Viswanatka Sastri, J.-The question that has been referred to us is as follows: “Whether in the circumstances section 42 of the Income-tax Act, as amended in 193c, would apply to ‘residents as well?”

The facts out of which this reference arises may be briefly stated. The assessee is a merchant carrying on business in Madras in paper and stationery and has been assessed as an individual resident and ordinarily resident in British India. In February, 1942, the assessee opened a branch of his business at Mysore where paper and articles of stationery were sold. It is common ground that there have been no remittances of money or profits from Mysore to British India. The Income-tax Officer, however, found that there was an intimate business connection between the head office at Madras and the branch at Mysore, and held that a portion of the profits earned by the business at Mysore should be deemed to have accrued or arisen in British India by reason of section 42(1) of the Income-tax Act of 1922 as amended. The business connection found was that the assessee regularly purchased paper and other articles of stationery in British India and sent them over to his branch at Mysore for sale. In the circumstances the Income-tax Officer apportioned the profits of the Mysore branch under section 42(3) of the Income-tax Act and assessed to Indian income-tax a sum of Rs. 9,139 along with the profits derived from the business carried on in British India. On appeal, the Appellate Assistant Commissioner reduced the Mysore profits, deemed to have accrued or arisen in British India by reason of the business connection, to the sum of Rs. 6,513. The assessee objected to the inclusion of this sum in his assessable income on the ground that section 42 of the Indian Income-tax Act had no application to the case of a resident in British India, and that under section 14(2)(c) of the Income-tax Act, income accruing or arising to a resident in British India, within an Indian State, and which had not been received in or brought into British India was exempt from liability to tax. The Appellate Tribunal upheld the contention of the assessee and modified the assessment accordingly. The revenue authority has applied for this reference.

The question turns upon the proper interpretation of section 42(1) of the Income-tax Act, as it now stands. The contention of the assessee is that having regard to the terms of section 42(1), it could possibly have no application to the case of a resident in British India, while the revenue authority maintains the contrary. The language of section 42(1) as it now stands after several amendments, as well as its previous legislative history, would indicate in our opinion, that it applies to residents, though having regard to the several categories of income specified in the section, its application to the case of residents must be rare. It may be conceded that the large majority of persons falling within section 42(1) would be non-residents. Extensive changes were made in sub-sections (1) and (2) of section 42 by the Amending Act of 1939. Before the amendment of 1939, section 42(1) ran as follows:

" In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, through or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.

It will be observed that the section as originally enacted was statedly confined in its application to the case of persons residing out of British India. Alter the amendment of 1939, section 42(1) reads as follows:

" All income, profits or gains accruing or arising, whether directly or indirectly through or from any business connection in British India or through or

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