1949 (12) TMI 31 - HC - Income Tax

Business profits taxable in British India due to business connection and managing agents.

The court held that profits were received in British India, a business connection existed in British India, and profits could be attributed to operations ... - Issues Involved:1. Whether profits were received in British India within the meaning of Section 4(1)(a) of the Income-tax Act.2. Whether the applicant company had any business connection in British India within the meaning of Section 42(1) of the Income-tax Act.3. If the answer to question 2 is affirmative, whether any profits could reasonably be attributed to the purchase of raw materials made by the managing agents in British India, constituting an 'operation' within the meaning of Section 42(3) of the Income-tax Act.Issue-wise Detailed Analysis:1. Receipt of Profits in British India (Section 4(1)(a)):The assessee argued that the mere receipt of sale proceeds by the agents in British India did not constitute the receipt of profits as such, contending that profits could only be determined at the end of the accounting period. However, the court held that the sale proceeds included profits if the business ended in profit. The mere fact that the sale proceeds also included circulating capital and other amounts did not negate the receipt of profits. The court relied on the Privy Council decisions in Chunilal Mehta's case and Mathias' case, which established that profits could be received even if they were not separated from other receipts at the moment of receipt. Thus, the court concluded that the sale proceeds received by the agents in British India were indeed received as profits within the meaning of Section 4(1)(a).2. Business Connection in British India (Section 42(1)):The assessee contended that the mere purchase of raw materials by the agents in British India did not constitute a business connection. The court, however, determined that a business connection existed due to the continuous and comprehensive relationship between the company and the agents. The agents purchased raw materials, managed the sale of manufactured goods, collected sale proceeds, and acted as bankers for the company. The court referred to various precedents, including the cases of Commissioner of Income-tax, Bombay v. Currimbhoy Ebrahim & Sons, Ltd., and Commissioner of Income-tax, Burma v. H.M. Hajee Oosman, to elucidate the meaning of 'business connection.' It concluded that the continuous purchase of raw materials and the management of the company's affairs by the agents in British India established a business connection within the meaning of Section 42(1).3. Attribution of Profits to Operations in British India (Section 42(3)):Given the affirmative answer to the second issue, the court examined whether profits could be attributed to the purchase of raw materials by the agents in British India. The court noted that the agents exercised considerable skill and judgment in purchasing raw materials, which was a significant operation contributing to the company's profits. The court agreed with the Income-tax Officer's apportionment of profits, attributing a portion of the company's income to the operations carried out in British India by the agents. This was supported by the comprehensive control and management exercised by the agents over the company's business activities, including the purchase of raw materials and the collection of sale proceeds.Conclusion:The court answered all three questions in the affirmative, holding that the profits were received in British India, there was a business connection in British India, and profits could be attributed to the operations carried out in British India by the managing agents. The assessee was directed to pay the costs of the Income-tax Commissioner, fixed at Rs. 250.