The main legal point established in the judgment is the interpretation of the 2nd proviso to Section 4(2) of the Indian Income Tax Act, emphasizing the distinction between the place where income accrues and the source from which it accrues.

Varadachariar, J.

1. The question referred to this Court for decision is whether, on the facts set out in the Commissioners statement, any part of the income derived by the assessee from the produce of his coffee estates in Mysore is exempt from taxation under the 2nd proviso to Clause (2) of Section 4 of the Indian Income Tax Act.

2. The assessee who owns coffee plantations in the Mysore State is a resident of British India (Mangalore) ; and the case states that while he maintains an office in the Mysore territory to supervise the cultivation work there, the labour required for the cultivation is recruited in Mangalore, materials required for the estate like manure, tools, spray materials, crop-bags, etc., are purchased at Mangalore, the harvested crops are brought to Mangalore in their raw state to be dried and cleaned there in the factories of Pierce Leslie & Co., and the coffee seeds thus prepared for the market are sold there, by Pierce Leslie & Co., the selling agents of the assessee. As the sale proceeds are received and retained at Mangalore and a separate staff is maintained by the assessee at Mangalore to attend to the above operations, the Commissioner was of opinion that the assessee was liable to be taxed as one carrying on business and receiving the income or profits thereof in Mangalore.

3. As both Section 4 and Section 6 of the Indian Income Tax Act are qualified by the opening words " save as hereinafter (otherwise) provided", the point for determination is whether the assessee can claim exemption under the 2nd proviso to Section 4(2) and, if so, to what extent. The Commissioner has expressed the opinion that proviso 2 to Section 4(2) has no application here. because the profits of the business are received in Mangalore, and the agricultural processes carried on in Mysore are not in themselves a source of income but merely an element in the business which produces the income. In support of this view he has relied on the decisions in R.S. T, Ponnuswami Pillai v. The Commissioner of Income Tax, Madras (1929) 3 I.T.C. 378 and Messrs. Amir Singh-Sher Singh v. The Commissioner of Income Tax, P.N.W.F. and Delhi Provinces (193S) 8 I.T.C. 198 : A.I.R. 1935 L. 361 but it must be observed that even in R.S.T. Ponnuswami Pillai v. The Commissioner of Income Tax, Madras [1937]5ITR118(Cal) (A.N. Aiyar) the proviso now to be interpreted did not come up and could not have come up for consideration and there can be little doubt that but for that proviso, the assessee in the present case will be liable to be assessed in respect of the profits to the extent determined by the authorities. After this reference had been made, the scope and effect of the proviso was considered by a Division Bench of the Calcutta High Court (In re Mohanpura Tea Co., Ltd.s) and the judgment is a direct authority in favour of the Commissioners view. We have carefully considered the reasoning in that judgment but, with all respect to the learned Judges, we are unable to follow that decision.

4. The basis of the Calcutta decision and of the Commissioners opinion is that when a person who owns lands outside British India sells the produce of those lands in British India, no income, profits or gains can be said to arise or accrue until the produce is sold and that in such cases there is accordingly no room for the application of the proviso which only relates to income.... arising or accruing in an Indian state. The learned Judges emphasise the distinction between the place where the income accrues and the source from which it accrues and point out that the proviso is not concerned with the source. As a corollary, they think that if the sale had taken place outside British India, the income thus realised, even if subse quently received in British India would be exempt as income from agriculture that had arisen or accrued in the state, within the meaning of the proviso. Whatever may be said as to profits or gains, the view that income from agricultur