This is a reference under Section 66(1) of the Indian income-tax act, 1922, by the Income-tax appellate Tribunal (Bombay Branch). The assessee is a company called the Hira Mills Ltd., (hereinafter called the assessee), which is registered at Ujjain in Gwalior State. The business of the assessee is to manufacture cloth and its mills are situated at Ujjain. The assessee is accordingly a non-resident company for the purposes of the Indian Income-tax Act, 1922. Two questions said to be questions of law, have been set up by the Income-tax Appellate tribunal in the statement of the case which is has submitted. The first is, we think, readily answered, but the second is one of difficulty.
The first question relates to the profits and gains of the assessee derived from the sale of cloth at, or through its establishment at Cawnpore in British India. In the accounting year the assessee sold its cloth manufactured in Gwalior at Cawnpore to the value of Rs. 3,87,305 gross, and the Income-tax Department has for the year 1939-40, the assessment year in question, sought to tax the assessee under Section 4(1)(c) upon the entire profits attributable to these gross sales, without allowing any apportionment of that profit between what is attributable to the manufacturing process in Gwalior up to the point of export from that State and what is attributable to the import into, and sale in, British India.
The facts, as stated in the case submitted to us, show that the assessee maintains a salesman of its own at Cawnpore, to whom it makes a monthly allowance by way of wage or salary. This we take to mean that the salesman at Cawnpore is nothing more or less than a paid employee of the assessee at Cawnpore. The goods imported from the assessees mills in Gwalior are then sold by the assessees salesman in Cawnpore and it is not in dispute that the while of the sale proceeds are collected by the assessees salesman at Cawnpore.
The contention of the assessee of before the Income-tax Appellate Tribunal was that the Cawnpore sales, being the result of an initial process of manufacture and production in Gwalior, could not be said to have produced profits and gains which accrued or arose wholly in British India within the meaning of Section 4(1)(e) of the Act, and must therefore, if assessable at all, be assessed as profits and gains which are merely deemed to accrue or arise under Section 42(1) of the Act and are as such, entitled to the benefit of the apportionment allowed by sub-section (3) of section 42. The question actually set by the Tribunal is this :-
'(1) Whether, on the facts of the case, the profits and gains derived from sales made at Cawnpore by the assessees salesman of the goods manufactured by the assessee at Ujjain outside British India were rightly held to accrue or arise to the assessee in British India within the meaning of the Section 4(1)(c) or received in British India by or on behalf of the assessee within the meaning of Section 4(1)(a) of the Indian Income-tax (Amendment) Act, 1939 ?'
We think that this question is most easily disposed of on the ground, which has been noted by the Tribunal, that the profits and gains in question were actually received by or on the behalf of the assessee in British India and are, therefore, assessable under Section 4(1)(a) of the Act. That the gross profits indeed, the gross sale proceeds, were received in British India is not to be disputed. The answers given to this by the assessee are, first, that Section 4 of the Indian Income-tax Act does not apply at all to a non-resident, by virtue of the special provision made for him in Section 42, and, secondly, that even if that is not so, section 4(1) is introduced by the words 'subject to the provisions of this Act,' which would suffice, even in the case of profits and gains received in British India, to entitle them to the benefit of Section 42(3). In our view, neither of these arguments can succeed. As to the former, we cannot accept it that Section 42(1) of the Act can be divorced from Section 3 and 4, so as to subject a non-resident assessee to a charge of income-tax arising only under Section 42, and not under sections 3 and 4. We appreciate, following the view expressed in Rogers Pratt Shellac & Co. v. Secretary of State for India and Commissioner of Income-tax, Bombay v. National Mutual Association of Australasia Ltd., that Section 42 of the Indian Income-tax Act is a charging section in the sense that, as the learned Chief Justice of Bombay has pointed out in the latter case at page 527, it does have the effect of rendering a non-resident liable to tax in respect of sources of income to which he would not be liable to tax if because a resident. In that sense it is, of course, a charging section but that is along way from saying that section 42(1) has to be read independently of the general charging sections. In seems to us that the truth is that the general charge of income-tax is imposed by Sections 3 and 4 and that the general charge is given a particular application in respect of a non-resident by Section 42(1). Neither can we accede to the alternative proposition that the charge of a non-resident to income-tax on profits and grains actually received or accruing or arising in British India is, by virtue of the words. 'subject to the provisions of this Act,' in any way modified by Section 42, sub-section (3). We think on construction alone that it is quite clear that the relief afforded by Section 42, sub-section (3), applies only to a case in which the profits and gains are deemed under Section 42 to accrue or arise in British India, and not to a case in which they actually so accrue or arise or are received in British India. Indeed, this is what the sub-section says. It in terms applies only to the profits and gains of a business 'deemed under this section to accrue or arise in British India.....' We are unable, therefore, to read the sub-section as amounting to a general proviso applied to profits and gains received, accruing or arising under Section 4, which is the section clearly applicable in this case to the Cawnpore profits of the assessee. Dismissing, therefore, sub-section (3) of section 42 of the Act, we are bound to look at the language of Section 4 and to interpret the meaning of the words 'profits and gains'. There is no reasons for giving to these words