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TMI Blog1958 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... lant repairs their ships at cost, and charges no profits. Now, the point for determination is whether, on these facts, the appellant is chargeable to tax under section 42(2) Of the Act. That sub-section runs as follows : " Where a person not resident or not ordinarily resident in the taxable territories carries 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 therefrom, or which may reasonably be deemed to have been derived therefrom, 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 income-tax." The Income-tax Officer, Bombay, who dealt with the matter took the view that the appellant company had so arranged its business with the non-resident companies that it did not produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year on the profits deemed to have been made by it under section 42(2), and against that order, an appeal is pending before the Appellate Assistant Commissioner. That order is not the subject-matter of the present proceedings, which are concerned only with the assessment of income-tax for the account years 1944-1945 and 1945-1946 and of excess profits tax for the account years 1943-1944, 1944-1945 and 1945-1946. Now, the sole point for determination in this appeal is whether on the facts found the appellant is chargeable to tax under section 42(2) of the Act. Mr. Palkhivala, learned counsel for the appellant, contends that it is not, and urges two grounds in support of his contention : (1) that section 42(2) imposes a charge only on a business carried on by a non-resident, and that therefore no tax could be imposed under that provision on the business of the appellant who is a resident ; and (2) that it is a condition for the levy of a charge under section 42(2) that the non-resident must carry on business with the resident, and that in the instant case it is not satisfied. The first ground does not appear to have been put forward in the court below, but before us it has been pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued as referring to the business of the non-resident. There would have been considerable force in this argument, had there been any ambiguity or uncertainty in the wording of section 42(2) as to whether it is the business of the resident that is sought to be taxed or that of the non-resident. But that is not so. The language of the enactment imposing the charge is too plain to admit of any doubt. Now, section 42(2) is, it may be noted, in two parts. The first part commencing with the opening words "Where a person not resident" and ending with the words "which may reasonably be deemed to have been derived therefrom" prescribes the conditions on which the charge arises. It does not of itself impose the charge. That is done by the second part, which provides that "the profits derived therefrom or which may reasonably be deemed to have been derived therefrom shall be chargeable to income-tax." The word "therefrom" is very important for the purpose of the present discussion. In the context, it can refer only to the business of the resident, and it is this business therefore that is the subject of the charge under section 42(2). It was suggested for the appellant that the word "theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strued as meaning not notional profits but such proportion of the actual profits of the non-resident as could reasonably be apportioned to the business in India. Reliance was placed in support of this contention on rules 33 and 34 of the Indian Income-tax Rules, 1922. Rule 33 provides for the determination of the profits of a non-resident in cases falling within section 42(1), and one of the modes prescribed for such determination is to fix an amount which bears the same proportion to the total profits of the non-resident as the Indian receipts bear to the. total receipts in the business. Rule 34 then provides that "the profits derived from any business carried on in the manner referred to in section 42(2) of the Act may be determined for the purposes of assessment to income-tax according to the preceding rule". Now, the argument of Mr. Palkhivala is that the interpretation put on section 42(2) by the rule-making authorities as manifest in rule 34 is that the business chargeable under section 42(2) is that of the non-resident, and that the words "which may reasonably be deemed to have been derived therefrom" had reference to the apportionment of the Indian out of the total profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, and that in the absence of such a provision, the word "deemed" must be construed as referring not to notional profits being treated as actual profits, but to a person who is not, in fact, an assessee, being treated as an assessee. We see no substance in this argument. There is no reason why an enactment should not both declare notional profits as taxable profits and at the same time impose a charge on the resident in respect of those profits, and that, quite clearly, is what section 42(2) has done. It may be that its language is not felicitous. But there can, however, be no mistaking its sense that it is the resident that is to be dealt with as assessee in respect of profits which he had not, in fact, made. Nor do we see much force in the argument that section 42, sub-sections (1) and (3) relate to income of the non-resident and that section 42(2) which is wedged in between them should therefore be interpreted as having reference to the profits of the non-resident. If the language of section 42(2) is clear that it is the resident who is chargeable to tax, it is of no consequence that under section 42, sub-sections (1) and (3) it is the non-resident that is taxed. It should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricted sense. Discussing the connotation of the word "trade", Scott, L.J., observed in Smith Barry v. Cordy : " The history of judicial decisions has been similar, showing a strong tendency not to restrict the scope of Schedule D ; a tendency which was, we think, in sympathy with the general social and economic outlook of the country. There is hardly any activity for gaining a livelihood and not covered by the other schedules, which does not seem to us to be swept into the fiscal net by the Schedule D." " The word 'business' connotes", it was observed by this court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, "some real, substantial and systematic or organised course of activity or conduct with a set purpose." Now, it may be conceded that when a person purchases his requirements from a particular dealer, he cannot without more be said to carry on business with him. But here there is much more. The non-resident companies send their ships for repair to the appellant, not as they might to any other repairer but under a special agreement that repairs should be done at cost. And further unlike customers who purchase goods for their own consumption or use, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and organised activities of a business character. We are accordingly of opinion that, on the facts found, the non-resident companies must be held to have carried on business with the appellant as provided in section 42(2). It was argued that the result of this arrangement was only to reduce the repairing charges and enable the non-resident companies to thereby make a saving ; that that was not profit or gains of a business liable to be taxed under the Act, and the decisions in Tennant v. Smith and Major John, In re were cited in support of this position. But, as already held by us, the subject-matter of the tax under section 42(2) is the business of the resident and not that of the non-resident, and what we have to decide is not whether the non-resident companies made profits in their dealings with the appellant but whether what they did was business, and for that purpose it is immaterial that the business was carried on by them in such manner that no profits could accrue to them therefrom. Vide the observations of Coleridge, C.J. at page 113 in Commissioners of Inland Revenue v. Incorporated Council of Law Reporting. The fact therefore that the non-resident companies could deri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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