PETITIONER:
ANGLO-FRENCH TEXTILE CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX,MADRAS.
DATE OF JUDGMENT:
22/12/1952
BENCH:
MAHAJAN, MEHR CHAND
BENCH:
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
BOSE, VIVIAN
BHAGWATI, NATWARLAL H.
CITATION:
1953 AIR 105 1953 SCR 454
CITATOR INFO :
C 1954 SC 198 (10,10A)
R 1958 SC 269 (14)
R 1958 SC 861 (15)
RF 1965 SC1526 (15)
ACT:
Indian Income-tax Act (XI of 1922), ss. 42(1),42(3)-Non-
resident-Purchase of materials in India by established
agency–Whether an ” operation “-Profits attributable to
purchase, whether assessable in India-”Business connection,”
meaning of.
HEADNOTE:
Though a few isolated transactions of purchase of raw mate-
rials in India by a manufacturer carrying on business
outside India may not amount to the carrying on of an ”
operation ” in India within the meaning of s. 42 (3) of the
Indian Income-tax Act, where raw materials are purchased
systematically and habitually in India through an
established agency having special skill and competency in
selecting the goods, such an activity will be an “operation”
within a. 42 (3), and the portion of the profits
455
attributable to the purchases in India can be assessed to
incometax under s. 42(1) and (3) of the Indian Income-tax
Act.
Bangalore Woollen, Cotton & Silk Mills Co. Ltd. v. Commis-
sioner of Income-tax, Madras [1950] (18 I.T.R. 423),
Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai d
Co. ([1950] S.C.R. 335), Commissioners of Taxation v. Kirk
([1900] A.C. 588), -Rogers Pyatt Shellac Co. v. Secretary of
State for India ([1925] I.L.R. 52 Cal. 1) and Webb Sons &
Co. v. Commissioner of Incometax, East Punjab ([1950] 18
I.T.R. 33) relied on.
An isolated transaction between a non-resident and a
resident in India without any course of dealings such as
might fairly be described as a business connection does not
attract the application of s. 42, but when there is a
continuity of business relationship between the person in
India who helps to make the profits and the person outside
India who receives or realises the profits, such
relationship constitutes a business connection.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12 of 1952.
Appeal from the Judgment and Order dated the 18th January,
1950, of the High Court of Judicature at Madras
(Satyanarayana Rao and Viswanatha Sastri JJ.) in Case
Referred No. 27 of 1947.
O.T. G. Nambiar (S. N. Mukherjee, with him) for the
appellant.
M.C. Setalvad, Attorney-General for India, and C.
K.Daphtary, Solicitor-General for India (G. N. Joshi and
P.A. Mehta, with them) for the respondent.
1962. December 22. The Judgment of the Court was delivered
by
MAHAJAN J. -This is an appeal from the judgment of the High
Court of Judicature at Madras dated 18th January, 1950,
delivered on a reference by the Incometax-.Appellate
Tribunal under section 66(1) of the Indian Income-tax Act,
whereby the High Court answered the two questions referred
in the affirmative.’ The appellant is a public limited
company incorporated in the United Kingdom and owns a
spinning and weaving mill located at Pondicherry in French
Indial. The year of account of the appellant is the
calendar year. In the year 1939 no sales of yarn or cloth
manufactured by the company were effected in
456
British India, though in the previous year such sales were
effected. All the purchases of cotton required for the
mills were made in British India by Messrs. Best & Co.,
Ltd. Under an agreement between the appellant and Messrs.
Best & Co., Ltd., Madras, dated 11th July, 1939, Messrs.
Best & Co., Ltd. were constituted the agents of the
appellant for the purposes of its business in India.
Messrs. Best & Co., Ltd. have under the terms of the
agreement full powers in connection with the business of the
appellant in the matter of purchasing stock, signing bills
and other negotiable instruments and receipts and settling,
compounding or compromising any claim by or against the
appellant. The agents are empowered to borrow money on
behalf of the appellant and to make advances. They are also
expected to secure the best commissions, brokerages,
rebates, discounts and other allowances in respect of and in
connection with the business of the appellant. They are
enjoined to keep proper accounts of the appellant and to pay
over to the appellant the sum standing to its credit. They
are remunerated by a salary of Rs. 6,500 per mouth and a
percentage commission on the profits made. During the
relevant year all the purchases of cotton required for the
mill at Pondicherry were made by the agents in British India
and no purchases were made through any other agency. The
agents exercised their judgment and skill and purchased such
qualities and quantities of cotton and at such prices as
they in their experience considered most advantageous in the
interests of the company.
