Mazagaon Dock Ltd. Vs. The
Commissioner of Income-Tax and Excess Profits Tax [1958] INSC 57 (12 May 1958)
AIYYAR, T.L. VENKATARAMA GAJENDRAGADKAR, P.B.
SARKAR, A.K.
CITATION: 1958 AIR 861 1959 SCR 848
ACT:
Income Tax-Non-resident carrying on business
with resident No profit accruing from dealings between them-Assessment of
resident-Validity-" Business ", meaning of -Indian Income- tax Act,
1922 (11 Of 1922), s. 42(2).
HEADNOTE:
Under s. 42(2) Of the Indian Income-tax Act,
1922, " 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 there from, or which may reasonably be deemed to have been derived
there from, shall be chargeable to income-tax 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 The appellant, a private limited company carrying
on business as marine engineers and ship repairers had its registered office in
Bombay and was resident and ordinarily resident in India, but its entire share
capital was beneficially owned by two non-resident companies whose business
consisted in plying ships for hire. Under an agreement between them the ships
plied for hire by the non- resident companies were to be repaired by the
appellant company at cost, charging no profits. The Income-tax Officer made an
assessment on the appellant company under S. 42(2) of the Indian Income-tax
Act, 1922. It was contended for the appellant (1) that S. 42(2) imposed a
charge only on a business carried on by a non-resident and that therefore no
tax could be imposed on the business of the appellant, and (2) that it was a
condition for the levy of a charge under that subsection that the non-resident
must carry on business with the resident and that in the instant case it was
not satisfied, as all that the non-resident companies did was only to get their
ships repaired by the appellant company:
Held, (1) that the business which is the
subject-matter of taxation under s. 42(2) Of the Indian Income-tax Act, 1922,
is that of the resident and not of a non-resident. The expression 849 "
derived there from " in that sub-section refers to the business of the
resident.
(2)that a person can be said to carry on a
business with another if the dealings between them form concerted and organised
activities of a business character.
Where, as in the instant case, the
nonresident companies got their ships repaired by the appellant, not as they
might by any other repairer but under a special agreement that repairs should
be done by the appellant at cost, the non- resident companies must be held to
have carried on business with the appellant within the meaning of s. 42(2) Of
the Act, even though the non-resident companies might have derived no profits
from the dealings with the appellant.
Narain Swadeshi Weaviing Mills v. The
Commissioner of Excess Profits Tax, [1955] 1 S.C.R. 952 and Commissioners of
lnland Revenue v. I corporated Council of Law Reporting, (1888) 3 Tax Cas. 105,
relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 381 of 1956.
Appeal by special leave from the judgment and
order dated February 24, 1955, of the Bombay High Court in Income-Tax Reference
No. 52/X of 1954.
N. A. Palkhivala (with him, Jamshedji B.
Kanga), S. N. Andley, J. B. Dadachanji, P. L. Vohra and Rameshwar Nath, for the
appellant.
H. N. Sanyal, Additional Solicitor-General of
India, G. N. Joshi and R. H. Dhebar, for the respondent. 1958.
May 12. The Judgment of the Court was
delivered by VENKATARAMA AIYAR J.-This is an appeal against the judgment of the
High Court of Bombay in a reference under s. 66(1) of the Indian Income-tax
Act, 1922, hereinafter referred to as the Act.
The appellant is a private limited company
incorporated under the Indian Companies Act, and is carrying on business as
marine engineers and ship repairers. Its registered office is in Bombay and it
is resident and ordinarily resident in India. Its entire share capital is
beneficially owned by two British companies, the P. & 0. Steam Navigation
Co. Ltd., and the British Indian Steam Navigation Co. Ltd., whose business 850
consists in plying ships for hire. Under an agreement entered into with the two
companies aforesaid, which will be referred to hereinafter as the non-resident
companies; the appellant repairs their ships at cost, and charges no profits.
Now, the point for determination is whether, on these facts, the appellant is
chargeable to tax under s. 42(2) of the Act. That sub-section runs as follows:
" Where a person not resident or not
ordinarily resident in the taxable territories carries 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
DO profits or less than the ordinary profits which might be expected to arise
in that business, the profits derived there from, or which may reasonably be
deemed to have been derived there from, shall be chargeable to income-tax 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. " The Income-tax
Officer, Bombay who dealt with the matter took the view that the appellant
company had so arranged its business with the non-resident companies that it
did not produce any profits to it, and that was because it was those companies
that really owned its share capital, and that therefore the profits which it could
ordinarily have made but for their close financial connection were liable to be
taxed under s. 42(2), and he computed the same at Rs. 6,80,000 for the account
year 1943-1944, at Rs. 4,67,559 for the account year 1944-1945 and at Rs.
