A) ABSTRACT / HEADNOTE (150–250 words)

This case delineates the nuanced application of the Excess Profits Tax Act, 1940, with particular reference to profits earned by a composite business partially operating in British India and partially in an Indian State. The key question before the Hon’ble Supreme Court was whether a business involved in manufacturing goods in the princely state of Hyderabad (Raichur) and selling them in Bombay could claim exemption from excess profits tax for the portion of profits attributed to its manufacturing activity conducted in the Indian State. The ruling comprehensively interpreted Section 5 of the Excess Profits Tax Act, 1940, particularly its third proviso, to determine whether the manufacturing component alone could be treated as a separate business for tax exemption purposes.

The apex court unanimously held that manufacturing at Raichur constituted “part of the business” under the third proviso to Section 5 and that the profits attributable to this part, even if realized through sales in Bombay, accrued or arose in Raichur and were therefore not liable to excess profits tax. The court also clarified the interplay between Sections 42(1) and 42(3) of the Indian Income Tax Act, 1922, thereby endorsing the principle of apportionment between manufacturing and selling operations.

Keywords: Excess Profits Tax Act, Apportionment, Section 5 Proviso, Accrual of Income, Raichur Manufacturing, Indian State, Section 42, Business Connection.

B) CASE DETAILS

i) Judgment Cause Title: Commissioner of Income-Tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay
ii) Case Number: Civil Appeal No. LXVIII of 1949
iii) Judgment Date: 4 May 1950
iv) Court: Supreme Court of India
v) Quorum: Kania C.J., Saiyid Fazl Ali, Patanjali Sastri, Mehr Chand Mahajan, Mukherjea, and Das JJ.
vi) Author: Kania C.J. (majority), Patanjali Sastri J., Mahajan J., Mukherjea J. (concurring)
vii) Citation: AIR 1950 SC 134; (1950) SCR 335
viii) Legal Provisions Involved:

• Section 5, Excess Profits Tax Act, 1940

• Section 42(1) & 42(3), Indian Income Tax Act, 1922

• Section 21, Excess Profits Tax Act, 1940

ix) Judgments overruled by the Case (if any): None
x) Case is Related to which Law Subjects: Taxation Law, Constitutional Law, Public Finance, Federalism, Interpretation of Tax Statutes

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arose from the interpretational conflict regarding taxation of businesses operating trans-territorially between British India and Indian States. The respondent-firm Ahmedbhai Umarbhai & Co., a Bombay-resident registered firm, operated three oil mills in Bombay and one in Raichur (Hyderabad State). The oil manufactured in Raichur was sold partly in Hyderabad and partly in Bombay. While its entire income was taxed under the Indian Income Tax Act, the department sought to levy excess profits tax on the entirety of profits under the Excess Profits Tax Act, 1940, including those from oil manufactured in Raichur but sold in Bombay.

The question before the High Court and later the Supreme Court was whether the profits arising out of such operations were exempt under the third proviso to Section 5 of the Excess Profits Tax Act, which excluded from its ambit profits accruing or arising in an Indian State from a part of the business located therein. The Income Tax Tribunal and authorities initially ruled in favor of the tax department, but the High Court reversed that position. The Commissioner of Income-Tax appealed against this ruling, bringing the matter before the Supreme Court.

D) FACTS OF THE CASE

The respondent firm had a dual operational model. It manufactured groundnut oil at its mill in Raichur in the then princely state of Hyderabad and sold this oil in two territories: a part in Hyderabad itself and the rest in Bombay. The entire profit was previously assessed under the Indian Income Tax Act, 1922, without dispute. However, under the Excess Profits Tax Act, 1940, a separate levy was imposed on profits above a standard threshold during wartime.

The revenue department argued that since the sale was made in Bombay and the income realized there, the entire profit was liable under the Excess Profits Tax Act. The assessee contended that manufacturing was a distinct part of the business carried out in an Indian State and therefore the portion of profits attributable to such operations should be exempt under the third proviso to Section 5 of the said Act.

The Income Tax Tribunal upheld the department’s view. However, the Bombay High Court, led by Chief Justice Chagla and Justice Tendolkar, concluded that the Raichur operation constituted a distinct “part” of the business and the profits attributable to it must be treated as arising in Hyderabad and thus exempt. The Commissioner then appealed to the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the manufacturing operation at Raichur could be considered a “part” of the business under the third proviso to Section 5 of the Excess Profits Tax Act, 1940.

ii) Whether profits arising from the sale of oil manufactured in Raichur and sold in Bombay accrued or arose in British India or in Hyderabad (an Indian State).

iii) Whether the principle of apportionment of profits between place of manufacture and place of sale was valid under the combined reading of Section 5 and Section 42 of the Indian Income Tax Act, 1922.

