P L D 1954 Lahore 157 (PLP)

KAIKAUS. J.-This is a reference under section 66 (1) of the Income Tax Act relating to an assessment for the year 1945-46. The assessee (hereinafter called the Baramula Company) is admit tedly a foreign company called the Baramula Saw Mills Limited. It is a private company registered in the Kashmir State under the Jammu and Kashmir Companies Act. The Income Tax Officer, the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal have found that, in view of the circumstances, which we will presently state, this company had, in the relevant year, a business connection in British India and profits arose from that business connection so as to attract the provisions of sec tion 42 (1) of the Income Tax Act. The following is the question referred to the High Court :- "Whether, in the circumstances of the case, the assessed profits of the assessee can be said to have accrued or arisen, directly or indirectly, through or from any business connection, in British India so as to be deemed to be income accruing or arising within British India within the meaning of section 42, subsections (1) and (3), of the Act?" The directors of the Baramula Company at all material times were Sir William Roberts and Mr. Herbert Roberts. There is another company (hereinafter called the Shahdara Company) incorporated in British India called 'Sir William Roberts & Com pany (Shahdara) Limited'. The directors of this company at all relevant times were Sir William Roberts and Lady Roberts. Sir William Roberts was also the Chairman of the Boards of Directors of both companies The Shahdara company, which is an old concern, secured in June or July 1943 a big contract for the supply of boxes in shocks to the Government of India. The Baramula Company was floated with the main object of executing this contract. It was registered in July 1943. In September 1.943 it entered into an agreement with the Shahdara Company for the supply of spooks, the material terms of which were:- (1) The quality of the stuff required is first class without knots and cracks, timber to be used is fur or kail seasoned timber without knots or cracks. (2) Shocks will be planed on one side including edges. (3) The planks are to be cut strictly according to the specifications which will be given from time to time. No varia tion in thickness will be acceptable. (4) The component planks will be bundled at the supplier's cost with string in such a way that complete ends, complete sides and complete tops and bottoms for 25 boxes are contained in a bundle. (5) The payments will be made to the foreign Company at the spot by cheques drawn on Imperial Bank of India, Srinagar, by the British Indian Office at Baramula. (6) The foreign Company will be held responsible for all rejections, if found, at destination. These replacements will of course be made at the Baramula factory of the foreign Company. Further charges will be borne by the British Indian Company. (7) The foreign Company will be allowed interest on any amounts outstanding at the end of the year. The shocks were to be supplied at Baramula to the agency at Baramula of the Shahdara Company. Total sales of shocks made under the agreement in the period under consideration were of the value of Rs. 6,54,

294. This was the only business transacted by the Baramula Company with the exception of sale of fuel of the value of Rs. 22,

117. The Income Tax officer came to the conclusion that though delivery of shocks was, according to the agreement, to be made at Baramula, the effect of clause 6 of the agreement was that delivery was to be made at Bombay where the goods were, to be rejected or accepted by the Government of India. He also found that though the agreement provided for payment at Baramula, price was in fact never paid at the spot and goods were supplied on credit. Although he did refer to the fact that the share-holders controlling both the companies were the s, me, the main reason for his finding, that there was a business connection in British India, was that delivery was to take place at Bombay. The total income of the Baramula Company in the year of assessment was calculated at Rs. 88,

695. As the profits were in part due to operations out side British India, they were apportioned under section 42 (3) and 3/5th of the profits were found to be due to operations in British India. The greater part of its income having accrued in British India, the company was held to be a resident company under section 4A and taxed as such on the whole income. The learned Appellate Assistant Commissioner as well as the Appellate Tribunal agreed that delivery was to be made at Bombay. The Tribunal found also that the two concerns were controlled by the same family, that is, the family of Sir William Roberts, and that the flow of business to the Baramula Company was due to the identity of control of the two companies. The sole point for decision is whether the profits made by the Baramula Company can be said to arise on account of a business connection in British India. Section 42 runs as follows:-- "(1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India, or through or from any property in British India, or through or from any asset or source of income in British India or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assesses in respect of such income-tax. Provided that where the person entitled to the income, profits or gains is not resident in British India, the income-tax so chargeable may be recovered by deduction under any of the provisions of section 18 and that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come within British India. Provided further that any such agent, or any person who apprehends that he may be assessed as such an agent, may retain out of any money payable by him to such non-resident person a sum equal to his estimated liability under this subsection, and in the event of any disagreement between the non-resident person and such agent or person as to the amount to be so retained, such agent or person may secure from the Income-tax Officer a certificate stating the amount to be so retained pending final settlement of the liability, and the certificate so obtained shall be his warrant for retaining that amount: Provided further that the amount recoverable from such agent or person at the time of final settlement shall not exceed the amount specified in such certificate except to the extent to which such agent or person may at such time have in his hands ad ditional assets