Case: Mazagaon Dock Ltd Vs. The Commissioner Of Income-Tax And Excess Profits Tax

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. and O. 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 sub-section 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 no 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 for the account year 1943-1944, at Rs. 4,67,559 for the account year 1944-1945 and at Rs. 4,68,963 for the account year 1945-46. On the basis of the above findings, orders of assessment of income-tax were made for the account year 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 July 3, 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 March 19, 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 February 24, 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 an obtained leave to appeal to this Court under Art. 136, and hence this appeal.

Court's reasoning:
2. Rule 33 provides for the determination of the profits of a non-resident in cases falling within S. 42(1), and one of the modes prescribed for such determination is to fix an amount which bears the same proportion to the total profits of the non-resident as the Indian receipts bear to the total receipts in the business. Rule 34 then provides that " the profits derived from any business carried on in the manner referred to in S. 42 (2) may be determined for the purposes of assessment to income-tax according to the preceding rule". Now, the argument of Mr. Palkhivala is that the interpretation put on S. 42 (2) by the rule-making authorities as manifest in R. 34 is that the business chargeable under S. 42(2) is that of the non-resident, and that the words "which may reasonably be deemed to have been derived therefrom" had reference to the apportionment of the Indian, out of the total profits. We see no force in this contention.There is nothing in R. 34 to justify the assumption that the rule-making authorities considered either that S. 42 (2) applied to the business of a non-resident or that the words "which may reasonably be deemed to have been derived therefrom" meant apportionment of the Indian out of the world profits of the nonresident. And even if those be the assumptions on which the Rule is based, that can have no effect on the true interpretation of S. 42 (2). And whatever doubts one might have had as to the meaning to be given to the words "derived therefrom or which may reasonably be deemed to have been derived therefrom" if they had to be construed in isolation, in the context of the Section and read in conjunction with the words "to the resident" and "therefrom", there cannot be any doubt that they have reference to the business of the resident and not that of the non-resident10. The word "or" in the clause would appear to be rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they are less than the normal profits, tax could only be imposed either on the one or on the other, and that accordingly a tax on the actual profits earned would bar the imposition of tax on profits which might have been received. Obviously, that could not have been intended, and the word "or" would have to be read in the context as meaning "and". Vide Mawells Inter pretation of Statutes, Tenth Edition, pages 238-239.But that, however, does not affect the present question which is whether the word "derived" indubitably points to the business of the non-resident as the one tax-able under S. 42 (2), and for the reasons already given, the answer must be in the negative"The word business connotes, it was observed by this Court in Narain Swadeshi Waving Mills v. Commissioner of Excess Profits Tax 1955-1 SCR 952   at p. 961: ((S) AIR 1955 SC 176   at p. 181), (B), "some real, substantial and systematic or organised course of activity or conduct with a set purpose."Now, it may be conceded that when a person purchases his requirements from a particular dealer, he cannot without more be said to carry on business with him. But here there is much more. The non-resident Companies send their ships for repair to the appellant, not as they might to any other repairer but under a special agreement that repairs should be done at cost. And further unlike customers who purchase goods for their own consumption or use, the non-resident Companies get their ships repaired for use in what is admittedly their business. These are clearly trading activities, organised and continuous in their character and it will be difficult to escape the conclusion that they constitute business.We are not even concerned in this appeal with the larger question whether the activities of the non-resident Companies in connection with the repair of the ships amount to carrying on of business. What we have to decide is whether having regard to the course of dealings between the non-resident Companies and the appellant it can be said of the former that they carry on business with the latter within the meaning of S. 42 (2).Now, it should be observed that S. 42 speaks not of the non-residents carrying on business in the abstract but of their carrying on business with the resident, and in the context, it must include all activities between them having relationship to their business.That is the view taken by the learned Judges in the Court below, and we are in agreement with itBut, as already held by us, the subject-matter of the tax under S. 42(2) is the business of the resident and not that of the non-resident, and what we have to decide is not whether the non-resident Companies made profits in their dealings with the appellant but whether what they did was business, and for that purpose it is immaterial that the business was carried on by them in such manner that no profits could accrue to them therefrom. Vide the observations of Coleridge, C. J., at page 113 ins of Inland Revenue v. Incorporated Council of Law Reporting, 1888-3 Tax Cas105 (H). The fact therefore that the non-resident Companies could derive no profits from the dealings with the appellant would not detract from their character as business with the appellant. This contention must, therefore, be rejected