Satyanarayana Rao, J.
(R.C. No. 57 of 1946)
1. The following question was referred to us by the Income-tax Appellate Tribunal under Section 66 (1), Income-tax Act :
'Whether in the circumstances of this case, the profits made on the sales which took place in British India were 'income arising in British India' within the meaning of Section 4-A (c) (b), Income-tax Act?'
The asseasee is the Little's Oriental Balm and Pharmaceuticals Ltd., Madras, which is a public limited company registered in Madras carrying on the business of manufacture and sale of medicines. Messrs. Oakley Bowden and Co. (Madras) Ltd., a private limited company, are its managing agents. The managing agency agreement conferred upon the managing agents very wide powers subject only to the control of the Board of the principal company. The control, however, is very general and is confined only to safeguarding the interests of its share-holders.
2. Until the war scare of 1942, the company(in this judgment referred to as the assessee)was a resident of Madras and was assessed assuch. On 22-4-1942, the office of the managingagents and the factory of the company wasshifted to Mysore, but was brought back in May1943. 'The previous year' of the companyended on 31-12-1942, the assessment year being1948-44. From 22-4-1942 to 31-12-1942, the factoryof the company and the office of the managingagents were undoubtedly in Mysore. The Appellate Tribunal found that out of the totalsales of Rs. 2,42,917 during the accounting year,sales of the amount of Es. 46,559 were made inMysore outside British India, but the balanceof Rs. 1,96,358 represented the sales in BritishIndia. The Appellate Assistant Commissionerheld that 80 per cent. of the profits made bythe company had accrued and arisen in BritishIndia and therefore the company was a resident in British India during the accountingperiod within the meaning of Section 4-A (c)(b),Income-tax Act.
3. The Appellate Tribunal differed from this conclusion. The Tribunal held that profits from the sales in British India did not arise or accrue in British India, but should be deemed to be profits which had arisen or accrued in British India. As under Section 4-A (c) (b) the test for determining the residence of a company is the actual accrual of the profits in British India and not profits deemed to have arisen in British India, the company, in their opinion, was not resident in British India. The Tribunal arrived at this conclusion from the language of Section 42 (3) of the Act, as it stood before the amendment of section in 1939. Section 42 (3) as it stood before 1939 was as follows :
'Where any profits or gains have accrued or arisen to any person directly or indirectly from the sale in British India by him or any agency or branch on his behalf of any merchandise exported to British India by him or any agency or branch on his behalf from anyplace outside British India, the profits or gains shall be deemed to have accrued and arisen and to have been received in British India.'
This section no doubt admits the argument that the profits and gains accrued or arising to a non-resident from the sales in British India shall be deemed to have accrued and to have been received in British India. But this language was altered in 1939 and the altered Section 42 (3) is as follows :
'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.'
It would be seen, that the language of the section has been radically altered in 1939 and this section it is that governs the assessment in the present case.
4. The fact that the sales in British India amounted to Rs. 1,96,358 during the accounting year was not disputed before us and the arguments in the case proceeded on the basis that the figures are correct and that the sales, in fact, took place in British India. It was not contended and indeed it could not be contended that in view of the language of Section 4-A (c) (a) that the control and management of the affairs of the company were situated wholly in British India in the accounting year and this clause was not relied on to establish that the company is resident in British India.
5. The sole question for determination, therefore, is whether on the facts the income that arose in British India in the accounting year exceeded the income of the company that arose without British India in that year.
6. Mr. M. Subbaraya Aiyar, the learned advocate for the assessee, argued the case from two aspects. The first position he maintained was that notwithstanding the alteration of the language of Section 42(3) in 1939, the profits that accrued from the sales in British India during the year must be treated as 'deemed profits' and not profits, which had actually arisen in British India. There is no authority, however, to support this construction of the section. Merely because under the law as it stood before 1939 the profits that arose in British India were treated as deemed profits under Section 42 (3), as it then stood, is no reason to construe the present Section 42 (3) in the same manner notwithstanding its clear and unambiguous language. We are not concerned with the policy or the scheme behind the alteration of the section. We are bound to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation. We cannot import the language of the repealed section into the present section and infer by that process, as did the Appellate Tribunal, that even under the present section, the income that actually arose in British India must be treated as 'deemed income'. Even the Tribunal does not dispute that the proper construction of Section 4-A (c) (b) is that the income must arise with-in British India in the year of account. The method of reasoning adopted by them was to treat the income that actually accrued and arose in British India as 'deemed income' and from that to argue that; Section 4-A (c) (b) has no application to the present case, as the income is 'deemed income' and not income that actually arose in British India.
7. Section 42 (1) defines for the purpose of the Act what constitutes income, profits or gains 'deemed to have accrued or arisen within British India'. In the case of a non-resident, if income, profits or gains accrue or arise outside British India by reason of business connection in British India, or by other nexus indicated in that clause, such income, profits and gains are deemed to have accrued or arisen in British India. In such a case under Section 42 (3) of the Act if the business comprised operations carried out within and without British India, the profits and gains of the business, which are deemed to have accrued under the section are apportionable between the operations carried out in British India and outside British India and the assessment would be confined to such of the profits and gains as are attributable to operations carried in British India.
8. This Court had occasion to construe this section in Nagayya v. Commissioner of Income-tax : 17ITR194(Mad) and interpreted the section as not applicable to cases where the profits and gains had actually arisen in British India in view of the clear language of the section that it applies only to profits deemed to arise, or accrue in British India. The same view was also adopted by the Allahabad High Court in the case of Hira-Mills Ltd., Cawnpur v. Income-tax Officer, Cawnpur : 14ITR417(All) . Apart from authority, on a plain reading of the sections that is also the conclusion which I have reached. The argument, therefore, that profits in the present case arising out of sales in British India must be treated as 'deemed profits', to use a compendious expression, must be rejected. The decision of the Appellate Tribunal which rested solely on this view is clearly erroneous.
9. The second line of argument adopted by Mr. Subbaraya Aiyar the learned advocate for the assessee, was that the income, profits and gains referred to in Section 4 (1) of the Act must be restricted to merchanting profits and that the manufacturing profits must be excluded, as in the present case the manufacturing processes of the medicines were carried out in the factory at Mysore and the goods were sold in British India. In other words, apart from cases falling under Section 42 (3), the contention of the learned advocate in substance amounts to saying that the same principle must also be applied anct adopted in the case of profits arising in British India by reason of sale of goods in British India manufactured outside India. This contention, as would be seen, is quite apart and independent of the applicability of Section 42 (3) of the Act. The question for consideration, therefore, is whether in the case of a non-resident carrying on manufacturing business outside British India when the sales are effected in British India, there is any warrant for apportioning and separating the profits attributable to the manufacturing processes from the entirety of the profits.
10. Profits and gains ordinarily connote the difference between the gross cost to the seller of the goods at the moment and at the point of sale and the net price, which he receives (see Hira Mills Case : 14ITR417(All) . In assessing the profits at the place of sale, the assessee would be entitled to a deduction from the sale proceeds, the cost of manufacture and export and other incidental charges, which are permissible deductions and the balance alone represents the profits. The fact that the manufacture of the goods was outside British India and in the state of Mysore makes no difference in the interpretation of the expression 'profits and gains'. It may be, as pointed out in Hira Mills Case : 14ITR417(All) that it gives rise to double taxation, but that is not a matter with which we are concerned in interpreting the section.
11. The non-resident is chargeable to income-tax under the Act in respect of income, profits and gains from whatever source derived, which he receives or is deemed to have received in British India in the year of account, or which accrue or arise or deemed to accrue or arise to him in British India in that year.
12. The expression 'deemed to have received or accrued in British India' is explained in Section 42, which has really to be read with Section 4 on which it is a commentary. Section 4 is the charging section and Section 42 gives the definition of the expression 'deemed to accrue and arise' or 'deemed to have been received in British India' in Section 4. As already observed, the profits in the present case are actual profits and not deemed profits. Is it permissible to exclude manufacturing profits out of profits which accrued, as a result of the sum total of the business operations ?
