Falshaw, J.:— This is a case referred to the High Court by the Income-tax Appellate Tribunal of Allahabad under Section 66(1) of the Income-tax Act.

2. The reference actually covers three cases relating to the same company which has been contesting its assessments for the assessment years 1940-1941, 1941-1942 and 1942-1943 the accounting years being those ending on 31-3-1940, 31-3-1941 and 31-3-1942. The company in question is Messrs J. Webb Son's and Co., Inc. of Philadelphia in the United States of America, its business being the manufacture of carpets. The company is represented in India by an agent named Shamji Mal of Amritsar and its only business in India has been the purchase of wool as raw material for use in the manufacture of carpets. The method by which the income-tax payable by the company for the period in question has been assessed is as follows. The company through its agent in each year filed returns showing no income as liable to tax on the ground that no sales were made in British India but only purchases, and no profit and loss account or balance sheet of the company was filed before the Income-tax Officer for any of the years. The only figures available were those of the actual purchases of wool made in this country which amounted to Rs. 22,88,709, Rs. 7,65, 202 and Rs. 15,26,298 during the respective accounting periods. The Income-tax Officer on the basis of these figures calculated the profits by simply taking a percentage of them, and then, after deducting the sums proved to have been incurred as expenditure, multiplied the resulting figure by four in order to arrive at the company's world income. The Income-tax Officer's percentage figures were 7½% 12½% and 15% for the respective years, but these percentages were reduced in appeal to 5½% 7½% and 7½%.

3. The assessee company has, however, throughout maintained that it is not liable to any income-tax in this country in which its business simply consists of the buying of raw material and it accordingly put in an application under Section 66(1) of the Income-tax Act, before the Tribunal for the stating of a case and referring it to the High Court on the point of law. The questions which the company proposed should be referred to the High Court have been somewhat modified by the Tribunal in its order of reference and in their final form they are as follows:

1. Is mere purchase of raw material an operation within the meaning of S. 42(3) of the Act?

2. Can any profit arise out of mere purchase of raw material?

3. Whether there was any material before the Tribunal to hold what proportion of the profits could be reasonably attributable to the acts of purchase of the assessee in British India?

4. As the points involved are the same, the three cases are covered by a single order of reference. The relevant portions of Section 42 of the Income-tax Act read as follows:

“42(1): All income, profits or gains accruing or arising, whether directly or indirectly through or from any business connection in British India…. shall be deemed to be income accruing or arising within British India, and where the persons entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such-agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.

(3) 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.”

5. As regards the first of the questions referred by the Tribunal I do not think there can be any doubt that within the ordinary meaning of the word “operation” the purchase of wool as raw material for use in manufacturing carpets is an operation carried out in the course of its business by a person or firm-which manufactures carpets. In fact wool is the most important raw material used in the manufacture of carpets, which cannot be carried on without it. Apart from the common sense view the learned counsel for the assessee has not been able to cite any authority in support of the proposition that the purchase of raw material is not an operation within the meaning of S. 421(3). The only case cited in which there was any reference to S. 42(3), Rahim v. Commissioner of Income-tax reported as 1949-17 I.T.R 256 : (A.I.R(36) 1949 Orissa 60), went against him on this point. This case referred to a merchant who purchased hides, horns, bones etc., in the Orissa States and exported them for sale to places in British India, and the questions referred to the High Court by the Income-tax Tribunal was whether the income, profits or gains on his business or any part thereof accrued or arose within an Indian State, and if so, whether such income, profits or gains were received or deemed to be received in or brought into British India (within the meaning of S. 14(2)(c) of the Act), or whether S. 42(3) of the Act had any application. The question was not considered in this case whether the assessee's buying of the materials which he-exported and sold was an operation, and in fact, it seems that it had been assumed to be such, as can be seen from the following observations of Narasimham, J.:

“The operation of buying is undoubtedly an essential part in the business or trade. But on that account can it be held that a portion of the profits of the business accrued or arose at the place of buying.”

