06 October 1964
Supreme Court


Case number: Appeal (civil) 808 of 1963






DATE OF JUDGMENT: 06/10/1964


CITATION:  1965 AIR 1526            1965 SCR  (1) 660  CITATOR INFO :  R          1977 SC1259  (15)  R          1981 SC 148  (12)  R          1981 SC1047  (10)  R          1987 SC1234  (3,4,6,10)

ACT: Income-tax  Act,  1922  (11  of  1922),  s.  42(1)-"Business connection",  meaning  of-Assessee  canvassing  orders   for nonresidents  in  taxable territories without  authority  to accept  orders-No other part in transaction  -Relation  with nonresident  whether amounts to business  connection  Income intended to be taxed under s. 42(1)-Nature of.

HEADNOTE: The assessees were a firm carrying on business as  importers and  commission agents.  They communicated orders  canvassed by   them  from  dealers  in  India  to  non-residents   for acceptance; if a contract resulted and the price was paid by the  Indian  dealers  to  the  non-resident  exporters   the assessees  became entitled to a commission.   In  assessment proceedings the income of the assessees was computed by  the addition  of 5% of the net total value of the sale  effected by the non-resident exporters in the previous year,  because in the Income-tax Officcr’s view there subsisted a ’business connection’   between  the  non-resident  dealer   and   the assessees.  The appellate authorities upheld the said  view. The  High  Court however held that there  was  no  ’business connection’  within  the  meaning of s.  42(1)  between  the assessees and the non-resident exporters.  The  Commissioner of  Income-tax  appealed  to the Supreme  Court  by  special leave. HELD  (i) Section 42(1) of the Indian Income-tax Act,  1922, seeks to tax those profits of a non-resident which arise  or accrue  to  him outside the taxable territories  through  or from a "business connection" within the taxable territories. [665 C-E]. (ii)"Business  connection" which is not defined in the  Act, may as several forms : it may include carrying on a part  of the  main business activity incidental to the main  business of the non-resident through an agent, or it may merely be  a relation  between  the business of the nonresident  and  the



activity  in  the taxable territories which  facilitates  or assists the carrying on of that business.  In each case  the question  whether  there is a business  connection  from  or through which income profits and gains arise or accrue to  a non-resident   must  be  determined  upon  the   facts   and circumstances of the case. [664 H; 665 B]. (iii)The expression "business connection" postulates a  real and  intimate relation between trading activity  carried  on outside the taxable territories and trading activity  within the  territories, the relation between the two  contributing to the earning of income by the non-resident in his  trading capacity.  In the present case, the activity of the assessee in procuring orders was not as agents of the nonresident it, the  matter of sale of goods manufactured by the latter  nor of  procuring raw materials in the taxable  territories  for their manufacturing process.  Their activity only led to the making of offers by merchants in the taxable territories  to purchase goods manufactured by the non-residents  assessees. [669 G-H; 670 A]. Commissioner  of  Income-tax v.  Remington  Typewriters  Co. Bombay  Ltd.  L.R. 58 I.A. 42, Commissioner  of  Income-tax, Bombay  Presidency and Aden v. Currimbhoy Ebrahim  and  Sons Ltd.   L.R.  63 I.A. 1, Bangalore Woollen, Cotton  and  Silk Mills Co. Ltd. v. Commissioner of Income-tax Madras,  (1950) 18  I.T.R. 423, Abdullabhai Abdul Kadar v. Commissioner  ,of Income-tax  Bombay City, (1952) 22 I.T.R. 241,  Anglo-French Textile 661 Company  Ltd. v. Commissioner of Income-tax, Madras,  [1953] S.C.R.  454  and  Hira Mills Ltd.   Cawnpore  v.  Income-tax Officer, Cawnpore, (1946) 14 I.T.R. 417, considered.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 808 and 809 of 1963. Appeals  by special leave from the judgment and order  dated October  5,  1960, of the Punjab High  Court  in  Income-tax Reference Nos. 11 and 13 of 1958. K.  N. Rajagopala Sastri, R. H. Dhebar and R.  N.  Sachthey, for the appellant. veda Vyasa and B. P. Maheshwari, for  the respondents. The Judgment of the Court was delivered by Shah  J.  R. D. Aggarwal & Company-called for  the  sake  of brevity  ’the assessees-are a registered firm  having  their place  of business at Amritsar in the State of Punjab.   The assessees  carry on business as importers and as  commission agents  or  non-resident exporters with two of whom  we  are concerned   in  these  appeals.   These   two   non-resident exporters Comptoirs Lainiers Osterieth s.a. Anvers (Belgium) and  Filaturae  Tessitura Di Tollengno  Biella  (Italy)  are exporters  and manufacturers of worsted woollen  yarn.   The assessees communicate orders canvassed by them from  dealers in  Amritsar  to  the non-residents  for  acceptance;  if  a contract  results and price for the goods purchased is  paid by  the  Amritsar dealer to the non-resident  exporter,  the assessees  become entitled to commission varying  between  1 1/2 and 2 1/2 % of the price. By letter dated March 24, 1951 the assessees were  appointed "sole agents" for the Italian Company "for sale" of  worsted woollen  yarns in the Indian territories terminable  by  one month’s notice.  The assessees had to "maintain the existing customers" and to secure new customers "conforming to  their general  terms  of sales", and were to receive 21  per  cent