of such non-resident person. (2) Where a person not resident or not ordinarily resident in British India, carries on business with a person resident in British India, and it appears to the income-tax Officer, that owing to the close connection between such person the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or loss than the ordin ary profits which might be expected to arise in that business, the profits derived therefrom or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income -tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. (3) In the case of a business of which all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India. Had there been a single transaction of sale of goods, the vendor being a non-resident company and the purchaser a resident company, without any particular connection between the persons controlling the two companies or any exceptional circumstances and the delivery of goods was to take place outside British India, it could hardly be argued that a business connection existed. What we have to decide is whether the attending circum stances, which have already-been narrated, make a difference. The term `business connection' is nowhere defined in the Act. In the decided cases also no definition has been attempted but a good deal of help can be derived from some of them including some Privy Council judgments, one of which would seem to cover the present case. We would refer at first to Commissioner of Income-tax Bombay Presidency and Aden v. Currimbhoy & Sons Ltd. (AIR 1936 P C 1) a case in which 'business connection' was found not to exist, but observations in which do give an indication as to what circum stances might have constituted a business connection. In that case the Nizam of Hyderabad had advanced as a loan Rs. 50,00,000 to Currimbboy & Sons Ltd. On the security of certain joint stock shares as well as immovable property. Interest was to be paid at 7 percent per annum and the questioned assessment related to the interest which the Nizam was entitled to receive. The amount advanced was payable at Hyderabad in five yearly in stalments. Currimbhoy & Sons Ltd. were using this money in their business in Bombay and by their agreement were bound to furnish the Nizam with a certified copy of their profit and loss account every year. On these facts it was contended for the Income Tax Commissioner that profits had arisen through a business connec tion in British India. Their Lordships of the Privy Council pointed out that the Nizam was not carrying on a business and that between the parties there was a single monetary transaction and not a course of dealing. The agreement bad in that case been entered into in British India but the judgment shows that nothing turned on that circumstance. It had been conceded by the Income Tax Commissioner that profits din not in fact accrue in British India (in spite of the agreement having been entered into at Bombay) and that it was only by virtue of the provisions of section 42 and because of the `business connection' that profits could be 'deemed' to have accrued in British India. While reject ing the contention of the Commissioner, their Lordships observ ed:- "Upon the question whether the interest income arose to the Nizam through or from any business connection in British India, their Lordships observe that so far as appears from the facts found in the Letters of Reference, the loan made by the Nizam to the respondent compa3y on 16th August 1929 was an insolated transaction between the parties. It is not shown that the Nizam has at any time had an interest direct or indirect in the respondent company. There is no evidence of a course of dealing between the parties such as might fairly be described as a business connection previously subsisting between them. There is no element in the present case which justifies a comparison on the facts with the position of the parties in Commissioner of Income-Tax. Bombay, v. Bombay Trust Cor poration (I L R 52 Bom. 702.). If the words accruing or arising to such person whether direct or indirect, through or from any business connec tion in British India' are not to be deemed satisfied in every case in which a single monetary transaction by a non-resident with a resident produces gain to the former, it is difficult to see in the facts of this case any distinguishing element of business connection which the legislature has chosen as the test for rendering chargeable to British India income tax income which has not accrued in British India. There is no proof that the Nizam is carrying on business of money lending either in Hyder abad or British India. So far as appears he invested some surplus capital in making a loan to the respondent company taking security therefor. That the respondent company doubt less used the borrowed money in connection with their own business is not a fact which brings the Nizam any nearer to being a person who has a business connection in British India. The circumstance that the repayments of the loan are contemp lated to extend over a period of five years, and that the in terest would be payable from time to time during this period, is equally ineffective to bring the case within the words of subsec tion (1) of section 42." The passage would show that the circumstance, which affected the decision, was the absence of a course of dealing. The observations would support the conclusion that had there been a course of dealing it may have been possible to establish a `business con nection', even though the loans were advanced outside British India, if the person to whom loans were advanced carried on business in British India. The above-mentioned Privy Council case was referred to in Commissioner of Income tax, Burma v. P. V R M, Visalakshi Achi. (A I R 1937 Rang. 258.) a Special bench case, wherein the question for con sideration was whether loan advanced at a place outside British India by a firm carrying on business outside British India to a person carrying on business in British India, constituted a business connection. 