Non-resident income assessment through resident agents remains valid, with purchasing operations covered by the statutory business-connection framework.
Section 42(1) of the Income-tax Act, 1922 permits non-resident income arising through a business connection to be assessed either in the non-resident's name or through its resident agent. The provision operates as a tax-collection mechanism, with the agent's vicarious liability linked to control over the business connection and safeguards for retention and recovery from the non-resident's assets. This assessment choice is treated as guided by the statutory scheme rather than arbitrary discretion and is not regarded as violating equality or business-freedom protections. Assessment in the non-resident principal's name through the resident agent remains valid, and purchasing operations undertaken by the statutory agent fall within the relevant statutory concept under section 42(3).
Issues: (i) Whether section 42(1) of the Income-tax Act, 1922 was unconstitutional as offending Articles 14 and 19(1)(g) of the Constitution of India; (ii) whether the assessments under section 34 were invalid because the income had been assessed in the name of the non-resident principal rather than in the name of the agent; (iii) whether the purchasing operations carried out by the statutory agent on behalf of the non-resident principal constituted an operation within section 42(3) of the Income-tax Act, 1922.
Issue (i): Whether section 42(1) of the Income-tax Act, 1922 was unconstitutional as offending Articles 14 and 19(1)(g) of the Constitution of India.
Analysis: Section 42(1) was treated as a machinery provision for bringing to tax income arising through a business connection with a non-resident and for facilitating collection where the non-resident could not effectively be reached. The choice to assess either the non-resident or the agent was held to be governed by the scheme and policy of the Act and not by unguided discretion. The liability imposed on the agent was held to be a vicarious liability connected with the agent's control over the business connection and was supported by the provisos safeguarding retention and recovery out of the non-resident's assets. The provision was therefore held not to create arbitrary discrimination and not to impose an unreasonable restriction on the right to carry on business.
Conclusion: Section 42(1) was held valid and not violative of Articles 14 or 19(1)(g); the contention of the petitioners failed.
Issue (ii): Whether the assessments under section 34 were invalid because the income had been assessed in the name of the non-resident principal rather than in the name of the agent.
Analysis: The decisive question was one of fact as to whose name appeared as the assessee. On the record, the notices, returns and assessment orders showed that the non-resident principals were assessed in their own names through the resident agents, and the evidence did not support the Tribunal's view that the agents themselves had been assessed as assessees. Since section 42(1) permitted assessment either in the name of the non-resident principal or in the name of the agent, assessment in the name of the non-resident principal did not by itself invalidate the proceedings.
Conclusion: The assessments were not invalid on this ground and the answer was against the petitioners.
Issue (iii): Whether the purchasing operations carried out by the statutory agent on behalf of the non-resident principal constituted an operation within section 42(3) of the Income-tax Act, 1922.
Analysis: The question was covered by existing authority holding that such purchasing operations fell within the statutory concept examined under section 42(3). The earlier Division Bench ruling was applied without departure.
Conclusion: The question was answered in the affirmative and against the petitioners.
Final Conclusion: The constitutional challenge to section 42(1) failed, the challenge to the assessments failed, and the reference on the third question was answered against the petitioners, resulting in dismissal of the writ petitions as well.
Ratio Decidendi: A provision that authorises assessment of non-resident income either in the non-resident's name or in the agent's name, with collection safeguards tied to business connection and recoverability from the non-resident's assets, is a valid tax-collection mechanism and does not, by itself, offend equal protection or the right to carry on business.