commission on the net cash amounts arising from the accepted business  "concluded by the mediation" of the  assessees  or directly  by  the Italian Company with the  customers.   The Belgian    Company    appointed    the    assessees    their representatives for the whole of India on condition that the latter  did  not represent any other Belgian  Mill  or  yarn producer and did not sell Belgian yam in India on their own account. In proceedings for assessment of tax in the assessment  year 1952-53 the Income-tax Officer, ’C’ Ward, Amritsar  computed the income of the assasees by adding Rs. 54,558 being 5%  of net total value of yam sold by the non-resident companies 662 to  Indian  merchants in the previous year, because  in  his view  there subsisted business connections between the  non- resident exporters and the assessees.  The orders passed  by the  Income-tax  Officer  were confirmed in  appeal  by  the Appellate Assistant Commissioner and also by the  Income-tax Appellate Tribunal. The  Income-tax Appellate Tribunal submitted a statement  of case  to  the  High Court of Punjab  on  the  following  two questions               "(1)  Whether  the  relationship  between  the               assessee and the non-resident fell within  the               meaning    of   the    expression    "business               connection" as used in S. 42(1) of the  Indian               Income-tax Act ?               (2)   If  the answer to the (second)  question               is in the affirmative whether on the facts and               in the circumstances of this case any  profits               or  gains accrued or arose or could be  deemed               to  have accrued or arisen to the  nonresident               on  account of the business connection of  the               non-resident  with  the  assessee  during  the               previous year under consideration."               The High Court answered the first question  in               the negative and declined to answer the second               question.     With    special    leave,    the               Commissioner  of  Income-tax has  appealed  to               this  Court  against the opinion of  the  High               Court in these two cases.               Section  42(1) of the Income-tax Act  and  two               related sections ss. 40(2) and 43(1) may first               be  set  out.  Section 40, insofar  as  it  is               material, by sub-s. (2) provides :               "Where  the  .  . . agent of  any  person  not               resident  in the taxable territories . .  .  .               (such  person being hereinafter in  this  sub-               section  referred  to  as  a  beneficiary)  is               entitled   to  receive  on  behalf   of   such               beneficiary,  or  is in receipt on  behalf  of               such  beneficiary of, any income,  profits  or               gains  chargeable under this Act, the tax,  if               not  levied on the beneficiary direct, may  be               levied  upon  and  recovered from  such.  .  .               agent  .  . . in like manner and to  the  same               amount  as  it  would  be  leviable  upon  and               recoverable from the beneficiary if in  direct               receipt of such income, profits or gains." Section 40(2) is an enabling section providing machinery for assessment  and  recovery  of tax from an agent  of  a  non- resident in the taxable territories on income taxable  under the  Act which the agent is entitled to receive or  in  fact receives on behalf of the principal if tax be not levied  on the principal direct.  The



