Case: Commissioner Of Income-Tax, Punjab Vs. R. D. Aggarwal &amp; Company

1. R.D. Aggarwal and Company called for the sake of brevity the assessees 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 months 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 questionsWhether 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 underHigh 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.

Reasoning: 18. Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by he non-residents outside the taxable territories, and delivery was also given outside the taxable territories. No operation such as procuring raw materials, manufacture of finished goods, sale of goods or delivery of goods against price took place within the taxable territories: the assesses merely procured orders from merchants in Amritsar for purchase of goods from the non-resident companies. The orders were offers which the assesses had no authority to accept on behalf of the non-residents. Some commercial activity was undoubtedly carried on by the assessees in the matter of procuring orders which resulted in contracts for sale by the non-residents of goods to merchants at Amritsar. But on this account no business connection of the assessees with the non-residents within the taxable territories resulted. The activity of the assessees in procuring orders was not as agents of the nonresidents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxable territories for their manufacturing process. Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression "business connection postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation isthe answer to this question be in the affirmative, the assessees would as statutory agents be chargeable to tax on behalf of theCompanies on profits and gains reasonably attributable to those parts of the operations which were carried on in the taxable territories.8. The expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection" and its precise connotation is vague and indefinite. The expression "business connection" undoubtedly means something more than "business". A business connection in S.42 involves a relation between a business carried on by awhich yields profits or gain and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of theand the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as at business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of thethrough an agent, or it may merely be a relation between the business of theand the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to amust be determined upon the facts and circumstances of the case.9. A relation to be a "business connection" must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to theBut it must in all cases be remembered that by Section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of thelaw, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by S. 4(1)(a) and (c) of the Act, whether the person earning is a resident orthe agent of areceives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in Section 40(2). Income not taxable under Section 4 of the Act of abecomes taxable under S. 42(1) if there subsists a connection between the activity in the taxable territories and the business of theand if through or from that connection income directly or indirectly arises.