4,68,963 for the account year 1945-46. On the basis of the above findings,
orders of assessment of income-tax were made for the account years 1944-1945
and 1945-1946 and of excess profits tax for the account years 1943-1944,
1944-1945 and 1945-1946.
Against these five orders, the appellant
preferred appeals to the Appellate Assistant Commissioner, who by his 851 order
dated July 3, 1952, confirmed the same. Then there was a further appeal by the
appellant to the Appellate Tribunal, and the Bench which heard the same having
been divided in its opinion, the matters came up for hearing before the
President, who by his order dated March 19, 1954, held that s. 42(2) was
inapplicable and he accordingly set aside the orders of assessment of
income-tax and excess profits tax made on the appellant. On the application of
the Department, the Tribunal referred the following question for the opinion of
the High Court of Bombay:
" Whether on the facts and in the
circumstances of the case any income falls to be included in the appellant's
assessment under s. 42(2). " The reference was heard by Chagla C. J. and
Tendolkar J. who by their judgment dated February 24, 1955, held that, on the
facts found, s. 42(2) was applicable and that the appellant was liable to be
assessed to income-tax and excess profits tax under that section. The appellant
applied under s. 66(A) for leave to appeal against this judgment to this court,
and that application was dismissed. The appellant thereafter applied for and
obtained leave to appeal to this Court under Art. 136, and hence this appeal.
It must be mentioned that on December 31,
1948, an order of assessment bad been made in respect of the income-tax payable
by the appellant for the account year 1943-1944, and therein, the profits
chargeable under s. 42(2) had not been included. But subsequently, the
Income-tax Officer took action under s. 34 of the Act, and on May 29, 1953,
made an order assessing the appellant to tax for that year on the profits
deemed to have been made by it under s. 42(2), and against that order, an
appeal is pending before the Appellate Assistant Commissioner. That order is
not the subject-matter of the present proceedings, which are concerned only
with the assessment of income-tax for the account years 1944-1945 and 1945-1946
and of excess profits tax for the account years 1943-1944, 1944-1945 and 1945-
1946.
Now, the sole point for determination in this
appeal is whether on the facts found the appellant is chargeable to tax under
s. 42 (2) of the Act. Mr. Palkhivala, 852 learned counsel for the appellant,
contends that it is not, and urges two grounds in support of his contention:
(1) that s. 42(2) imposes a charge only on a business carried on by a
nonresident, and that therefore no tax could be imposed under that provision on
the business of the appellant who is a resident; and (2) that it is a condition
for the levy of a charge under s.42 (2) that the non-resident must carry on
business with the resident, and that in the instant case it is not satisfied.
The first ground does not appear to have been put forward in the Court below,
but before us it has been presented with great elaboration and pressed with
considerable insistence. The argument in support of it may thus be stated: S.
42 (2) imposes a charge on profits of a business, actual or notional, when the
conditions specified therein are satisfied; but the section does not, in terms,
say who the person is whose business is liable to be taxed, but that that can
only be the non-resident is clear from other parts of the section. Thus, the
tax is imposed under s. 42 (2) on profits " derived " from business,
which must mean profits actually made therein. Ex hypothesi, the resident has
so arranged his business that it produces little or no profits to him. If it
has produced some profits, then they are taxable in his hands even apart from
this provision, and if he has made no profits, then the word " derived
" would be inapplicable to his business.
Therefore, the profits " derived "
and taxable under the section can have reference only to the business of a non-
resident. Then again, the profits are chargeable under this section in the name
of the resident. If the profits chargeable under s. 42(2) accrue from a
business of the resident, he would be the person who would, even apart from the
section, be liable for the tax, and in that situation, the expression " in
the name of the resident " would be inappropriate. It would make sense if,
in fact, the profits accrued in a business carried on by a person other than
the resident, and the legislature sought to tax them in his hands. The true
intention behind the legislation, it is said, is that the profits of the
non-resident should be taxed, but that the tax should fall on the resident by
reason of his 853 close connection with the nonresident. Support for this
contention is sought in the provision in s. 42 (2) that the resident shall be
deemed to be the assessee for all purposes of the Act. The word " deemed
" imports, it is argued, a legal fiction, and if it was the, business of
the resident that was intended to be taxed, then he is, in fact, the assessee,
and it would be' inconsistent with that position that he should be treated as
an assessee by a legal fiction.
