TMI Blog1949 (12) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of Section 42(3). The year of assessment is 1939-40 and the accounting year is the period ending with 31st December, 1938. The accounts of the assessee were kept on mercantile basis. The assessee is the Bangalore Woollen and Cotton and Silk Mills Co., Ltd., Bangalore, hereinafter called the 'company' and the managing agents of the company are Messrs. Binny Co., (Madras) Ltd., hereinafter called the 'agents'. The company was registered under the Mysore Companies Regulation (III of 1895) and carries on business at Bangalore, in the manufacture of woollen, cotton and silk goods. From the year 1935-36 the company was assessed only on the income derived from interest on Government securities. In the assessment year 1938-39, it was assessed by the Income-tax department on a sum of ₹ 41,878 from Government of India securities both taxed and tax-free. The assessment for the year included also a sum of ₹ 1,53,296, the income claimed to have been received in British India by the company, and ₹ 51,099 as income which accrued to the non-resident company outside British India. The dispute relates to the two items of income which were included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured goods. The sales of the goods were no doubt made in Bangalore City and under the agreement of sales, the price of the goods is payable by the buyer at Bangalore City; and, when the price of the goods was cleared either by V.P.P., bill of exchange, or by a bank, the bank and post office are the buyer's agents, so far as the buyer is concerned. The managing agents buy raw products like cotton, wool etc. in British India for the manufacture by the company at Bangalore City. It is also admitted that the agents acted as bankers of the company and that the following transactions were put through in the banking account of the agents:- Credits:-(a) Bills of exchange are collected by other banks and the proceeds remitted direct to the agents for the credit of the mills' account. (b) Cash remittances received through other banks. Disbursements:-(a) Sterling remittances are made in London in payment of machinery, mill stores etc. (b) Cheques are drawn on the agents by the mills in payment for mill stores etc., purchased from Madras merchants and for railway freight paid to the M.S.M. Railway. (c) Bills of exchange drawn on the mills in payment for wool purchased by them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deemed to have accrued or arisen whether directly or indirectly in British India within the meaning of Section 42(1) of the Act and therefore Section 42(3) had no application; (2) that there was no receipt of any profits in British India within the meaning of Section 4(1)(a). The questions referred to us practically cover the same ground. Mr. Subbaraya Ayyar, the learned advocate for the assessee, strenuously argued that mere purchase of raw material by the agents in British India did not constitute a business connection within the meaning of Section 42(1) and that the conclusion of the Income-tax authorities to the contrary was not justified on the facts. In order to elucidate the meaning of the expression business connection the learned counsel on both sides drew our attention to several decisions which have considered the question. A detailed examination of these decisions however does not enable us to arrive at the exact meaning of the expression business connection and define its scope and ambit. It is, however, clear that it is an expression of a very comprehensive nature and not necessarily confined to the definition of business in Section 2(4) of the Act. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent business and the resident business may be two separate legal entities and they may be closely connected or associated either by reason of some common control or by reason of the non-resident company or firm financing the resident company or firm. The goods of a non-resident company may be sold by a broker or commission agent residing in British India or the person resident may render various services to the non-resident or conduct business activities. These are some of the factors which result in a business connection within the meaning of the section. The cases cited at the Bar fall under one or other of the categories enumerated above. If there is only one isolated transaction between a non-resident and resident that would not constitute a business connection (vide Commissioners of Income-tax, Bombay v. Currimbhoy Ebrahim Sons, Ltd. [1935] I.L.R. 60 Bom. 172). The cases cited afford some general guidance in deciding the question whether on the facts in a given case, a business connection is or is not established. It is from this point of view that the decisions relied on have to be examined. In Rogers Pyatt Shellac Co. v. Secretary of State for India [1925] I.L.R. 52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Metro Goldwyn Mayer Ltd. [1939] 7 I.T.R. 176, a decision by Sir John Beaumont, C.J., and Rangnekar, J., arose out of peculiar facts. A non-resident company which was incorporated in New York entered into an agreement with Metro Goldwyn Mayer Ltd., who was the assessee whereunder the exclusive rights in certain motion pictures owned by the non-resident company were transferred to the assessee. The agreement contained various stipulations defining the conditions under which the pictures could be exploited by the assessee. The agreement was construed to be a licence and not a sale and that the relationship brought about by the agreement was connection of business within Section 42(1) of the Act. Beaumont, C.J., in considering the meaning of the expression through or from any business connection observed that it connotes some element of continuity in the relationship between the person in India who makes the profits and the non-resident who receives them and the necessity of the existence of some element of continuity in the relationship between the parties was emphasised. In the case before the learned Judges even though the transaction was a single transaction, as the operations ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dukathan Bank; and the loans advanced to the latter bank represented a large part of the capital of the Pudukottah Bank. This again was an ingenious attempt to make it appear that there was no business connection and to keep the profits of the money-lending out of the reach of the income-tax in British India. This circuitous process did not however escape from income-tax as there was clearly a business connection as held by the Privy Council. The decision in Commissioner of Income-tax v. Remington Typewriter Co. Ltd.