663. clause it may be noticed deals with charge to tax on  income which  the agent is entitled to receive or in fact  receives on behalf of a non-resident beneficiary.               Section   42,  insofar  as  it  is   material,               provides:               "(1)  All income,profits or gains accruing  or               arising,   whether  directly  or   indirectly,               through or from any business connection in the               taxable  territories,  shall be deemed  to  be               income accruing or arising within the  taxable               territories, and where the person entitled  to               the  income, profits or gains is not  resident               in   the   taxable   territories,   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 incometax :               Provided........               Provided further               Provided further               (2)   Where  a  person  not  resident  or  not               ordinarily    resident    in    the    taxable               territories, carried on business with a person               resident  in the taxable territories,  and  it               appears to the Income-tax Officer, that  owing               to  the close connection between such  persons               the course of business is so arranged that the               business done by the resident person with  the               person not resident or not ordinarily resident               produces to the resident either no profits  or               less than the ordinary profits which might  be               expected  to  arise  in  that  business,   the               profits   derived  therefrom  or   which   may               reasonably  be  deemed to  have  been  derived               therefrom, shall be chargeable to incometax in               the  name of the resident person who 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  the               taxable territories, the profits and gains  of               the  business  deemed under  this  section  to               accrue  or  arise in the  taxable  territories               shall  be only such profits and gains  as  are               reasonably  attributable to that part  of  the               operations   carried   out  in   the   taxable               territories." LISup.165-17 664 It  may  be  observed that sub-ss. (2)  and  (3)  illustrate special cases of business connections and do not purport  to limit the connotation of that expression.               Section 43, by the first paragraph, provides               "Any  person  employed by or on  behalf  of  a               person    residing   out   of   the    taxable               territories, or having any business connection               with such person, or through whom such  person               is  in the receipt of any income,  profits  or               gains  upon  whom the Income-tax  Officer  has               caused a -notice to be served of his intention               of  treating  him  as the agent  of  the  non-               resident person shall, for all the purposes of



             this Act, be deemed to be such agent:" This section authorises the Income-tax Officer to appoint  a person as statutory agent of a non-resident , and to  assess him  as agent of a nonresident in respect of the  income  of the non-resident in the taxable territories. The  only  question  that falls to be  determined  in  these appeals  is whether there was in the two cases  between  the non-resident companies and the assessees such a relation  as may   be  called  "business  connection,  in   the   taxable territories.   If  the  answer to this question  be  in  the affirmative,  the  assessees would as  statutory  agents  be chargeable to tax on behalf of the non-resident Companies on profits and gains reasonably attributable to those parts  of the  operations  which  were  carried  on  in  the   taxable territories. The  expression  "business"  is defined in the  Act  as  any trade, commerce, manufacture or any adventure or concern  in the  nature of trade, commerce or manufacture, but  the  Act contains   no   definition  of  the   expression   "business connection"  and  its  precise  connotation  is  vague   and indefinite.     The   expression    "business    connection" undoubtedly  means  something  more than  "business  "  .  A business  connection in S. 42 involves a relation between  a business  carried on by a non-resident which yields  profits or gains and some activity in the taxable territories  which contributes  directly or indirectly to the earning of  those profits  or gains.  It predicates an element  of  continuity between the business of the non-resident and the activity in the  taxable territories a stray or isolated transaction  is normally  not  to  be regarded  as  a  business  connection. Business  connection may take several forms it  may  include carrying  on a part of the main business or  activity  inci- dental  to the main business of the non-resident through  an agent or it may merely be a relation between the business of the non- 665 resident and the activity in the taxable territories,  which facilitates or assists the carrying on of that business.  In each   case  the  question  whether  there  is  a   business connection  from or through which income, profits  or  gains arise or accrue to a nonresident must be determined upon the facts and circumstances of the case. A  relation to be a "business connection" must be  real  and intimate,  and through or from which income must  accrue  or arise  whether directly or indirectly to  the  non-resident. But it must in all cases be remembered that by s. 42 income, profit  or  gain which accrues or arises to  a  non-resident outside  the  taxable territories is sought  to  be  brought within the net of the Income-tax law, and not income, profit or  gain which accrues or arises or is deemed to  accrue  or arise  within the taxable territories.  Income  received  or deemed  to be received, or accruing or arising or deemed  to be accruing or arising within the taxable territories in the previous  year is taxable by s. 4 (1 )(a) & (c) of the  Act, whether  the person earning is a resident  or  non-resident. If  the agent of a non-resident receives that income  or  is entitled  to  receive that income, it may be  taxed  in  the hands of the agent by the machinery provision enacted in  s. 40(2).   Income not taxable under s. 4 of the Act of a  non- resident becomes taxable under s. 42(1) if there subsists  a connection  between the activity in the taxable  territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises. Important  cases which have arisen before the Courts may  be briefly  reviewed, not for evolving a definition  applicable