It is also urged that sub-ss. (1) and (3) of
s. 42 deal with the profits of a nonresident and prescribe the conditions under
which and the manner in which the tax could be imposed and collected, and s. 42
(2) must in this setting, be construed as referring to the business of the
nonresident.
There would have been considerable force in
this argument, had there been any ambiguity or uncertainty in the wording of s.
42 (2) as to whether it is the business of the resident that is sought to be
taxed or that of the nonresident. But that is not so. The language of the
enactment imposing the charge is too plain to admit of any doubt. Now, s. 42
(2) is, it may be noted, in two parts.
The first part commencing with the opening
words " Where a person not resident " and ending with the words
" which may reasonably be deemed to have been derived there from "
prescribes the conditions on which the charge arises. It does not of itself
impose the charge. That is done by the second part, which provides that
"the profits derived there from or which may reasonably be deemed to have
been derived there from shall be chargeable to -income-tax." The word
" there from " is very important for the purpose of the present
discussion. In the context, it can refer only to the business of the resident,
and it is this business therefore that is the subject of the charge under s. 42
(2) It was suggested for the appellant that the word there from " has
reference to the arrangement between the nonresident and the resident, but
apart from the fact that such a construction would, on the grammar of it, be
untenable, :it is impossible to conceive how an arrangement relating to the
conduct of business can, as such, be the 854 subject-matter of income-tax,
apart from the business in which profits or gains are made. The language of the
section is clear beyond all reasonable doubt as to what it is that is sought to
be taxed under this section. That is only the business of the resident and not
that of the nonresident. In this view, it is only necessary to consider whether
there is anything in the wording of the other parts of s. 42 (2) relied on for
the appellant, which precludes us from giving effect to the plain import of the
word " there from ".
It is on the expression "profits
derived" in the charging part of the enactment that the appellant leans
heavily in support of his position that it is the business of the non- resident
that is really intended to be taxed. But then, those words do not stand alone.
They are associated with the words " or which may reasonably be deemed to
have been derived ", and this association has its origin in the preceding
clause produces to the resident either no profits or less than the ordinary
profits which might be expected to arise in that business ". This clause
contemplates two classes of cases, one where the business of the resident
produces no profits and the other where it produces less than the normal
profits. The charge is imposed on both these classes of cases, and the word
" derived " has reference to the latter, while the words "
profits which may reasonably be deemed to have been derived " relate to
the former. That both these clauses relate to the business of the resident is
clear from the words " to the resident " occurring therein. The word
" derived " in s. 42 (2) must therefore be interpreted as referring
to the business of the resident.
The respondent sought further support for
this conclusion in the words " which may reasonably be deemed to have been
derived" in s. 42(2), and contended that those words could apply only to a
business which does not yield profits, and that will fit in, in the context,
only with the business of the resident and not of the non-resident. The answer
of the appellant to this contention is that the words in question should be
construed as meaning not notional profits but such proportion of the actual
profits of the nonresident as 855 could reasonably be apportioned to the
business in India.
Reliance was placed in support of this
contention on Rr. 33 and 34 of the Indian Income-tax Rules, 1922. Rule 33
provides for the determination of the profits of a non- resident in cases
falling within s. 42(1), and one of the modes prescribed for such determination
is to fix an amount which bears the' same proportion to the total profits of
the non-resident as the Indian receipts bear to the total receipts in the
business. Rule 34 then provides that "the profits derived from any
business carried on in the manner referred to in s. 42 (2) may be determined
for the purposes of assessment to income-tax according to the preceding rule
". Now, the argument of Mr. Palkhivala is that the interpretation put on
s. 42 (2) by the rule-making authorities as manifest in R. 34 is that the
business chargeable under s. 42 (2) is that of the non-resident, and that the
words " which may reasonably be deemed to have been derived there from
" had reference to the apportionment of the Indian, out of the total
profits. We see no force in this contention. There is nothing in R. 34 to
justify the assumption that the rule-making authorities considered either that
s. 42 (2) applied to the business of a non- resident or that the words “which
may reasonably be deemed to have been derived there from " meant
apportionment of the Indian out of the world profits of the non-resident. And
even if those. be the assumptions on which the Rule is based, that can have no
effect on the true interpretation of s. 42 (2). And whatever doubts one migt
have had as to the meaning to be given to the words " derived there from
or which may reasonably be deemed to have been. derived there from " if
they had to be construed in isolation, in the context. of the section and read
in conjunction with the.
words " to the resident " and
" there from ", there cannot be any doubt that they have reference to
the business of the resident and not that of the non-resident.