*** was referred to and was applied to the facts of that case. In the Remington Typewriter Co. case [1931] I.L.R. 55 Bom. 243, the Bombay company was formed expressly for the purpose of acquiring from the American company and carrying on the American company's business and selling its manufactured goods. There was no doubt no contractual relationship between the Bombay company and the American company which compelled the Bombay company to purchase manufacturers of the American company but there was a continuous flow of business between the two companies and the ultimate control of the Bombay company vested in the American company which practically owned all the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British India and the finding of the Appellate Tribunal is in the circumstances justified. The second contention is that the sale proceeds received by the agents in British India were not received as profits as such at the moment the sale proceeds were received in British India and, therefore, there was no receipt of the profits of the business in British India during the accounting period. This contention is based on the fact that the profits of the business are determined only at the end of the year and the realisations include the circulating capital, the permissible deductions and profits. In other words, according to the assessee at the time of the receipt of the sale proceeds it was a composite sum and the receipt contemplated by Section 4(1)(a) is the receipt of profits as such. At no point of time argued the learned counsel for the assessee, could it be said that the receipt in the present case by the agent of the sale proceeds was a receipt of profit. It is inapt to call the receipt as a receipt of profit. Further, what was received during the accounting period cannot be deemed to be profit until the accounts are taken at the end of the year and the profits ascertained, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Mad. 178. In that case also at the time the sale proceeds of the coffee, after it was dried and cured at Mangalore, was sold and received there was no separation of the profits but yet the Judicial Committee held that the assessee was liable to pay tax in respect of such portion of the price as represented the profits which were received at Mangalore, in British India. It was observed at page 187: But in the High Court it was pointed out that the income was received in British India as the proceeds of all sales were paid to the assessee in Mangalore and so much of the price as represented profit was there received for the first time . This position was accepted by the Privy Council and the assessee was held liable to pay tax in respect of the profits which were received in British India. Reliance was placed on behalf of the assessee upon cases relating to remittances and decisions interpreting agreements or contracts under which profits became payable. These decisions in my opinion bear no analogy to the question now under consideration. In the case of remittances from foreign business, the presumption is that they included profits if the profits of the foreign business exceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the debt was not treated at the face value and as representing the purchase price. This decision does not support the contention advanced on behalf of the assessee in the present case. The passage in 17 Halsbury (Lord Hailsham) paragraph 224, page 119, which was referred to in the course of the arguments by the assessee's learned advocate does not help the assessee. In that paragraph the general principles as to trade receipts have been enunciated in the following words:-- The general principle is that receipts are trade receipts in the period in which the money becomes due, though it may be that the payment of the money is postponed by the custom of the trade or by contract or otherwise, or even that the amount due is not actually known at the time of delivery of goods or performance of services. Thus when a continuing contract is made for the manufacture and delivery of goods, the contract price being due on or after delivery, such price is not a trade receipt at the date of the contract nor when the whole contract is completed but as and when the goods are delivered. As regards debts due to a trader at the end of any year of period, no allowance is made in arriving at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re ceased to be profits. The sale proceeds received during the calendar year 1938, a statement of which is appended below, would give an idea of the magnitude of the operations which were carried on in British India by the agents on behalf of the company. They run to several lakhs and it is not contended before us that the business in the accounting year ended in a loss. For these reasons I am of opinion that the questions 1 to 3 referred to us must be answered in the affirmative and in favour of the Crown. The assessee must pay the costs of the Income-tax Commissioner which I fix at ₹ 250. Statement showing particulars of monies received by Messrs. Binny Co., (Madras) Ltd., Madras, on the account referred to in the letter dated 13th April, 1943. For the calendar year 1938 (1st January, 1938, to 31st December, 1938) woollen and cotton cloth. Rs. A. P. Shipments to Rangoon, Penang, Fiji, etc. B/E drawn by Messrs. Binny amp; Co., Madras. 