits alone exempted from tax.
2. Though under Section 4 of the Income-tax Act, as it stood before the amendment of 1939, the place of accrual of income was of importance it lost its importance in the case of a person resident in British India by reason of the drastic amendment of Section 4 in 1939 making such residents taxable on income, profits and gains accruing or arising to them in any part of the world. Generally speaking, the place of accrual and receipt of business income is now of importance only with reference to non-residents. A limited measure of exemption was, however, granted in 1941 by the enactment of Section 14(2) (C) of the Income-tax Act dealing with income, profits or gains accruing in an Indian State (now Part B State) to residents in British India.) A corresponding amendment of the Excess Profits Tax Act was also made in 1941 by the addition of the third proviso to Section 5 of that Act which ran 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 purposes of this Act, be deemed to be a separate business.' Section 21 of the Excess Profits Tax Act incorporates by reference the provisions of Section 42(3) of the Income-tax Act which laid down the basis on which the income of a part of a business had to be determined. Section 42 (3) of the Income-tax Act ran 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.'
These were the relevant statutory provisions governing the liability to tax and the claim for exemption from tax, at the time when the assessment was made in this case.
3. We had occasion to examine the effect of these provisions in our judgments in 'Commissioner of Excess Profits Tax v. Goculdoss Jamnadass & Co.', : 18ITR277(Mad) and 'Commissioner of income-tax v. Parasuram Jethanand : 18ITR302(Mad) , but we had not then the benefit of the exposition of the law by the Supreme Court In 'Commissioner of Income-tax v. Ahmedhbhai Umarbhai & Co. : 18ITR472(SC) , which has substantially affirmed our decision. The case before the Supreme Court was comparatively simple on the facts. There the assessee firm, a resident in Bombay, owned an oil mill at Raichur in Hyderabad State where ground nut oil was manufactured. The manufactured oil was despatched to the assessee at Bombay where it was sold for a profit. The manufacturing part of the business was conducted from start to finish in Hyderabad State where the assessee's oil mill was situate, the sale of the oil alone being effected in Bombay. The Supreme Court held that the production and manufacture of groundnut oil in the assessee's mill at Raichur was 'a part' of the business of the assessee carried on in an Indian State within the meaning of the third proviso to Section 5 of the Excess Profits Tax Act. The Court negatived the contention of the revenue authority that as the sales of oil were effected and the price was received at Bombay by the assessee, the whole of the profits of the business accrued or arose in Bombay. The receipt of the price of the goods sold at Bombay was distinguishable from the accrual of the profits of the business and a part of the profits of the business must be attributed to the manufacture of oil in Raichur. Acting under Section 42 (3) of the Income-tax Act incorporated by reference Into the Excess Profits Tax Act the Court held that the profits of the business should be apportioned between the manufacturing and the trading activities of the assessee, each set of activities constituting a separable part of the business. The profits attributable to the manufacture of oil in Raichur were held not liable to excess profits tax. According to the decision of the Supreme Court, where a resident of British India manufactures goods in an Indian State and sells them and realises their price in British India, the whole of the profits should not be treated as 'accruing' or 'arising' from the sale, or at the place of sale, though the profits may be treated as 'received on sale.' Apportioning the profits between the selling and the manufacturing operations, each of which forms a 'part of the business,' the profits attributable to the manufacturing part of the business carried on in the Indian State must be exempted from liability to excess profits tax.
4. The question as to what can be styled 'a part of the business' of an assessee does not always admit of an easy answer. Fatanjali Sastri, J., in 'Commissioner of Income-tax v. Ahmedbhai Umarbhai & Co. : 18ITR472(SC) , would apparently read 'part of the business' in their third proviso to Section 5 of the Excess Profits Tax Act as signifying one or more operations of the business contemplated by Section 42 (3) of the Income-tax Act. His Lordship after adverting to the difficulty of cutting
'business, operations arbitrarily into two or more operations, apportioning as between them the profits resulting from one continuous process ending in a sale,'
nevertheless held that the third proviso to Section 5 of the Excess Profits Tax Act demanded such an apportionment. How far is this process of dissection of business operations and the apportionment of profits among the several operations of a business to go? Kania, C.J., was alive to this difficulty when he said:
'It is not contended in the present case that the activities of the assessee as a manufacturer are 60 spread out as to be Incapable of being ascertained as one unit of business in an Indian State. For instance, difficulties may arise if a manufacturer buys groundnuts in one place, has a crushing mill in another place, has a refinery in a third place and packing, etc,, in a fourth place. It is not disputed that the assessee's activities as a manufacturer are all in Raichur and if GO, that set of activities under the definition 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 asses-see are 'a part of his business in an Indian State.' Those conditions of the proviso are therefore fulfilled.'