13. The definition of 'business' in Section 2 (4) includes no doubt manufacture. The operations of a business cannot be split up for the purpose of assessment under the Act and to make each part a definite and separate business merely because the definition is an inclusive one. By so splitting, the result is a conglomeration of several businesses by an artificial process of splitting up of what was merely one business into its component operations. So long as a business is one and entire, it must be treated as a single unit and the result of its operations, which end in profits, must be ascertained. A manufacturing process, itself may consist of several operations carried on in different places and may be situated at different places where such processes are carried on. For the purpose of the imposition of the income-tax, the place of the source, however, is not at all material as it is now finally decided by the Privy Council in Commr. of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta, Bombay . Probably the various places at which the processes are carried may be legitimately considered as places where the income is earned in part as they are all links in a chain of profit-making operations, but the cumulative effect of all such operations is to produce profits and the profits accrue and arise only at one place, namely, the place of the sale in the case of goods. The income-producing transactions may be several in a business and the profits of each such transaction may be produced and may accrue or arise at different places; but the transaction itself cannot be split up into its component parts and the situation of each of such part cannot be taken as the place of accrual of profits. For example, the place of formation of contract in the case of purchase of goods may be at one place and the sale may be at a different place, the profits of the business of purchase and sale ordinarily arise and accrue at the place of sale (see Chunilal Mehta's case From this it follows that there is no warrant under the provisions of the Act to separate and apportion the manufacturing profits as contended by the learned advocate for the assessee.
14. It now remains to examine whether there is any authority in support of such a contention. The decision in Hira Mills case : 14ITR417(All) is definitely against such a contention. A similar contention was also raised in In re Port Said Salt Association Ltd. : AIR1932Cal626 . The assessee in that case was a manufacturer of salt with the headquarters in Egypt. He exported salt for sale to the various parts of the world including India. The assessee were made liable to pay Indian income-tax under Section 42 of the Act as it then stood, which did not contain a power to apportion as under the present Section 42 (3). The assessee claimed that he was entitled in computing the profits and gains of his business in British India to make a deduction representing the proportion of profits earned by manufacture of salt in the country of origin. This contention was repelled and Rankin C. J. observed in the course of the judgment that 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.'
It was also pointed out that the profits earned by manufacture was not a permissible deduction under Section 10 of the Act and, therefore, on that ground also the assessee was not entitled to the deduction claimed. No doubt in that case it was claimed as a deduction, but the essence of the matter and the substance of the contention was an apportionment of the profits between manufacturing profits and the merchanting profits,
15. Of the several decisions cited before us, some of the decisions turned upon the interpretation of Section 42 of the Act and the decisions of the foreign Courts turned upon the language of the particular statute which had to be construed. Of the decisions in India reference may be made to the decision of this Court in Commissioner of Income-tax, Madras v. S. L. Mathias, I.L.R. (1988) Mad. 25 : A. I. R. 1937 Mad. 745 (High Court). The decision on appeal to the Privy Council in the same case is Commissioner of Income-tax, Madras v. S. L. Mathias which was concerned with agricultural income or produce of land. The remarks of the learned Judges in that case were confined to income from agricultural land and this is made clear in the judgment itself by the observations of the learned Judge Varda-chariar J. who delivered the judgment of the Court, occurring in more than one place. The proviso to Section 4 (2) of the Act, which was construed in that case contained the words :
'Nothing in this sub-section shall apply to income from the agriculture arising or accruing in a State in India from land for which any annual payment in money, or in kind is made to the State.'
The question which arose for consideration inthat case was whether in the case of coffee grown and harvested in Mysore, but broughtto Mangalore where it was dried and cured and was sold, the income received from such sale was within the exemption. The Commissioner of Income-tax treated it as an income, which accrued and arose in British India and hence not exempted under the proviso. The High Court did not accept this view. Thefollowing observations are enough to show thatthe learned Judge was not dealing with profits and gains, but was only considering income from agricultural land. In the first place, at p. 28 it is observed :
'Whatever may be said as to 'profits' or 'gains,' theview that 'income from agriculture' can be said to arise and accrue only when and where the produce is sold and converted into money seems to us, with all res-pect, difficult to reconcile with the reasoning, in Commissioners of Taxation v. Kirk, (1900) A. C. 588: (69 L. J. P. C. 87.)'
Secondly, at p. 29 it is remarked :
'In Commissioner of Income-tax, Bihar v. Maha-rajadiraj of Darbanga the Privy Council observed that a receipt in hind may be taxable income; they only add that what is received in kind should be money's worth, It was admitted before us by Mr. Patanjali Sastri, that in respect o the produce of land in British India, the Indian Income-tax Act recognises the receipt of income or rent in kind as receipt or accrual of income; it is difficult to see why, as a matter of language, the expressions 'receipt' or 'accrual' of income should not have the same significance when used in connection with the receipt of produce from lands outside British India.'
The decisions in In re Port Said Salt Association Ltd. : AIR1932Cal626 and Jiwandas v. Income-tax Commissioner, Lahore, 10 Lah. 657 : A.I.R. 1929 Lah. 609 were not dissented from and were distinguished on the ground that in the former case no portion of the income could escape taxation, unless, there was a convention to limit the claim of one State against the Nationals of the other and that the second proviso to Section 4 (2) was the result of such a convention and that the decision in Jiwandas v. Income-tax Commissioner, Lahore, 10 Lah. 657 : A.I.R.1929 Lah. 609 was not concerned with the receipt of produce of land in a Native State. According to the view of the learned Judge, the income from agricultural land is received at the place where it was produced and therefore it is income, which accrued and arose in the Native State of Mysore, which attracted the exemption under the proviso. This decision, therefore, though it was reversed in appeal in Mathias case by the Privy Council is no authority for holding that the manufacturing profits, which arose or accrued in a Native State should be separated, as not forming part of the income received in British India. The Privy Council rested their decision on the fact that the entire income was received in British India and therefore Section 4 (1) applied to the case. There were however two passages in the judgment of the Judicial Committee, which are seemingly irreconcilable and which are relied on by both sides. On behalf of the Crown, reliance was placed upon the passage at p. 186 in which it was observed :
'The business operations cannot be arbitrarily out into two portions, but must be regarded as a whole.'
From this it is argued that there is no warrant under any of the provisions of the Act save in the case provided by Section 42 (3) of the Act to apportion the profits by cutting up the business operations and separating the profits attributable to operations outside British India frpm the profits attributable to operations in British India. On the other hand, counsel for the assessee relied upon the passage, which occurs a little below on the same page which states :
'On the other hand, upon the question whether the profits and gains accrued 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 notwithstanding that it was sold in British India, especially if it be proved that it was sold without further process of a 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.'
The principle of cutting up profits is one thing and the decision of the question where and to what extent profits accrue or arise is a different question. Confining to the language of Section 4 (1), it is impossible to cut up the business operations and the consequent profits in the manner contended by the learned advocate for the assessee in the absence of a specific provision to that effect. As has been already pointed out, it has been ruled by this Court and also in Hira Mills case : 14ITR417(All) , that Section 42 (3) has application to profits, which are deemed to have accrued in British India, which implies that in the case of profits, which actually accrued in British India, the Legislature has not applied the principle of apportionment contained in Section 42 (3) of the Act. It may be from the point of view of the Native State, the State would be entitled to impose tax upon profits attributable to the manufacturing processes carried on within its jurisdiction if the law obtaining there permits it and might result in double taxation. But, that is no reason to construe the plain language of Section 4 (1) in a manner, which permits the apportionment of profits as claimed by the assessee. This aspect of the matter was considered in the Hira Mills case : 14ITR417(All) , where it was observed that :
'The circumstances that the assessee produced the goods in an Indian State can make no difference to the meaning of the words 'profits' or 'gains' and if the true construction of the Act gives rise in this, as in other cases, to double taxation that is not a matter by which we can he influenced in considering the Indian Income-tax Act.'
The Bench of the Bombay High Court consisting of Chagla C. J. and Tendolkar J. in Ahmed Bhai Umarbhai & Co. v. Excess Profits Tax Officer 1948-16 I. T. R. 192 : A. I. R. 1948 Bom. 426, had to construe the third proviso to Section 5, Excess Profits Tax Act, which provided that :
'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 facts in that case were : the assessee was the owner of three Mills in Bombay and one in Raichur in Hyderabad state. The business he carried on consisted of purchasing ground nuts and converting them and extracting oil in the mills. The oil extracted was sold. The case was confined to the oil extracted in the mill at Raichur, some of which waa sold in British India. The assesaee was a resident in British India and he claimed that the profits of part of his business, which accrued in Eaichur and were referable to the manufacturing process at Eaichur should be excluded from taxation. The argument advanced by the Advocate-General on behalf of the Excess Profits Tax Officer was that the business of the assessee was one comprehensive, and integrated business and that the profits accrued and arose only when oil was sold at the place where it was sold and at the time when it was sold and that till the sale was effected, no profits could have accrued in respect of the assessee's business. Therefore, the profits attributable to the manufacture of the oil at Eaichur could not be separated. It was held that the business of manufacturing the oil at Eaichur was 'part of a business' within the meaning of the proviso and therefore it should be treated as a separate business. There are, however, some observations in the judgment of both the learned Judges, which have been relied on, on behalf of the respondent. The larger question considered was whether the manufacture of oil, which was part of the business of the assessee in that case, could have produced profits. No doubt, until the oil was sold, no profits were made, but that according to the learned Judges was only to fix the time when the profits were made. From that fact, however, it did not follow that the profits were made merely by the act of sale. 'The act of sale' said Tendolkar J. at p. 203,
'is the culminating process of the whole business; and it would be undoubtedly laying an undue emphasis on this final act or process to say that all the profits were attributable to that operation only. Part of the process which enabled the assesses to sell the oil was the manufacture of the oil and to my mind a portion of the profits must necessarily be attributable to the manufacture of the oil when profits are made. It is not necessary that they should be so attributable at the time that the goods are manufactured, because it may well happen that the business makes no profits at all, in which case there will be no profit of manufacture.'
