The expression "business connection" in S. 42(1) of the Indian Income-tax Act involves a relation between a business carried on by a non-resident which yields profits or gain and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains.

Judgment

SHAH, J. : R. D. Aggarwal and Company called for the sake of brevity the assessee s are a registered firm having their place of business at Amritsar in the State of Punjab. The assessees carry on business as importers and as commission agent of non-resident exporters with two if whom we are concerned in these appeals. These two nonresident exporters Comptoirs Lainiers Osterieth s.a. Anvers (Belgium) and Filature Tessitura Di Tollengno Beilla (Italy) are exporters and manufacturers of worsted woollen yarn. The assessee communicate orders canvassed by them from dealers in Amritsar to the non-residents for acceptance; if a contract results and price for the goods purchased is paid by the Amritsar dealer to the non-resident exporter, the assessee become entitled to commission varying between 1 1/2 and 2-1/2 per cent of the price.

2. By letter dated March 24, 1951 the assessees were appointed "sole agents" for the Italian Company "for sale" of worsted woollen yarns in the Indian territories terminable by one month s notice. The assessees had to "maintain the existing customers" and to secure new customers "conforming to their general terms of sales", and were to receive 2- 1/2 per cent commission on the net cash amounts arising from the accepted business "concluded by the mediation" of the assessees or directly by the Italian Company with the customers. The Belgian Company appointed the assessees their representatives for the whole of India on condition that the latter did not represent any other Belgian Mill or yarn producer and did not sari Belgian yarn in India on their own account.

3. In proceedings for assessment of tax in the assessment year 1952-53 the Income-tax Officer, C Ward, Amritsar computed the income of the assessee by adding Rs. 54,558 being 5 per cent of net total value of yarn sold by the non-resident companies to Indian merchants in the previous year, because in his view there subsisted business connections between the non-resident exporters and the assesses. The orders passed by the Income-tax Officer were confirmed in appeal by the Appellate Assistant Commissioner and also by the Income-tax Appellate Tribunal.

4. The Income-tax Appellate Tribunal submitted a statement of case to the High Court of Punjab on the following two questions :

"(1) Whether the relationship between the assessee and the non-resident fell within the meaning of the expression "business connection" as used in S. 42(1) of the Indian Income-tax Act?

(2) If the answer to the (second) (sic) question is in the affirmative 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."

The High Court answered the first question in the negative and declined to answer the second question. With special leave,the Commissioner of Income-tax has appealed to this Court against the opinion of the High Court in these two cases.

5. Section 42 (1) of the Income-tax Act and two related sections 40(2) and 43(1) may first be set out. Section 40, in so far as it material, by sub-s. (2) provides :

"Where the X X agent of any person not resident in the taxable territories X X X X (such person being hereinafter in this sub-section referred to as a beneficiary) is entitled to receive on "behalf of such beneficiary, or is in receipt on behalf of such beneficiary of, any income, profits or gains chargeable under this Act, the tax, if not levied on the beneficiary direct, may be levied upon and recovered from such X X agent X X X in like manner and to the same amount as it would be leviable upon and recoverable from the beneficiary if in direct receipt of such income, profits or gains."

Section 40(2) is an enabling section providing machinery for assessment and recovery of tax from an agent of a non-resident in the taxable territories on income taxa