The opinion of Mukherjea, J., (with whom Das, J., agreed) was also to the effect that though a business might consist of several operations it is not every operation that would constitute 'a part of the business' within the meaning of proviso 3 to Section 5 of the Excess - Profits Tax Act. His Lordship substantially affirmed the view taken by us in 'Commissioner of Excess Profits Tax v. Goculdass Jamnadass & Co.',  18 ITR 217, that profits can be considered to accrue in respect of a part of the business if the apportionment of the total profits and allocation of a portion of such profits to the part in question was possible on any recognised or intelligible principle of mercantile accountancy. Mahajan, J., (with whom Fazl Ali, J., agreed), no doubt quoted with approval the following observation of Tendolkar, J., in the Judgment appealed against:
'Normally the meaning of the word 'part' is a portion in whatever way carved out and I have no doubt in' my mind that any of the portions that go towards a complete business are a part of that business.'
The learned Judge, however, was not taking a view different from that of the learned Chief justice and Mukherjea, J., as appears from the following passage in his judgment:
'the proviso (to Section 2, Clause 5, of the Excess Profits Tax Act) has made an amalgam of the businesses of one individual and it is in view of this amalgam that proviso 3 of Section 5 has to be considered .......... If a number of business carried on by a person are situate in different places, then the effect of the proviso is to again treat them as separate businesses 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 purposes of Section 5 all these four trades are part of the business within the meaning of proviso 3 to Section 5, one part situate in one place and another part situate at another place and if any of these parts produce profits at the place of the business, that place being in Indian State, then proviso 3 would have application.'
In the light of the foregoing statement of the law we hold that the purchase of goats and sheep in Mysore, their transport to Cochin and the loading of the goods on board the ship provided by the military authorities at Ernakulam form a separate section or part of the business of the assessee, a part separable from the rest of the business. These operations together constituted a part of the business and a part which was carried on outside British India in Mysore and Cochin State. The assessee's office at Ernakulam was in charge of these operations. The buying of goats and sheep at Mysore and their sale at Ernakulam might itself produce a profit without reference to the contract entered into in British India. Entering into the contract with the military authorities in British India, supervision of the performance of the contract from British India and the realisation of the price payable for the goods delivered at Katpadi In British India where the head office of the firm was situate, could be treated - as constituting a separate part of the business of the assessee.
5. The further question is whether the whole of the profits of the assessee from the military contracts arose in British India where the contract was entered into and the price realised, or in Indian States where the contractual obligations of the assessee were substantially performed. The criterion under proviso 3 to 8. 5 of the Excess Profits Tax Act Is the place where the profits accrue or arise and not the place where the profits are received. We have dwelt at length with the question of the Place of accrual of profits in a case like the present one in 'Commissioner of 'Income-tax v. Little's Oriental Balm, etc., Co., Ltd.',  13 ITR 849, which, however, was a case relating to the levy of income-tax. We need not again embark on an elaborate examination of the decided cases. Suffice it to refer to a few landmarks. In 'Commissioner of Income-tax v. Chunilal B. Mehta', ILR (1938) Bom 752, the assessee, a resident of Bombay, through brokers in foreign countries, carried on buying and selling operations in foreign markets by entering into forward contracts of a speculative nature. Delivery of goods was never given or taken. Only differences were paid or realised abroad, with the result that a large sum stood to the credit of the assessee with his foreign bankers as a result of these transactions. The money was not sent over to the assessee in British India. The Judicial Committee found that the contracts for sale or purchase were neither framed nor carried out in British India and held that the profits derived from those transactions did not accrue or arise in British India. The words 'profits accruing or arising' were interpreted as requiring a place to be assigned as that at which the result of trading operations come, whether gradually or suddenly, into existence. It was observed that there was no necessity arising out of the general conception of a business as an organisation, that profits should arise only at one place and that profits were frequently, if not ordinarily, regarded as arising from many transactions, each of which had a result --not as if the profits needed to be disintegrated with difficulty --- but as if they were an aggregate of the particular results. It was also stated that discrimination between different kinds of profits according to the place at which they accrued or arose was a plain dictate of the Income-tax Act. Their Lordships, however, refrained from laying down a general rate applicable to concrete cases and said:
'If such profits have not been received in or brought into British India it becomes or may become necessary 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 neither framed nor carried out in British India; the High Court's conclusion that the profits accrued or arose outside British India is well-founded.'
6. Shortly, after this decision came the 'Commissioner of Income-tax v. Govindram Seksaria',  6 ITR 584 (Bom), where the only differentiating feature was that the assessee, a resident of Bombay, instructed his brokers in Bombay to enter into transactions on his behalf on the New York Exchange for the buying and selling of cotton. The transactions resulted in profits which were realised in New York and kept there without being remitted to the assessee. The Court held that the profits accrued in British India because they were derived from and paid in respect of the contracts entered into at Bombay. This Court in 'Commissioner of Income-tax v. S.L. Mathias', ILR (1938) Mad 25, took the view that by production of coffee on the assessee's own plantations in Mysore and sate of the coffee in British India, the income of the assessee was really agricultural and it accrued in Mysore. This Court differed from 'Mohanpura Tea CO. v. Commisioner of Income-tax', ILR (1937) 2 Cal 201, which held in similar circumstances that the profits of the assessee accrued or arose only at the place where the produce was sold and the price realised. The Judicial Committee on an appeal from the Madras decision left the question open and the conflict unresolved -- See 'Commissioner of Income-tax v. S. L. Mathias', ILR (1939) Mad 178.