It was held that the profits attributable to the manufacture of oil accrued at Eaichur, though they were realised at the place where the oil was sold, i.e., in British India. There is no need to take exception to the view taken by the learned Judges, but this decision is no authority for holding that the apportionment of profits could be made in the absence of a statutory provision. So far as British India is concerned, the accrual of the entire profits was there and for the purpose of income-tax there is no restriction in the charging section to confine the assessment to profits attributable to the sale proceeds less the manufacturing profits. The decision in the Hiralal Mills, case : 14ITR417(All) and in Chunilal Mehta's case are clear authorities on the interpretation of the language of S, 4 (l) and the decision in Ahmedbhai Umarbhai & Co., v. Excess Profits Tax Officer 1948-16 I. T. R. 192 : A.I.R. 1948 Bom. 425 is not in conflict with that view, if understood in the manner suggested above. The decisions in Jiwandas v. Income-tax Commissioner, Lahore 10 Lah. 657 : A.I.R. 1929 Lah. 609 Secy., Board of Revenue, Income-tax, Madras v. Madras Export Co., 46 Mad. 360 : A.I.R. 1923 Mad. 422 and Sudailamani Nadar v. Commissioner of Income-tax, Madras, 1940-8 I.L.B. 619 : A.I.R. 1941 Mad. 229 relate to businesses of a simple nature of pur-chase at one place and sale at another place and it has been held that the profits accrued and arose at the place of sale and not at the place of purchase. They are not cases relating to the business of manufacture and do not, therefore, afford assistance in the solution of the question that arises in this case.
16. Mr. Sabbaraya Aiyar, learned counsel for the assessee pressed upon us also three decisions : Kirk's case (1900) A. C. 588 : (69 L. J. P. P. C. 87), Federal Commissioner of Taxation v. W. Angilse, Co. Pty. Ltd., 46 commonwealth L. R. 417 (sic). In Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87 the question was whether a company, which had its head office and residence in the colony of Victoria had any income in New South Wales, which was assessable to income-tax under the Act in force in that colony. The company carried on the business of mining and for this purpose obtained a lease of lands from the Crown in the colony of New South Wales, which was assessable to income-tax under the Act in force in that colony. The company carried on the business of mining and for this purpose obtained a lease of lands from the Crown in the colony of New South Wales; where also the company had an office and a manager. A portion of crude ore extracted from the mine was sold in New South Wales; and the purchase money was received either in London or Melbourne. The company made large amount of profits from this business operation. The question that had to be considered was whether in view of the language of the Income-tax Act, the company had earned any profits within the colony of New South Wales. Under section 15 of the Act, a person whose income exceeded .200 per annum was liable to pay income-tax in respect of incomes:
'1. Arising or accruing to any person wheresoever residing from any profession, trade, employment or vocation carried on in New South Wales, whether the eame 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 license issued by or on behalf of the Crown.
4. Arising or accruing to any person wheresoever residing from any kind of property except from land subject Co land tax as hereinafter specifically excepted, or from any other source whatsoever in New South Wales not included in the preceding sub-sections.'
Under section 27 (3), no tax shall be payable in respect of income earned outside the colony of New South Wales, Under the provisions of the Act, it was immaterial whether the person resided in the colony or not and it was equally immaterial whether he received the income in the colony or not if it was earned outside the colony. The ore was derived from a mine in the colony and a portion of the crude ore was sold in the State. A part of the crude ore was treated at the Company's works in a place in South Australia and the contracts for sale were not made in New South Wales. The sale of the products of the company was made and the purchase money was received either in London or in Melbourne. The following passage on the construction of the Act, which occurs at p. 592 of the report is instructive:
'The word 'trade' no doubt primarily means traffic by way of sale or exchange or commercial dealing, but may have a larger meaning so as to include manufactures. But if you confine trade to its literal meaning, one may ask why is not this income derived (mediately or immediately) from lands of the Crown held on lease under Section 15, Sub-section 3, or from some other source in New South Wales under Sub-section 4. Their Lordships attach no special meaning to the word 'derived', which they treat as synonymous with arising or accruing. It appears to their Lordships that there are four processes in 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 which terminate in money, and the income is the money resulting less the expenses attendant on all the stages. The first process seems to their Lordships clearly within Sub-section 8, and the second or manufacturing process, if not within the meaning of 'trade' in Sub-section (1), is certainly included in the words 'any other source whatever' in Sub-section (4.)
So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South Wales.'
The simple question, therefore, which the Judicial Committee had to consider was whe-ther there was any income, which was earned and arose and accrued in New South Wales. On the language of the section it was held that the income was earned in New South Wales. This decision can in no sense be treated as an authority for separating manufacturing profits under Section 4 (1), Income-tax Act. The question before us is not whether the profits accrued and arose in British India, but whether from the profits that accrued here in British India, the manufacturing profits could be separated. The decision in Federal Com-missioner of Taxation v. Angliss Co. Pty. Ltd., 46 commonwealth L. R. 417 is also of a similar nature as the Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87. The company was incorporated in Victoria and its head office and the principal works were in Victoria. It had a branch office in London. The company exported from Australia preserved meat, which was prepared in Australia, to London, where it was sold at a profit. The company exported also tallow, part of which was produced by the company's own operations and the remainder was bought in Australia. The contracts for the sale of the meat and tallow were made and performed in England, but the net proceeds were brought to Australia. It was held by the majority of the Judges that in ascertaining the liability of the company for war time profits tax, no part of the moneys obtained by the sale outside Australia of preserved meats or tallow produced by the company, which exceeded the value of the goods in Australia before exportation should be taken into account and that no part of the money obtained from resale outside Australia of tallow bought and not produced by the company for the purpose of war time profits should be taken into account. In the statute there in force the place of the source from which the income or profit was derived was important and therefore the decision is of no assistance under the Indian Act. The decision in International Harvester Co. of Canada Ltd, v. Provincial Tax Commission, 1949 A. C. 36: A. I. R. 1949 P. C. 72 arose under the Income-tax Act of 1932 of Saskatchewan in Canada. Under that Act, income was defined by Section 3 and in the case of business it provided that income means only net profits or gain received by a person from any trade, manufacture or business as the case may be, whether derived from sources within Saskatchewan or elsewhere. Section 7 imposed a tax on a non-resident and Sub-section (1) (d) of that section provided that a person shall be assessed to income-tax who, not being resident in Saskatchewan, is carrying on business in Saskatchewan during such year. Section 21 was as follows:
'Where any corporation carrying on business in Saskatchewan purchases any commodity from a parent, subsidiary or associated corporation at a price in excess of the fair market price, or where it sells any commodity to such a corporation at a price less than the fair market price, the Minister may, for the purpose of determining the income of such Corporation, determine the fair price at which the purchase or sale shall be taken into the accounts of the Corporation,' and Section 21 (a), which is the most important section was as follows :
'The income liable to taxation under this Act of every person residing outside of Saskatchewan, who derives income for services rendered in Saskatchewan, otherwise than in the course of regular or continuous employment, for any person resident or carrying on business in Saskatchewan, shall be the income so earned by such person in Saskatchewan.'
Person included under the Act was a corporation. Power was also given to the Lt. Governor-in-Council to make regulations. The assesses was a company registered and incorporated under the Companies Act of the Province of Ontario having its head office at Hamilton in the Province. The business of the assessee was manufacture and sale of agricultural implements and parts thereof. The manufacturing operations were carried out entirely outside the Province of Saskatchewan, but the selling operations were carried on partly in Saskatchewan and partly in other Provinces and countries. The company had no directors resident in Saskatchewan and the entire central management and control was at the head office. The selling business in Saskatchewan was carried on at this branch office and the money received by the assessee in Saskatchewan was deposited in separate bank accounts, which were thereafter remitted to the Head Office. The assessee, therefore, was a resident outside Saskatchewan, He was assessed to income-tax in Saskatchewan in respect of the business in Saskatchewan. The assessee claimed that out of the net profits arising from the business in Saskatchewan the manufacturing profit earned outside the Province should be excluded. In construing the language of the statute, Duff C. J. of the Supreme Court of Canada expressed himself thus : 'Nowhere does the statute authorise the province of Saskatchewan 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 italics are mine).