generally  to all cases, but with a view to illustrate  what relation  between the non-resident and the activity  in  the taxable  territories  which contributes to  the  earning  of income may or may not be regarded as business connection. In  Commissioner of Income-tax v. Remington Typewriters  Co. (Bombay)  Ltd.(1)  a Company incorporated under  the  Indian Companies  Act, 1913, which was a subsidiary of an  American Company was deemed for the purposes of the Indian Income-tax Act to be the statutory agent of the latter Company and  was charged  to tax under s. 42 (1 ) in respect of profits  made by  that  Company  upon machines  exported  to  the  taxable territories  and in respect of dividends received  from  the Indian  Company,  although the assessee Company was  not  an agent for the American Company (1)  L.R. 58 I.A. 42. 666 under s. 40, as it had not received the profits and gains in question.  In that case, in consideration of transfer of the goodwill of the American Company in a specified territory in India  shares were allotted by the assessee Company  to  the American  Company.  In respect of those shares dividend  was paid  to the American Company by the assessee Company :  the American Company also sent machines to the assessee  Company for  sale  within the territory.  The profits  made  by  the American  Company  by  sale of the  machines  and  dividends received  by the American Company from the assessee  Company were  held  taxable  on  the ground  that  there  existed  a business ’connection. In Commissioner of Income-tax Bombay Presidency and Aden  v. Currimbhoy  Ebrahim and Sons Ltd.(1) advance of a loan by  a non-resident  was  held  not to be  a  business  connection. Currimbhoy  Ebrahim  & Sons Ltd. a private  limited  Company carrying on business as managing agents of various companies and  as dealers in cloth, borrowed a loan from the Nizam  of Hyderabad and executed a document in Bombay and as  security for  repayment of the loan deposited shares in  joint  stock companies  and  created an equitable mortgage  of  immovable properties  in British India.  The loan was to be repaid  in Hyderabad  then  an Indian State.   The  taxing  authorities treated  the  private  Company  as  agent  in  the   taxable territories of the Nizam within the meaning of S. 43 of  the Indian  Income-tax Act, and assessed to tax the interest  on the loan which the taxing authorities regarded as profit  or gain  which must be deemed to have accrued or arisen to  the Nizam, through or from a business connection or property  in British  India  within the meaning of S. 42(1) of  the  Act. The Judicial Committee held that the loan transaction was an isolated transaction.  There being nothing to show that  the Nizam  had at any time any interest, direct or indirect,  in the respondent Company, there-was no business connection  in British India within the meaning of s. 42 of the Act between the  Company and the Nizam and the interest on the loan  did not  constitute a profit or gain accruing or arising to  the Nizam, directly or indirectly, through or from any  business connection  or  property  in British  India,  chargeable  to income-tax in the name of the Company. In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Com- missioner of Income-tax, Madras (2 ) the assessee a  Company registered  in  the Indian State of Mysore  carried  on  the business of manufacturing woollen, cotton and silk goods  at Bangalore.  ’Me (1) L.R. 63 I.A. 1.       (2) (1950) 18 I.T.R. 423. 667 assessee’s  managing agents had their head office at  Madras in British India.  Under the managing agency agreement,  the