6. There does not in fact seem to be any case in which this point was specifically considered, but our attention has been drawn by Mr. Sikri for the respondent to some remarks-in the decision of the Privy Council in International Harvester Co. of Canada Ltd. v. Provincial Tax Commission, (1949) 17 I.T.R (sup.) 58 : (A.I.R(36) 1949 P.C 72). That was an appeal from a decision of the Supreme Court of Canada in which Sir Lyman Duff, C.J who was in a minority, made the following observations:

“The appellant company is admittedly resident outside of Saskatchewan within the meaning of this provision; and the business of the company in Saskatchewan is limited to making contracts of sale by its agents and by them receiving the proceeds of such sales. The profits of the company are derived from a series of operations, including the purchase of raw material or partly manufactured articles, completely manufacturing its products and transporting and selling them, and receiving the proceeds of such sales. The essence of its profit making business is a series of operations as a whole.”

7. These and other observations of the learned Chief Justice were cited with approval and the Privy Council accepted the view of the minority in the Supreme Court of Canada. In the circumstances I should have no hesitation in answering the first of the questions referred to us in the affirmative.

8. The answer to the second question is not quite so simple. If the question were to be taken in vacuo and not as related to the other questions framed it would at first sight seem that the answer would have to be in the negative, since in the ordinary meaning of the words obviously no profit arises in the mere purchase of raw material which is intended to be manufactured into some finished product. In the present context, however, the question requires further consideration. It is quite obvious that the purchase of raw material is one of the processes or stages which ultimately leads to the profits on the sale of the finished product and in the Privy Council case referred to above a passage is cited from the judgment in Commissioner of Taxation v. Kirk, 1900 A.C 588 : (69 L.J.P.C 87) which reads:

“Their Lordships attach no special meaning to the word ‘derived’, which they treat as synonymous with ‘arising’ or ‘accruing.’ It appears to their Lordships that there are four processes in the earning or production of this income: (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages…. The fallacy of the judgment of the Supreme Court in this and in Tindal's case is in leaving out of sight the initial stages, and fastening their attention exclusively on the final stage in the production of the income.”

9. The judgment of Lord Morton in International Harvester Co. of Canada Ltd. v. Provincial Tax Commission, (1949) 17 I.T.R (Sup.) 58 : (A.I.R(36) 1949 P.C 72) then goes on:

“In their Lordships' view, the fallacy of regarding a profit as arising solely at the place of sale appears also in the arguments advanced on behalf of the respondents in the present case.”

10. It is quite Obvious that the wise purchase of raw material must-contribute to a considerable extent to the profits realised on the sale of manufactured products, and one immediate way in which this can be brought about is by the manufacturer's direct purchase of raw materials in the countries where they are available instead of buying the raw materials through merchants in those countries. In this way the profits which the merchants dealing in such commodities could make in their own countries out of supplying the raw materials to the manufacturers are eliminated, and thus the ultimate profits of the manufacturer are increased.

11. On the 2nd and 3rd questions the points involved are inter-connected. Mr. Sikri has drawn our attention to S. 42 as a whole. According to S. 42(1), the whole of the profits of a company which derives profits directly or indirectly through business connections with British India are deemed to be income accruing within British India and so are liable to tax in this country, but this is qualified in S. 42(3) which provides that where all the operations of the business are not carried out in British India, the profits and gains of the business deemed to accrue or arise in this country are limited to such profits and gains as can be reasonably attributed to the part of the operations carried out in this country.