These observations were approved by their Lordships of the Judicial Committee. According to their Lordships, Sections 21 to 25 of the Act contain a scheme for dealing with the taxation of profits from the activities of persons or Cor-porations, who carry on certain activities within the province of Saskatchewan and other activities outside the Province. At p. 51 their Lordships observe:
'Section 21 applies both to resident and to nonresident corporations, and is plainly directed to preventing an artificial reduction of the net profit arising from the business of such corporations in Saskatchewan. Section 22 contemplates the case of a person residing and regularly employed outside Saskatchewan who renders certain services within that Province. Sections 23 and 24 show that the Legislature contemplated, in the case of a non-resident person, a charge of tax on an apportioned part of income, which although it might be received outside the Province of Saskatchewan, could fairly be regarded as having been partially earned inside that Province. In their Lordships' view, it would be reasonable to suppose that in the present case the legislature would regard a proportion of the profit received by the appellant in Saskatchewan as 'arising' from its manufacturing business carried on outside that province, and as being, in consequence, exempt from taxation under the Act. They think that no distinction is intended between income 'earned' in the province and income 'arising' within the province. The word 'earn' is employed in Sections 23 and 24 merely because of the grammatical structure of the sections. In each case the intention is to bring within the ambit of Section 21-A an apportioned part of the 'profit' mentioned in Section 23 and the 'income' mentioned in Section 24 because such part of the profit or income is regarded as being earned within the province. Their Lordships think that if Section 21-A is construed as excluding from taxation a 'manufacturing profit' earned outside the province, effect is given to the general scheme of taxation set out in the Act. Further, this construction seems to their Lordships to result in a fair and reasonable scheme of taxation, in accordance with that comity which naturally prevails between one province and another.'
These observations have been quoted in extenso to show that the scheme underlying the Act under consideration in that case is totally different from the scheme underlying the Indian Act. In my opinion, therefore, this decision does not at all support the contention of the assessee.
17. I am therefore clearly of opinion that the decision of the Appellate Tribunal cannot be sustained even on the second of the arguments urged on behalf of the assessee. The profits arose in British India and they exceed the profits outside. The company is there 'resident' in British India within the meaning of Section 4-A (c) (b) of the Act. The question referred to us must in my judgment be answered in the affirmative and in favour of the Commissioner of Income-tax. The Commissoner of Income-tax is entitled to his fee, which we fix at Rs. 250.
18. R. C. No. 59 of 1946:--The decision in R. C. No. 57 of 1946 also governs the decision in this case. The facts are similar and the question referred to is also identical. The answer to the question in this case also must be in the affirmative and the Commissioner of Income-tax is entitled to his fee, which we fix at Rs. 250.
Viswanatha Sastri, J.
19. These two references raise the question of the liability of two limited companies to pay income-tax as 'residents in British India.' The two assessees are limited companies registered at Madras and they manufacture and sell an ointment and some medicines. The year of account for both of them was the calendar year 1942. Owing to the scare created by War conditions, the companies shifted their office and 'factory' --a rather high sounding name for a small and unpretentious affair--to Mysore on 22-4-1942 and brought them back to Madras in May 1943. In R. C. No. 57 of 1946 the company made a nett profit of Rs. 50,157 during the second half year of 1942, there being no profits in the first half year. The total sales of the company amounted to Rs. 2,42,917 out of which sales to the extent of Rs. 1,96,358 took place in British India. The company had a depot in Bombay where goods were stocked and sales effected. Another limited company was appointed as the sole selling agents of the assessee in Calcutta. The Appellate Assistant Commissioner held that the company was a resident' within the meaning of Section 4-A (c) (b), Income-tax Act, as more than 60 per cent. of its profits arose in British India. The Appellate Tribunal accepting the above facts came to a different conclusion which may be summarised in its own words as follows:
'In our opinion no profit arises in British India from the sale in British India of any merchandise exported to British India and as such the requirements of Section 4-A (c) (b) are not fulfilled ..... Thus in the case of the appellant (company) who is a 'nonresident' we find it should be held that the profits from the sale in British India whether by the appellant company's own depot at Bombay or their agents at Calcutta or through V. P. P. or through bankers do not arise or accrue in British India but should be held as deemed to have arisen or accrued in British India .... We further find that as sales to the extent of Rs. 1,96,858 have been made in British India, the pro-fits that should be deemed to have arisen or accrued out of such sales under 8. 42 (3) are to be computed, Aa the matter has not been considered by the Officers below, it will have to be done by the Income-tax Officer now.'
In the view of the Appellate Tribunal, the company was a non-resident whose profits had to be apportioned for purposes of assessment under Section 42 (3) of the Act. The facts and conclusions in R. C. No. 59 of 1946 are similar, only the figures vary. The following question has been referred to us:
'Whether in the circumstances of the case, the profits made on the sales which took place in British India were 'income arising in British India' within the meaning of Section 4-A (o) (b) of the Income-tax Act.'
The sections of the Act that have a bearing on this matter are Sections 3, 4, 4-A, 6, 10 and 42 which need not be set out here. Section 3 which is the charging section expressly includes companies among the persons or bodies liable to charge and levies income-tax at the rate current for the year. Section 4 confines the levy to income, profits and gains accruing or arising or received in British India or deemed to accrue, arise or be received in British India. Section 4 imposes a heavier burden of tax on residents than on non-residents or persons not ordinarily resident and Sections 4-A and 4-B define 'residents' and 'ordinary residents' as applied to individuals, undivided Hindu families, firms, association of persons and companies. Section 6 classifies income, profits and gains under different heads and Sections 7 to 12 provide rules and directions regulating the manner in which the income, profits and gains under each of the heads specified in Section 6 have to be computed. In view of the arguments advanced before us, it-is necessary to state at the outset that the tax is not levied on the sources of income situated or having their location in British India. The test of liability under Section 4 of the Act is the place of the accrual or arising of the income, profits and gains, though the source may, in many cases, point to the place of accrual or arising of the income. Though the tax is levied in respect of the income of a person and the liability to tax is measured by the total income of a person computed in accordance with the provisions of the Act, still it is the person to whom income accrues or arises or by whom it is received or to whom the income is deemed to arise or accrue or by whom it is deemed to be received that is assessed and made personally liable for payment of the tax.
20. It is artificial to attribute residence to a company and no less artificial is the selection of its place of residence by Section 4-A (o) of the Act. In a series of decisions of the House of Lords it was held that the residence of a company was where its real business was carried on and the real business of the company was carried on where the central management and control abided (De Beers Consolidated Mines Ltd. v. Howe, (1906) A. C. 455 : 75 L. J. K. B. 858; Mitchell v. Egyptian Hotels Ltd., (1915) A. c. 1022 : 84 L. J. K. B. 1772; Egyptian Delta and Investment Co. v. Todd, (1929) A. C. 1 : 98 L. J. K. B. 1. The decision in Swedish Central Railway Co. v. Thompson, (1925) A. C. 495 : 94 L. J. K. B. 527 is reconcilable with the cases above cited only if one assumes that the management and control of a limited company could be divided so as to make the company resident in more than one place. The Indian Legislature did not adopt in its entirety the English pattern but provided in Section 4A, two alternative tests of residence in the case of companies. Either the control and management of the company's affairs should be situated wholly in British India in a particular year or its income arising in British India in that year should exceed its income arising without British India. There need be no connection between the company and British India except the derivation from British India of the major part of the income during the previous year and the company, in that event, would be taxable on all its profits and gains including income arising without British India. The justification of this piece of legislation whose legality is not open to question, is found in the following passage of the judgment of the Judicial Committee in the case of Wallace Bros. & Co., v. Commr. of Income-tax, Bombay .
'When a company in any particular year derives the major portion of its income from a country, it is a legitimate conclusion that the company has rooted itself there in that year. The connection that results is at least as solid as the connection given by the place of central control ; and in a search lor a home for income-tax purposes as respects that year that connection might well be thought more pertinent than the connection, readily changeable and often changed, given by the place of central control. In such a search the place where commercial activities yield the result is at least as relevant as the place where they are conceived. A company which in substance lives on a country may rationally be treated as living in it.'