any thing but their usual meaning of the difference between the gross cost to the seller at Cawnpore was unquestionably the assessee. The cost to the assessee at the moment of sale in Cawnpore was the cost of, and other charges incidental to, the manufacture and export of them to Cawnpore and their sale there. The circumstances that the assessee produced the goods in an Indian State can, make no difference to the meaning of the words 'profits and gains', and, if the true construction of the Act gives rise, in this, as in other cases, to double taxation, that is not a matter by which we can be influenced in construing the Indian Income-tax Act. If assistance were needed in reaching this conclusion, it is afforded by the case of Erichsen v. Last in which a very similar contention in a different context was rejected by the English Court of Appeal. Our attention has been drawn to the decision of the High Court of Burma in Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd. But, even in this case there is no decision that the profits and gains of one continuous process between manufacture and sale can be apportioned so as to give rise to two processes, one, up to the point of export of the manufactured article, and the other, from that point onward until final sale. It is true that it was held in that case that, where there was the reverse operation of manufacture in India and sale in England, the non-resident company in England which handled the selling organization of the goods produced by its own Branch in Burma was entitled to deduct a proper commission from the profits accruing or arising in British India in consideration of its sales services. This, however, would appear to us, with great respect, to be a little difficult to understand as it is not easy logically to see how, if the net profits and gains received in England by Messrs. Steel Brothers & Co., Ltd., were taxable in British India as profits and gains accruing and arising in Burma, those net profits could again be diminished be deducting from them a sum for commission payable to the assessee company itself which would in effect represent a further taxable profit.
We must, therefore, answer this first question by saying that the profits and gains referred to therein were rightly held both to have been received in British India by or on behalf of the assessee within the meaning of Section 4(1)(a) of the Indian Income-tax Act, 1922, as amended, and also to have accrued or arisen to the assessee in British India within the meaning of Section 4(1)(c) of the same Act. We feel it right to add, as was obviously intended by the case and since it has formed the sole subject for argument before us, that such profits and gains derived from sales made at Cawnpore by the assessees salesman of the goods manufactured by the assessee at Ujjain must be calculated without allowing any apportionment of that profit as between the period prior to the moment of export from Gwalior and the moment subsequent to that export.
The second question is more difficult. It is :-
'(2) Whether, on the facts of the case, the profits and gains derived from sales made from Ujjain to customers in British India through brokers in British India were rightly held to be profits or gains deemed to have accrued or arisen to the assessee company in British India within the meaning of Section 42(1) and assessable under sub-section (3) of that section ?
The facts relating to this question, so far as they have been stated to us, deserve careful attention. The assessees goods are also marked in British India in other ways besides the sales through the medium of their Cawnpore salesman. The following, as we understand it from the statement of the case, is the method employed.
Brokers in British India, who are not the employees of the assessee, are, as part of their own business, in the habit of canvassing orders from purchasers of cloth in British India. There is nothing in the case to lead us to suppose that these brokers are in the any sense specially engaged by the assessee. It has not been found that they canvass orders exclusively for the assessee; neither is their anything to establish either that individual brokers are 'retained' by the assessee, or that the assessee has any special arrangement with any particular broker or brokers to canvass systematically on his its behalf. The brokers are 'free lance' brokers, and, so far, at least, as the assessee is concerned, are at liberty to place the orders obtained by them where they will. We are vouchsafed no information as to the supply of catalogues or other canvassing material by the assessee to the brokers. Officers of purchase obtained by the brokers are, in paragraph 3(b) of the Appellate Tribunals judgment, stated to be first sent by the brokers to the assessee at Ujjain for acceptance or rejection either by letter or on the brokers own contract forms used in the general course of their business. We understand that the brokers did not use any special form in the case of the assessees business. The assessee then either endorsed its acceptance or its refusal, and it is mentioned in the assessment order that in the great majority of cases this was done over a Gwalior State stamp. The brokers accepted form was then returned to the broker for the purchasers signature. Apparently the contracts are all for delivery 'F. O. R. Ujjain.' Nothing is stated in the case as to the who the actual consignee is; but we understand that the goods are generally consigned to 'self' at the place of destination, while the railway receipts are sent (to make the words of the Appellate Tribunals judgment) 'by the applicant,' i.e., the assessee, 'to the purchasers through he said brokers or bankers.'The Appellate Tribunal in paragraph 7 of its judgment says that 'presumably, also, the goods were paid for at Ujjain.' The actual facts, however, appear to be that the purchasing merchant took delivery by paying the invoiced price, plus freight and insurance, to a broker or bankers in British India and receiving in exchanges as endorsed railway receipt. The original assessment order only mentions payment through brokers. If the question had been one under Section 4(1)(a) or 4 (1)(c) of the Act, is might have been very material to know more exactly in what capacity such bankers and brokers received these payments.
