Business connection and profit attribution under the Income-tax Act upheld on continuous purchase dealings in British India.

Section 42(1) of the Income-tax Act, 1922 was treated as wide enough to cover a business connection where there was continuity of dealings between a non-resident and persons in British India, even without a formal agency. On the stated facts, repeated and substantial cloth purchases through named suppliers established such a connection. The text further notes that profit could be attributed to procurement in British India where no further intermediary operation was needed to earn it, and that apportionment under section 42(3) must rest on a rational basis; an attribution of 20% to purchase operations was considered reasonable in the circumstances of scarcity of cloth.

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Issues: (i) whether the reassessment proceedings were barred by limitation under section 34(1)(a) of the Income-tax Act, 1922; (ii) whether the assessee had a business connection in British India within the meaning of section 42(1) of the Income-tax Act, 1922; (iii) whether any profit could be attributed to and deemed to arise on the mere purchase of goods in British India; and (iv) whether 20% of the profits could reasonably be attributed to the purchase operations in British India under section 42(3) of the Income-tax Act, 1922.

Issue (i): whether the reassessment proceedings were barred by limitation under section 34(1)(a) of the Income-tax Act, 1922

Analysis: The limitation objection was not pressed before the Court and did not require independent adjudication on merits.

Conclusion: The objection was rejected and the answer was against the assessee.

Issue (ii): 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 under section 42(1) is of wide import and requires a relationship showing continuity between the non-resident and the business in British India. The presence of an agency is not indispensable. On the facts, the assessee repeatedly procured cloth in British India through named suppliers, the purchases were substantial, and the transactions formed a continuous and regular course of dealings connected with the profit-making scheme.

Conclusion: The assessee had a business connection in British India, and the answer was in favour of the Revenue.

Issue (iii): whether any profit could be attributed to and deemed to arise on the mere purchase of goods in British India

Analysis: Where a non-resident secures a profit by purchasing goods in British India and no further intermediary operation is necessary to earn that profit, a part of the profit may be attributed to the purchase operation and deemed to arise from it.

Conclusion: Profit was attributable to the purchase operation, and the answer was in favour of the Revenue.

Issue (iv): whether 20% of the profits could reasonably be attributed to the purchase operations in British India under section 42(3) of the Income-tax Act, 1922

Analysis: Apportionment under section 42(3) must rest on a rational basis. In the circumstances of scarcity of cloth, the assessee's assured profit followed upon procurement itself, so the attribution of 20% to the purchase operations was not arbitrary.

Conclusion: The attribution of 20% was reasonable, and the answer was in favour of the Revenue.

Final Conclusion: The references were answered substantially in favour of the Revenue, with the assessee failing on the main jurisdictional and apportionment issues.

Ratio Decidendi: A business connection under section 42(1) requires continuity of dealings between the non-resident and persons in British India, and where profit is directly earned through procurement in British India, a reasonable proportion of that profit may be attributed to the purchase operations under section 42(3).

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