Profits received in British India: sale proceeds collected by agents can be taxed and profits attributable via business connection.

Receipts of sale proceeds collected in British India by managing agents that include a profit component constitute "profits received in British India" for tax purposes, so such collections are taxable under the statutory receipt rule. A continuous and substantial managing-agency relationship - evidenced by sustained purchases of raw materials, ongoing realisation of sale proceeds, custody and disbursement authority, and effective management functions performed in British India - establishes a business connection permitting taxation of the non-resident. Where operations in British India are substantial and managerial, a proportionate share of the non-resident's profits may reasonably be attributed to those operations and assessed accordingly.

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Issues: (i) Whether receipts of sale proceeds collected in British India by an agent constituted "profits received in British India" within the meaning of Section 4(1)(a) of the Income-tax Act; (ii) Whether the non-resident company had a "business connection" in British India within the meaning of Section 42(1) of the Income-tax Act; (iii) If a business connection existed, whether profits could reasonably be attributed to operations in British India such as purchases of raw materials by the managing agents under Section 42(3) of the Income-tax Act.

Issue (i): Whether receipts of sale proceeds collected by the managing agents in British India amounted to profits received in British India within Section 4(1)(a) of the Income-tax Act.

Analysis: The mercantile accounting principles treat receipts as trade receipts when they are receivable and include trade debts in the computation of profits for the accounting period unless shown to be bad or doubtful. Receipt of sale proceeds that include a profit component is not negated because the sum also contains circulating capital or unpaid items. Privy Council authority and precedent recognize that so much of a sale price as represents profit received in British India is taxable there even if final accounts are cast later. Remittances and collections identifiable as proceeds of sales carry a rebuttable presumption of representing profit rather than capital.

Conclusion: In favour of Revenue. The sale proceeds collected in British India by the managing agents constituted receipts that included profits received in British India under Section 4(1)(a).

Issue (ii): Whether the non-resident company had a business connection in British India within Section 42(1) of the Income-tax Act.

Analysis: A business connection requires continuity of relationship between a person in British India who helps to make profits and the non-resident recipient. Factors demonstrating such a connection include sustained purchases of raw materials, continuous realisation of sale proceeds, collection and custody of realisations by the agent acting as banker, authority to manage and make disbursements, and exercise of effective management functions from British India. The managing agency agreement conferred wide and continuous powers on the agents to buy raw materials, sell manufactured goods, collect proceeds, meet disbursements and appoint managers, evidencing an enduring operational nexus. Precedents establish that branches, agencies, financing arrangements or continuous managerial and commercial operations in British India create a business connection under Section 42(1).

Conclusion: In favour of Revenue. The facts establish a business connection in British India within Section 42(1).

Issue (iii): Whether profits could reasonably be attributed to operations in British India such as purchases by the managing agents under Section 42(3) of the Income-tax Act.

Analysis: Where operations conducted in British India (including selection and large-scale purchase of raw materials) are substantial, regular and require skill and judgment, a portion of the profits can reasonably be attributed to those operations. The managing agents carried out continuous and significant purchases and related operational activities from British India, constituting "operations" under Section 42(3) to which a share of profits may be attributed.

Conclusion: In favour of Revenue. A portion of the profits is reasonably attributable to operations in British India under Section 42(3).

Final Conclusion: The reference questions are answered affirmatively for each issue: the sale proceeds collected in British India included taxable profits under Section 4(1)(a); a business connection existed in British India under Section 42(1); and a portion of profits could be attributed to operations carried out in British India under Section 42(3), resulting in the assessment being sustainable as applied to the sums apportioned.

Ratio Decidendi: Receipt of sale proceeds in British India that include a profit component constitutes "profits received in British India" under Section 4(1)(a); and a continuous, substantial and managerial nexus created by a managing agent who purchases raw materials, realises sale proceeds and manages disbursements establishes a "business connection" within Section 42(1), permitting reasonable attribution of profits to operations in British India under Section 42(3).

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