TMI Blog1968 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... sfactory inasmuch as it found that the goods imported were always not according to the specifications and the orders were either not executed or executed too late. In May, 1952, VEM, therefore, arrived at an arrangement with the assessee under which the assessee undertook to study and advise VEM on the possibility of acquisition of iron and manganese ore mines in India and to supervise the execution of contracts concluded by VEM with the Indian exporters of ores as to quantity, quality, time of delivery and transport until f.o.b. steamer. This arrangement was to continue for a year from the beginning of 1st of July, 1952, and VEM was to pay the assessee pounds 112-10-0 per month by way of reimbursement of costs incurred by them on the exploration for acquisition of ore mines in India and a special remuneration to be mutually, agreed upon between the parties from time to time on the basis of tonnage actually shipped and paid for, with regard to its advice and supervision of the contracts already entered into or to be entered into by VEM with the Indian exporters. Although the arrangement was for one year, it continued subsequently in respect of the advice to be given by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces under section 43 on the 29th September, 1959, in respect of both the years. It may be mentioned that the notices under section 43 and section 22 in respect of the first year, viz., assessment year,] 954-55, were " as read with section 34 ". In the assessment proceedings he held that the assessee could be treated as agent of VEM and the income of the latter under section 42 could be taxed in the hands of the assessee. According to the Income-tax Officer, in respect of the procurement of the ore from India in the course of its business activity it had a business connection in India and profits or gains apportion able to the purchasing activity in India could be said to have arisen or accrued to VEM from the said business connection. The V.E.M.'s business connection in India was with the assessee and consequently in respect of the income, profits and gains which could be deemed to have accrued or arisen from the said business connection under section 42 could be assessed in the hands of the assessee as the agent of VEM under section 43. The Income-tax Officer accordingly estimated the total profits of VEM on the goods imported from India at 10% of their export price and the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the said five questions into four questions reframed by it and referred them to this court. They are as follows: " 1. Whether, having regard to the course of transactions between the assessee, VEM and the Indian shippers as given above, VEM was liable to tax under section 42 ? 2. If the answer to question No. 1 is in the affirmative, whether having regard to the memorandum dated 23-5-1952 and the services rendered by the assessee, the assessee was liable to be treated as an agent under section 43 of VEM, the non-resident, and if so, to what extent ? 3. Whether the issue and service of notice under section 43, after the relevant notices under section 22(2) were served, invalidated the assessments for 1957-58 and 1958-59 ? 4. Whether the assessment for 1954-55 is invalid because the assessee was given an opportunity to place the objection to the application of section 43 after the notice under section 22(2) read with section 43 was served on the assessee? " The question, which was refused by the Tribunal, was in these terms: " Whether the assessment upon the applicant as an agent of the non-resident, VEM, for the assessment year 1954-55 is barred by limitation and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act, 1961, the original assessment order dated 31st March, 1959 ? " Mr. Mehta for the assessee has, therefore, stated that in view of the matter raised on the said question having been dealt with under the rectification application and consequently having been the subject-matter of the other reference, the notice of motion would not survive. In view of these facts, the notice of motion must be dismissed. We order accordingly. Coming now to the first two questions, which may conveniently be considered together, the main questions to be considered are whether the connection, which the assessee had with VEM, constituted a business connection of VEM so as to enable the Income-tax Officer to regard the assessee as the deemed agent of VEM for the purpose of section 43 assessment and whether through such business connection as VEM may be having with the assessee, could any part of the profits or gains of VEM in its trading activity be deemed to have arisen or accrued to VEM ? It is the contention of Mr. Mehta that it may be that VEM had some connection with the assessee. It may also be that the nature of the connection may be commercial connection in the sense that it may have so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the nonresident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection. 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 non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In such cases the question whether there is business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. The expression ' business connection ' postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. " It would thus be seen that in order to constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely facilitated the making of offers by the merchants in the taxable territories to purchase goods manufactured by the non-resident. If the said offers were accepted by the non-resident, business would result. But if they were not accepted, no business resulted from the activity. Although, therefore, there was some commercial activity on the part of the assessee, which was not altogether unconnected with the trading activity of the non-resident, it had not a real and intimate connection with the trading activity of the non-resident. Mr. Mehta has relied strongly on this case and has argued that the present case before us falls in the line of this case. He has pointed out that in the present case before us also no direct part was taken by the assessee in the purchase of the raw materials by the non-resident in the taxable territories. The contracts for the supply of raw materials were entered into directly between the non-resident and the Indian exporters, the goods were shipped by the exporters and the price was also paid direct to the exporters. Just as in the case before the Supreme Court, the assessee had merely canvassed for orders and forwarded them to the non-resident and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being properly executed as to quality, quantity, time of delivery and transport of the goods on board. It will thus be seen that the activity of the assessee and its connection with the business activity of the non-resident did not merely consist of advising the non-resident as to the advisability of entering into contract with certain Indian exporters, it went much