A) ABSTRACT / HEADNOTE

This case concerns the interpretation of certain provisions of the Indian Income-tax Act, 1922, specifically Sections 4(1)(a), 4A(c)(b), and 42(1) & (3) in the context of taxation of a foreign company earning income in British India. The appellant, Anglo-French Textile Co. Ltd., incorporated in the UK, operated a textile mill in French India (Pondicherry) but marketed and received payments for its goods in British India. The crux of the matter revolved around whether such income is taxable under Indian tax laws, and whether there needs to be an apportionment between manufacturing profits (arising in French India) and sales profits (arising in British India). The Supreme Court held that since the income was received in British India, the company was liable to tax under Section 4(1)(a). However, in determining whether the company was “resident” under Section 4A(c)(b), the Court emphasized that only that portion of income arising from business operations in British India should be considered, necessitating allocation based on the principle of apportionment as per the Ahmedbhai Umarbhai case. The decision demarcates the scope of taxable territorial nexus and stresses the need to differentiate income arising within and outside British India for determining residency.

Keywords: Income-tax Act 1922, Section 4(1)(a), foreign company, territorial nexus, apportionment, deemed income, British India, taxable territories

B) CASE DETAILS

i) Judgement Cause Title: Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax, Madras

ii) Case Number: Civil Appeal No. 11 of 1952

iii) Judgement Date: 22nd December, 1952 (final order on 8th December, 1953)

iv) Court: Supreme Court of India

v) Quorum: Mehr Chand Mahajan, S.R. Das, Vivian Bose, and N.H. Bhagwati, JJ.

vi) Author: Justice N.H. Bhagwati

vii) Citation: AIR 1954 SC 425; (1954) 25 ITR 27; 1954 SCR 523

viii) Legal Provisions Involved: Sections 4(1)(a), 4(1)(b), 4A(c)(b), 4B(c), 42(1), and 42(3) of the Indian Income-tax Act, 1922

ix) Judgments overruled by the Case: None

x) Case is Related to which Law Subjects: Taxation Law, International Taxation, Corporate Law, Constitutional Law (federal legislative competence)

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The judgment addresses a critical issue under the Indian Income-tax Act, 1922 — whether a foreign company manufacturing goods outside British India but receiving sale proceeds within British India can be taxed as a resident entity and if so, whether the entire global income is liable to Indian tax. The decision brings clarity to the interplay between territorial jurisdiction and fiscal statutes. The case arose from assessments made for the years 1942–43 and 1943–44. The appellant contended non-residency status, asserting that its manufacturing business in Pondicherry (then French India) precluded complete tax liability. The case had been remanded by the Supreme Court for clarity on whether income received in India equated to income “arising” in India for residency determination, following which the High Court responded with affirmative rulings on partial applicability.

D) FACTS OF THE CASE

The Anglo-French Textile Co. Ltd. was incorporated in the United Kingdom with its registered office in London. It operated a spinning and weaving mill in Pondicherry, which at the relevant time was part of French India, not under British sovereignty. It manufactured yarn and cloth there, which were largely sold in British India through its appointed agents, Best and Co. Ltd., based in Madras. The agreements for the sale of goods were entered into in British India, deliveries were made within British India, and payments — including for exports — were received in Madras.

For the assessment year 1942-43, the total turnover was ₹69,69,145, and for 1943-44 it was ₹93,48,822. In both years, a major portion of sales and receipts occurred in British India. The assessing officer held that due to the receipt of income in British India, the assessee was a resident and liable to be assessed on global income under Section 4(1)(a). The company, however, contended that it should be assessed only on the portion of profits attributable to operations in British India under Section 42(3). The issue eventually led to reference under Section 66(1) to the Madras High Court, and ultimately, to an appeal before the Supreme Court.

