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Issues: (i) Whether the assessee had a business connection in British India within the meaning of Section 42(1) of the Income-tax Act, 1922. (ii) Whether profits could reasonably be attributed to the purchase of cotton made in British India by the assessee's agents within the meaning of Sections 42(1) and 42(3) of the Income-tax Act, 1922.
Issue (i): Whether the assessee had a business connection in British India within the meaning of Section 42(1) of the Income-tax Act, 1922.
Analysis: A business connection requires more than an isolated purchase transaction and must involve continuity of relationship between the person in British India who assists in earning the profit and the non-resident who realises it. On the facts, the assessee had an established agency in British India for the purchase of the entire cotton required for its foreign manufacture. The agents acted with wide authority and exercised judgment in making regular purchases essential to the business. Such systematic and continuous agency constituted a business connection within the statutory provision.
Conclusion: The existence of a business connection in British India was established and the issue was answered against the assessee.
Issue (ii): Whether profits could reasonably be attributed to the purchase of cotton made in British India by the assessee's agents within the meaning of Sections 42(1) and 42(3) of the Income-tax Act, 1922.
Analysis: Section 42(3) authorises apportionment where only part of the business operations is carried on in British India, so that only the portion of profits reasonably attributable to those operations is taxed. The term "operation" is wide enough to include the systematic purchase of raw materials through an established agency, even though manufacture and sale occur abroad. Since the purchases in British India formed an integral part of the profit-making process, a reasonable part of the foreign profits was attributable to those operations and could be apportioned for tax purposes.
Conclusion: Profits were attributable to the purchases made in British India and the issue was answered against the assessee.
Final Conclusion: The reference was answered in favour of the Revenue on both questions, and the assessee's foreign profits were held liable to apportionment to the extent reasonably attributable to the business operations carried on in British India.
Ratio Decidendi: Where a non-resident maintains a regular and continuous agency in British India for the purchase of essential raw materials, that agency constitutes a business connection, and profits earned abroad may be apportioned under Section 42(3) to the extent reasonably attributable to the Indian operations.
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