agents  bought  raw materials and other articles  or  things required for the purpose or use of the assessee and sold and disposed   of   goods   manufactured   by   the    assessee. Manufactured  goods were also sold in the Mysore  State  and deliveries  were  effected  in that State,  but  the  agents collected  the price of the goods sold in British India  and credited it in their books to the account of the assessee as they also acted as bankers of the assessee.  It was held  by the Income-tax Officer that the assessee Company was  liable to pay tax under the Indian Income-tax Act under two  heads- (i)  on  the  profits  attributable  to  the  sale  proceeds received  in  British  India and (ii) on  the  profits  that accrued  or arose outside British India to the  assessee  by reason  of business connection in British India.   The  High Court  of Madras held that the managing agents purchased  in British  India  raw  materials  required  for  the  business continuously  for several years, received the sale  proceeds of manufactured goods in British India and credited in their books  to the account of the Company acting as bankers,  met all  the  expenditure from out of the collections  in  their hands,  paid  for  the purchase, made  also  other  payments referred  to in the managing agents’ accounts.  This  was  a clear  case  of a business connection in  British  India  in respect  of  income which accrued or arose to  the  assessee outside British India. In  Abdullabhai  Abdul Kadar v. Commissioner  of  Income-tax Bombay  City(1) the assessee acted as commission agent of  a nonresident and entered into transactions within the taxable territories  on behalf of the non-resident, but he  was  not the  sole  commissions  agent of the  non-resident  who  did business  through other agents as well.  The  assessee  also purchased  cloth  on behalf of other constituents.   It  was held  that there was a -business connection, because it  was not predicated of a business connection that the broker must be  exclusively retained by the assessee.  Chagla  C.J.,  in dealing with the provisions of s. 42(1) observed               "......  the language used by the  Legislature               is  very wide, any business connection is  not               necessarily that business connection which  is               constituted  by  a  permanent  and   exclusive               agency.   On  the  other hand  a  mere  casual               connection,   a   connection  which   has   no               continuity,  would  also  not  be  a  business               connection as contemplated by the  Legislature               under section 42.               (1)   (1952) 22 I.T.R. 241.               668               Therefore,  in  order that  the  agency  which               constitutes   a  connection  between  a   non-               resident and the assessee should be a business               connection as contemplated by Section  42there               must  be  an  element of  continuity  in.  the               agency.  An  isolated transaction  through  an               agent, or even a     connection  for  a  short               period,   would  not  necessarily   constitute               business connection." Then  there  is  a decision of  this  Court  :  Anglo-French Textile   Company  Ltd.  v.  Commissioner   of   Income-tax, Madras(1).  The assesses Company incorporated in the  United Kingdom owned a spinning and weaving factory at  Pondicherry in French India.  The assessee had appointed another limited Company  in Madras as its constituted agent for the  purpose of its business in British India.  During the relevant  year of  account  no sales of yam or cloth  manufactured  by  the assessee Company were effected in British India, but all the