In my opinion, the Appellate Tribunal went wrong in holding that no profits at all arose here in British India from the sale of goods manufactured by the company in Mysore and all the profits made by the company by the sale of ita products in British India should only 'be deemed to have arisen or accrued' under Section 42 (1) and should therefore be apportioned under Section 42 (3) of the Act. It is pointed out on behalf of the assessee that Section 42 (1) has recently been amended so as to apply equally to residents and non-residents and that Section 42 (3) has been amended so as to lay down a rule for apportioning and determining the quantum of profits of the assessee, resident or non-resident, chargeable to Indian income-tax under Section 42 (1). It is argued that if goods are manufactured and sold in British India the whole of the resultant profits arise in British India, but if the 'manufacture' which is also included in the definition of a 'business' in Section 2 (4) of the Act, takea place outside British India and only the sales take place here, the profits attributable to the selling operations should be separated from the 'manufacturing profits' under Section 42 (2) of the Act and the selling profits alone should be held to arise in British India within the meaning of Section 4-A (c) (b) of the Act. Section 42 (3) of the Act deals only with cases where the profits and gains of a business are deemed under Section 42 (1) to accrue or arise in British India. Mr. Subbaraya Aiyar argues, if I understand him aright, that even incomes arising in British India are treated as 'deemed incomes' for the purpose of apportionment by the combined operation of Sections 4 and 42 (1) and (3). I am unable to agree with this argument for this simple reason that the use of the words 'shall be deemed to be income accruing or arising in British India' in Section 42 (1) denotes something which is a contradiction to the actual facts of the case. To adapt the language of Lord Dune-din in Commr. of Income-tax, Bombay v. Bombay Trust Corporation Ltd when a thing is deemed to be something, the only meaning possible is that whereas it is not in reality thafc something, the statute requires it to be treated as if it were. I cannot accept the contention that by enacting Rule 42 (1) and (3) the Legislature wanted to treat all cases of income, profits and gains accruing or arising in British India within the meaning of Section 4 (1) (c) of the Act as falling within the category of income described in Section 42 (1) of the Act. The logical result of the argument would be that the distinction drawn in Section 4 (1) (c) between income, profits and gaina arising or accruing in British India and income, profits and gains deeinej to arise or accrue in British India is meaningless Indeed Section 4 (1) (c) would stand superseded by Section 42 (1) of the Act and an argument which leads to this result cannot possibly be accepted. It was rejected in a recent judgment of this Court in Nagayya v. Commissioner of Income-tax, Madras : (1949)1MLJ623 which followed the decision of the Allahabad High Court in the Hira Mills case : 14ITR417(All) . I therefore hold that the principle of apportionment in Section 42 (3) of the Act cannot be applied when ascertaining the amount of income arising in British India for the purpose of Section 4-A (c) (b) of the Act. It is not possible to ignore the difference between Section 42 (3) as it stood before the amendment of 1939 and Section 42 (3) as it stanis after the amendment and hold that profits arising from sales effected in British India must always be put in the cate-gory of profits which are 'deemed to have arisen or accrued in British India.
21. The further contention of the assessee's learned advocate raises a point of difficulty and importance. It is to the effect that where the business activities or operations that produce profits and gains are carried out in more than one State, the tax should be levied in each of the States only on that portion of the income which is reasonably attributable to that part of the operations carried on in the State levying the tax. This is stated to be a general principle underlying the scheme of our income-tax legislation and recognised by Sections 4 and 4-A (b) (c) of the Act, It may be conceded that the ideal system of taxation is to tax the whole of a person's income, gains and profits but that they should be taxed only once and the liability should be distributed or divided among the several tax jurisdictions according to their relative importance in the scheme of profit-making. It is said that where there is a composite business consisting of manufacture of goods outside British India and their sales in British India, you must as a matter of common sense and common fairness, apportion the profits realised by the sales and attribute to the British Indian business only the selling profits it would have derived if the business were an independent enterprise engaged only in the sale of the goods and dealing at arm's length with the manufacturer. This portion of the profits alone it is said, arises in British India. The rest of the profits would be 'manufacturing profits' which would accrue or arise outside British India. It is said that these principles are inherent in the very conception of profits accruing or arising at a particular place, and reliance is placed on the analogy of Section 42 (3) which provides for an apportionment of profits in cases where they are deemed to arise or accrue in British India and the business operations are not all of them carried out in British India. It is said that Section 42 (3) is only an illustration of a general principle in the background of which Sections 4 (1) (c) and 4-A (b) (c) have to be construed. In effect the arguments of the learned advocate come to this: If a non-resident trader manufactures goods outside British India and sells his goods here through an establishment or branch oragency, his profit is the difference between the amount for which the goods are sold in India and the amount for which they could be sold to a wholesale buyer in similar circumstances in the country of manufacture, less any expenses incurred in transporting the goods to and selling them in India ; if the trader is not the manufacturer of the goods sold, the difference between the amount for which the goods are sold and their purchase price, less the cost of transporting the goods to and selling them in India. I am unable to read into the Income-tax Act any such general scheme or principle however desirable its adoption may be. It is difficult to say a priori what is or ought to be the scheme of income-tax and one can only look to the actual terms of the Act to find out its scheme.
22. As considerable stress was laid on the principle that double taxation should be avoided by Court, I have to point out that there is here no question of double taxation in the proper sense of that term. It is not as if the same person is charged in respect of the same piece of income under two different sections of the Act by the same taxing authority either directly or indirectly. As already pointed out, it is not incompetent for the Indian Legislature to enact that a company shall pay income-tax on the whole of its profits, if the profits arising in British India exceed its profits arising outside, even though the foreign profits might be liable to pay income-tax in the foreign country. Double taxation in that sense and in such cases is due to the co-existence of a personal and impersonal tax liability, personal liability being based on the domicile or residence of the tax-payer and impersonal liability being based on the earning or receipt of income within the territory of a State which claims to tax such incomes without regard to the personal status of the recipient. It is beyond the province of this Court to redress any supposed hardship or injustice to the tax payer by double taxation in his sense by importing qualifications and implications not required or warranted by the language of the Income-tax Act. Those are matters to be settled by conventional arrangements among states or by legislation. A legislature which passes a law which, in certain circumstances, may have extra-territorial operation may find that what it has enacted cannot be directly enforced, hut the Act is not invalid on that account and the Courts of the country must enforce the law as it has been enacted.
23. What is the meaning to be attributed to the words 'income arising in British India' in Sections 4 (1) (c) and 4-A (c) (b) of the Act The answer would, to some extent, depend upon the nature of the business carried on by the company whose status is in question. To start with a simple case, no income ia considered to arise from a mere purchase of goods in a particular place and no portion of the profits arising from the sale of goods in a foreign country can be considered to accrue or arise in this country merely by reason of the purchase of goods to this country. The profits in such a case accrue or arise at the place where the goods are sold, Where the business consists merely of buying and selling, the profits resulting from a pur-chase in one country cannot be separated or distinguished from the profits made on the sale of the goods abroad ; in fact, there is but one profit. This view has been uniformly taken in decided cases both here and in England (See Sulley v Attorney General, (1860) 5 H. & N. 711 : 29 L. J. Ex. 464 ; Grainger v. Gough, (1696) A. C. 326 ; 65 L. J. Q. B. 410; Lovell & Christmas Ltd. v. Commrs. of Taxes, 1908 A. C. 46 : 77 L. J. P. C. 81; Greenwood v. Smidth & Co., (1922) l A. C. 417 91 L. J. K. B. 349 ; Maclaime v Eccoott, (1926) A. C. 424 : 95 L. J. K. B. 616 ; The Madras Export Co.'s case, 46 Mad. 360 : A. I. r. 1923 Mad. 422 ; Jiwandas's case, 10 Lah. 657 : A. I. R.1929 Lah. 609 and Sudalai-mani Nadar's case : (1941)1MLJ99 . But if the activities extend beyond mere purchasing and include acts such as sorting, grading, cleaning, or processing for export, these operations which are carried on in British India increase the value of the raw products and are deemed to yield a profit though the profits are realised by the sale of the goods abroad. In such cases the operations in British India have produced merchantable goods or have given or added value to things marketed abroad and wealth or value has been produced or increased in British India and is imbedded in the marketable goods. In other words, unrealised profits exist in British India whence the goods are exported for sale. The Legislature has therefore enacted Section 42 (1) and (3) of the Act to bring into the net of the Indian Taxation that portion of the profits which might be apportioned and attributed to the operations in British India.
