1964 (10) TMI 9 - SC - Income Tax

No Business Connection: Tax Liability Decision Affirmed

The Supreme Court affirmed the High Court's decision that there was no business connection between the assessees and the non-resident exporters under ... Whether the relationship between the assessee and the non-resident fell within the meaning of the expression 'business connection' as used in section 42(1) of the Indian Income-tat Act ? Whether on the facts and in the circumstances of this case any profits or gains accrued or arose or could be deemed to have accrued or arisen to the non-resident on account of the business connection of the non-resident with the assessee during the previous year under consideration ? Held that:- The activity of the assessees in procuring orders was not as agents of the non-residents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxable territories for their manufacturing process. Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression ' business connection ' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation is absent. Appeal dismissed. Issues Involved:1. Whether the relationship between the assessee and the non-resident fell within the meaning of the expression 'business connection' as used in section 42(1) of the Indian Income-tax Act.2. Whether any profits or gains accrued or arose or could be deemed to have accrued or arisen to the non-resident on account of the business connection of the non-resident with the assessee during the previous year under consideration.Issue-wise Detailed Analysis:Issue 1: Business Connection under Section 42(1) of the Indian Income-tax ActThe primary question was whether the relationship between the assessees (R. D. Aggarwal and Company) and the non-resident exporters constituted a 'business connection' under Section 42(1) of the Indian Income-tax Act. The assessees, a registered firm in Amritsar, acted as commission agents for two non-resident exporters from Belgium and Italy, facilitating the sale of worsted woollen yarns in India. The Income-tax Officer added Rs. 54,558 to the income of the assessees, representing 5% of the net total value of yarn sold by the non-resident companies to Indian merchants, asserting the existence of business connections.The High Court ruled that there was no business connection, and the Supreme Court reviewed this decision. The Court noted that the term 'business connection' implies a real and intimate relation between a business carried on by a non-resident and some activity in the taxable territories contributing to the earning of profits or gains. The relationship must be continuous and not merely a stray or isolated transaction.The Court examined several precedents to illustrate the concept of business connection:- Commissioner of Income-tax v. Remington Typewriters Co. (Bombay) Ltd.: A business connection was found due to the continuous relationship and transactions between the Indian subsidiary and the American parent company.- Commissioner of Income-tax v. Currimbhoy Ebrahim and Sons Ltd.: No business connection was found as the loan transaction was isolated and there was no continuous relationship.- Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Commissioner of Income-tax: A business connection was found due to the continuous activities of the managing agents in British India for the non-resident company.- Abdullabhai Abdul Kadar v. Commissioner of Income-tax: A business connection was found due to the continuous agency relationship.- Hira Mills Ltd. v. Income-tax Officer, Cawnpore: No business connection was found as the agents merely canvassed orders without a continuous relationship.In the present case, the Court found that the assessees merely procured orders from merchants in Amritsar for the non-resident companies, which were offers that the non-residents were not obliged to accept. The contracts, payments, and deliveries all took place outside the taxable territories. Thus, there was no real and intimate relation contributing to the earning of income by the non-residents within the taxable territories, and hence, no business connection existed.Issue 2: Accrual of Profits or GainsGiven the High Court's negative answer to the first question, it declined to address the second question regarding the accrual of profits or gains. The Supreme Court, having affirmed the absence of a business connection, also found no basis to consider whether any profits or gains accrued or arose to the non-residents due to the alleged business connection.ConclusionThe Supreme Court dismissed the appeals, affirming the High Court's decision that there was no business connection between the assessees and the non-resident exporters within the meaning of Section 42(1) of the Indian Income-tax Act. Consequently, the assessees could not be charged as statutory agents for tax on behalf of the non-resident companies. The appeals were dismissed with costs.