7 he learned judges found that a business connection did not exist and in so doing relied upon the fact that isolated loan transactions and not a course of dealing existed between the parties. They said :-- "There is nothing in the Letter of Reference to show that these loans were other than isolated transactions between the parties. True there may have been many loan transactions between persons in Burma and the respondent, but there is no evidence of a course of dealing between the respondent and these particular borrowers (using the words of Sir George Rankin at p. 180, "Such as might fairly be described as a business previously subsisting between them"). Sir George Rankin remarked that the mere fact that Messrs Currimbhoy Ebrahim & Sons used the loan from the Nizam in connection with their own business did not bring the Nizam any nearer to being a person who had a business connection in British India. It was not shown that he had any interest direct or indirect with the respondent company. Similar observations might be applied to the present case.' When it was contended before the learned judges that the lender was acting as financier for the borrower, Roberts C. J. said :- "In one sense anyone who lends money to another is financing that other person, but I cannot find that such a series of loans were advanced, or that the interest taken by the lender in the borrower's business was such, as to constitute a course of dealing amounting to a business connection with the firms enu merated in Schedule B." In "Schedule B" were mentioned the firms to whom the assessee had been lending money. It would appear from the judgment that although the loans took place outside British India, the learned judges would have found a business connection had there been a course of dealing instead of isolated transactions and they regarded Commissioner of Income-tax, Bombay Presidency, and Aden v. Currimbhoy-Ebrahim & Sons Ltd. as supporting the view they took. The facts in Commissioner of Income-tax, Bombay v. Metro- Goldwyn-Mayer (India) Ltd. (A I R 1939 Bom. 257.) will appear from the following headnote of the case. "A non-resident company, namely, Culvert Export Corpora tion of New York which was the owner of exclusive rights in India of certain motion pictures, entered into an agreement with assessee carrying on business in British India, namely Metro-Goldwyn-Mayor India Ltd. The agreement described the former as vendor and the latter as vendee. According to the agreement the vendor sold the vendee for a period of one year exclusive rights to resell, exhibit or lease throughout the territory all motion pictures controlled or purchased by the vendor. The vendor was to perform various acts which were intended to have the effect of making the user of those productions by the vendee profitable. The vendee agreed to provide sufficient sales force, to pay certain percentage of taking, to deliver accounts, to protect property of vendor, to advertise and not to assign: Held, that the agreement between the parties was not a partnership ; it was something in the nature of a license and not a sale out and out' There was a business connection between the two companies and the non-resident was receiving profits and gains in respect of business connection between himself and assessee". The view which the learned judges took will appear from the following passage at pages 257 and 258 :- "The difficulty arises from the expression "through or from any business connexion." I think these words denote some element of continuity in the relationship between the person in India who makes the profits and the non-resident who receives them. A single transaction would, I think, not fall within the section. If a manufacturer of a motor car in England and America sells it to a customer in India, there is no doubt a business connexion in relation to that sale between the manu facturer and the purchaser, and the manufacturer probably makes a profit, but nobody would suggest that in respect of the profit on that single transaction he is liable to pay British Indian Income-tax. I think there must be some element of continuity in the relationship between the parties, and in every case one has to look at the particular facts of the case to see whether it falls within section 42." Although there was only one agreement between the parties, the learned judges held that a business connection existed because they found an 'element of continuity' which they regarded as the criterion for finding whether there was a business connection. The ruling is important because according to the learned judges, even the case of a manufacturer supplying goods to a purchaser in British India would fall within the connotation of a business con nection if there was an element of continuity in it. In Bank of Chettinad Ltd. v. Commissioner of Income-tax, Madras (A I R 1940 P C 183), the material facts were that Bank of Chettinad Ltd. a bank outside British India, had been lending money to the Chet tinad Bank Ltd., Pudukottai, a bank within British India. Both banks had branches within and without British India and the loans were negotiated through the Malay Branches of the banks. All shares in both banks were held by Sir Annamalai Chettiar of Chet tinad and members of his family. The question before their Lord ships was whether the interest which the foreign bank received from the British India bank was a profit arising out of a business connection in British India. The contention of the assessee before their Lordships appears from the following passage :- "It was argued on behalf of the appellant bank that in order to bring the case within the section it must be shown by the income-tax authorities that the Pudukottai Bank, non-resident in British India, had a business connexion in British India in relation to actual transactions in question, that a business con nexion arises out of business transactions and that the transac tions in this case, namely the above-mentioned loans, were made not in British India but in the Malay States and were to be repaid in the Malay States in the Malay States currency. Consequently, it was argued that although the profits of such transactions did accrue to the Pudukottai Bank, they did not accrue through a business connexion in British India." After quoting section 42 (1), their Lordships observed :- "The terms of the section are very wide, and their Lordships are not prepared to place upon them the limitation for which the appellant contends. The words are wide enough to cover profits or gains which can be said to accrue or arise to the Pudukottai Bank directly or indirectly through or from any business connexion which may exist between the Pudukottai Bank and the Kanadukathan Bank in British India. That the Pudukottai Bank had a business connexion with the Kana dukathan Bank in British India cannot on the facts be doubted, and the transactions in question could not have been carried