Anglo-French Textile Co. Ltd. vs The Commissioner of Income Tax, No. 3

Viswanatha Sastri, J.—The questions that have been referred to us are three in number. It is however conceded by the learned counsel for

the assessee that the third question has been answered against the assessee by the decisions of the Federal Court and the Judicial Committee

which are binding upon us. We therefore answer the third question referred to us by stating that the provisions of Section 4 (1) and Section 4-A

(c) (b), Income Tax Act are not ultra vires the Indian Legislature.

The other two questions which remain to be considered are these :

Whether on the facts and in the circumstances of the case Section 42 (1) and (3) of the Act alone and not Section 4 of the Act have application

to the income accruing or arising by reason of sales in British India of manufactured goods where the manufacturing process took place outside

British India?

The question as here stated has been the result of an agreed amendment of the question originally framed by the Appellate Tribunal, both the

learned counsel for the Revenue authority and the assessee having stated that the question may be raised in the form in which we have stated it

above.

Whether on the facts and in the circumstances of the case the entire profits and gains arising to the assessee company in British India should be

taken into account for the purpose of applying the test laid down u/s 4-A (c) (b) or only that part of the profits which could be determined after the

application of Section 42 (3) of the Act as reasonably attributable to that part of the operations carried on in British India ?

The facts relevant to this reference have mostly been stated in our judgment in The Anglo-French Textile Co. Ltd. by agents, Best and Co. Ltd.

Vs. The Commissioner of Income Tax, . The additional facts that have to be considered in connection with the present reference are these. The

assessee concedes that all contracts with reference to the sales of goods manufactured in Pondicherry were entered into in British India. The

deliveries of goods were effected and the price was received in British India. Even in respect of the sales-effected abroad it is stated in the

statement of facts sent by the Tribunal that the profits were received in British India. This is a finding of fact which we have to accept for the

purposes of this reference. We have already stated that the entire cotton for the mills was purchased in British India through the agent of the

assessee. On these facts the Income Tax. Officer found that the assessee was a resident Company in British India within the meaning of Section 4-

A (c) (b) by reason of its income arising in British India in the year of account exceeding its income arising without British India. On that basis he

assessed the Company for the two assessment years 1942-43 as a resident in British India on the profits and gains which had accrued to the

Company both within and without British India u/s 4 (1) (b) (i) and (ii) of the Act. The assessment was confirmed on appeal and by the Appellate

Tribunal. Hence the present reference.

The contention of Mr. O. T. G. Nambiar, the learned counsel for the assessee, is that the Company is a non-resident Company and the profits

that have accrued or arisen to the Company in British India must be determined by the process of apportionment prescribed by Section 42 (3),

Income Tax Act and the profits attributable to the manufacturing operations carried on outside British India must be excluded from the computation

of the profits and gains accruing or arising in British India from the sales effected here. In our judgment in Commissioner of Income Tax Vs. The

Little''s Oriental Balm and Pharmaceuticals Ltd. and Another, , we have considered this question with reference to the language of Sections 4 (1)

(b) (i) and (ii), 4-A (c) (b) and 42 (1) and (3), Income Tax Act and the decisions of the Indian Courts with reference to the construction of these

provisions. It is unnecessary to repeat here the reasons which we have given in that judgment for reaching the conclusion that for the purposes of

ascertaining whether a Company is resident within the meaning of Section 4-A (c) (b) of the Act the entire income accruing or arising in British

India to the Company should be taken into account and not merely a portion of the income apportioned u/s 42 (3). The sales of goods having been

effected in British India the profits arising by reason of such sales accrued or arose in British India and no portion of such profits can be left out of

account on the ground that that portion represents the profits attributable to manufacturing operations carried on outside British India. Section 42

(s) which allows an apportionment of profits, where the profits are the result of operations, some of which are carried on in British India and some

outside, is made applicable only to cases where the profits and gains of a business are ""deemed"" under this section to accrue or arise in British

India. In other words, Section 42 (3) of the Act applies only where Section 42 (1) of the Act would apply. u/s 4-A (c) (b), it is the income arising

in British India that has to be taken into account and profits and gains which are deemed to accrue or arise in British India do not enter into the

computation. Therefore Section 42 (1) and (3) do not override the provisions of Section 4-A (c) (b) of the Act and for the purposes of the latter

section, we have only to take into account profits arising in the British India in the year of account without recourse to Section 42(1) and (3). If on

such a computation of profits and gains, the conclusion is reached that the Company is a resident within the meaning of Section 4-A (c) (b), then

the provisions of Section 4 (1)(b) are attracted, with the result that the income, profits and gains accruing or arising to the resident either within or

without British India are brought into charge. There is no question here of any apportionment u/s 42 (1) and (3).

For these reasons our answer to the first of the questions referred to us is, that Section 42 (1) and (3) of the Act have no application to the

computation of income accruing or arising to the Company in British India for the purposes of Section 4-A (c) (b) even if the manufacturing

process of the goods which were sold in British India took place outside British India.

The answer to the second question is that the entire profits and gains arising to the Company in British India should be taken into account for the

purpose of applying the test laid down in Section 4-A (c) (b), and not merely that part of the profits which could be attributed to the operations

carried on in British India. In other words, Section 42 (3) has no application to the computation of profits u/s 4-A (c) (b).

All the three questions having been answered against the assessee, the Commissioner of Income Tax would be entitled to the costs of this

reference which we fix at Rs. 250.