12. The question to what extent profits arise or accrue when commodities are bought in one country and sold in another country has been the subject of a number of decisions. The cases relied on chiefly on behalf of the assessee are the Secretary Board of Revenue (Income-tax), Madras v. Madras Export Co., 46 Mad. 360 : (A.I.R(10) 1923 Mad. 422), Jiwan Das v. Income-tax Commissioner, Lahore, 10 Lah. 657 : (A.I.R(16) 1929 Lah. 609 F.B), S.V.P Sudalaimam Nadar v. Commissioner of Income-tax, Madras, A.I.R(28) 1941 Mad. 229 : (194 I.C 76 S.B) and Rahim v. Commissioner of Income-tax, (1949-17) I.T.R 256 : A.I.R(36) 1949 Orissa 60), the decision of the Orissa High Court to which reference has already been made. The first of these cases referred to a Company whose headquarters was at Paris and whose only business in India was the purchase of raw hide for export and sale in Prance. It was held by a Division Bench that the profits of the firm accrued wholly in Prance and were therefore not taxable in British India. In Jiwan Das v. Income-tax Commissioner, Lahore, (10 Lah. 657 : A.I.R(16) 1929 Lah. 609 F.B), the facts were that the assessee brought goods in British India which he used to sell in Kashmir, and it was held by a Full Bench consisting of Shadi Lal, C.J, Broadway, Zafar Ali, Tek Chand and Jai Lal, JJ. that a person residing in British India is not liable to be assessed to income-tax under the Income-tax Act, on any part of the profits derived from sale in a foreign country of the goods purchased by him in British India when the profits have neither been received in, nor brought into, British India.

13. In the second of the Madras cases Sudalaimani Nadar v. Commissioner of Income-tax, Madras, A.I.R(28) 1941 Mad. 229 : (194 I.C 76 S.B) the assessee through his agents purchased animals in British India and exported them to foreign country for sale, and it was held that the profits derived from the sale in a foreign country of animals purchased in British India were not assessable to income-tax when the profits had not been received or brought into British India. The decisions in Secretary Board of Revenue (Income-tax), Madras v. Madras Export Co., 46 Mad. 360 : (A.I.R(10) 1923 Mad. 422) and Jiwan Das v. Income-tax Commissioner, Lahore, 10 Lah. 657 : (A.I.R(16) 1929 Lah. 609 F.B) were relied on. It is, however, to be noted that the two out of these three cases in which the assessee was a resident of British India, the Lahore case and the second of the Madras cases, were decided on the Act as it stood before substantial amendments were introduced into S. 42 in 1939 when the first and the third sub-sections were amended. Prior to 1939 sub-s. (1) referred only to persons not resident in India and the Full Bench decision in Jiwan Das's case, (10 Lah. 657 : A.I.R(16) 1929 Lah. 609 F.B) contained the following passage in the judgment of Shadi Lal, C.J:

“It is to be observed that while the statute has enacted a special rule making a non-resident having business connection or property in British India liable to Indian income-tax in respect of the income accruing outside the territorial limits of British India, there is no corresponding provision imposing a similar liability on a resident who derives income from the sale in a foreign country of the goods purchased by him in British India. We cannot extend the scope of the statute by analogy or place upon it what is called a beneficent or equitable construction in order to prevent a real or supposed anomaly.”

14. Thus neither of these cases is applicable to the present case.

15. As regards the decision in Secretary Board of Revenue (Income-tax), Madras v. Madras Export Co., 46 Mad. 360 : (A.I.R(10) 1923 Mad. 422) where the assessee was a foreign company it can only be said that the decision appears to be incorrect, and this in fact has been held to be the case in one of the leading cases cited on behalf of the respondent, Rogers Pratt Shellac Co. v. Secy. of State, 52 Cal. 1 : (A.I.R(12) 1925 Cal. 34 F.B). In that case if was held by a Full Bench that a company incorporated in the United States of America and having its head office in New York and: branch offices, agencies and factories in Calcutta, London, etc., which purchases goods in; India for sale in the open market in America, or for another company in America (the commission for the purchase for the company being: paid in America) and which has also a factory in the United Provinces, where raw produce is brought locally, and is worked up into a form suitable for exports to America, is not exempt-from assessment to income-tax or super-tax in India. The following passage appears in the judgment of Chatterjea, J.:

