Court rules purchase of goods constituted business operations, profits attributed accordingly under section 34(1)(a).

Bikaner Textile Merchants Syndicate Ltd. Versus Commissioner of Income-Tax, Delhi

Bikaner Textile Merchants Syndicate Ltd. Versus Commissioner of Income-Tax, Delhi - [1965] 58 ITR 169 Issues Involved:
1. Whether the proceedings initiated under section 34(1)(a) were barred by the period of limitation.
2. Whether the assessee had business connections in British India within the meaning of section 42(1) of the Income-tax Act.
3. Whether the mere purchase of goods could be said to be an operation within the meaning of section 42(3) of the Income-tax Act.
4. Whether any profit could be attributable to and deemed to arise on mere purchase of the goods.
5. Whether 20% of the profit could be reasonably attributable to the acts of purchase of the assessee in British India.

Analysis of the Judgment:

1. Limitation under Section 34(1)(a):
The assessee's counsel conceded not to press this question. Consequently, the court answered question No. (1) in the negative.

2. Business Connections in British India:
The court examined whether the assessee had business connections in British India under section 42(1) of the Income-tax Act. The term 'business connection' was interpreted broadly, and it was concluded that it connotes an element of continuity between the non-resident and the business in British India. The court held that the assessee had a business connection in British India, as evidenced by continuous and regular dealings with suppliers in British India. The court noted that the relationship between the assessee and the suppliers was not a mere isolated transaction but had continuity and regularity, fulfilling the criteria for a business connection under section 42(1). Thus, question No. (2) was answered in the affirmative.

3. Purchase Operations as Business Operations:
Given the affirmative answer to question No. (2), the court also answered question No. (3) in the affirmative. The court noted that the purchase of goods by the assessee in British India constituted an operation within the meaning of section 42(3) of the Act.

4. Attribution of Profits to Purchase Operations:
The court examined whether profits could be attributed to the mere purchase of goods. The court rejected the reliance on Jiwan Das v. Income-tax Commissioner, Lahore, as it was not governed by section 42(1). The court observed that the assessee secured a clear profit of 1.5% on goods purchased in British India, and since no intermediary operations were required to earn these profits, they arose directly from the purchase operations. The court concluded that profits were attributable to the purchase of goods in British India and answered question No. (4) in the affirmative.

5. Reasonableness of Attributing 20% of Profits:
The court considered whether attributing 20% of the profits to the purchase operations was reasonable under section 42(3). The court agreed that the apportionment should be rational and not arbitrary. Given the acute shortage of cloth and the assured profits once the cloth was procured, the court found the department's assessment of 20% to be reasonable. The court noted that the assessee had virtually a monopoly for importing cloth, and its profits were assured upon procurement. Thus, question No. (5) was answered in the affirmative.

Conclusion:
The court answered question No. (1) in the negative and questions Nos. (2), (3), (4), and (5) in the affirmative. The assessee was directed to pay the costs of the two references.