4,20,438 10 0 Bills drawn through the P. amp; O. Banking Corporation Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreigner. The mills where cotton, woollen and silk fabrics are manufactured by the company are situate in Bangalore. The company does extensive business and its goods are sold far and wide in India and abroad. Messrs. Binny and Co., (Madras) Limited, a well known public company registered and having its office at Madras, is the managing agent of the assessee company under the terms of an agreement dated 29th May, 1920, entered into between them at Madras. In my opinion sufficient attention has not been paid to the terms of the managing agency contract by the Tribunal. Under the arrangement Binny and Co., hereinafter called the agents , had to buy all raw materials in the shape of cotton, wool, silk, jute and other fibres and all other articles like plant, machinery etc. required by the assessee company hereinafter called the mills . The agents had full discretion with reference to the conduct of the business of the mills. The agents had to sell and dispose of all goods manufactured by the mills and realise the price. The agents had to disburse all monies required for the purchase of raw materials and machinery and plant and the payment of salaries and wages of the establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 4(1)(a) of the Act on the ground that some sale proceeds of goods were received in British India? 2. Whether in the circumstances of this case the applicant company had any business connection in British India within the meaning of Section 42(1) of the Act? 3. If the answer to question 2 is in the affirmative whether any profits could reasonably be attributed to purchases of raw materials made by the managing agents in British India which would mean an operation within the meaning of Section 42(3)? Dealing with the first question Mr. Subbaraya Ayyar, the learned advocate for the assessee, has advanced several reasons why our answer should be in the negative. His main arguments on this head may be summarised as follows:-There were only receipts of monies by the agents in British India in the year of account and these sums were no doubt credited to the mills in the accounts of the agents who were functioning as the bankers of the mills. But the sums so received were not received as income, profits or gains and the monies credited to the mills in the year of account did not and could not constitute profits and gains of that year. In order to attract Section 4(1)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the date of receipt is postponed. Similarly, an item becomes an admissible outgoing of the business on the day on which it becomes a debt due from the business irrespective of the date of its actual payment. If, for instance, goods are sold by the mills today, the sale price is brought into today's account and will form part of the total sales in the profit and loss account of the mills even though the price may be payable next month. Similarly if goods have been bought by and for the mills, the purchase price has to be entered in the account the moment the property in the goods has passed to the mills, though payment may not be made till afterwards and this item will go to form part of the total purchases. Debts remaining due at the end of the period of account should be brought in at their full value unless they are found to be bad or doubtful. This is the general rule though an exception has been recognised in the case of payments spread over a long period of years under a contract about which there has been some difference of opinion between the learned Lords who decided the case of Absalom v. Talbot [1944] A.C. 204. It is further necessary to state that a deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results. According to the argument a mere receipt of money is not a receipt of profits, because the amount received may be merely a capital receipt and may or may not contain a component profit and indeed may carry with it an element of loss. Unless the accounts are made up at the end of the year and the resulting profit or loss of the year's trade is ascertained you cannot say you have received any profit. Therefore a receipt of money during the course of a year does not mean a receipt of profits. The logical result of accepting this argument would be that there is no profit when you receive money during a year and there can be no receipt of money after the end of the year when you cast the accounts. The truth is that when money is received it does not wear any label as profit or loss or as circulating capital or otherwise. The circulating capital of a business is represented by such of its assets as form the stock-in-trade which is bought and sold or bought and manufactured and then sold. The operations by which circulating capital is turned into stock, the stock is sold and the money realised is again utilised in the purchase of stock for being sold again are compendiously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission due to the agent in the other case were payable under contracts and covenants entered into between the parties under which it was only on the ascertainment of the basis profits that the payments to the railway company or the commission agent had to be made. Consequently the profits could be said to be received only on the ascertainment of the figures on the basis of which