7. In 'Commissioner of Income-tax v. Ahmedbhai Umarbhai & Co. : 18ITR472(SC) , the Supreme Court affirmed the decision of the Bombay High Court which had taken a view in consonance with that taken by this Court in 'Commissioner of Income-tax v. Mathias', ILR (1938) Mad 25, as regards the place of accrual of profits. Referring to the observation of the Judicial Committee in 'Commissioner of Income-tax v. Chunilal B. Mehta', ILR (1938) Bom 752, that the location of the sources of the income or the place where the business is carried on is not the criterion, but the place where the income accrues or arises and that this test itself can be applied distributively to the profits of a single source, Kania, C. J., in 'Commissioner of Income-tax v. Ahmedbhai Umarbhai & Co. : 18ITR472(SC) observed;
'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 income cannot accrue or arise at the place where the source existed. 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 assessee to be exempted from taxation in the present case.' (8) Mahajan, J., (with whom Fazl Ali, J., agreed) also said that 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. This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the accrual of profits. Patanjali Sastri, J., referred to 'Commissioner of Income-tax v. Chunilal B. Mehta', ILR (1938) Bom 752, and struck a somewhat different note when he said: 'It is with reference to such transactions which individually contribute to the surplus arising in the various places abroad that their Lordships spoke' 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 proceeds such as manufacture and sale and their 'disintegration and apportionment 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 be disintegrated with difficulty but as if they were the aggregate of the particular results.'
With reference to the business of purchasing and selling goods without any manufacturing process intervening, there are decisions to the effect that profits arise at the place where the contracts of sale are made -- See 'Board of Revenue v. Madras Export Co.,' 46 Mad 360, 'Jiwandas v. Commissioner of Income-tax', 10 Lah 657, 'Sudalaimani Nadar v. Commissioner of Income-tax : (1941)1MLJ99 , 'Sri Hardeo Bengal Salt Co. v. Commissioner of Income-tax : 10ITR13(Patna) In 're Post Said Salt Association Limited', 59 Cal 1228, 'Commissioner of Income-tax v. Chunilal B. Mehta', ILR(1938) Bom 752, and 'Rahim v. Commissioner of Income-tax 1949 ITR 258. In 'Commissioner of Income-tax v. Ahmedbhai Umarbhai and Co. : 18ITR472(SC) , Kania, C. J., (page 478) and Mahajan, J., (page 499) recognise that a trade consisting merely of purchase and sale of goods without any process of manufacture falls into a separate category and referred to some of the cases above cited, with evident approval. The view has also been taken in some decisions that the operations of buying would be relevant in determining the question whether any part of the income, profits, or gains accrues or arises at the place of buying especially if it is a process of selective buying requiring the exercise of skill and judgment -- See, Per Bay, C. J., in 'Rahim v. Commissioner of Income-tax : 17ITR256(Orissa) , 'Commissioner of Income-tax Excess Profits Tax Madras v. Parasuram Jethanand : 18ITR302(Mad) , 'Anglo French Textile Ltd. v. Commissioner of Income-tax', Madras No. 2 : 18ITR888(Mad) ; 'Rogers Pratt Shellac & Co. v. Secretary of State', 52 Cal 1; 'Commissioner of Income-tax v. Steel Bros.', 3 Rang 614 and Webb Sons & Co. v. Commissioner of Income-tax . Some of the judgments above cited, were referred to in the judgment of Mukherjea, J., in 'Commissioner of Income-tax v. Ahmedbhai Umarbhai and Co. : 18ITR472(SC) .
9. in the present case it cannot be said that the entire profits of the assessee derived from the military contract accrued or arose in an Indian State. The contract for sale was entered into in British India, the business was supervised from British India and the price payable under the contract was also realised in British India. A substantial portion of the business operations such as buying of goats and sheep, their transport and loading on ships had to be conducted in Mysore and Cochin. These operations constitute a separable and separate part or unit of the business of the assessee conducted by a separate establishment maintained at Ernakulam in the Cochin State. Profits attributable to this part of the business of the assessee must be apportioned and held to be exempt from excess profits tax, as having accrued in an Indian State within the meaning of the third proviso to Section 5 of the Excess Profits Tax Act. The rest of the profits alone can be considered to accrue' or arise in British India where the income producing contract was entered into, the business was supervised and the price of the goods sold was realised. The facts that the income producing contract was entered into in British India and that the price was paid in British India cannot be brushed aside. An unexecuted contract under which a person is entitled to buy or sell goods at advantageous prices has pecuniary value as a business asset -- 'See John Smith and Son v. Moore', (1921) 2 AC 13. The contract made by the assessee firm in British India in the course of its trade or business was a source of the profits made by the assessee, though the performance of the contract in an Indian State also contributed to the accrual of such profits.
10. Our answer to the questions referred to us is that the profits apportioned and attributed to that part of the business of the assessee carried on in Mysore and Cochin States would alone be exempt from excess profits tax under the third proviso to Section 5 of the Excess Profits Tax Act and that the rest of the profits would be liable to such tax. As each party has succeeded and failed in part there will be no order as to the costs of this reference.