Deeming fiction for business connexion treats non-resident profits as arising in British India, making them taxable and agent liable.

Non-resident profits that accrue or arise, directly or indirectly, through or from a business connexion in British India are to be treated as deemed to accrue or arise in British India under the statutory deeming rule; the proper approach is to identify and allocate the portion of profits attributable to that business connexion (including from manufacture or a factory) and charge those amounts as taxable in British India, with the resident agent being made liable for recovery of the tax where the statute so provides.

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Issues: (i) Whether profits or gains of a non-resident arising directly or indirectly through or from any business connexion in British India are to be deemed to accrue or arise in British India and therefore chargeable to income tax under Section 33(1) of Act VII of 1918 read with Sections 3 and 5 of that Act (and correspondingly under Section 42(1) read with Sections 4 and 6 of Act XI of 1922); and whether the Rogers Pratt Shellac Company is liable to income tax in respect of such profits.

Analysis: Section 3(1) of the Income-tax Act, 1918 (and Section 4 of the Income-tax Act, 1922) charges income that accrues, arises or is received in British India or is by the Act deemed to accrue, arise or be received in British India. Section 33(1) of the 1918 Act (and Section 42(1) of the 1922 Act) provides that profits or gains of a person residing out of British India which accrue or arise, whether directly or indirectly, through or from any business connexion in British India shall be deemed to accrue or arise in British India and that the agent is to be deemed the assessee for recovery. The provisions operate as a deeming fiction that fixes the place of accrual/arising for specified profits or gains and supplies a method of realization by making the resident agent liable. The statutory language differs from the English statutes relied upon by the Company; unlike those statutes, the Indian enactments expressly enact the deeming rule. The term "business connexion" is capable of covering activities, including manufacture, that give rise to profits attributable to a connection with British India. Where part of a non-resident's income is attributable to such a business connexion, the proper function of the tax authority is to ascertain the profits or gains attributable to that connexion (including by applicable assessment rules) and charge them as income deemed to accrue or arise in British India. The existence of a factory or manufacturing branch in British India constitutes income from business within the statutory heads and is chargeable accordingly.

Conclusion: The profits or gains of the Rogers Pratt Shellac Company that accrued or arose, directly or indirectly, through or from a business connexion in British India are to be deemed to accrue or arise in British India and are chargeable to income tax; the Company is liable to pay income tax for the years in question.

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