Permissibility for apportionment of income for operation of manufacture and sale.

Satyanarayana Rao, J.-R.C. No. 57 of 1946.-The following question was referred to us by the Income-tax Appellate Tribunal under section 66(1) of the 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) of the Income-tax Act?”

The assessee in this case 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 & 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 shareholders.

Until the war scare of 1942, the company (in this judgment referred to as the assessee) was a resident of Madras and was assessed as such. On the 22nd April, 1942, the office of the Managing Agents and the factory of the company was shifted to Mysore, but was brought back in May, 1943. “The previous year” of the company ended on 31st December, 1942, the assessment year being 1943-44. From the 22nd April, 1942 to 31st December, 1942, the factory of the company and the office of the Managing Agents were undoubtedly in Mysore. The Appellate Tribunal found that out of the total sales of Rs. 2,42,917 during the accounting year, sales of the amount of Rs. 46,559 were made in Mysore outside British India, but the balance of Rs. 1,96,358 represented the sales in British India. The Appellate Assistant Commissioner held that 80 per cent, of the profits made by the company had accrued and arisen in British India and therefore the company was a resident in British India during the accounting period within the meaning of section 4-A (c)(b) of the Income-tax Act.

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 from any place 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.

The fact that the sales in British India amounted to Rs. 1,06,358 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

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