Mohapatra, J.
1. This is a reference under Section 66(2), Income-tax Act, 1922, read with Section 21, Excess Profits Tax Act, 1940 arising in the following circumstances:
The petitioner Bhagawati prasad Ramasankar, at all material times, was carrying on business on extensive scale of collecting Kendu leaves from some forests in Raigarh State and also in Kolabira jungle within the district of Sambalpur. He used to sell them at considerable profits at several places which formerly formed part of British India. For the assessment year of 1944-45, his total net profits for the preceding accounting year (14-4-1943 to 2-4-1944) were estimated by the Income-tax Officer of Sambalpur at Rs. 60,000. It was further observed by the Income-tax Officer in his order dated 20-7-1946, that the said net profit of Rs. 60,000 was made up of Rs. 52,000 for Raigarh and Rs. 8,000 for Kolaabira Jungle.
It is to be noted here that Raigarh which is now in the State of Madhya Fradesh was a, native State in India as defined in the Government of India Act, 1935, prior to 1947. The petitioner was also assessed to pay Excess Profits Tax on the above basis of his net profits of Rs. 60,000, as found by the Income-tax Officer. The petitioner filed an appeal against the order of assessment before the Appellate Assistant Commissioner where for the first time he raised the contention that he was not liable to pay Excess Profits Tax in respect of net profits to the extent of Rs. 52,000 which accrued or arose in Raigarh State. The petitioner relied upon third proviso to Section 5, Excess Profits Tax Act, 1940, which runs as follows:
'Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State; and where the profits of a part of a business as accrue or arise in an Indian State, such part shall, for the purpose Of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business.'
This contention of the petitioner was negatived by the taxing authorities on two grounds, namely, (i) that the leaves which were collected in Raigarh State were actually sold and the sale proceeds received in British India, as it then was, and (ii) that the petitioner had placed no material before the authorities from which they could conclude as to what profits of the business or a part of the business accrued or arose in Raigarh State.
2. The petitioner filed a petition under Section 66 before the Appellate Tribunal, Calcutta Bench, to refer the points of law to this Court. The petition having been rejected the petitioner filed the present S. J. C. This Court by the order dated 4-11-1952, directed the Tribunal to state a case on the following points of law:
'1. Whether the third proviso to Section 5, Excess Profits Tax Act, 1940, is applicable to the facts and circumstances of this case; and
2. If the said proviso is applicable, whether there is a statutory duty on the Excess Profits Tax Officer or on the Income-tax Appellate Tribunal to determine that portion of the assessee's income which could be said to have accrued or arisen in Raigarh State.'
3. The facts have been found that the petitioner's business consisted tn collecting Kendu leaves in Raigarh State and transporting them to various places in India which formerly formed part of British India and the Rales in fact took place in British India and the prices also were received in British India. It is further to be noted that Kendu leaves were transported without undergoing any process of curing. Indeed while Kendu leaves were being transported in huge quantities outside the State of Raigarh, the processes of bundling packing and filling were undergone for the purpose of transport.
4. The main question that arises for determination in the present case is when the Kendu leaves were being collected in the State of Raigarh and transported from out of the State to different parts of British India where they were sold and sale-proceeds were received, whether any part of the business of the petitioner was at Raigarhand the profits of that part of the business accrued or arose in Raigarh. Before proceeding further it will be pertinent to quote Section 42 (3), Income-tax Act as it stood amended after 1939. Section 42, Income-tax Act has been made applicable to the Excess Profits Tax Act, 1940, by virtue of Section 21 of the Act. Sub-section (3) of Section 42, Income-tax Act, runs 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.'
5. Previously there were series of conflicting decisions of different High Courts on this part of the law as to whether the business must be taken to be closed at the place where the commodities were sold and sale-proceeds realised and whether therefore the entire business must be in place of sale, or where the act of purchase can be taken to be a part of the business itself, and as such, the sources or the places of purchase can be taken to be the parts of the business. In the series of cases they also drew a distinction between the source or the place of purchase where the commodities, before being transported to the place of sale, had undergone several processes of manufacture and secondly where the sources were simply the places where the act of purchase took place and the commodities were transported as raw materials to the places of sale where sale-proceeds were received.
6. it would be unnecessary to make a review of these arrays of decisions on the subject on account of the decisions of their Lordships of the Supreme Court in the meantime. We will now take up the decision in the case of -- 'Commr. of Income-tax, Bombay v. Ahmedbhai Umarbhal and Co., Bombay', AIR 1950 SC 134 (A), which was also referred to in the order of this Court dated 4-11-52. There the assessees carried on business of manufacturing and dealing in oil during the relevant accounting periods. They owned 3 mills at Bombay and one at Raichur (Hyderabad State) for manufacturing oil from ground-nuts. The oil produced at Raichur was sold partly at Raichur and partly in Bombay. The question was in respect of their liability under the Excess Profits Tax Act for the Oil manufactured at Raichur, but sold in Bombay.
