Section 42(1) and Section 42(3) of the Income-tax Act apply to both residents and non-residents, and the historical context and wording of the provisions are essential in determining the applicability of tax provisions.

( 1 ) THIS is a Reference made by the Appellate Tribunal, Bombay Bench, under Section 66 (1), Income-tax Act stating a case upon the following question: "whether in the circumstances of the case and having regard to the fact that the applicant company is 'resident in British India,' Section 42 has been validly invoked. "

( 2 ) THE assessee was a limited liability company having its head office at Calcutta and a factory at Okara in British India where cloth was manufactured. The cloth so manufactured was sold by the assessee on a wholesale basis both within and without British India. During the year of account, the assessee had three selling offices in certain Indian States. The goods sold at these centres were sent out from the factory at a profit margin of 9 per cent, on cost.

( 3 ) THE Income-tax Officer dealing with the assessment for the relevant year came to the conclusion that on the facts which I have set cut the provisions of Section 42, Income-tax Act, were applicable and he made an allocation of profits under Section 42 (3) on the basis that 50 per cent, of the profit made on sales effected in Indian States outside British India was attributable to the business operations carried on in British India. (It is to be observed that there is a serious misprint in line 24 at page 1 of the paper-book. "sales effected in British India" should read, "sales effected outside British India. ")

( 4 ) THE assessee appealed to the Appellate Assistant Commissioner, but the appeal was dismissed and a further appeal was preferred to the Tribunal. Before the Tribunal it was argued that Section 42 (3), Income-tax Act, had no application to the case as that section applied only to "nonresidents," Further it was contended that if the section did apply the proportion of profits allocated to the manufacture in India was too great. The Appellate Tribunal, however dismissed the appeal holding that Section 42 (3) had been correctly applied by the Income-tax authorities. The Tribunal were asked to state a case on two points. First, whether Section 42, Income-tax Act, applied to residents or not, and secondly, that if it did what proportion should have been attributed to operations in India in this case.

( 5 ) THE Appellate Tribunal was of opinion that the proportion to be applied to operations in India was a pure question of fact and refused to state a case on thatpoint. The Tribunal, however, was of opinion that the question whether Section 42, Income-tax Act, applied to residents, was an important question of law and therefore stated the question which I have set out.

( 6 ) THE only point this Court has to decide is whether Section 42, Income-tax Act, has any application to residents in India and was therefore properly applied in the present case.

( 7 ) SECTION 42, Sub-section (1), is in these terms: "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 assessee in respect of such income-tax. "

( 8 ) THEN follow three provisos. The first proviso deals with persons who are not resident in British India, and the second deals with cases where an agent is assessed. The third proviso deals with the amount recoverable.

( 9 ) SUB-SECTION (2) of Section 42 deals with a case where a person not resident or not ordinarily resident in British India carries on business with a person resident in Brinish I