1960 (10) TMI 99 - HC - Income Tax

Business connection - profits or gains accrued or arose or could be deemed to have accrued or arisen to the non-resident on account of the business connection of the non-resident with the assessee - Relationship between the assessee and the non-resident fell within the meaning of the expression business connection as used in section 42(1) of the Indian Income-tax Act - Held that - These observations fully apply to the facts of the present cases as I have already said. Here also the alleged agent is nothing more than a free-lance broker. He has not been appointed by the non-resident companies. He is not bound to canvass business for them. Whatever orders he canvasses are at his sweet will and if those orders are ultimately carried out the non-resident companies give him a certain amount of commission which varies from 1 per cent. to 2 per cent. As a matter of fact the entire sale transaction is completed outside the taxable territories. The only part of the transaction which takes place in the taxable territories is the canvassing by the alleged assessee agent for the goods of the non-resident companies. Such a connection which is of a very loose nature and has no firm basis cannot in our opinion be held to be business connection within the meaning of section 42(1) of the Act.

Issues Involved:
1. Validity of the notice dated March 29, 1954, issued under section 22 read with section 34 of the Indian Income-tax Act.
2. Whether the relationship between the assessee and the non-resident fell within the meaning of "business connection" under section 42(1) of the Indian Income-tax Act.
3. If the relationship is deemed a "business connection," whether profits or gains accrued or arose to the non-resident due to this connection during the previous year under consideration.

Detailed Analysis:

1. Validity of the Notice:
The first issue was whether the notice dated March 29, 1954, issued under section 22 read with section 34 of the Indian Income-tax Act, was validly served on the assessee. The Tribunal and the Department held that the service of the notice was proper. The notice was served through Bhagat Ram, process server, who affixed the notice on the shop in the presence of witnesses after concluding that the family members were evading service. The learned counsel for the assessee did not press this issue, and thus, the answer to this question was returned in the affirmative.

2. Business Connection:
The second issue was whether the relationship between the assessee and the non-resident fell within the meaning of "business connection" under section 42(1) of the Indian Income-tax Act. The Tribunal held that the relationship was that of a principal and agent, constituting a "business connection." However, the High Court disagreed, stating that to fasten liability on the non-resident companies or their alleged agent, there must be a "business connection" in the taxable territories (India) out of which the income sought to be taxed has accrued or arisen.

The Court reviewed various precedents and concluded that the term "business connection" cannot be precisely defined and must be interpreted based on the specific facts of each case. The Court cited the case of Hira Mills Ltd. v. Income-tax Officer, Cawnpore, where it was held that a mere transaction or a loose connection does not constitute a "business connection." The Court noted that the alleged agent in the present case was a free-lance broker without any formal appointment or obligation to canvass business for the non-resident companies. The entire sale transaction was completed outside the taxable territories, and the only part of the transaction occurring in India was the canvassing by the alleged agent. Therefore, such a loose connection does not amount to a "business connection" within the meaning of section 42(1) of the Act.

3. Profits or Gains:
The third issue was whether any profits or gains accrued or arose to the non-resident due to the business connection with the assessee during the previous year under consideration. Since the Court answered the second question in the negative, this issue did not arise for consideration.

Conclusion:
The High Court concluded that:
- The notice dated March 29, 1954, was validly served on the assessee.
- The relationship between the assessee and the non-resident did not constitute a "business connection" under section 42(1) of the Indian Income-tax Act.
- Consequently, the question of profits or gains accruing to the non-resident did not arise.

The references were answered accordingly, with costs awarded to the assessee.

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