1952 (12) TMI 3 - SC - Income Tax

Whether, in the circumstances of this case, the assessee Company had any business connection in British India within the meaning of Sections 42(1) and 42(3) of the Income-tax Act ? Whether any profits could reasonably be attributed to the purchase of entire cotton made in British India by the secretaries and agents of the assessee-company within the meaning of Sections 42(1) and 42(3) of the Income-tax Act ? Held that - In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place of purchase. Such activity appears to us to be well within the import of the term operation as used in Section 42(3) of the Act. It is not in the nature of an isolated transaction of purchase of raw materials. The first contention of the assessee is therefore negatived. In this case there was a regular agency established in British India for the purchase of the entire raw materials required for the manufacture abroad and the agent was chosen by reason of his skill, reputation and experience in the line of trade. The terms of the agency stated in the earlier part of this judgment fully establish that Messrs. Best & Co. Ltd. were carrying on something almost akin to the business of a managing agency in India of the foreign company and the latter certainly had a connection with this agency. We therefore negative this contention of the learned counsel as well. Appeal dismissed.

Issues Involved:
1. Whether the assessee company had any business connection in British India within the meaning of Sections 42(1) and 42(3) of the Indian Income-tax Act.
2. Whether any profits could reasonably be attributed to the purchase of entire cotton made in British India by the secretaries and agents of the assessee-company within the meaning of Sections 42(1) and 42(3) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Business Connection in British India:
The appellant, a public limited company incorporated in the UK, owned a spinning and weaving mill in Pondicherry, French India, and had an agreement with Messrs. Best & Co., Ltd. in Madras to act as its agents for business in India. The agents had full powers concerning the appellant's business in India, including purchasing stock, signing bills, and negotiating claims. The Income-tax Officer found that the appellant continued to have an active business connection in British India through these purchases, even though no sales were made in British India in 1939. The High Court affirmed this finding, and the Supreme Court agreed, stating that the regular agency established for purchasing raw materials in British India constituted a business connection. The continuity of the business relationship and the systematic and habitual purchases through an established agency with special skill and competency were sufficient to establish a business connection under Section 42.

2. Attribution of Profits to Purchases in British India:
The appellant argued that mere purchases of raw materials in British India did not result in the accrual of profits and that profits arose only at the place of sale. However, the Supreme Court rejected this contention, citing various precedents, including Rogers Pyatt Shellac Co. v. Secretary of State for India and Motor Union Insurance Co. Ltd. v. Commissioner of Income-tax, Bombay. The Court emphasized that the purchase of raw materials is a significant business operation contributing to the ultimate profit realized on the sale of manufactured articles. The Court reasoned that profits accrue from a combination of business processes, including the purchase of raw materials, manufacturing, and sales. Therefore, the profits attributable to the purchase operations in British India were taxable under Section 42(3) of the Indian Income-tax Act. The Court also noted that the insertion of Section 42(3) by the amending Act of 1939 supported this interpretation.

Conclusion:
The Supreme Court upheld the High Court's judgment, affirming that the appellant had a business connection in British India through its agents and that profits could reasonably be attributed to the purchase of raw materials in British India. The appeal was dismissed with costs, reinforcing the view that systematic and habitual business activities through an established agency constitute a business connection, and profits from such operations are taxable under the relevant provisions of the Indian Income-tax Act.

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