further and concerned itself with the activity of procuring raw materials itself. The assessee's part corresponded to an organisation set up by the non-resident in the taxable territories for the purpose of ensuring a regular and proper supply of the raw materials. Although the contracts for the supply of ore were entered into directly with the exporters and price was also paid to them directly, due and proper performance of the contracts, which was an important part of the activity of the procurement of the raw material, was entrusted to the assessee. The part played by the assessee in the activity of procurement of raw material was a real and intimate part, which was contributing to the improvement of the profits of the non-resident and preventing its losses. The non-resident, for the purpose of its business activity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-resident had reference solely to the purchases made outside British India and was in no way affected by the business done in British India and the commission earned by the non-resident did not accrue or arise to him through or from a business connection in British India within the meaning of section 42 of the Income-tax Act. In our opinion, this case is entirely of a different kind from the one before us. In that case the income, which was the commission earned by the nonresident, did not arise out of any activity within British India but out of the activity, which was solely performed outside the taxable territories. There was no activity in British India which had contributed to the earning of the said income. The learned judges observed as follows: " There is no warrant for holding that purchase and supply of raw material to a resident manufacturer by a non-resident would render the commission earned by the latter liable to tax under section 42(1) in the absence of anything to show that there was any course of dealing between the resident and the non-resident or that the commission earned by the non-resident was made to depend on business done in British India. The comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent, no doubt, is some guess-work done by the Income-tax Officer, but substituting it by 10 per cent. again would be nothing more than indulging in further guesswork. There is no material before us which would show the total extent of the business activity of the non-resident. We do not know whether its business activity consisted of merely purchasing of ore in markets ; whether it could profitably purchase and sell it in other markets, where it could be sold at a profit, or whether the ore procured by it from the taxable territories was for the purpose of manufacture of goods and the manufacture and the sale of the finished goods were also parts of its business activity. We also do not know the entire extent of the business of the non-resident. If the assessee had supplied proper material before the income-tax authorities on the basis of which a more definite and certain apportionment could have been made, the position would have been different. On the material, as it stands, we cannot say that the Income-tax Officer has erred in making his calculations. Coming then to the third (sic) question, the only argument urged before the Tribunal was that in respect of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a valid assessment under section 43 that a notice under section 43 must precede a notice under section 22. It is argued that on the language of section 43 it is only on the service of a notice intimating the assessee of the intention to treat him as the agent of the non-resident that he could be deemed to be such an agent. In other words, unless the notice is served, the person could not be deemed to be an agent under section 43 and unless he could be deemed to be an agent, no proceeding can be initiated for making an assessment on him. It is, therefore, argued that the service of a notice under section 43 is a condition precedent to the initiation of an assessment proceeding against an agent under section 43 of the Indian Income-tax Act. We do not think that the contention raised by Mr. Mehta is sustainable. Having regard to the scheme of sections 42 and 43, if the requirements of section 42 are satisfied, a deemed income accrues or arises to the non-resident in the taxable territories and becomes taxable under the Indian Income-tax Act. Section 43 is a section for facilitating the assessment of such deemed income by making it assessable in the hands of a deemed agent. A deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unity is given the assessment proceedings against the person cannot even be initiated. The contention of the assessee, therefore, that the assessment is invalid by reason of the proper procedure under section 43 not having been followed by the Income-tax Officer cannot be sustained. Moreover, the irregularity pointed out by the assessee is at best a procedural irregularity which, on the facts of the case, has caused no prejudice to the assessee. It may also be pointed out that no grievance as to this procedural irregularity had been made by the assessee before the Income-tax Officer. For all these reasons, we are of the opinion that the Tribunal was right in taking the view that the assessments for the assessment years 1957-58 and 1958-59 were not invalidated, as contended by the assessee. In the result, therefore, our answer to the questions arising on Income-tax Reference No. 67 of 1962 are as follows: Question No. 1 in the affirmative. Question No. 2: first part, in the affirmative, and the second part, to the extent found by the Income-tax Officer. Questions Nos. 3 and 4 in the negative. We then come to the companion Reference No. 102 of 1968 relating to the correctne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invalid. It is not within the power of the Income-tax Officer under section 154 to rectify the order by cancelling the order itself. Both these contentions have been negatived by the Tribunal and in our opinion rightly. As to the merger, the income-tax Officer's order, which has merged in the order of the Appellate Assistant Commissioner and the Tribunal is only to that extent to which it was taken in appeals before the said authorities. In view of the observations of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd., which are reproduced in the order of the Appellate Tribunal, Mr. Joshi, learned counsel for the revenue, has fairly conceded that he will not be able to rely strongly on the merger argument and has consequently not seriously pressed the said point before us. On the other point, however, he has urged that section 154 having spoken merely of an amendment of the order, the scope of the jurisdiction of the Income-tax Officer under the said section is limited and cannot extend to the cancellation of the whole order. We are not prepared to agree with the said submission. The power intended to be given under section 154 is to rectify an error apparent on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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