TMI Blog1955 (2) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company includes repair and maintenance of ships and an arrangement was arrived at between the assessee company and the P. O. Steam Navigation Co. and the British India Steam Navigation Co. that the assessee company will repair the ships of these two companies at cost price and will charge no profit. Therefore the result of the assessee company carrying on the business of repairing ships of these two British companies was that it made no profit for the relevant assessment years. The income-tax authorities took the view that section 42(2) applied to the case. They worked out the profit which would have ordinarily been made out of this business activity on the part of the assessee company and assessed it to tax, and the question that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n but for the provisions contained in that sub-section, the provisions of sub-section (2) are aimed at the resident whose profits would escape taxation but for the provisions contained in that sub-section. Now, in our opinion on a true reading of sub-section (2) what has got to be determined in the first place is whether there is a resident in the taxable territories who is carrying on a business. It is then necessary to consider whether such business would ordinarily have yielded profits. If such a business would have ordinarily yielded profits, it is next to be determined whether the resident is carrying on business with a non-resident. If he is so carrying on business it has also got to be established that there is a close connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son not resident carries on business with a person resident in the taxable territories, and in advancing the argument that he does he overlooks the important and vital distinction between the expression carrying on business and the expression carrying on business with a certain person. The essential requirement of sub-section (2) is not that the non-resident should carry on business in the taxable territories. The essential requirement is that the resident should carry on business in the taxable territories which business would ordinarily yield profits. The non-resident is introduced in this sub-section because by reason of the close connection between the resident and the non-resident, the resident agrees to a scheme by which he does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then each is carrying on business with the other and not only one party to that activity is carrying on business with the other. All that is necessary in order that it could be said that a non-resident is carrying on business with a resident is that the non-resident must carry on an activity in relation to the resident, which activity can be characterised as a business activity. It is perfectly true that every activity of a non-resident in relation to a resident would not be a business activity. But if the activity is sufficiently continuous and if the activity is in relation to the business of the non-resident, then there is no reason to suggest that the non-resident is not carrying on business with the resident. We must construe sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that before section 42(2) is attracted it is necessary that not only the business activity of the resident must be such as would ordinarily yield profits, but also the business activity of the non-resident must be such as would ordinarily yield profits. But even assuming that was so, it is again difficult to understand how the activity on the part of the shipping companies to get their ships repaired is not a part of the scheme of profit making. The P. O. company and the British India Steam Navigation Company, we take it, pride themselves on putting on the sea seaworthy ships and they can only make profits provided they have ships which are seaworthy, and in order to make ships seaworthy we again assume and rightly that they have to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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