1984 (12) TMI 42 - HC - Income Tax

Summary

Issues Involved:

1. Whether M/s. Premnath Diesels Grainvaying Division had a business connection with the non-resident company under section 163(1)(b) of the Income-tax Act, 1961.
2. Whether M/s. Premnath Diesels Grainvaying Division, as an agent of the non-resident company, was liable to pay tax as a representative assessee for the assessment made on the non-resident company.

Issue-wise Detailed Analysis:

1. Business Connection under Section 163(1)(b):

The appellant, M/s. Premnath Diesels Grainvaying Division, argued that it had no business connection with the non-resident company, M/s. International Grainvaying Company Incorporated, as it was merely a labour contractor providing supervisory and other staff for maintenance and operation of grainvayors. The appellant contended that there was no profit-sharing and no real and intimate relation between the two entities, thus negating the business connection.

The court examined the definition of "business connection" as interpreted by the Supreme Court in CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20, which requires a real and intimate relation between the business of the non-resident and activities in the taxable territories contributing to profits. The court found that the appellant's role was limited to providing labour and supervisory services, which could have been performed by any other contractor or directly by the non-resident company without affecting its business operations.

The court concluded that there was no real and intimate relation between the appellant and the non-resident company, and therefore, no business connection existed under section 163(1)(b) of the Income-tax Act, 1961.

2. Liability to Pay Tax as a Representative Assessee:

The appellant argued that even if it was considered an agent, it could not be taxed as a representative assessee since the non-resident company had already been assessed, and the assessment period had expired. The court noted that the non-resident company filed its return on August 25, 1969, and was assessed on January 11, 1972. The order declaring the appellant as an agent under section 163(1)(b) was made on February 12, 1974, beyond the statutory period of two years required under section 149(3) of the Income-tax Act.

The court referenced the Andhra Pradesh High Court's decision in CIT v. Claggett Brachi & Co. Ltd. [1975] 100 ITR 46, which held that the Department cannot assess both the agent and the principal. Additionally, the court cited the Full Bench judgment of the Punjab & Haryana High Court in CIT v. Kanhaya Lal Gurmukh Singh [1973] 87 ITR 476, emphasizing the necessity of issuing a notice under section 139(2) to the agent for filing a return before assessing them.

The court determined that the appellant was denied the opportunity to be heard and to challenge the quantum of tax, violating procedural requirements. Consequently, the appellant could not be taxed as a representative assessee without a proper assessment process.

Conclusion:

The court answered the first question affirmatively, stating that M/s. Premnath Diesels Grainvaying Division did not have a business connection with the non-resident company under section 163(1)(b). The second question was answered negatively, indicating that the appellant could not be held liable to pay tax as a representative assessee for the non-resident company's assessment. The judgment favored the assessee, with each party bearing its own costs.