1. Resident company repairs ships for non-resident owners at cost without profit — Chargeability of deemed profits under Section 42(2), Indian Income-tax Act, 1922. (Para 2 )
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1958 Supreme(SC) 76
SUPREME COURT OF INDIA
A.K.Sarkar : P.B.Gajendragadkar : T.L.Venkatarama Ayyar
Mazagaon Dock Limited
Versus
Commissioner Of Income-tax And Excess Profits Tax
Case No. : 381 of 1956
Date of Decision : 5/12/58
Advocates Appeared: Andley S.N. : Dadachanji J.B. : Dhebar R.H. : Joshi C.N. : Kanga Jamshedji : Nath Rameshwar : Palkhivala N.A. : Sanyal H.N. : Vohra P.L. : Joshi G.N. : Narain Rajender
Advocates:
C.N.Joshi, H.N.SANYAL, J.B.DADACHAN, JAMSHEDJI B.KANGA, N.A.PALKHIWALA, P.L.VOHRA, R.H.Dhebar, RAMESHWAR NATH ROY, S.N.ANDLEY
C.N.Joshi, H.N.SANYAL, J.B.DADACHAN, JAMSHEDJI B.KANGA, N.A.PALKHIWALA, P.L.VOHRA, R.H.Dhebar, RAMESHWAR NATH ROY, S.N.ANDLEY
Section 42(2) of the Indian Income-tax Act, 1922, taxes the resident's business on notional profits they would have earned but for an arrangement with a non-resident. "Carrying on business" is broadly construed to include organized activities of a business character between the parties.
Headnote:(A) Indian Income-tax Act, 1922 - Section 42(2) - Charge on profits where a non-resident carries on business with a resident and the business is arranged so that the resident produces no profits or less than ordinary profits - Interpretation of "profits derived therefrom" - The charge is imposed on the business of the resident, not the non-resident, as the resident is deemed to be the assessee for profits they would have normally made but for the association with the non-resident (Paras 7, 8, 11, 12).
(B) Interpretation of "carrying on business with" - Broad construction in fiscal statutes - Activities between a non-resident and a resident that are concerted and organized activities of a business character, such as a special agreement for ship repairs at cost for use in the non-resident's business, constitute carrying on business with the resident (Paras 14, 15).
(C) Notional Profits - The legislature can declare notional profits as taxable and impose a charge on the resident in respect of those profits, treating the resident as the assessee for profits not actually made (Para 11).
Facts of the case:
A resident company engaged in ship repairs had its share capital owned by two non-resident companies. Under an agreement, the resident company repaired the ships of the non-resident companies at cost, charging no profits. The tax authorities assessed the resident company under Section 42(2) of the Act on the profits it could have ordinarily made, which were deemed to have been derived from its business.
Findings of Court:
The court found that the resident company was chargeable to tax under Section 42(2) because the non-resident companies carried on business with the resident company, and the arrangement resulted in the resident company producing no profits.
Issues: Whether Section 42(2) imposes a charge on the business of the non-resident or the resident, and whether the arrangement of repairing ships at cost constitutes the non-resident "carrying on business" with the resident.
Ratio Decidendi: The court held that the phrase "profits derived therefrom" in Section 42(2) refers to the business of the resident. The section is designed to tax a resident on profits they would have normally earned but for a close connection with a non-resident. Furthermore, "business" in fiscal statutes is construed broadly; a systematic and organized arrangement for services used in the non-resident's business constitutes carrying on business with the resident, regardless of whether the non-resident itself derived profits from the specific arrangement.
Result: Appeal dismissed with costs.
