Commissioner of Income-Tax, Punjab Vs.
R. D. Aggarwal & Company  INSC 220 (6 October 1964)
06/10/1964 SHAH, J.C.
CITATION: 1965 AIR 1526 1965 SCR (1) 660
R 1977 SC1259 (15) R 1981 SC 148 (12) R 1981
SC1047 (10) R 1987 SC1234 (3,4,6,10)
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.
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 Officer'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.
(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
[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,  S.C.R. 454 and Hira Mills
Ltd. Cawnpore v. Income-tax Officer, Cawnpore, (1946) 14 I.T.R. 417,
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
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
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 nonresident
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 subsection
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 nonresident 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,
"(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 income tax :
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 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
(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 nonresident 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
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
Business connection may take several forms it
may include carrying on a part of the main business or 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 non665 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
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 nonresident 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
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. Commissioner 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
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 nonresident 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, Cawnpore(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
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) 
(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
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 nonresident 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.