24. In Rogers Pyratt Shellac Co. v. Secy. of State : AIR1925Cal34 and Commr. of Income-tax v. Steel Brothers & Co., 3 Rang. 614 : A. I. R. 1926 Rang 97 it was held that Section 33 (1) of the Act of 1918 corresponding to Section 42 (1) of the present Act applied to cases of non-residents whose business connection with British India in the shape of a regular buying agency or establishment yielded profits though the goods wera sold abroad. The view of Schwabe C. J. in the Madras Export Co.'s case, 46 Mad. 360 : A. I. R. 1923 Mad. 422 that Section 33 (1) of the Act of 1918 corresponding to Section 42 (1) of the present Act was mere machinery and not a charging section, a view which was based on the interpretation of Section 31 (2), English Finance Act of 1915 by the Court of Appeal and the House of Lords in Greenwood v. Smidth & Co., (1922) 1 A. C. 417 : 91 L. J. K. B. 349, must now be held to be erroneous, in view of the radical difference between the scheme of the English and Indian enactments pointed out by the Judicial Committee in Chunnilal Mehta's case , Commr. of Income-tax, Bengal v. Shah Wallace & Co. ; Pondicherry Railway Co. Ltd. v. Commr. of Income-tax Madras and Bijay Singh Dhudhuria v. Commr. of Income-tax, Cal-cutta . It cannot now be said that Section 42 of the Act is mere machinery and therefore of any less importance or weight than Section 4 which incorporates by reference incomes deemed to accrue or arise or be received in British India under Section 42 of the Act. One has to look into all the sections as forming part of the enactment under which income-tax is levied. Section 42 (1) is so designed as to widen the net of taxation and it is a charging section in so far as it has the effect of rendering persona liable to tax on profits which do not accrue or arise or are received in British India but are merely deemed to be such profits. This view receiver support from the later decisions of this and the other High Courts (See Commr. of Income-tax v. National Mutual Insurance Association of Australasia Ltd., 57 Bom. 519 : : AIR1933Bom427 ; Commr. of Income-tax, Madras v. Bank of Chettinad Ltd. : 7ITR1(Mad) ; Commr. of Income-tax, Bombay v. Currimbhoy Ebrahim & Sons Ltd. ; Hira Mill's case : 14ITR417(All) and Rogers Pyatt Shellack Co.'s case : AIR1925Cal34 . Section 42 (1) is not now confined in its application to non-residents and has been amended so as to apply to residents also.
25. As regards profits which result from a series of acts or transactions which enhance the value of the goods at each stage before they are finally sold, is it to be said that the entire profits arise in British India where the goods are sold even though the antecedent stages of purchase of raw materials and the manufacture of raw materials into marketable goods take place outside British India The contention of Mr. Rama Eao Sahib is that the question is answered in favour of the Department by the plain language of Section 4-A (c) (b) of the Act, while the learned advocate for the assessee contends that such a construction of Section 4-A (c) (b) would be opposed to the provisions of Sections 4 (1) (c), 10 and 42 of the Act. In my opinion, a literal reading of Sections 4-A (c) (b) tends to support the contention of the Department that business income arises only at the time when and at the place where the sales of goods are effected. Section 4-A (c) (b) refers only to 'income' and discards its usual and familiar companions 'profits and gains' and again refers to the word 'arising' without its associate 'accruing', an omission which I consider is deliberate. Income denotes a monetary return or money which comes in not as capital but as profit. In the Oxford Dictionary income is defined as
'that which comes in as the periodical produce of one's work, business, lands, or investments considered in reference to its amount and commonly expressed in terms of money.'
In Stroud's Judicial Dictionary the words 'arising in the United Kingdom' are defined as 'coming into the person's hands in the United Kingdom'. The word 'arises' should not, in the context, be taken as synonymous with 'accrues'. The expression 'arises' means 'comes into existence or notice or presents itself' while the word 'accrues' means 'growing up by way of addition or increase or as an accession or advantage'. The word 'accrues' connotes the idea of a growth or accumulation while the word 'arises' signifies the idea of the growth or accumulation with a tangible shape so as to be receivable (Per Mukerji J. in Rogers Pyatt Shellack Co.'s case : AIR1925Cal34 .
26. In Chunilal Mehta'scase Sir George Rankin delivering the judgment of the Court, observed :
'Proftis 'accruing or arising in British India' are words which, in their ordinary meaning, seem to require a plane to be assigned as that at which the result of trading operations comes, whether gradually or suddenly into existence.'
Evidently the learned Judge was expanding the expressions 'accruing' or 'arising'. Later, in the course of the judgment, it was pointed out that under the Indian Income-tax Act profits did not necessarily arise at the place where the business was carried on or control exercised and the test of changeability was not the location of the source of profits in British India, a test which was discarded by the Act, but the place where the profits accrued or arose to which alone the Act directed attention. After referring to an observation of Lord Macmillan in Robinson Bros. Ltd. v. Houghton & Ches-ters Le-street Assessment Committee, (1938) 54 T. L. R. 568 : 1938 A. C. 321 that the profit of a brewer was actually made where the sales were effected, Sir George Rankin said :
'Profits are frequently if not ordinarily regarded as arising from many transactions each of which haa a result--not as if the profits need to be disintegrated with difficulty but as if they were an aggregate of the particular results. To discriminate between all kinds of income according to the place at which they accrue or arise is a plain dictate of the statute.'
The learned Judge guarded himself against laying down any rule of general application but) the trend of the judgment shows that the operations of a single business which contribute to the emergence of profits could not be cut up into parts and profits arise at the place where the contracts of purchase and sale are made and monies are realised. The decision in S. L. Mathia's case , serves only to emphasise the difficulty of a finding ready answer. In that case this Court held that income from coffee planted, grown and gathered in Mysore accrued or arose in Mysore though the raw coffee was cured and then sold in British India, relying upon a somewhat analogous decision of the Judicial Committee in Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87. The decision of this Court was reversed by the Judicial Committee on another point but with reference to the point now under consideration Sir George Rankin observed :
'But the green coffee itself cannot be regarded as income, profits or gains within the meaning of the Act ; it is grown for purposes of sale and in order that profit might be earned. The business operations cannot be arbitrarily out into two portions but must be regarded as a whole. Thus, if the coffee market may be assumed to have its ups and downs, the assessee, if he delayed his sales in expectation of rise but found that prices fell, would nob expect to be charged on the profits that he would have made had he sold without delay. On the other hand upon the question whether the profits and gains accrued or arose in British India it may be that the fact that coffee was grown in Mysore is by no means to be disregarded notwithstanding it was sold in British India especially if it be true that it was sold without further process of a manufacturing character. For the moment it is enough to say that it may be without examining the matter and without prejudice to either view.'
The different views referred to above were those of the Madras High Court in Mathia's case, I. L. R. (1938) Mad. 25 : (A. I. R., (24) 1937 Mad. 745 F. B.) aad of the Calcutta High Court in re Mohanpur Tea Co. Ltd. : AIR1938Cal148 . The Judicial Committee refrained from expressing any opinion as to the effect of Kirk's case, (1900 A. C. 588 : (69 L. J. P. C. 87) on the interpretation of the relevant provisions of the Indian Income-tax Act. I have already referred to the observation of Lord Uthwatt in the case of Wallace Bros. Ltd. that the place 'where the commercial activities yield the result' (italics mine) is the test of residence of a company under Section 4-A (c) (b) of the Act. These are the relevant decisions of the Judicial Committee under the Indian Act.
27. I am of the opinion, therefore, that the profits of the assessees in these cases arose in British India where the bulk of the goods manufactured by them in Mysore was sold, the true measure of such profits being the price realised by the sales of their products in British India through their Bombay and Calcutta depots and agents less the cost of production, manufacture, transport and distribution of the goods whether incurred in Mysore or in British India. The circumstance that the goods were produced or manufactured in Mysore can make no difference to the place where the income of the business arises. There is nothing in Sections 4 and 4-A (c) (b) to suggest that the profits derived from a continuous process of manfacture and sale of goods should be cut up into different parts and allocated proportionately to the several places where the several stages of production and manufacture and sale take place. The business of the assessees is to manufacture ointment and medicinal tablets only for sale. The income from that business arises only if their products are sold and at the place where and at the time when they are sold. Till sales are effected no 'income' would have 'arisen.' At every stage of the process from the purchase of raw materials down to the marketing of the finished goods there may he an increase or enhancement in values, but the profits arise only when those enhanced values get converted or transmitted into money by the sale of the goods. In the case of a mercantile business the primary object is to sell the goods and thereby make a profit. Profits are obtained by selling goods and the place where profits emerge as profits is where the goods are sold. It is true that buying raw products and manufacturing them into marketable medicines are necessary parts of a business of the kind now in question which derives its profits from selling the medicines. But it does not follow that in order to determine where the profits arise it is proper to enquire into all the causes which in combination or succession operate to produce them. The different links in the chain of causation of profits do not require to be severed. The Court has to ascertain not why but where the profits come into existence. Here the assessees had an agent in Calcutta and a depot in Bombay, the goods were stocked in those places, contracts for sale of the goods were entered into and deliveries of the gooda were effected in those places and the price was realised by payment to the account of the assessees in their banks in British India. The income of the assessees could therefore properly be considered as arising in British India. This is my view on the construction of the language of Section 4-A (c) (b). The cases cited by learned counsel on both sides remain to be noticed.