Prior to 1939-40 the appellant was assessed to income-tax in
British India on the profits computed on a turnover basis
earned by the sales in British India of the goods
manufactured by the appellant. In the course of the
assessment year 1939-40 the appellant stated that it
discontinued its business in British India with effect from
1st April, 1939, and claimed relief under section 25`3)
which was granted. In the course of his further enquiries
the Income-tax Officer found ‘that though the appellant was
not
457
selling its goods in British India and earning a profit
thereby, it continued to have an active business connection
in British India having regard to the way in which the
business of purchasing goods and materials for them ills was
carried on. There upon the Incometax officer held that such
purchases of cotton in British India constituted a business
connection in British India and that the profits
attributable to the purchases were liable to tax under
sections 42(1) and 42(3) of the Act. The net income of the
company was computed to be Rs. 2,81,176 and ten per cent. of
this sum was apportioned under section 42(3), of the Act as
being the profits and gains reasonably attributable to that
part of the business operations, which were carried out in
British India. The appellant appealed against the said
order of the Income-tax Officer to the Appellate Assistant
Commissioner who confirmed the order of the Income-tax
Officer. A further appeal by the appellant to the Tribunal
was unsuccessful.
At the instance of the appellant, the Tribunal stated a case
and referred the following questions for the decision of the
High Court under section 66(1) of the Act :-
” 1. Whether in the circumstances of this case the assessee-
company had any business connection in British India within
the meaning of sections 42(1) and 42(3) of the Income-tax
Act ?
2.Whether any profits could reasonably be attributed to
the purchase of entire cotton made in British India by the
secretaries and agents of the assessee company within the
meaning of sections 42(1) and 42(3) of the Income-tax Act ?
The High Court answered both these questions in the
affirmative and, in our opinion, rightly.
The learned counsel for the appellant reiterated before us
the arguments that he had addressed in the High Court and
contended that on the facts of this case there was no scope
for the finding that any profits or. gains accrued to the
assessee directly or
458
indirectly through or from any business connection in India.
It was argued that a mere purchase of raw materials or goods
in British India does not result in the accrual or arising
of profits and that the profits on the sale of goods arise
and accrue only at the place where the sales are effected
and that in the present case, there being no sales effected
in British India in the year of account 1939, no profits
accrued or arose to the company in British India nor could
ally profits be deemed to have accrued or arisen in British
India. In support of his proposition, the learned counsel
placed reliance on a number of cases, inter alia, on Board
of Revenue v. Madras Export Co.(1), Jiwan Das v.
Commissioner of Income-tax, Lahore (2), Rahim v.
Commissioner of Income-tax(3), Commissioner of Incometax,
of Income-tax v. Little’s Oriental Balm Ltd.(5). Most of
these decisions were given under the Act of 1922, before the
insertion of section 42 (3) in the Act of 1922 by the
amending Act of 1939.
As against the cases relied upon by the learned counsel for
the appellant, several authorities have been cited to us
which have proceeded on the footing that even purchase of
raw materials could be an operation in connection with a
business and if it was carried on in British India it might
make the profits attributable to such operation taxable
under section 42 of the Indian Income-tax Act. The case
Rogers Pyatt Shellac Co. v. Secretary of State for India(6)
is one of the leading decisions on this point. This case
was decided under section 33 of the Indian Income-tax Act,
1918, and the judgment shows that the principle followed in
the case was similar to that which was subsequently embodied
in section 42 (3) of the Income-tax Act, 1922. The question
referred to the High Court in that case was in these terms:-
“Is this company which purchased shellac and mica in India
for sale in the open market in America
(1) (1923) I.L.R. 46 Mad. 360.
(2) (I929) 1. L. R. 10 Lah. 657.
(3) A.I.R. 1949 Orissa 60.
(4) A.T.R. 1946 Bom. 185.
(5) [1950) 18 I.T.R. 849.
(6) (1925) I.L.R.52 Cal. 1.
459
liable to be assessed to income-tax and super-tax under
either Income-tax Act VII of 1918 or Act XI of 1922 and the
Super-tax Act, VIII of 1917."
And it was answered in the affirmative. The same line of
reasoning was adopted by the Rangoon High Court in
Commissioner of Income-tax- Burma v. Steel Bros. Co.'(1).
Among recent cases on this point which were decided under
section 42 of the Income-tax Act, 1922, can be mentioned the
case of Motor Union Insurance Co. Ltd. v. Commissioner of
Income-tax, Bombay(2) and that of Webb Sons & Co. v.
Commissioner of Income-tax, East Punjab(3). In the last
case, the assessee company which was incorporated in the
United States of America was carrying on in America the
business of manufacturing carpets. Its only business in
British India was the purchase through its agent in British
India, of wool as raw material for use in the manufacture of
carpets. It was held that the purchase was an operation
within the meaning of section 42 (3), and the profits from
such purchases could be deemed to arise in British India and
it was consequently assessable under section 42 (3) of the
Indian Income-tax Act. The questions referred to the High
Court in this case and relevant to this enquiry were these:
"(i) Is mere purchase of raw material an operation within
the meaning of section 42 (3) of the Act?