The assessees contended that in respect of such oil a portion of the profits earned by them was attributable to their business of manufacturing oil at Raichur and that portion of the profits should not be assessed to tax under the Excess Profits Tax Act. The profits of a part of the business of the assessees accrued at Raichur and to that extent the part of the business should be treated as a separate business and be exempted from Excess Profits under Proviso 3 to Section 5 of the Excess Profits Tax Act. It was held unanimously by all the 7 Judges even though on different reasons, that the manufacturing operations of the assessees at Raichur were s part oftheir business within the meaning of Section 5, proviso 3 and that the profits of this part of the business accured or arose at Raichur and were exempt from excess profits tax.
By this Judgment the position is settled at rest that the place where the articles are sold and the sale-proceeds are received cannot be the only place of business of the assessee. The place where the articles are manufactured is also to be taken as a place of business and the act of manufacture is to be deemed as a part of the business itself. Their Lordships laid stress upon the feature that the words appearing in proviso 3 to Section 5 are not receipt of profits but 'accrue or arise' which do clearly indicate that the places where the articles are manufactured and made ready for market are also to be taken as places where some parts of the profits accrue or arise even though they were not actually received at the place. Kania C. J. observed:
'I am however unable to accept the contention that the source of income can never be the place where the Income accrues or arises. In my opinion there is nothing to prevent income accruing or arising at the place of the source. The question where the income accrued has to be determined on the facts of each case. The income may accrue or arise at the place of the source or may accrue or arise elsewhere, but it does not follow that the income cannot accrue or arise at the place where the source exists.'
This decision however does not solve the problem before us in its entirety, because this was a case where their Lordships were laying down the principle in the case of articles, such as oil, which was manufactured at Raichur before being transported to Bombay for sale, but we are confronted with a case where there was no process of manufacture or even curing before the Kendu leaves were transported from Raigarh to British India for sale. As we get it from the judgment of Mahajan J. (as he then was) and Mukherjea J., they have drawn a distinction between the two classes of cases and it is particularly clear from the Judgment of Mahajan J. that the case before them does not lay down the principle for raw material being purchased at one place and sold at another. In paragraph 43 of the report, Mahajan J. observed as follows:
'These are cases where raw materials were purchased at one place and sold at another and it was held that in such cases it was the act of sale from which the profits accrued or arose. In most of these cases the goods as purchased were sold without going through any manufacturing process. It was observed that mere act of purchase produces no profit. This proposition has been doubted in a later case. But it is unnecessary to go into this matter. In the case of a trading business, like purchase and sale, it may be said that the business of a person is one operation and the nature and the character of the business is such that the profits arise at the place of sale and that in such a case it is not possible to ascribe any profits to the act of purchase and it is stillmore difficult to apportion them. These cases are no guide for the decision of cases of this nature.'
In the judgment of Mukherjea J. we get in the last portion of paragraph 70 of the report: 'The question before us is where do the profits resulting from the manufacturing process accrue or arise?' in paragraph 71 of the report, his Lordship (Mukherjea J.) observed:
'when a raw material is worked up into a new product by process of manufacture, it obviously increases in value: in other words; there is an accretion of profit to it and the increased value represents this income or profit which is the result of manufacture. As these profits accrue by reason of manufacture, the accrual, in my opinion, cannot be located at the place where the manufacturing process is gone through.'
7. But the problem before us is completely solved by a subsequent decision of their Lordships of the Supreme Court, reported in -- 'Anglo-French Textile Co., Ltd. v. Commr. of Income-tax, Madras', AIR 1953 SC 105 (B). This was a) case of purchase of raw materials by a foreign company doing business outside British India systematically and habitually through an established agency in British India and it was held that such activity of purchase of 'raw materials was well within the import of the term 'operation' as used in Section 42 (3) of the Act. The assessee was a public limited company incorporated in the United Kingdom carrying on business in cloth and yarn. All the purchases of cotton required for the mills were made in British India and transported outside. The questions, which appear to be very pertinent for us as referred to the High Court in that case, are as follows:
'1. Is mere purchase of raw material an operation within the meaning of Section 42 (3) of the Act?
