1958 (10) TMI 43 - HC - Income Tax

Summary

Issues Involved:
1. Definition and scope of "business connection" under Section 42(1) of the Income-tax Act.
2. Determination of whether there was a business connection between the assessee and the Indian company.
3. Assessment of income attributable to the business connection.
4. Applicability of the proviso to sub-section (3) of Section 42.

Issue-wise Detailed Analysis:

1. Definition and Scope of "Business Connection" under Section 42(1):

The Court examined the term "business connection" as used in Section 42(1) of the Income-tax Act, which deems income accruing to an assessee directly or indirectly through any business connection in the taxable territories to be income arising in those territories. The Court noted that "business connection" is an expression that has not been definitively defined by any court, and its determination depends on the facts of each case. The Court emphasized that the term is of wide and indefinite import and that the Legislature has deliberately avoided defining it due to the diverse and infinite nature of business dealings.

2. Determination of Whether There Was a Business Connection:

The Court analyzed the agreement between the assessee (Evans Medical Supplies Ltd., UK) and the Indian company (Evans Medical Supplies (India) Ltd., referred to as "Indco"), dated April 1, 1947. The agreement appointed Indco as the sole authorized agent in India and Burma, with provisions for commissions, advertising allowances, and restrictions on Indco's dealings with other products. The Tribunal had found that there was no business connection in respect of goods sold and supplied directly to the Indian company under clause 10 of the agreement. However, the Court disagreed with the Tribunal's approach, emphasizing that the nature of the dealings between the assessee and the Indian company indicated a business connection. The Court noted that the Indian company acted as the sole authorized agent and was obligated to spend the entire advertising and propaganda allowance on the assessee's products, which indicated a continuous and significant relationship.

3. Assessment of Income Attributable to the Business Connection:

The Court held that the income attributable to the sale of goods by the assessee to the Indian company accrued to the assessee through the business connection. The Court emphasized that the expression "business connection" requires a business in India, a connection between the assessee and that business, and income earned directly or indirectly through that connection. The Court found that the assessee had a business connection with the Indian company, as the Indian company acted as the sole authorized agent, received commissions and allowances, and was restricted from dealing with other products. The Court concluded that the profits accruing to the assessee from the sales to the Indian company were attributable to this business connection.

4. Applicability of the Proviso to Sub-section (3) of Section 42:

The assessee argued that even if there was a business connection, no profits were liable to be assessed on a deemed accrual basis because all operations connected with the sales were performed outside the taxable territories. The Tribunal had accepted this contention, but the Court did not address this issue in detail, as it was not the primary question referred to the Court. The Court noted that the Tribunal's acceptance of the second contention was based on its acceptance of the first contention, which the Court had already rejected.

Conclusion:

The Court answered the referred question in the affirmative, holding that there was a business connection in the taxable territories within the meaning of Section 42(1) in regard to the goods sold outside the taxable territories by Evans Medical Supplies Ltd., Liverpool, to Evans Medical Supplies (India) Ltd. The assessee was ordered to pay the costs, and the reference was answered in the affirmative.