(ii)Can any profit arise out of mere purchase of raw
material?"
While answering these questions in the affirmative it was
said:-
"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 realized on the sale of manufactured articles."
There is thus no uniformity of judicial opinion on the
question that the mere act of purchase produces no profit.
(1) (1926) I.L.R. 3 Rang. 614.
(2) A.I.R. 1945 Bom. 285.
(3) [1950) 18 I.T.R. 33.
460
In our judgment, the contention of the learned counsel for
the appellant, and on which his whole .argument is founded,
that it is the act of sale alone from which the profits
accrue or arise can no longer be sustained, and has to be
repelled in view of the decision of this Court in
Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai &
Co.(1). That was a case that arose under the Excess Profits
Tax Act, XV of 1940. A firm which was resident in British
India and carried on the business of manufacturing and
selling groundnut oil, and owned some oil mills within
British India also owned a mill in Raichur in the Hyderabad
State where oil was manufactured. The oil manufactured in
Raichur was sold partly within the State of Hyderabad and
partly in Bombay. It was held by this Court that the
profits of that part of the business, viz., the manufacture
of oil at the mill in Raichur accrued or arose in Raichur
even though the manufactured oil was sold in Bombay and the
price was received there, and accordingly, that part of the
profits derived from sales in Bombay which was attributable
to the manufacture of the oil in Raichur was exempt from
excess profits tax under the proviso to section 5 of the
Act. Reference in this case was made to the decision of the
House of Lords in In re Commissioners of Taxation v. Kirk
(2), wherein it was held that where income was in part
derived from the extraction of ore from the soil of New
South Wales Colony, and from the conversion in the latter
colony of the crude ore into a merchantable product, this
income was assessable under the New South Wales Land and
Income Tax Assessment Act of 1895, section 15, sub-sections
3 and 4, nowithstanding that the finished products were sold
exclusively outside the colony. Lord Davey while delivering
the judgment of the Privy Council observed as follows :-
"It appears to their Lordships that there are four processes
in the earning or production of this income -(I) the
extraction of the ore from the soil ; (2) the
(1) [1950] S.C.R. 335.
(2) [1900] A.C. 588.
461
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 first process seems to their Lordships clearly within
sub-section 3, and the second or manufacturing Process, if
not within the meaning of ‘ trade ‘ in subsection 1, is
certainly included in the words any others source whatever
in sub-section 4.
So far as relates to these two processes, therefore, their
Lordships think that the income was earned and arising and
accruing in New South Wales.”
On a parity of reasoning it can well be said in this case
that the profits accrue or arise to the appellant from three
business processes or operations, those being (1) the
purchase of cotton in British India; (2) its conversion by
the process of manufacture in Pondicherry into yarn or cloth
; and (3) the sale of the merchantable product, and those
have to be apportioned between these three operations. The
same line of reasoning was adopted by the Madras High Court
in Bangalore Woollen, Cotton & Silk Mills Co. Ltd. v.
Commissioner of Income-tax, Madras(1). There it was held
that the purchase of raw materials by the man-aging agents
in British India would be an operation within the meaning of
section 42(3) and-it was reasonable to attribute a portion
of the profits to such purchases in British India.
After a careful consideration of the decided cases on the
subject and in view of the insertion of section 42 (3) in
the Act of 1922 by the amending Act of 1939, we have reached
the conclusion that in the present state of the law there is
hardly any scope for maintaining the view contended for by
the learned counsel for the appellant and we therefore agree
with the High Court in repelling it. While maintaining the
view taken by the High Court in this case we wish
(1) [1950] 18 I.T.R. 423.
462
to point out that it is not every business activity of a
manufacturer 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 of
a casual or 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 of 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 learned counsel argued in a rather half-hearted manner
that there was no business connection of the assessee in
British India. This contention does not require serious
consideration. An isolated transaction between a non-
resident and a resident in British India without any course
of dealings such as might fairly be described as a business
connection does not attract the application of section 42,
but when there is a continuity of business relationship
between the person in British India who helps to make the
profits and the person outside British India, who receives
or realizes the profits, such relationship does constitute
business connection. In this case there
463
was a regular agency established in British India for the
purchase of the entire raw materials required for the
manufacture abroad and the agent was chosen by reason of his
skill, reputation and experience in the line of trade. The
terms of the agency stated in by earlier part of this
judgment fully establish that Messrs. Best & Co. Ltd. were
carrying on something almost akin to the business of a
managing agency in India of the foreign company and the
latter certainly had a connection with this agency. We
therefore negative this contention of the learned counsel as
well.
For the reasons given above we uphold the view taken by the
High Court and dismiss the appeal with costs.
Appeal dismissed.
Agent for the appellant: P. H. Mukherji.
Agent for the respondent: G. H. Rajadhyaksha.