The words "business connection" in S. 42 (1) of the Act are different from and wider and more extensive than, though not unrelated to, the word "business" which is defined in S. 2 (4) of the Act. The mere fact that there is an isolated transaction between the parties without any course of dealings such as might fairly be described as a "business connection" does not attract S. 42 (1). To constitute a business connection, there must be some continuity of relationship between the person in British India who helps to make the profits and the person who receives or realises them.

Satyanarayana Rao, J. :- The following questions were referred to us by the Appellate Tribunal under S. 66 (1), Income-tax Act :

"1. Whether in the circumstances of this case, it is correct to hold that profits were received in British India within the meaning of S. 4 (1) (a) of the Act on the ground that some sale proceeds of goods were received in British India.

2. Whether in the circumstances of this case the applicant company had any business connection in British India within the meaning of S. 42 (1) of the Act.

3. If the answer to question (2) is in the affirmative, whether any profits could reasonably be attributed to purchases of raw materials made by the managing agents in British India which would mean an operation within the meaning of S. 42 (3)."

2. The year of assessment is 1939-40 and the accounting year is the period ending with 31-12-1938. The accounts of the assessee were kept on mercantile basis. The assessee is the Bangalore Wollen and Cotton and Silk Mills Co. Ltd., Bangalore, hereinafter called the "company" and the managing agents of the company are Messrs. Binny and Co. (Madras) Ltd., hereinafter called the "agents."

3. The company was registered under the Mysore Companies Regulation (III [3] of 1895) and carries on business at Bangalore, in the manufacture of Wollen, Cotton and Silk goods. From the year 1935-36, the company was assessed only on the income derived from interest on Government securities. In the assessment year 1938-39, it was assessed by the Income-tax department on a sum of Rs. 41,878 from Government of India securities both taxed and tax-free. The assessment for the year included also a sum of Rs. 1,52,296, the income claimed to have been received in British India by the company, and Rs. 51,099 as income which accrued to the nonresident company outside British India. The dispute relates to the two items of income which were included in the assessable income of the year.

4. The facts on which the assessment was made may now be briefly stated. Messrs. Binny and Co. Ltd., have their head office at Madras. They carry on various businesses at Madras. They were appointed managing agents by the company under an agreement dated 29-5-1920. Under this agreement the agents have to purchase raw cotton, wool, jute, silk and other fibres and all other articles or things required for the purpose or use of the company. They were also empowered to enter into contracts or agreements for the supply of those articles. The agents have to sell and dispose of wollen, cotton and silk and other materials manufactured by the company and for this purpose they were empowered to enter into contracts or agreements for the sale and delivery of the same. The agents have to keep and maintain regular accounts and are authorised to pay and receive moneys owing by or due to the mills and give all receipts and other proper discharges for moneys received by them. For the effectual management, working and carrying on of the business of the company, the agents were also empowered to engage and appoint managers, engineers and other persons required for the proper and effectual management and working of the company. There is also the residuary power of generally managing and conducting the business of the company to the best of their judgment and ability, but subject only to the superintendence, control and direction of the directors of the company. In consideration of the services rendered by the managing agents the agreement provided (or the payment of a monthly remuneration of Rs. 3,500 and a commission of 10 per cent. of the net profits of the company in each year. They were also authorised to draw an allowance of Rs. 500 for the calendar month during every half year for which a dividend at the rate of 8 per cent. per annum has been paid by the company. From this short summary of the terms of the managing agency agreement, it is clear that the agents are entrusted with the complete control and management of the company,