The word " or " in the clause would
appear to be rather inappropriate, as it is susceptible of the interpretation
that when some profits are made but they log 856 are less than the normal
profits, tax could only be imposed either on the one or on the other, and that
accordingly a tax on the actual profits earned would bar the imposition of tax
on profits which might have been received. Obviously, that could not have been
intended, and the word " or " would have to be read in the context as
meaning " and ". Vide Maxwell's Interpretation of Statutes, Tenth
Edn. pp. 238-239. But that, however, does not affect the present question which
is whether the word " derived " indubitably points to the business of
the nonresident as the one taxable under s. 42 (2), and for the reasons already
given, the answer must be in the negative.
The appellant also relied on the clauses in
s. 42 (2) that the profits shall be chargeable to tax in the name of the
resident' and that he shall be deemed to be the assessee for all purposes of
the Act' as indicating that it is not the business of the resident that is
really sought to be taxed.
But these clauses are explainable with
reference to the fact that the profits taxed are not actual profits but what
are deemed to be profits. It was argued that if it was the intention of the
legislature that what was not profits should be deemed to be profits, that
should have been independently provided for before the tax is imposed, and that
in the absence of such a provision, the word " deemed " must be
construed as referring not to notional profits being treated as actual profits,
but to a person who is not, in fact, an assessee, being treated as an assessee.
We see no substance in this argument. There is no reason why an enactment
should not both declare notional profits as taxable profits and at the same
time impose a charge on the resident in respect of those profits, and that,
quite clearly, is what s. 42 (2) has done. It may be that its language is not
felicitous. But there can, however, be no mistaking its sense that it is the
resident that is to be dealt with as assessee in respect of profits which he
had not, in fact, made.
Nor do we see much force in the argument that
s. 42, sub-ss. (1) and (3) relate to income of the nonresident and that s. 42(2)
which is wedged in between them should therefore be interpreted as having 857
reference to the profits of the non-resident. If the language of s. 42(2) is
clear that it is the resident who is chargeable to tax, it is of no consequence
that under s. 42, sub-ss. (1) and (3) it is the non-resident that is taxed.
It should be remembered that s. 42 occurs in
Ch. V headed " Liability in Special Cases ", and s. 42(2) is a
liability which is out of the ordinary run, and it is not inappropriate to deal
with it in s. 42, because while s. 42(1) seeks to bring within the ambit of
taxation the profits of a non-resident which accrue in India, s. 42(2) seeks to
tax the resident in respect of profits which he would have normally made but
for his business association with a non-resident. On the other hand, on the
construction contended for by the appellant s. 42(2) would become practically
useless because a non-resident whose profits could be taxed under s. 42(2)
could also be taxed under s. 42(1), as also the resident if he were the agent.
None of the considerations put forward by the appellant is of sufficient weight
to displace the conclusion to be drawn from the words " to the resident
" and " there from " in s. 42(2), and we must hold that the
business which is the subject-matter of taxation under that provision is that
of the resident and not of a non-resident. This contention must accordingly be
found against the appellant.
We shall next consider the second ground
urged in support of the appeal that it is a condition for the levy of a charge
under s. 42(2) that a non-resident should carry on business with the resident,
and that, on the facts found, that condition is not satisfied, and that
therefore the tax is unauthorised. It is argued that the business of the non-
resident companies is to ply ships for hire, and that the appellant has no
concern with that; that the business of the appellant is to repair ships and
that the non-resident companies have no connection with that business; and that
all that the non-resident companies do is to get their ships repaired by the
appellant, and that does not amount to carrying on any business with the
appellant. A person who regularly purchases his goods from a particular dealer
does not, it is said, carry on business with 858 that dealer, and on the same
analogy, in getting their ships repaired by the appellant the non-resident
companies cannot be said to carry on business with them in the real sense of
that word.
We are unable to agree with this contention.
The word "business" is, as has often been said, one of wide import
and in fiscal statutes, it must be construed in a broad rather than a
restricted sense. Discussing the connotation of the word trade", Scott L.