the profits had to be fixed and paid. There is nothing inherent in the nature of the business in the present case that profits must be or can be ascertained only on a particular day or after the lapse of a particular time. The accounts of a trader or merchant can be cast monthly, quarterly, half-yearly or yearly as he chooses and his profits can be ascertained for any given period on the lines already indicated. There are observations in the decided cases which also tend to negative the contention of the assessee. In Chunilal Mehta's case [1938] I.L.R. 1938 Bom. 752; 6 I.T.R. 521, there is the following passage in the judgment of the Judicial Committee:- Profits are frequently if not ordinarily regarded as arising from many transactions each of which has a result--not as if the profits need to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or divert them. But they are none the less profits of the year or accounting period to which the accounts relate and as such assessable to income-tax. Reliance was placed on the following passage in the judgment:- After all, it is inevitable that profits should be ascertained at intervals of time more or less fixed, whether the object is to certiorate the trader of his commercial position or to submit his profits to assessment to a tax. In my opinion this passage is no authority for the position that profits can be said to be received only if and only after an account is taken, though in truth, all the monies have been actually received before the accounts are cast. Whenever the accounts may be made up the receipts contain the profits of the year and the profits are imbedded in the receipts during the year. The case above cited was followed by Rowlatt, J., in Glamorgan Coal Company's case [1928] 12 Tax Cas. 1023, 1027. The relevant passage is as follows:-- The way it is looked at and must be looked at, is this, that that sort of expenditure is expenditure incurred on the running of the business as a whole in each year and the income is the income of the business as a whole fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act makes such a method of accounting a compulsory basis of computation of gains and profits unless the income cannot properly be deducted therefrom. In such a system of accounting trade debts owing at the relevant account period but then unpaid are included in the computation of profits and per contra bad and doubtful debts are deducted to the extent to which they are estimated to be bad. That trade debts though unpaid may be profits and gains according to the mercantile accountancy system was held in Ramkumar Kedarnath's case(1937] 5 I.T.R. 261). It is not permissible for an assessee to adopt the mercantile basis of accounting for the purposes of his business and insist on a cash basis for arriving at the profits for purposes of assessment to income-tax: (Subramanyam Chettiar's case(1927] I.L.R. 50 Mad. 765)). In Westminster Bank v. Riches(1945] 2 All E.R. 111; 15 I.T.R. Suppl. 26), cited by Mr. Rama Rao Sahib, it was held that if a composite sum is decreed by Court and it consists of a principal sum as well as interest awarded by way of damages for wrongful detention of money the interest portion of the decree is severable and taxable as interest. The right of the Crown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the mere carrying on of a business in British India made the resulting profits and gains liable to tax wherever they accrue or arise, but the Privy Council in Chunilal Mehta's case [1938] I.L.R. 1938 Bom. 752; 6 I.T.R. 521 definitely rejected that view and held that the place where the profits or gains accrued was the test of liability to tax even in the case of residents. Sections 4, 4-A and 4-B of the Act have since been amended so as to make residents liable to tax in respect of profits and gains accruing or arising outside British India and to bring within the category of residents several persons who otherwise would have been nonresidents. The decided cases all of which have been cited to us may be very briefly grouped and noticed. Where a non-resident enters into a financing arrangement with a resident in British India, and on the face of the contractual arrangements profits in the shape of interest accrue to the non-resident but not in British India, such profits were deemed to accrue or arise in British India (Bombay Trust Corporation case [1930] I.L.R. 54 Bom. 216 affirming I.L.R. 52 Bom. 702). This case is now expressly provided for by Section 42(1) of the Act. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connection is not equivalent to carrying on a business in British India but is of wider import. See National Mutual Association of Australasia case(5); Hira Mills Limited case(7); Currimbhoy's case(1935] 3 I.T.R. 395; I.L.R. 60. Bom 171). The observations to the contrary in Rogers Pyatt Shellac Company's case(2) and Steel Brothers' case(3) no longer hold good. This does not mean that every non-resident manufacturer who sells goods outright to a consingee in British India is liable to tax under Section 42(1) when the consignments are irregular or casual or made to various persons without any regular establishment or agency: Hira Mills' case(1946] 14 I.T.R. 417). In the present case the assessee is a non-resident. The company is registered in Mysore, the mills are situated and the goods are also manufactured there. Contracts for sale of the manufactured goods are also entered into in the State. The agents of the mills are a reputed and well established company registered and having their offices in Madras. The agents buy all the raw materials, machinery and plant and other requirements of the mills from places all over India and outside India and pay for these p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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