28. In Rogers Pyatt Shellac Co's case, 52 Cal. 1 : A.i.r. 1925 cal. 84 the assessee, a limited company incorporated in the United States, had a branch office in Calcutta for the purchase of forest produce which was worked into a form available for export to America. The branch also acted as buying agents for other concerns in the United States. No sales were effected in India by the company. It was held that though the goods were sold and the profits and gains accrued or arose outside British India, the company was assessable under Section 42 of the Act on the basis that the profits attributable to the business activities of the company in British India must be deemed to have arisen or accrued in British India and were therefore liable to income-tax under Section 42 of the Act. In the Port Said Salt Association case : AIR1932Cal626 a foreign company manufacturing salt in Egypt imported it into India and sold it here. In addition to the expenses of producing, transporting and marketing the salt the company claimed to deduct manufacturing profits earned in Egypt. Rankin C. J. who delivered the judgment of the Full Bench disallowed the deduction of manufacturing profits earned in Egypt from the sale price of the salt in India in arriving at the taxable profits of the company. The following passage in the judgment of the learned Judge is very much in point :
'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 ..... Section 10 (2) contains no hint that part of the profits will be exempted although they arise or are received in British India because they have been earned elsewhere.'
In the view of the Full Bench, the profits and the whole of the profits arose on sale in India and no portion of the profits was exempt from tax on the ground that it represented manufacturing profits earned in Egypt. In the Mohanpur Tea Co.'s case : AIR1938Cal148 it was held that until manufactured goods were sold, it could hardly be said that there was any income, profits or gains and that profits arose at the place where the goods were sold though the process of manufacture was carried on outside British India. This decision was dissented from by a Full Bench of this Court in Mathia's case, I.L.B. (1938) Mad. 25 : A.I.R. 1937 Mad. 745 relying on the decision of the Judicial Committee in Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87. Later, in the course of this judgment I shall examine Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87 and in this context it is sufficient to note that when the decision of this Court went up on appeal to the Judicial Committee they expressly refrained from deciding whether this Court was right in relying on Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87 and reaching the conclusion it did. See Mathia's case . In Jiwandas' case, 10 Lah. 657 : A. I. R. 1929 Lah. 609 the Court held that:
'In ordinary cases, profits can be ascertained only when the price is realised, because until realisation it cannot be said that the transaction will result in profits ..... It is beyond dispute that the place, where the sale is effected and the price realised, is certainly the principal place, if not the place, of the accrual of profits.'
In the Hira Mills case : 14ITR417(All) , the assessee, a limited company incorporated and manufacturing cloth in Gwalior State sold its goods through salesman at Cawn-pore where the sale proceeds were also received. It was held by the Allahabad High Court that the profits derived from the sales, accrued or arose to the assessee in British India within Section 4 (1) (c) of the Act and that
'the difference between the gross costs to the seller of the goods at the moment and at the point of sale and the net price which he received'
represented the taxable profits of the nonresident.
29. Mr. Subbaraya Aiyar, the learned advocate for the assessee relying upon two decisions of the Judicial Committee interpreting the Income-tax legislation of Australia and Canada argues that unrealised profits do exist and that a sale in one place of goods manufactured elsewhere is merely a conversion into money of the profit made by the treatment of the goods at the place of manufacture. Before I consider the two decisions cited by him I have to observe that in Australia and Canada, unlike India, income-tax is leviable by the legislature of each State or Province, within its own territory. In India income-tax is levied only by the centre under one enactment though the tax is partially apportioned among the provinces. Legislation in Australia and Canada has proceeded on the basis that each State or Province could tax only that part of the income that was produced in its territory. The territorial law only pro. vided for taxation within the State and in effect limited the subject of taxation to profits arising from sources within that territory. In the case of a two-territory business it was found necessary to divide the actual profits into those which arise from such sources and those which did not. The apportionment of the profits between different territories where the business activities of an individual or company which result in the profits, are carried on, has therefore been either provided for by Statute or left to be determined by rules and regulations framed under the statute.
30. I now proceed to examine Kirk's case, (1900) A. C. 588 : 69 L. J. P. . 87. Taxation by reference to 'source' or 'sources' of income or profits haa been a special principle of Australian Legislation even from the pre-Federa-tion days, and where business was conducted partly within and partly without a colony it was provided that taxation should be directed to that part of its income or profits of which its business connection with the colony could be predicated. In the New South Wales Land and Income-tax Act of 1896 the word 'source of income' was used in order to describe acts and things done in that colony which could be regarded as leading to the 'income' to be taxed. The words 'arising' or 'accruing' and 'derived' were employed to refer to the relationship of the income sought to be taxed to the 'sources' of the business in New South Wales. The New South Wales Act designated as a 'source' the operations or transactions taking place within the colony which resulted in the receipt of income either within or without the colony. It is in this background that the decision in Kirk's case, (1900) A. C. 588: 69 L. J. P. C. 87 has to be understood. I am examining this case at some length because it has been strongly relied upon by Courts in this country especially by the Full Bench of this Court in Mathia's case, I.L.R. (1938) Mad 25: A.I.R. 1987 Mad. 745 In the Australian cases the profits in question were derived from the business of mining in leasehold lands held from the Crown in New South Wales. It was held that the process resulting in the profits consisted of four parts : (1) extraction of ore from soil; (2) conversion of the crude ore into a merchantable state; (3) sale of the merchantable product; and (4) the receipt of the monies arising from the sale. It was further held that as the first two processes took place in New South Wales the profits were 'derived from lands of the Crown held under lease from the Crown' within the meaning of Section 15 (3) or accrued or arose 'from any kind of property or other source whatsoever' in New South Wales within the meaning of Section 15(4), New South Wales Land and Income-tax Assessment Act, 1895. Though there was no provision for apportionment in the New South Wales Act of 1895 the Judicial Committee on a construction of Section 15 of the Act came to the following conclusions : The business operations numbered as (1) and (2) above established the existence of a source within the colony; these initial stages should not be left out of account and attention should not be fastened on the final stage of sale in the production of income; it was erroneous to suppose that the income was not earned in the colony because the finished products were sold outside the colony; some portion of the income was earned in the colony although the sales of the products took place outside; and that portion had to be fixed having regard to the relative importance of the profit-earning operations carried on in New South Wales. The Indian Income-tax Act, however, does not regard the source from which income is derived as the criterion of assessability but the place where the income accrues or arises or is deemed to accrue or arise. The place where income accrues or arises need not necessarily be the place where the source from which it accrues or arises is situated as pointed out by the Judicial Committee in Chunilal Mehta's case .
31. In the Saskatchewan case, 1949 A. C. 86 agricultural implements manufactured by a limited company in Ontario were partly sold in Saskatchewan where the profits were sought to be assessed and income-tax levied on the company. Under section 21 (a), Income-tax Act, 1932, of Saskatchewan, the net profits of an assesaee from his or its 'business in Saskatchewan' was liable to tax. In making the assessment the Commissioner acting under Regulation II made under Section 7 (4) of the Act computed the net income of the asseasee everywhere and then fixed the 'assessee's income applicable to Saskatchewan' by applying the percentage specified in the Regulation. The assessee objected to this method of computation of profits on the ground that the Commissioner thereby taxed a percentage of the assessee's 'manufacturing profits all of which were earned outside Saskatchewan'. It was held by the Judicial Committee that so much of the profits as might fairly be attributed to the manufacturing operations outside Saskatchewan, referred to as 'the manufacturing profits' did not arise 'from the business of the assessee in Saskatchewan' within the meaning of Section 21 (a) of the Act and should be excluded in computing the income of the assessee liable to tax under that section. The Judicial Committee observed that the phrase 'manufacturing profit' was inaccurate in the sense that no company made an actual profit merely by manufacturing goods and that the profit did not come into the company's hands until the'goods were sold. If an article is sold at a profit by a company which has manufactured it through its own selling organisation, there are two stages in the production of the net profits, (1) the manufacture of the article, and (2) the sale of the article, and a part of the net profit might be attributed to each stage, the part attributed to the earlier stage being described as a 'manufacturing profit'. The several provisions of the Colonial Statute and the Regulations framed thereunder for apportionment of profits set out in the judgment of the Judicial Committee show that only the profits arising from the business in Saskatchewan and not the profits arising from the company's business carried on in Saskatchewan and elsewhere, or received in Saskatchewan were taxable. The Judicial Committee concluded their observations as follows :
'Their Lordships think that if Section 21(a) is construed as excluding from taxation 'a manufacturing profit' earned outside the province, effect is given to the general scheme set out in the Act. Further this construction seems to their Lordships to result in a fair and reasonable scheme of taxation in accordance with that comity which naturally prevails between one province and another,'
This decision cannot govern the interpretation of Sections 4 and 4-a (c) (b) of our Act whose scheme and language are wholly different. There may be practical difficulties in working out the principle suggested by the aasessee. The manufacturing profit may accrue or arise in one year and the selling profit in another year when sales are effected. Are they to be apportioned in different years, and if so, on what basis ?
