1968 (12) TMI 3 - HC - Income Tax

Foreign company liable for Indian tax due to business connection, agent deemed responsible for profits. Assessments upheld, costs apportioned.

The court held that VEM was liable to tax under section 42 of the Indian Income-tax Act, 1922, due to its business connection in India through the ... Can the order of assessment be cancelled by the rectification u/s 154 - Held, Yes - The power to rectify u/s 154 is one which is apparent on the record and can extend even to the extent of cancelling an order of assessment, where it is required for elimination of the error Issues Involved:1. Whether VEM was liable to tax under section 42 of the Indian Income-tax Act, 1922.2. Whether the assessee was liable to be treated as an agent under section 43 of VEM, the non-resident, and to what extent.3. Whether the issue and service of notice under section 43, after the relevant notices under section 22(2) were served, invalidated the assessments for 1957-58 and 1958-59.4. Whether the assessment for 1954-55 is invalid because the assessee was given an opportunity to place the objection to the application of section 43 after the notice under section 22(2) read with section 43 was served on the assessee.5. Whether it was competent to the Income-tax Officer to rectify under section 154 of the Income-tax Act, 1961, the original assessment order dated 31st March, 1959.Detailed Analysis:Issue 1: Tax Liability of VEM under Section 42The court examined whether the connection between the assessee and VEM constituted a 'business connection' under section 42, which would make VEM liable to tax. The court noted that 'business connection' involves a relation between a business carried on by a non-resident and some activity in the taxable territories contributing directly or indirectly to the earning of profits or gains. The court concluded that the assessee's activities, including advising and supervising contracts, were integral to VEM's business operations in India and contributed to VEM's profits. Therefore, VEM had a 'business connection' in India, making it liable to tax under section 42.Issue 2: Assessee's Liability as an Agent under Section 43The court considered whether the assessee could be treated as an agent of VEM under section 43. It was established that the assessee had a significant role in ensuring the proper execution of contracts, which was crucial for VEM's business. Hence, the court affirmed that the assessee was liable to be treated as an agent of VEM. Regarding the extent, the Income-tax Officer estimated VEM's total profits on goods imported from India at 10% of their export price, with 25% of these profits attributable to the purchasing activity in India, which the court found reasonable in the absence of contrary evidence.Issue 3: Validity of Assessments for 1957-58 and 1958-59The court addressed whether the assessments for these years were invalidated because notices under section 43 were issued after notices under section 22. The court held that the procedural steps under section 43 were complied with, as the assessee was given an opportunity to show cause before the assessment was made. The court concluded that the assessments were not invalidated by the sequence of notices.Issue 4: Validity of Assessment for 1954-55The court examined whether the 1954-55 assessment was invalid due to the timing of the opportunity given to the assessee to object to the application of section 43. The court found that the assessee was given an opportunity to show cause, which he did not avail. Therefore, there was no non-compliance with section 43, and the assessment was valid.Issue 5: Competence to Rectify under Section 154The court considered whether the Income-tax Officer could rectify the original assessment order under section 154. The Tribunal had found an error apparent on the face of the record based on a Supreme Court decision, which made the assessment for 1954-55 invalid. The court held that the power to rectify an error under section 154 includes correcting the order to eliminate the error, even if it means canceling the entire order. Thus, the rectification was competent.Judgment:1. Question 1: Affirmative.2. Question 2: First part, affirmative; second part, to the extent found by the Income-tax Officer.3. Questions 3 and 4: Negative.4. Competence to Rectify under Section 154: Affirmative.The court ordered the assessee to pay the costs of the Commissioner in Income-tax Reference No. 67 of 1962 and the Commissioner to pay the costs of the assessee in Income-tax Reference No. 102 of 1968. There was no order as to costs on the notice of motion.