Law: Income Tax Act, 1922

Section: 34,42(3)

Income-tax Act (XI of 1922)----Ss. 34 & 42 (3)-Raw materials purchased in Pakistan and manufactured in India--Profits attributable to purchase whether assessable in Pakistan--Inter-Dominion Agreement, whether applicable-Escapement of income pertaining to pre-partition period-Assessability in Pakistan. The assessee, a public limited Company, owned and worked several jute mills in India. It maintained a regular jute purchas­ing agency in Pakistan which purchased jutes in Pakistan and sent them to the assessee in India where goods were manufac­tured and sold. The Income-tax Officer initiated proceedings under sec­tion 34 and assessed to tax the income attributable to the act of purchase of jute in Pakistan. The Appellate Assistant Commissioner confirmed the assessment. Before the Tribunal the assessee contented that (i) as the process of manufacture and sale took place in India mere purchase of raw material in Pakistan could not give rise to any profit in Pakistan, (ii) in determining the place of accrual of profit the element of purchase should not come into picture at all and (iii) in any case clause 7 (a) of the Schedule to the Inter-Dominion Agreement should be applied to this case. The Tribunal overruled all the grounds and confirmed the assessment, giving certain relief in the quantum. On a reference it was held that :- (i) as the assessment was of income which escaped assessment in British India, when it was in existence, and as Pakistan was a successor Government to British India in relation to that part of the country now comprised in Pakistan, income was assessable; (ii) the purchase of raw materials was one of the processes or stages which ultimately led to the profits on the sale of the finished products and the purchase was therefore a part of the business operation within the meaning of section 42 (3) ; (iii) clause 7 (a) to the Schedule to the Inter-Dominion Agreement for the avoidence of the double taxation of income applied only to cases of goods purchased in one dominion and sold in the other in the same condition without any manufacturing process. The jute was sold after being subjected to a manu­facturing process to which clause 7 (a) of…

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