Those, as we understand them, are the facts to be gathered from the statement of the case and the accompanying judgments and orders. Perhaps we may properly observe that it would be a practice more in conformity with Section 66(1) of the Act and with general convenience, if the statement of the case itself had contained all the relevant facts, rather than that they should have had to be sought for in the judgments. No question of law is raised by the question submitted to us whether, in the circumstances set out above, the profits on such sales as we have described were actually 'received' or 'accrued' or 'arose' in British India under Section 4(1)(a) and 4(1)(c) of the Indian Income-tax Act. The question is expressly and distinctly confined to Section 42(1) of the Act. The Appellate Tribunal, in fact, itself decided that the profits were not 'received' and did not 'accrue' or 'arise' in British India, and in his reply dated the 15th May 1943 to the statement of the case the Commissioner took exception to the omission from the question of law stated by the Tribunal of any reference to Sections 4(1)(a) and 4(1)(c) of the Act and himself submitted an alternative question, which raised no issue under Section 42(1), but rested solely on Sections 4 (1)(a) and 4(1)(c). Which of these two alternatives was right we do not feel called upon to consider, since the only question of law which has come before us to be considered is the one under Section 42(1) of the Act propounded by the Appellate Tribunal. The Commissioner, had he been so minded, could have required the Tribunal to submit the question propounded by him, either alternatively, or in addition to its own, and, if the Tribunal had refused, the Commissioner could have taken steps under Section 66 to compel it to state that question. But the Commissioner has not taken that course, though obviously alive to it, and we do not think therefore, that we are bound, or, indeed, entitled, to propound for ourselves a question of law, which apparently the Commissioner decided not to press, as an alternative to the only one set up by the Appellate Tribunal.
We have, therefore, to consider in short whether the income, profits or gains which accrued or arose, directly or indirectly, to the assessee from the transactions we have endeavoured to describe accrued or arose 'through or from any business connection in British India.' We think that the answer must be in the negative. The relevant words of Section 42(1) of the Act are these :-
'All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in British India.... shall be deemed to be income accruing or arising within British India.....'
Our attention has been called to many of the authorities which have been decided by the Judicial Committee and by Indian Courts as to the application of the words 'business connection' to various sets of circumstances in which a non-resident has had dealings of one sort or another in British India. But we think that, in solving a question which must necessarily depend on particular facts, it is impossible to obtain more than general guidance from other cases involving very different facts. The truth perhaps is that the expression 'business connection' in Section 42 (1) of the Indian Income-tax Act is one which permits of no precise definition. No definition of it is given by the Act itself and the legislature has apparently deliberately chosen to use words of wide, if uncertain, meaning.
In the case of Commissioner of Income-tax, Burma v. Messrs. Steel Brothers & Co., Ltd., the Rangoon High Court took the view that the expression 'business connection' was limited by the use of the word 'business' and by the explanation of that word contained in Section 2(4) of the Act, to such a connection as amounts to a business establishment in the opposite territory, and regarded it as a 'compendious expression to cover such concerns in the nature of trade, commerce, or manufacture as arise through a branch, factorship, agency, receivership or management.' In other words, they thought that there must be something in the nature of a definite trade, commercial or manufacturing establishment to constitute a 'business connection.' With respect, we are inclined to share the view of the learned Judges of the Bombay High Court in Commissioner of Income-tax, Bombay v. National Mutual Association of Australasia Ltd., that this places too narrow a construction on the words 'business connection.' In the plain English, the word 'connection' may be used in two slightly different shades of meaning. It may be used to denote an abstract connection in the sense of a bond with, or an interest in, some opposite place or person; or it may be used in a concrete sense to mean the opposite person or unit, himself, or itself,in some other place. The expressions, 'I have had connections with Bombay for many years' and 'I have a connection by marriage in Bombay,' employ the word 'connection'in the two slightly different senses. It may be that the use of the words 'business connection in' (as opposed to with) in Section 42(1) of the Indian Income-tax Act lays some slight emphasis on the more concrete meaning of the word 'connection', but, nevertheless, we think it limits it too much to confine it to some definite organization, establishment or entity being in the nature itself of an operating business branch or agent of the potential assessee.