32. It is true that two income-tax investi-gation committees which functioned in this country recommended a change in the law on the lines of the Canadian and Australian enactments. It may be that a more equitable system of taxation should proceed on the lines suggested by Ayer's Committee and Sir S. Varadachari's Committee, but it is a matter for the Legislature and not for us. The Legislature could have, but has not said, in Section 4 that profits accruing or arising or received from sources located or situated in British India or from busins operations carried on and conducted in any place in British India, shall alone be taxable. Nor is there any provision for apportionment of profits under Section 4 similar to that contained in Section 42 (3) in respect of income, gains and profits accruing or arising in British India or received in British India.
33. I may briefly refer to the Indian decisions cited on behalf of the assessee. In the Steal Bros case, 3 Rang. 614 : A. I. R. 1926 Rang. 97 a limited company registered in London carried on large business operations in Burma which was then a part of British India. The company exported raw materials pur-chased in Burma and worked up in its factories a well as commodities purchased in Burma without being subjected to any process of manu-facture, to London where the goods were sold. The question arose whether the profits made as a result of the sales effected in London of commodities purchased here and exported in the same state to London could be taxed. It was held by the Rangoon High Court relying on Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87 that in determining whether any profits and gains accrued or arose in British India it was not only the last stage or accrual that had to he looked to, but the previous stages as well and the fact that the sales took place in London and the price was realised there, did not prevent the profits accruing or arising or from being deemed to accrue or arise in British India. It was held that the provisions of Section 42, Income-tax Act, were wide enough to bring the profits into the net of Indian Income-tax even if Section 4 did not catch them. The Court went further and held that in arriving at the amount of profits liable to income-tax a reasonable agent's commission should be deducted in respect of goods exported to and sold in London. In calculating the not profits, due deductions in respect of the London establishment were claimed and allowed but in addition thereto a sum representing the selling agent's commis-sion was also held exempt from tax. Evidently the business profits were apportioned between Burma and London and the selling agency commission represented the profits attributable to that part of the trading operations consisting of sales in London. It is difficult to support this part of the judgment especially when it is remembered that at the time the case was decided there was not even a provision correspond-ing to Section 42 (3) of the Act. Further it has to be borne in mind that in cases decided before the decision of the Privy Council in Chunilal Mehta's case . English decisions given on the language of the English Income-tax Act levying a charge on profits and gains accruing or arising from the exercise of a trade, were accepted as govering the interpretation of the Indian enactment and sufficient attention was not paid to the place where income, profits and-gaina accrued or arose which as pointed out by the Judicial Committee is the crucial matter for consideration under our Act. In Mathiah's case, I. L. R. (1938) Mad. 25 : A. I. R. 1937 Mad. 745 Varadachariar J. delivering the judgment of the Full Bench observed :
'Whatever may be said as to 'profits or gains' the view that 'income from agriculture' can be said to arise or accrue only when and where the produce is sold and converted into money seems to us difficult to reconcile with the reasoning in Kirk's case, (1900) A. C. 588 : 69 L. J. P. C. 87.'
This Court held that income from a coffee estate situated in Mysore accrued or arose in Mysore where the coffee beana were collected and delivered though the place of sale and receipt of the sale proceeds was in British India. The agricultural produce of one's own estate was held to constitute 'income' unlike goods which are bought for sale, whether subjected to a manufacturing process or not, in which case the profits and gains would arise only on a sale of the goods. This Court dissented from the Mohanpur Tea Co.'s case : AIR1938Cal148 which held that even in the case of agricultural produce 'income, profits and gains' would accrue or arise only on the sale of the produce in the market. Though the judgment of this Court was reversed by the Privy Council in Mathiah's case, I. L. R. (1988) Mad. 25 :A. I. R. 1937 Mad. 745 the Judicial Committee expressly avoided resolving the conflict between the views of thia Court and the Calcutta High Court.
34. I may now refer to a recent decision of the Bombay High Court in Ahmed Umarbha's case, A. I. B.) 1948 Bom. 425 : (1948-16 I.T.R. 192) which arose under proviso 3 of Section 5, Excess Profits Tax Act (XV  of 1940) running in these terms :
'Where the profits of a part of a business accrue or arise 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 accrue or arise in an Indian State and the other part of the business shall, for the purposes of this Act be deemed to be a separate business.'
The Excess Profits Tax Act treats all the separate businesses of the same person as one business while the Income-tax Act recognises them as different. In interpreting the expression 'a part of a business' in the proviso above cited, the Court held that the production and manufacture of oil in a Native State and the sale of the oil in British India, were different parts of the business and the profits realised by the sales in British India should be apportioned between the two different parts of the business and an appropriate part should be allotted as the manufacturing profits of the business in the Native State. The following passage in the judgment of Chagla C. J. deals with the principle in these terms :
It is true that both these parts constitute one business but profits do accrue and arise as far as manufacture of oil is concerned and profits also arise and accrue as far as the sale of oil is concerned. It is impossible to say that at the stage where the manufacture of oil is completed no profits would have accrued or arisen in respect of that business. A man who just sells oil may bay it in the market and the profits that may accrue to him would be the difference between the selling price and the cost price; but if he were to get the goods direct from the factory then the position would be different. More profits undoubtedly would accrue to him and it could not be stated that all these profits accrue only with regard to the sale of that particular commodity. A part of the profits must accrue or arise with regard to the manufacture of that particular article.'
These observations are no doubt of a general nature and are not confined to the apportionment of profits under the Excess Profits Tax Act. The learned Chief Justice relied upon Kirk's case, (1900) A. C. 588 : (69 L. J. P. C. 87) and Mathiah's case, I. L. R. (1938) Mad. 25 : A.i.r. 1937 Mad. 745 for the conclusion that the profits of one continuous pocess of manufacture and sale should be considered to arise in part at the place of manufacture and in part at the place of sale and not entirely at the place of sale. The learned Judges also dissented from the Mohanpur Tea Co.'s case : AIR1938Cal148 and the Hira Mills case : 14ITR417(All) . This decision, however, is not a direct authority on the interpretation of SECTIONS 4 (1) (c) and 4-A (c) (b), Income-tax Act, though the principle enunciated by the Bombay High Court is general and might be extended to the interpretation of these provisions as well.
35. Though the matter is not free from difficulty I have come to the conclusion that the process of manufacture, while it may increase the value of the raw product, does not in itself produce a profit. Profits are realised only on sale and at the time and place of sale. The expression 'manufacturing profits' referred to in the decisions refers only to a notional apportionment of the profits resulting from sale of goods between the two stages of manufacture and sale, an apportionment which is recognised in cases falling with Section 42 of the Act but not by Section 4 or 4-A (o) (b) of the Act. Income-tax is not like an excise duty levied upon a manufacturer or producer in respect of the commodity produced or manufactured. It is not a tax on goods or even on the sale proceeds of goods like a sales tax. Governor-Genernl in Council v. Province of Madras, (1945) 1 M. L. J. 225 : A.I.R 1946 P. C. 98. It is a tax upon profits which arise only on sales. Profits on coming into existence attract tax at that point. The Pondicherry Railway Co's case .
36. For these reasons I would answer the question referred to us in the affirmative and hold that the profits made by the assessee on sales which took place in British India constituted 'income arising in British India within the meaning of Section 4A (c) (b), Income-tax Act. I agree in the direction for costs given by my learned brother both in R. C. No. 57 and in R. C. No. 59 of 1946.