purchases of cotton required for the factory at  Pondicherry were  made by the agents in British India and  no  purchases were  made through any other agency.  In that case,  it  was held, that the assessee Company had a business connection in British  India within the meaning of s. 42 and a portion  of the profits of the non-resident attributable to the purchase of  cotton  in British India could be apportioned  under  s. 42(3). In  Hira Mills Ltd., Cawnpore v. Income-tax  Officer,  Cawn- pore(2)  a  non-resident  Company  carried  on  business  of manufacturing cloth at Ujjain in the Indian State of Gwalior and  sent  cloth to Cawnpore in British India.   Goods  were sold  by  the Company’s salesman at Cawnpore  and  the  sale proceeds  were  collected  by him  at  Cawnpore.   In  these transactions,  income  accrued or arose to  the  Company  in British India within the meaning of s. 4(1).  The  Company’s goods  were also marketed in British India  through  brokers who  were  not  the Company’s employees  and  who  were  not canvassing  orders exclusively for the Company.   Offers  of purchase  sent by brokers to Ujjain were not in any  special form.  They were either accepted or rejected by the  Company at  Ujjain,  but  all contracts were  for  delivery  "F.O.R. Ujjain".   Goods were generally consigned to "self"  at  the place  of destination and the merchants took delivery  after paying  the invoiced price plus freight and insurance  to  a broker  or banker in British India in exchange  of  endorsed railway receipts.  On (1) [1953] S.C.R 454. (2) (1946) 14 I.T.R. 417. 669 the facts the Allahabad High Court held that there was no business connection in British India. The  distinction between Abdullabhai Abdul  Kadar’s  case(1) and the Hira Mills’ case (2) may be noticed.  In the  former the  commission  agents had purchased cloth in  the  taxable territories  for  the  non-resident and in  the  latter  the agents did not purchase or sell goods for the non-resident : they  merely  canvassed orders which were in the  nature  of offers and communicated them to the non-resident who had the option to accept or reject the offers.  The sales took place outside  the  taxable territories, and in the  view  of  the Income-tax  Appellate Tribunal "Presumably also,  the  goods were  paid  for at Ujjain." The Court was  on  the  question framed  and  referred not called upon  to  consider  whether because of payment of the invoiced price plus insurance  and freight to a broker or banker in British India and  delivery in  exchange  of endorsed railway receipts,  the  case  fell within s. 4(1)(a) or s.4 (1 ) (c). Turning  to the facts of the present case, as found  by  the revenue  authorities, contracts for the sale of  goods  took place outside the taxable territories, price was received by the  nonresidents  outside  the  taxable  territories,   and delivery was also given outside, the taxable territories.  . No operation such as procuring raw materials, manufacture of finished  goods, sale of good or delivery of  goods  against price  took  place  within the  taxable  territories  :  the assessees merely procured orders from merchants in  Amritsar for purchase of goods from the non-resident companies.   The orders  were offers which the assessees had no authority  to accept  on  behalf of the  non-residents.   Some  commercial activity was undoubtedly carried on by the assessees in  the matter  of procuring orders which resulted in contracts  for sale by the nonresidents of goods to merchants at  Amritsar. But on this account no business connection of the  assessees with  the  non-residents  within  the  taxable   territories



resulted.  The activity of the assessees in procuring orders was not as agents of the non-residents in the matter of sale of  goods manufactured by the latter, nor of  procuring  raw materials in the taxable territories for their manufacturing process.   Their activities led to the making of  offers  by merchants  in  the  taxable territories  to  purchase  goods manufactured by the non-residents which the latter were  not obliged  to  accept.  The expression  "business  connection" postulates  a  real and intimate  relation  between  trading activity (1) 22 I.T.R. 241. (2) 14 I.T.R 417. 670 carried  on  outside  the taxable  territories  and  trading activity  within the territories, the relation  between  the two  contributing  to  the earning of  income  by  the  non- resident  in  his  trading activity.  In this  case  such  a relation is absent. In  that view of the case, these appeals must fail  and  are dismissed with costs.  One hearing fee. Appeals dismissed. 671