Anglo-French Textile Co. Ltd. Vs.
Commissioner of Income-Tax, Madras  INSC 82 (22 December 1952)
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)
Indian Income-tax Act (XI of 1922), ss.
42(1),42(3)-Nonresident-Purchase of materials in India by established
agency--Whether an " operation "-Profits attributable to purchase,
whether assessable in India-"Business connection," meaning of.
Though a few isolated transactions of
purchase of raw materials 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. Commissioner of Income-tax, Madras  (18 I.T.R. 423),
Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai d Co. ( S.C.R.
335), Commissioners of Taxation v. Kirk ( A.C. 588), -Rogers Pyatt
Shellac Co. v. Secretary of State for India ( I.L.R. 52 Cal. 1) and Webb
Sons & Co. v. Commissioner of Incometax, East Punjab ( 18 I.T.R. 33)
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.
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-taxBurma 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 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, notwithstanding 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)  S.C.R. 335.
(2)  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
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)  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 nonresident 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.
Agent for the appellant: P. H. Mukherji.
Agent for the respondent: G. H. Rajadhyaksha.