“The Madras High Court in the case of the Board of Revenue v. Madras Export Co., (A.I.R(10) 1923 Mad. 422 : 46 Mad. 360), which in its facts is similar to the present case, has followed the English case of Smidth and Co. v. Greenwood, (1920-3 K.B 275 : 89 L.J.K.B 993). It has held that Section 33(1) of the Indian Income-tax Act (the earlier equivalent of S. 42(1) did not create a new category of income which would be charged under the Act in addition to incomes mentioned under S. 5 as chargeable under the Act, but that S. 33(1) merely provided a machinery by which non-resident foreigners (amongst others) trading in British India or having business connection in British: India could be taxed on income derived by them in British India. But the learned Judges do not appear to have noticed the difference between the Indian Act and the English Act in so far as the former lays down-that certain profits though not arising or accruing in. British India shall be deemed to arise or accrue in. British India.”

16. The other leading case cited on behalf of the respondent is Commissioner of Income-tax, Burma v. Steel Brothers & Co. 3 Rang. 614 : (A.I.R(13) 1926 Rang. 97 F.B). The company in this case was a large company incorporated in England and with its head office in London, and it carried on various-large business undertakings in Burma, especially in connection with rice, timber and cotton. It also had numerous rice-mills, sawmills, cotton-ginning mills and vegetable oil mills in Burma where commodities on raw materials were worked up into forms suitable? for use and shipped to the United Kingdom. Further, it also exported from Burma raw-commodities in the same form as purchased. The following rules were laid down by a Full Bench:

“It is necessary to look to Section 42(1) of the Indian Income-tax Act to find out, in the case of a non-resident, what-income, profits or gains are deemed to accrue, or arise, or to be received in British India under the provisions of the Act; and from S. 42(1), we find that all profits, or gains accruing or arising to a non resident, whether directly or indirectly, through or from any business connexion or property in British India is deemed to-be such income, and is, therefore, chargeable under Ss. 4(1) and 6.

2. The fact of the produce being sold in London and the money being received there did not prevent profits or gains accruing, or arising, or being deemed to accrue or arise in British India, from being taxable under the Indian Income-tax Act.

3. No distinction, so far as liability to income-tax is concerned, could be drawn between profits on produce, which had undergone some process of conversion or ‘working-up’ by the company in Burma, and profits on produce purchased by it in Burma and exported in the same form as when purchased.

4. In arriving at the amount of profits liable to the Indian Income-tax, the Commissioner of Income-tax must allow the London Office a reasonable commission agents' commission on the sale and realization of the produce, and, therefore, so much of the profits as can reasonably be attributed to commission agents' commission should not be assessable to income-tax in Burma.”

17. In this decision Rogers Pratt Shellac Co. v. Secy. of State, 32 Cal. 1 : (A.I.R(12) 1925 Cal. 34 F.B) and Commissioner of Taxation v. Kirk, 1900 A.C 588 : (69 L.J.P.C 87) were followed and the decision in Secretary Board of Revenue (Income-tax) Madras v. Madras Export Co., 46 Mad. 360 : (A.I.R(10) 1923 Mad. 422) was severely criticised. The judgment as a whole shows that the principle which was subsequently embodied in S. 42(3) was followed, and Indian income-tax was held to be chargeable on such portion of the profits of the firm as were reasonably attributable to the part of the firm's operations which were carried out in Burma.

18. The decision in Motor Union Insurance Co., Ltd.…Assessee; v. Commissioner Of Income-Tax, Bombay, Bombay, A.I.R(32) 1945 Bom. 285 : (47 Bom. L.R 222) was also cited. In this case the assessee company carried on business in British India in forms of insurance other than life insurance and the premium receipts were remitted to London and invested in London, none of them being retained for investment in this country, and it was held by Stone, C.J and Kama, J. that the portion of the interest income which was reasonably attributable to that part of the business operations which were carried out in British India was liable to be assessed to income-tax.