2. Can any profit arise out of mere purchase of raw material?'
Their Lordships took cognizance of the view that there is no uniformity of the judicial opinion in the matter that mere act of purchase produces no profit The contention that in such cases of mere purchase of raw materials in one place and the sale having taken place in another it is always to be held that the place of sale alone is the place of business where the entire profits accrued or arose was negatived. It will be pertinent to quote the important part of the judgment of Mahajan J. (as he then was) :
'While maintaining the view taken by the High Court in this case we wish to point out that 16 is not every business activity or manufacture that comes within the expression 'operation' to which the provisions of Section 42(3) are attracted. These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well-defined business operation. Activities which are not well-defined or are ofa casual and isolated character would not ordinarily fall within the ambit of this rule. Distribution of profits on different business operations or activities ought only to be made for sufficient and cogent reasons and the observations made here are limited to the facts and circumstances of this case.
In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature 'operations' within the meaning of that expression. In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place for purchase. Such activity appears to us to be well within the import of the term 'operation' as used in Section 42(3) of the Act. It is not in the nature of an isolated transaction of purchase of raw materials. The first contention of the assessee is therefore negatived.'
The position therefore is clear that if it is really a case of casual or stray purchases, it cannot form part of the business of the assessee. But if the act of purchase is through a regular and well established organisation and the raw materials are purchased systematically and habitually on an extensive scale, as in the present case, the act of purchase will be a part of the business and a portion of the profits would accrue or arise at the place of purchases within the meaning of proviso 3 to Section 5.
8. in the present case, it can never be taken to be an act of stray or casual purchase in view of the findings of the authorities. The finding of the Appellate Assistant Commissioner, on appeal, which is a part of the statement submitted to us, is as follows:
'During the previous year he had lease at two places, viz., Raigarh and Kolabira in Sambal-pur District. For the former place he showed a sale of Rs. 52,199/- for the latter place a sale of Rs. 18,560/-........ The appellant took lease of more than half the entire area of Raigarh, for Rs. 9,500/-. But in a subsequent year he has taken the whole area for a sum of Rs. 2,40,000/-. This means that the sale proceeds for the portion taken in the previous year must be near about Rs. 1,50,000/-. The sale of Rs. 52,199/-shown is therefore absurd. It is apparent that the Income-tax Officer has estimated the sale of about Rs. 1,50,000/- for Raigarh and about Rs. 25,000/- for Kolabira and considering all the circumstances of the case I cannot say that these figures are high or anything but reasonable.'
The fact that in the Raigarh State the assessee took lease of the whole area for collection of Kendu leaves for a sum of Rs, 2,40,000/- the sale proceeds of which portion has been assessed by the authorities at Rs. 1,50,000/- goes strongly against any suggestion that this is a case of stray or casual collection. It appears from the statement of profits and loss filed by the assessee and accepted by the authorities that considerable amounts were spent for bundling, packing and filling of the leaves. The assessee has also established several godowns in the locality for the purposes of collection. There is no doubt left in our mind that it is a case of systematic and habitual collection in an extensive and organised scale coming within the dictum laid down by their Lordships of the Supreme Court in AIR 1953 SC 105 (B), and, as such, we are of the opinion that the first question must be answered in the affirmative that is to say, that a part of the profits of the assessee accrued and arose in the State of Raigarh and would therefore be exempt from taxation.
9. Coming to the second question, on a perusal of the provisions of 3rd proviso to Section 5, Excess Profits Tax Act, 1940 and Sub-section (3) of Section 42, Income-tax Act, we are definitely of the view that when in the present case all the operations of the business were not carried out in British India and a part of the profits and gains of the business accrued, or arose at Raigarh and a part of the profits and gains of the business accrued or arose in British India, it is incumbent upon the taxing officer to determine which part of the profits and gains is reasonably attributable to that part of the operations carried out in British India. If no sufficient materials are placed by the assessee before the taxing officer, the taxing officer can proceed in accordance with the provisions of Rule 33, Income-tax Rules, 1922. It is accepted by the counsel of both parties that R. 33 is applicable to the present case, Rule 33 runs as follows:
'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 the taxable territories whether directly or indirectly through or from any business connection in the taxable territories, or through or from any assets or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind 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 receipts 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.'
This rule makes it clear that the taxing officer has power to determine the proportion which is reasonable in the circumstances of each case.
10. We would, therefore, answer both the questions in the affirmative. 'Under the 3rd proviso to Section 5, Excess Profits Tax Act, 1940, the assessee is entitled to the exclusion of profits and gains accruing or arising in Raigarh State and that the taxing officer is to determine the portion of theincome so accruing or arising in Raigarh State. The reference is accordingly disposed of and the petitioner is entitled to his costs. Hearing fee is assessed at Rs. 100/- (one hundred rupees).
Misra, J.
11. I agree.