Resident business deemed taxable where close dealings with non-residents produce less-than-ordinary profits under section 42(2).

Section 42(2) of the Indian Income-tax Act, 1922 was construed as charging the resident's business where close connection with non-residents caused profits to be nil or less than ordinary profits, so the deeming provision could sustain tax on the resident appellant. The phrase "carrying on business with" was given a broad fiscal meaning: continuous, organised dealings under a special repair arrangement were sufficient, and not merely isolated purchases. On that basis, the non-resident companies were treated as carrying on business with the appellant, the statutory conditions were satisfied, and the assessments were upheld.

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Issues: (i) Whether section 42(2) of the Indian Income-tax Act, 1922 applied to the resident appellant's business and authorised taxation of profits deemed to arise from its dealings with non-residents. (ii) Whether the non-resident companies were carrying on business with the appellant within the meaning of section 42(2).

Issue (i): Whether section 42(2) of the Indian Income-tax Act, 1922 applied to the resident appellant's business and authorised taxation of profits deemed to arise from its dealings with non-residents.

Analysis: The charging language of section 42(2), read with the expressions "to the resident" and "therefrom", was held to make the resident's business the subject of the charge. The references to profits "derived" or "reasonably deemed to have been derived" were construed in the context of a resident business producing no profits or less than ordinary profits because of close connection with non-residents. The deeming language and the structure of section 42 did not support the argument that only the non-resident's business was intended to be taxed.

Conclusion: Section 42(2) was applicable to the resident appellant's business, and the charge could be sustained against the appellant.

Issue (ii): Whether the non-resident companies were carrying on business with the appellant within the meaning of section 42(2).

Analysis: The expression "carrying on business with" was given a broad fiscal construction. The dealings between the companies were not ordinary isolated purchases but a continuous and organised course of activity under a special repair arrangement for ships used in the non-residents' own business. Such concerted and systematic dealings were sufficient to constitute carrying on business with the resident for the purposes of section 42(2).

Conclusion: The non-resident companies were carrying on business with the appellant within section 42(2).

Final Conclusion: The statutory conditions for taxing the appellant under section 42(2) were satisfied, and the challenge to the assessments failed.

Ratio Decidendi: Under section 42(2) of the Indian Income-tax Act, 1922, the charge is on the resident's business where, because of a close connection with a non-resident, that business yields no profit or less than ordinary profit, and a continuous organised course of dealings between the resident and the non-resident constitutes carrying on business with the resident.

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