Legal Category Hierarchy
Table of Contents
2. Whether Section 42(2) taxes non-resident business or resident business — Whether getting ships repaired under a cost-only agreement constitutes carrying on business with the resident. (Para 6 , 13 )
3. Section 42(2) taxes the resident's business based on deemed profits — Business includes organised activities of a business character, regardless of whether the non-resident earns profits. (Para 7 , 8 , 11 , 12 , 14 , 15 , 16 )
4. Section 42(2) imposes tax on the resident's business for profits reasonably deemed to have been derived when business is arranged to produce low or no profits. (Para 7 , 8 , 12 )
5. Appeal dismissed with costs. (Para 18 )
6. Who is the target of the tax charge under Section 42(2) of the Indian Income-tax Act, 1922?
The charge is imposed on the business of the resident person, not the non-resident. The resident is deemed the assessee for profits they would have normally made but for the close connection with the non-resident. (Para 7 , 8 , 11 , 12 )
7. What constitutes carrying on business with a resident under Section 42(2)?
It includes all concerted and organised activities of a business character between the non-resident and the resident, including activities related to their business, even if the non-resident does not derive profits from those specific dealings. (Para 14 , 15 , 16 )
8. Does the absence of actual profits for the non-resident preclude the application of Section 42(2)?
No. The subject-matter of the tax is the resident's business. It is immaterial whether the non-resident made profits; the key is whether the activities between them constituted a business. (Para 16 )
T.L.VENKATARAMA AYYAR, J.
(1) THIS is an appeal against the judgment of the High court of Bombay in a reference under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act.
(2) THE appellant is a private limited company incorporated under the Indian Companies Act, and is carrying on business as marine engineers and ship repairers. Its registered office is in Bombay and it is resident and ordinarily resident in India. Its entire share capital is beneficially owned by two British companies, the P. & 0. Steam Navigation Co. Ltd., and the British Indian Steam Navigation Co. Ltd., whose business consists in plying ships for hire. Under an agreement entered into with the two companies aforesaid, which will be referred to hereinafter as the non-resident companies; the appellant repairs their ships at cost, and charges no profits. Now, the point for determination is whether, on these facts, the appellant is chargeable to tax under s. 42(2) of the Act. That Ss. runs as follows: ` Where a person not resident or not ordinarily resident in the taxable territories carries on business with a person resident in the taxable territories, and it appears to the Income-tax Officer that owing to the close connection between such persons 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 DO profits or less than the ordinary 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) THE Income-tax Officer, Bombay who dealt with the matter took the view that the appellant company had so arranged its business with the non-resident companies that it did not produce any profits to it, and that was because it was those companies that really owned its share capital, and that therefore the profits which it could ordinarily have made but for their close financial connection were liable to be taxed under s. 42(2), and he computed the same at Rs. 6,80,000.00 for the account year 1943-1944, at Rs. 4,67,559.00 for the account year 1944-1945 and at Rs. 4,68,963.00 for the account year 1945-46. On the basis of the above findings, orders of assessment of income-tax were made for the account years 1944-1945 and 1945-1946 and of excess profits tax for the account years 1943-1944, 1944-1945 and 1945-1946. Against these five orders, the appellant preferred appeals to the Appellate Assistant Commissioner, who by his order dated 3/07/1952, confirmed the same. Then there was a further appeal by the appellant to the Appellate tribunal, and the bench which heard the same having been divided in its opinion, the matters came up for hearing before the President, who by his order dated 19/03/1954, held that s. 42(2) was inapplicable and he accordingly set aside the orders of assessment of income-tax and excess profits tax made on the appellant. On the application of the Department, the tribunal referred the following question for the opinion of the High court of Bombay: ` Whether on the facts and in the circumstances of the case any income falls to be included in the appellants assessment under s. 42(2). `
(4) THE reference was heard by Chagla C. J. and Tendolkar J. who by their judgment dated 24/02/1955, held that, on the facts found, s. 42(2) was applicable and that the appellant was liable to be assessed to income-tax and excess profits tax under that section. The appellant applied under s. 66(A) for leave to appeal against this judgment to this court, and that application was dismissed. The appellant thereafter applied for and obtained leave to appeal to this court under Art. 136, and hence this appeal.
(5) IT must be mentioned tha
