1. This Reference has been made by the Commissioner of Income tax upon a question arising out of assessments upon the Port Said Salt Association, Ltd., for the years 1928-29 and 1929-30. The assessees have their headquarters in Egypt where they manufacture salt and export it to various parts of the world including India. They do not contest that they are liable to pay income tax under Section 42 of the Act (11 of 1922), but they have raised before the Commissioner and he has referred to us the following question: Is an assessee assessed under Section 42 in respect of a business in which the manufacture of a commodity takes place in a foreign country and the sale thereof takes place in British India, entitled in computing the profits and gains of such business, to make a deduction representing the proportion of profits earned by manufacture in the country of origin, or is he bound, in computing such profits or gains, to do so on the assumption that the whole of these are earned in the country of sale
2. The Commissioner has disallowed any deduction of this character and it appears to me that he is right. By Section 4 the tax is charged upon profits 'accruing or arising or received' in British India, and if any profit is, or must be deemed to be, of this character it will not be saved by the circumstance that work was done and money spent abroad in order to obtain it. Naturally the cost to the assessees, wherever incurred, of producing the article, transporting it and selling it, must be deducted from the price obtained before the balance can be called a profit. Again upon a valuation of stock in hand the Egyptian business might be well entitled to treat it as an asset for more than the bare cost of production. But profit, though it may be anticipated by valuation or otherwise, is not realized before price, and when the article is sold the whole profit is realised for the first time. Support for the assessee's argument cannot be derived from anything in Section 10 of the Act, the principle of which is to permit of allowances for actual expenditure and loss actually incurred for the purpose of earning the profits. The phrase 'earning such profits' occurs in Clause 9, Sub-section 2, Section 10, but the section 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.
3. The purpose of Section 42 in its first subsection is to enact that all profits accruing to a person through or from any business-connexion or property in British India shall be deemed to come within the class of profits taxed by Section 4. Sub-section 3 shows that profits arising from sale of merchandise exported to British India are within the class that has been made taxable under Section 4. To permit of the assessee's contention both subsections must be drafted very differently, and the Rule 33, which appears to have been applied to the present case, authorizes a method of computation by taking, the proportion of receipts so accruing or arising' to the total receipts, a computation which would be radically changed if the claim of the assessees is admitted. An international convention to limit the rapacity of nations towards the nationals of others might listen to the argument of the assessees with great respect, but we cannot make room for it in the Indian Act. The question referred to us must be answered as to the first part in the negative. The second part need not be answered as it assumes that profits to be taxable must be ' earned' in British India, which is to beg the question. The assessees must pay the costs.
C.C. Ghose, J.
4. I agree.
5. I agree.