J. observed in Smith Barry V. Cordy (1):
" The history of judicial decisions has
been similar, showing a strong tendency not to restrict the scope of Schedule
D; a tendency which was, we think, in sympathy with the general social and
economic outlook of the country.
There is hardly any activity for gaining a
livelihood and not covered by the other Schedules, which does not seem to us to
be swept into the fiscal net by the Schedule D." 'The word business'
connotes", it was observed by this Court in Narain Swadeshi Weaving Mills
v. The Commissioner of Excess Profits Tax (2), "some real, substantial and
systematic or organised course of activity or conduct with a set purpose."
Now, it may be conceded that when a person purchases his requirements from a
particular dealer, he cannot without more be said to carry on business with
him.
But here there is much more. The non-resident
companies send their ships for repair to the appellant, not as they might to
any other repairer but under a special agreement that repairs should be done at
cost. And further unlike customers who purchase goods for their own consumption
or use, the non-resident companies get their ships repaired for use in what is
admittedly their business. These are clearly trading activities, organised and
continuous in their character and it will be difficult to escape the conclusion
that they constitute business. We are not even concerned in this appeal with
the larger question whether the activities of the nonresident companies in
connection with the repair of the ships amount to carrying on of business. What
we have to decide is whether having regard to the (1) (1946) 28 Tax Cas. 250,
259.
(2) [1955] 1 S.C.R. 952, 961.
859 course of dealings between the
non-resident companies and the appellant it can be said of the former that they
carry on business with the latter within the meaning of s. 42(2).
Now, it should be observed that s. 42 speaks
not of the nonresidents carrying on business in the abstract but of their
carrying on business with the resident, and in the context, it must include all
activities between them having relationship to their business. That is the view
taken by the learned Judges in the Court below, and we are in agreement with
it.
In this connection, reference may be made to
s. 42(1) under which a charge is imposed on income, profits or gains accruing
to a non-resident through any business connection in the taxable territories.
In Commissioner of Income-tax v. Curimbhoy Ebrahim & Sons (1), it was
observed by the Privy Council that business connection in s. 42(1) is different
from business as defined in s. 4(2) of the Act. " The phrase business
connection', observed Sir George Rankin, " is different from, though not
unrelated to, the word business' of which there is a definition in the Act
". And in Anglo-French Textile Co., Ltd. v. Commissioner of Income- tax, Madras
(2), this Court has observed that " 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 realises his profits, such
relationship does constitute a business connection". Vide also the
observations in Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v.
Commissioner of Income-tax, Madras (3 ). The words "where a person not
resident in the taxable territories carries on business with a person
resident" in S. 42(2) must be similarly interpreted, and a non-resident
should be held to carry on business with a resident, if the dealings between
them form concerted and organised activities of a business character.
We are accordingly of opinion that, on the
facts found, the non-resident Companies must be held to have carried on
business with the appellant as provided in s. 42(2).
(1) [1935] 3 I..T.R. 395. (2) [1953] S.C.R.
454.
(3) [1950] 18 1,T.R. 423. 433. 434.
860 It was argued that the result of this
arrangement was only to reduce the repairing charges and enable the
non-resident Companies to thereby make a saving; that that was not profit or
gains of a business liable to be taxed under the Act, and the decisions in
Tennant v. Smith (1) and In re Major John(") -were cited in sup. port of
this position. But, as already held by us, the subject-matter of the tax under
s. 42(2) is the business of the resident and not that of the non-resident, and
what we have to decide is not whether the nonresident Companies made profits in
their dealings with the appellant but whether what they did was business, and
for that purpose it is immaterial that the business was carried on by them in
such manner that no profits could accrue to them there from. Vide the
observations of Coleridge C. J. at p. 113 in Commissioners of Inland Revenue v.
Incorporated Council of Law Reporting (3 ). The fact therefore that the
nonresident Companies could derive no profits from the dealings with the
appellant would not detract from their character as business with the
appellant.
This contention must, therefore, be rejected.
It was finally contended that the profits
chargeable under s. 42(2) must be separately assessed and not added on to the
other profits or income of the appellant. This contention is based on the
assumption that s. 42(2) imposes on the appellant, a vicarious liability, the
charge being in reality on the profits of the nonresident. On our finding that
the charge is on the business of the appellant and not of the non-resident
Companies, this contention does not survive.
In the result, the appeal fails and is
dismissed with costs.
Appeal dismissed.
(1) [18921 3 Tax Cas. 158.
(2) [1938] 6 I.T.R. 434.
(3) [1888] 3 TaxCas. 105.
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