E) LEGAL ISSUES RAISED

i. Whether income received in British India, derived from goods manufactured outside British India, attracts tax under Section 4(1)(a)?

ii. Whether such income can be said to arise wholly in British India within the meaning of Section 4A(c)(b) for determining residency?

iii. Whether Section 42(1) and (3) apply to such a situation, or if they are inapplicable when the income is not “deemed” but “actually” arises in India?

iv. Whether income needs to be apportioned between manufacturing and merchanting activities for taxation purposes?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i. The counsels for Petitioner / Appellant submitted that the appellant was a foreign company and the manufacture of goods occurred entirely outside British India, thus the profits arose outside the taxable territory. They relied on the Ahmedbhai Umarbhai case (Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., [1950] SCR 335), where it was held that profits in a manufacturing business partly arise at the place of manufacture and partly at the place of sale. Therefore, only the portion of income attributable to the Indian operations could be taxed under Section 42(3).

ii. They contended that Section 42 applied specifically to “deemed” accruals and that the income, in this case, did not “actually” arise in British India but was received there due to agency arrangements. Consequently, they argued for apportionment of income to delineate what arose in India.

iii. They also argued against the High Court’s view that Section 42(1) was irrelevant, stating that it was necessary to analyze the deeming provisions in conjunction with actual territorial source of income.

G) RESPONDENT’S ARGUMENTS

i. The counsels for Respondent submitted that all profits were received in British India and, therefore, were taxable under Section 4(1)(a). They maintained that the situs of receipt, not production, governed liability.

ii. They asserted that the entirety of profits, regardless of manufacturing location, accrued in British India because sales, deliveries, and receipt of payment occurred there.

iii. They further argued that the company’s income satisfied the residency test under Section 4A(c)(b) as more income arose within India than without, thereby making it a “resident” liable to tax on its global income under Section 4(1)(b).

H) RELATED LEGAL PROVISIONS

i. Section 4(1)(a) of the Indian Income-tax Act, 1922 – Tax liability for income received in British India

ii. Section 4(1)(b) – Taxation of income that accrues or arises in British India

iii. Section 4A(c)(b) – Residency test for companies based on income arising within and outside India

iv. Section 42(1) – Deemed income provisions for business connections in British India

v. Section 42(3) – Apportionment of income where part of operations are conducted in British India

I) JUDGEMENT

a. RATIO DECIDENDI

i. The Supreme Court held that since the entire profits were received in British India, Section 4(1)(a) applied and made the company liable to tax on that income. However, for purposes of determining whether the company was a resident under Section 4A(c)(b), income must be apportioned based on the origin of business operations.

ii. The Court ruled that income received in British India could not be equated with income arising there. Profit attribution had to be based on functional demarcation of operations — manufacturing vs. selling.

iii. The Court relied on Ahmedbhai Umarbhai ([1950] SCR 335) to affirm that in manufacturing businesses, income accrues partly where manufacturing occurs and partly where sales happen. Therefore, residency status should be evaluated by separating Indian and foreign sourced income accordingly.

b. OBITER DICTA 

i. The Court clarified that Section 42(3) has no relevance in determining actual accrual under Section 4A. Its applicability is confined to situations where income is “deemed” to accrue.

ii. It remarked that general principles of apportionment should guide taxation in transnational manufacturing and sales operations.

c. GUIDELINES 

• Income received in India is taxable under Section 4(1)(a).

• For determining residency under Section 4A(c)(b):

  • Assess where income actually arises, not merely where it is received.

  • Apportion profits based on nature of operations (manufacturing vs. selling).

• Section 42(1) is inapplicable when there is no deemed income involved.

• Apportionment of profits is not limited to Section 42(3) and may be done based on business realities.

J) CONCLUSION & COMMENTS

This decision provides a seminal interpretation of residency and taxable income for foreign companies operating in dual jurisdictions. The Court emphasized the distinction between receipt of income and its accrual or origin, reinforcing the principle that taxation should follow substance over form. The judgment has become a cornerstone in the domain of cross-border taxation and continues to influence jurisprudence in allocation of income between multiple jurisdictions.

K) REFERENCES

a. Important Cases Referred

i. Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, [1950] SCR 335

ii. Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, Madras, AIR 1931 PC 187

iii. Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, West Bengal, [1953] SCR 520

iv. Commissioner of Income-tax, Madras v. Diwan Bahadur Mathias, [1939] 7 ITR 48

v. Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax, AIR 1948 PC 118

b. Important Statutes Referred

i. Indian Income-tax Act, 1922: Sections 4(1)(a), 4(1)(b), 4A(c)(b), 4B(c), 42(1), and 42(3)

ii. English Companies Act (for company incorporation details)

iii. Excess Profits Tax Act (contextual application in earlier precedents)