iv) Whether the taxing authorities were correct in denying the assessee the benefit of exemption for Raichur-manufactured oil sold in Bombay.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the phrase “part of the business” under the third proviso to Section 5 implies a complete composite unit involving all business operations such as manufacturing, sale, and profit realization. Since the sale occurred in Bombay, they argued that Raichur operations did not constitute a standalone “part” of business.

ii) They also contended that profits only accrue or arise upon sale and hence must be deemed to accrue in Bombay where the transactions were completed and money received.

iii) Further, the counsel emphasized the absence of any explicit apportionment provision in the Excess Profits Tax Act, unlike in Section 42(3) of the Income Tax Act, and contended that apportionment cannot be read into the statute by analogy.

iv) The appellant also relied on Re Mohanpura Tea Co., ILR 2 Cal 201 to support the proposition that profits must accrue at the place of sale and not manufacturing.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that manufacturing constituted a severable and substantive part of the business and not merely a preparatory act. This was fully covered under the definition of “business” under Section 2(5) of the Excess Profits Tax Act which includes manufacturing.

ii) They contended that profits are not wholly earned at the place of sale, but inchoately accrue during the process of manufacture. The increase in value due to manufacture results in profit, irrespective of the location of sale.

iii) The respondent relied on the principles laid in Commissioner of Taxation v. Kirk, [1900] AC 588, which recognized apportionment of profits between manufacture and sale, and held that income could accrue at the source of manufacture.

iv) They also argued that Section 42(3) of the Income Tax Act is incorporated into the Excess Profits Tax Act via Section 21, thereby allowing for apportionment of income between the Indian State and British India.

H) RELATED LEGAL PROVISIONS

i) Section 5, Excess Profits Tax Act, 1940
ii) Section 42(1) and 42(3), Indian Income Tax Act, 1922
iii) Section 2(5), Excess Profits Tax Act, 1940
iv) Section 21, Excess Profits Tax Act, 1940

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that manufacturing operations at Raichur were indeed a part of the business under the third proviso to Section 5, and not merely auxiliary or incidental.

ii) The Court ruled that profits attributable to manufacture, even if realized post-sale in Bombay, accrued or arose in Raichur. As such, they were not chargeable to excess profits tax, as Raichur was part of an Indian State.

iii) The Court upheld the principle of apportionment of profits under Section 42(3) of the Indian Income Tax Act, 1922, which applied to the Excess Profits Tax Act via Section 21.

b. OBITER DICTA (IF ANY)

i) Kania C.J. observed that the expression “part of a business” does not require a composite cross-section of business operations. Even a single component like manufacturing can be a part, if separable and substantial.

ii) Mukherjea J. emphasized that “profits begin to accrue the moment raw materials undergo transformation,” reinforcing the location of manufacturing as a site of income origination.

iii) Mahajan J. noted that even if actual receipt happens at sale, profits accrue where the productive operations occur.

c. GUIDELINES (IF ANY – WRITE IN DETAIL AND IN POINTERS AS THE CASE MAYBE)

• Manufacturing alone can constitute a “part of business” for tax purposes.

• Apportionment of profits between manufacture and sale is legally permissible under Section 42(3).

• Place of accrual is not necessarily the place of sale; it can be the place of manufacture.

• The term “business” under tax statutes must be interpreted inclusively and contextually.

J) CONCLUSION & COMMENTS

This judgment laid a foundational precedent in Indian taxation jurisprudence, particularly regarding operations spanning multiple jurisdictions. It clarified that substantive economic activities, even when part of a larger business, must be treated distinctly if they meet the criteria under statutory exemptions. The Court took a commercially pragmatic view, ensuring that businesses operating in princely states were not unjustly taxed due to logistical sale operations in British India.

Furthermore, the judgment affirmed the principle that accrual of income is a process, not an instantaneous event, thus allowing a fair and equitable apportionment of profits across multiple territories. It harmonized domestic law with international tax principles and respected federal structures by upholding sovereign boundaries between Indian States and British India for taxation.

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K) REFERENCES

a. Important Cases Referred

i) Commissioner of Taxation v. Kirk, [1900] AC 588
ii) Chunilal Mehta v. Commissioner of Income-Tax, ILR (1938) Bom 752
iii) International Harvester Co. of Canada v. Provincial Tax Commission, [1949] AC 36
iv) Re Mohanpura Tea Co., ILR 2 Cal 201
v) Sulley v. Attorney-General, (1860) 5 H & N 711
vi) Grainger & Son v. Gough, [1896] AC 325

b. Important Statutes Referred

i) Excess Profits Tax Act, 1940, Sections 2(5), 5, 21
ii) Indian Income Tax Act, 1922, Sections 4, 42(1), 42(3)