19. Some further reference must be made to the decision in Rahim v. Commissioner of Income-tax, (1949-17 I.T.R 256 : A.I.R(36) 1949 Orissa 60), relied on, on behalf of the petitioner. In that case the principal question referred to the Orissa High Court was:

“Whether in the circumstances of the ease, and on the findings of the Tribunal, the income, profits or gains in question or any part thereof accrued or arose within an Indian State and if so, whether such income, profits or gains were received or deemed to have been received in or were brought into British India,”

20. The circumstances were that the assessee used to buy hides, horns, etc. in the Orissa States and sell them in British India. The decision of. Narasimham, J. was that the answer to this question was in the negative and that the? second question, “whether Section 42(3) of the Indian Income-tax Act was applicable” did not arise. It is, however, to be noted that while Narasimham, J. answered the first question with and unqualified negative Pay, C.J did not altogether-subscribe to his views-and wrote a separate judgment in which, while he agreed that the answer-to the first question should be returned in the? negative on the facts of the case, it should be-made clear that the answer was only intended to apply to the facts of that case. Towards the end of his judgment Ray, C.J observed as follows:

“Led by these considerations, have taken care to add as much so that our answers to the questions submitted may not be considered as laying down an absolute proposition of law applicable to all cases of buying and selling under all circumstances. What we say here is without prejudice to any other view that may be taken on the particular facts of a case. The questions put to us are limited by the words ‘in the circumstances of the case and on the findings of the Tribunal,’ as the contention had never been raised before the Income-tax Officer we do not know the nature and extent of the operations that were carried out in the states for the purpose of buying; according to the authorities cited by my learned brother, the mere fact of buying may in certain cases, as in the present one, be so negligible a part of the operation of business as not to make an appreciable difference in apportionment of the amount that accrued or arose in British India.”

21. Earlier in his judgment he had observed:

“I would not, however, accept it as an abstract proposition of law that in all cases without any exception of a trade of buying and selling, the principle as enunciated will necessarily apply.”

22. From the above discussion it is clear that the purchase of raw material by a firm of manufacturers is one of the processes or operations which contributes to an appreciable degree to the ultimate profit which is realised on the sale of manufactured articles, and the two leading decisions by Full Benches of Calcutta and Rangoon in which it has been held that the profit resulting from operations of this kind in British India by the foreign firms are subject to Indian income-tax have not been overruled. In the circumstances I would answer the second of the questions framed by the Appellate-Tribunal in the affirmative.

23. As regards the third question, it is clear that the best material for arriving at the profits of the assessee firm would have been its own profit and loss accounts and balance-sheets for the periods in question, but these have been withheld, and the only figures available to the Income-tax Officer, for arriving at any conclusion were the figures of the actual purchases of wool made by the company's agent in this country. It may be added that the company has not objected to the multiplication of its assessed profits in this country by four for the purpose of calculating its world profits. In assessing the profits of the assessee company the Income-tax Officer has acted under R. 33 which reads:

“In any case in which the Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of British India whether directly or indirectly through or from any business connexion in British India or through or from any property in British India……… cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion, to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act) as the receipt so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable.”

24. It is clear that in the absence of the assessee company's own accounts the profits could not be ascertained and the Income-tax Officer had, therefore, to fall back on the turnover of the company in this country. The principle which he has applied in determining the margin of the profits earned by the assessee was the rate of gross profit a wool merchant in India would normally make if he supplied goods to the assessee instead of the assessee himself purchasing the wool here. The contention of the assessee was that there should have been definite material on the record to prove what the margin of the assessee's profits on his purchase was, and that in the absence of any such material there was no material at all. In the circumstances I consider that in calculating the profits, as he has done, the Income-tax Officer has acted well within the powers given to him under R. 33, and that the purchase figures of the assessee company did amount to material on which the proposition of the profits could be reasonably attributable to the acts of purchase of the assessee in British India. I would accordingly also return an answer in affirmative to the third question, and allow the costs of these proceedings to the respondent. Counsel's fee Rs. 250.

Harnam Singh, J.:— I agree.

M.K

25. Answer in the affirmative.