Business connection in British India established where continuous financing and practical control linked resident and non-resident banks

Profits from the first six loan items were treated as attributable to the non-resident bank through a business connection in British India under Section 42(1), because the resident bank and non-resident bank were effectively controlled by the same family, the resident bank was substantially financed by the non-resident bank, and the lending arrangement was continuous rather than isolated. The Court stated that a business connection need not arise from contracts made in British India and may be inferred from a continuing course of dealings and practical control over the flow of business. The Bentong office was only a nominal conduit, so the income was regarded as accruing or arising through that business connection and assessment through the resident bank as agent was valid.

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Issues: Whether the profits from the first six items of loans were attributable to the non-resident bank through or from a business connection in British India within the meaning of Section 42(1) of the Indian Income Tax Act, so as to justify assessment through the resident bank as agent.

Analysis: The decisive factors were that the two banks were under the effective control of the same family in British India, the resident bank was substantially financed by the non-resident bank, the lending arrangement was continuous and not isolated, and the Bentong office functioned only as a nominal conduit. The Court held that a business connection need not arise from contracts made in British India and may be inferred from a continuing course of dealings and from the practical control securing the flow of business between the two concerns. On the facts, the financing arrangement was not a mere isolated loan transaction but a business connection located in British India.

Conclusion: The question was answered in the affirmative, and the income was held to accrue or arise to the non-resident bank through a business connection in British India, making the assessment valid.

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