Judgement

MAHAJAN J.: This is an appeal from the judgment of the High Court of Judicature at Madras dated 18-1-1950. delivered on a reference by the Income-tax Appellate Tribunal under S. 66 (11). Income-tax Act. whereby the High Court answered the two questions referred in the affirmative.

2. The appellant is a public limited company incorporated in the United Kingdom and owns a spinning and weaving mill located at Pondicherry in French India. The year of account of the appellant of the calendar year. In the year 1939, no sales of yarn or cloth manufactured by the Company were effected in British India, though in the previous year such sales were effected. All the purchases of cotton required for the mills were made in British India by Messrs. Best & Co. Ltd. Under an agreement between the appellant and Messrs. Best & Co. Ltd., Madras, dated 11-7-l939, Messrs. Best & Co. Ltd., were constituted the agents of the appellant for the purposes of its business in India. Messrs. Best & Co. Ltd., have under the terms of the agreement full powers in connection with the business of the appellant in the matter of purchasing stock, signing bills and other negotiable instruments and receipts and settling, compounding or compromising any claim by or against the appellant. The agents are empowered to borrow money on behalf of the appellant and to make advances. They are also expected to secure the best commissions, brokerages, rebates, discounts and other allowances in respect of and in connection with the business of the appellant. They are enjoined to keep proper accounts of the appellant and to pay over to the appellant the sum standing to its credit. They are remunerated by a salary of Rs. 6,500 per month and a percentage commission on the profits made. During the relevant year all the purchases of cotton required for the mill at Pondicherry were made by the agents in British India and no purchases were made though any other agency. The agents exercised their judgment and skill and purchased such qualities and quantities of cotton and at such prices as they In their expenence considered most advantageous in the interests of the company.

3. Prior to 1939 -40 the appellant was assessed to income-tax in British India on the profits computed on a turnover basis earned by the sales in British India of the goods manufactured by the appellant. In the course of the assessment year 1939-40 the appellant stated that it discontinued its business in British India with effect from 1st April 1939 and claimed relief under Sec.25 (3) which was granted. In the course of his further enquiries the Income-tax Officer found that though the appellant was not selling its goods in British India and earning a profit thereby, it continued to have an active business connection in British India having regard to the way in which the business of purchasing goods and materials for the mills was carried on. Thereupon the Income-tax Officer held that such purchases of cotton in British India constituted a business connection in British India and that the profits attributable to the purchases were liable to tax under Ss. 42(1) and 42 (3) of the Act. The net income of the company was computed to be Rs. 2,81,176 and ten per cent. of this sum was apportioned under S. 42(3) of the Act as being the profits and gains reasonably attributable to that part of the business operations which were carried out in British India. The appellant appealed against the said order of the Income-tax Officer to the Appellate Assistant Commissioner, who confirmed the order at the Income-tax Officer. A further appeal by the appellant to the Tribunal was unsuccessful.

4. At the instance of the appellant, the Tribunal stated a case and referred the following questions for the decision of the High Court under S. 66(1) at the Act:

"1. Whether, in the circumstances of this case the assessee- company had any business connection in British India within the meaning of Ss. 42(1) and 43 (3), Income-tax Act?

2.