out but for the existence of the Kanadukathan Bank which was in British India, and the business connexion between that bank and the Pudukottai Bank. It has already been shown that the two banks are controlled by the same people, viz., the Raja and his family. It further appears that the main function of the Pudukottai Bank was to finance the Kanadukathan Bank that the loans advanced by the Pudukottai Bank to the Kanadukathan Bank represented a large part of the capital of the Pudukottai Bank, that the flow of business between the two banks secured by the complete control exercised by the Raja and his family over the business of both banks, so that the loans could be safely made without security and for indefinite periods. In view of these facts their Lordships are of opinion that the High Court was right in holding that the Pudukottai Bank had a business connexion with the Kanadukathan Bank in British India during the year of assessment and they are further of opinion that the profits and gains, the subject matter of the assessment, accrued to the Pudukottai Bank directly or indirectly through such business connexion in British India." It would emerge from the observations quoted above that the terms of the section are wide, that the fact that loans are nego tiated outside British India and interest is to be paid outside British India does not exclude a business connection in British India, and that the identity of control and relative functions of the parties concerned are relevant considerations. We have dealt with cases relating to interest. It may be clarified that by an amendment in 1934 interest on money lent in British India has been separately mentioned in section 42, but the cases cited relate to a period before amendment and in those cases interest could be the subject of assessment only if it was income arising from a 'business connection' in British India. The last case we refer to is the one which seems to cover the present case. In Commissioner of Income-tax, Bombay v. Remington Typewriter Company, (Bombay) Limited (A I R 1931 P C 42), the material facts were that the Remington Typewriter Company of New York had started three companies in India called the Remington Typewriter Company (India) Ltd., the Remigton Typewriter Company (Bombay) Limited, and the Remington Typewriter Company (Madras) Limited respectively. The New York Company had transferred its goodwill in different parts of India to these three companies in exchange for fully paid-up shares of these companies so that all shares in these companies were owned by the New York Company. The New-York Company was selling its goods to these companies who then sold them to the public. It had also been receiving dividends from the companies. The question for decision was whether the income arising to the New York Company from sales and from dividends was arising out of a business connection in British India. In so far as the case relates to income from sales to the companies, it is directly applicable to the facts of this case. As will appear from Commis sioner of Income-tax, Bombay v. Remington Typewriter Company (Bombay) Limited (A I R 1928 Bom 465), the case from which A I R 1931 P C 42 was an appeal, it had been alleged in that case by the assessed that the goods were sold by the New York Company to the other companies in America and payment was made in dollars. This contention bad not been rejected by the learned judges but in spite of this it had been held (a finding which was maintained by their Lordships of the Privy Council on appeal) that the income from sales did arise out of a business connection. The following passage in their Lordship's judgment would throve light on the grounds of this decision :- "The Bombay Company was formed for the express purpose of acquiring from the American Company and carrying on in a particular area the American company's business of selling the American Company's manufactures Although no contractual obligation exists by which the Bombay Company is compelled to purchase any of the manufactures of the American Com pany, the flow of business between the two companies is secured by the fact that the ultimate and complete control of the Bombay company is vested in the American Company which owns all its shares. In the present case all that is urged on behalf of the assessee is that delivery took place outside British India and the transaction being just a sale by one legal person to another it cannot be called a business connection. Yet in that case too delivery was given in America. The fact that the Companies had been formed for the purpose of selling the goods of the New York Company was relied upon for the finding as to business con nection. Similar is the case here, for the Baramula Com pany was formed with the object of executing a contract of the Shahdara Company. The only difference in the two cases is that in the case cited all the shares of the three Indian Companies were owned by the New York Company, whereas in the case before us all shares in both companies are not held by the same person. There is, however, a substantial identity of Control. Sir William Roberts is the Chairman of the Boards of Directors of both companies whereas in the Shahdara Company it is his wife who is director along with him, in the Baramula Company it is his brother. The criterion applicable as appears from the observations of their Lordships is that the flow of business is affected by the identity of control of two companies. Similar were the observations of their Lordships in Bank of Chattinad Ltd. v. Commissioner of Income-tax, Madras, where the shares in both the banks were owned by Sir Annamalai Chattiar of Chettinad and his family. In the case before us, though there is no complete identity of control, the flow of business is certainly affected by the control. The Baramula Company had been started for executing a contract of the Shahdara Company. The words business connection' are, as their Lordships have pointed out, wide words. No bard and fast rule can be laid down and it will have to be determined in each case whether the A facts constitute a business connection. The fact that the foreign company which has dealings with a British India Company is a separate legal entity, does not exclude the existence of a business connection in respect of continued dealing between the two companies and the identity of control is a relevant matter. We answer the question referred in the affirmative. A. H. Reference answered.