TMI Blog1964 (3) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Whether any profit could be attributable to and deemed to arise on mere purchase of the goods? As the Tribunal refused to refer the fifth question relating to the adoption of the rate of the profit attributable to the act of purchase of the goods by the assessee in British India, the assessee moved this court and obtained a direction on August 31, 1962, for the reference of that question as well to this court. This is how reference No. 45 of 1962 has been made in respect of the following question which we have numbered as question No. (5) for facility of reference: Whether, on the facts and circumstances of the present case, 20% of the profit could be reasonably attributable to the acts of purchase of the assessee in British India? As both the references relate to the same business transactions of the assessee and pertain to the assessment year, we shall dispose them of together. The assessee is the Bikaner Textile Merchants Syndicate Limited, Bikaner, which was a company incorporated in the former Bikaner State. The company was a non-resident company which commenced its business in October, 1946, and the present dispute relates to its first assessment for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the British Indian purchases would be ₹ 41,014, and that one-third of these profits amounting to ₹ 13,671 be taken as having accrued in British India and should be chargeable to income-tax. On an appeal by the assessee, the Appellate Assistant Commissioner, by his order dated April 4, 1960, also rejected the assessee's contention that its case was not covered by section 42(1) read with section 42(3) of the Act. The learned Appellate Assistant Commissioner held that there was a continuity in the business relationship between the assessee and the Textile Commissioner of Bombay and the producers and distributors of the textile goods in British India. In reaching this conclusion, he took note of the series of transactions which were entered into by the assessee, as well as the manner in which the goods were actually purchased by it, and held that the assessee had a business connection in British India within the meaning of section 42(1). The learned Assistant Commissioner also rejected the assessee's other contention in regard to the computation of the net profit attributable to the sales of the goods procured or purchased in British India, but he reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case and we have set them out at some length in order that the controversy before us may be appreciated in its proper perspective. We may start by saying that Mr. M.D. Bhargava, learned counsel for the assessee, frankly conceded that he would not press questions Nos. (1) and (3) (mentioned above) for consideration by us. We would, therefore, answer question No. (1) in the negative and as, for reasons to be stated presently, we propose to answer question No. (2) in the affirmative, we would answer question No. (3) in the affirmative. We shall now address ourselves to the second question, which is the main point in controversy between the parties, the point for determination being whether it could be said that the assessee had business connections in British India within the meaning of sub-section (1) of section 42 of the Act. That sub-section, excluding its three provisos with which we are not directly concerned, stood at the relevant time as follows: 42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax [1950] 18 I.T.R. 423, Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax (No. 2) [1950] 18 I.T.R. 888, Abdullabhai Abdul Kadar v. Commissioner of Income-tax [1952] 22 I.T.R. 241 and A.P. Damodara Shenoy v. Commissioner of Income-tax [1954] 26 I.T.R. 650. In fact the matter stands concluded by a decision of their Lordships of the Supreme Court in Anglo-French Textile Company Ltd. v. Commissioner of Income-tax (No. 2) [1953] 23 I.T.R. 101; [1953] S.C.R. 454 to the same effect. It is thus necessary that in order to establish a business connection within the meaning of section 42(1) there should be an element of continuity in the relationship between a non-resident and a resident in British India. It may also be pointed out that it is not the length of time during which the connection has subsisted but the nature of the connection which would determine whether a business connection within the meaning of section 42(1) has been established or not. Thus a course of numerous dealings within a short time having an element of continuity about them would be sufficient to establish a business connection. We hold accordingly. Mr. Bhargava was however at pains to argue that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o this conclusion, by the view adopted in Commissioner of Income-tax v. National Mutual Association of Australasia Ltd. [1933] 1 I.T.R. 350, 361, wherein Rangnekar J. observed as follows: All that is necessary is that there should be a 'business' in British India and a connection between a non-resident person or company and that 'business', and that the non-resident person or company has earned an income through such connection. This test was applied by Rangnekar J. as far back as 1933, but it has stood the test of time. It was subscribed to by their Lordships of the Allahabad High Court in Hira Mills Ltd. v. Income-tax Officer, Cawnpore [1946] 14 I.T.R. 417, in which their Lordships observed that they found an explanation of the meaning of the term business connection in Rangnekar J.'s observation which, with great respect, we think approaches as nearly to a definition as possible in the circumstances . The same view was taken by their Lordships of the Madras High Court in the case of Bangalore Woollen, Cotton and Silk Mills Co. Ltd. [1950] 18 I.T.R. 423. #[1959] 36 I.T.R. 418 and by their Lordships of the Bombay High Court in Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the payment of a separate remuneration to the assessee's eight experienced and influential members cannot negative that basic fact. It is also futile to argue that the permits were entrusted to the assessee in Bikaner and that the assessee came into the picture only on the import of the goods in that State, for we have no doubt that the entire operation of making the purchases in British India was made on behalf of the assessee. So also, it cannot matter that the mills from which the quota was to be purchased were named in the permits. Here again, it is significant that it has not been disputed by the assessee that the choice of selecting the suppliers or distributors of the cloth still rested with the assessee. We therefore hold that there was definitely a connection between the assessee and the firms from whom it purchased the textile goods in question. It can also be easily concluded that there was a continuity in that business connection inasmuch as the assessee repeatedly had business dealings with M/s. Chatturbhujdas Karnani from whom it purchased cloth of the total value of ₹ 23,82,878 and with M/s. Chhabildass Hargopal of Ahmedabad from whom it purchased cloth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had neither been received in, nor brought into, British India. It was in that context that their Lordships of the Lahore High Court made the observation that no part of the profits could be said to have accrued or arisen in British India merely because the goods were purchased in British India. That case was not governed by section 42(1) or a corresponding provision to that section and cannot, therefore, be accepted as authority for the argument that the profits in a case like the present should not be attributable to and be deemed to arise on the mere purchase of the goods. The point to be noted is that the assessee here was able to secure a clear profit of 1? per cent. on the goods purchased by it in British India and as no intermediary operation or process was required in order to earn those profits, there can be little doubt that the profits arose merely as a matter of course as soon as the goods were purchased and were brought into the Bikaner State. It was held in Chas J. Webb Sons and Co. Inc., Philadelphia v. Commissioner of Income-tax [1950] 18 I.T.R. 33 that the purchase in British India of wool by a non-resident company as raw material for use in manufacturing carpet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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