In the case of Rogers Pratt Shellac Co. v. Secretary of State for India, the facts were that an American company had a branch office in Calcutta and a factory in the United Provinces, which pointed to a 'business connection' in a concrete sense. In Commissioner of Income-tax, Bombay Presidency v. Bombay Trust Corporation, it was held that a company incorporated in Hong Kong to carry on a finance business, which used virtually its entire capital by way of loan to a company with similar objects in Bombay, had a 'business connection' in British India. In that case there was a definite operating unit is British India with which the Hong Kong company was connected. The case of Commissioner of Income-tax, Bombay v. Remington Typewriter Company (Bombay) Ltd. is probably the strongest illustration of a concrete 'business connection,' since in that case the American parent company had established subsidiry companies in India to operate its patents, which subsidiaries it completely controlled. In the Pondicherry Railway case, the question of 'business connection' did not arise since the case turned on where the profits or gains were received. These, we think, are all cases where the non-resident company sought to be assessed had a very definite 'business connection' in British India in the sense of an organized entity, either controlled by itself or working for it under its direction. In the case in our own Court of Nand Lal Bhandari Mills Ltd., Cawnpore v. Commissioner of Income-tax, Central and United Provinces, there was again a definite branch of the non-resident manufacturing company in British India, although it had not been established by the manufacturing company itself, but by its managing agents, who were also non-resident. It was held - and, if we may with respect say so, rightly held - that there was a business connection in British India between both the non-resident manufacturing company and the non-resident firm of managing agents and the Cawnpore branch, which sold the products of the manufacturing company, managed by the non-resident firm. At first sight it would appear that the case of Commissioner of Income-tax, Bombay Presidency and Aden v. National Mutual Association of Australasia was a case of a non-resident company having a 'business connection' in British India in a more abstract sense. But when the facts of this case are examined from the earlier report in Commissioner of Income-tax, Bombay v. National Mutual Association of Australasia, it appears that here again the assessee had its head office at Melbourne and maintained a branch office in the Bombay Presidency. This case was, therefore, another in which the non-resident had a connection in British India with or through which it did business of its own creation and under its own control. We find, however, in this case an explanation of the meaning of the term 'business connection' which, with great respect, we think, approaches as nearly to a definition as is possible in the circumstances. Mr. Justice Rangnekar at page 534, after observing that the expression 'business connection'is a comprehensive expression including not only those kinds of things specifically included by Section 2(4) of the Indian Income-tax Act within the meaning of the word 'business' but the kind of things which are specifically mentioned in the English Act, adds :-
'All that is necessary is that there should be a business in British India and a connection between a non-resident person or company and that business,and that the non-resident person or company has earneda an income through such connections.'
If we may respectfully adopt this language, we have, we think to ascertain whether the sales in British India effected by the assessee in the case before us in fulfilment of orders brought to it by British India brokers constituted a 'business' of the assessee in British India and whether that 'business' brought profits of gains to their assessee through any connection of the assessee with it. It becomes, therefore, a practical question.
The assessee, the Hira Mills Ltd., undoubtedly, by the means we have described, sold its cloth to the value of nearly five lakhs in British India during the accounting year. It had customers in British India. It traded with British India. We think, therefore, that there was a business in British India, in the limited sense that a substantial part of the assessees output found its way into consumption in British India. The next question is whether there was a 'connection' between the assessee and that business. In one way there was an obvious connection in that the assessee was the maker of the goods which were eventually consumed by British India buyers. But we do not think that it is a connection in such a loose sense as this that is contemplated by Section 42(1) of the Indian Income-tax Act. On the facts, as proved, what other 'connection' was there The assessee had no branch, agency or establishment of its own in British India. We cannot discover any facts upon which it can be held even that the assessee, by an arrangement with British India Brokers, had in effect constituted an agency for itself. The brokers were not, as far as we know, retained by the assessee. The assessee had no claim upon the goodwill of the brokers. The fact that the assessee may have paid the brokers a commission and certain out of pocket expense, if an when they brought an offer which the assessee accepted, does not, we think, alter the circumstances. As we see it, on the proved facts, the position was that the assessee sold its goods in British India to a British India customer if and when that customer, either direct or through a broker, offered to purchase them by sending an order to Ujjain. We do not think that this amounted to a'business connection in British India' from or through which the assessee derived the profits or gains on those transaction within the meaning of the authorities to which our attention has been drawn. They were sales to customers who happened to be in British India. It may be that, in the circumstances of this or any other particular case, the profits or gains accruing or arising to a non-resident from its sales in British India can be reached by the British India Income-tax authorities under Section 4(1) of the Indian Income-tax Act. But that is quite a different thing from 'deeming' them to have accrued or arisen in British India from or through a 'business connection.' In this case we do not think that there was any such 'business connection' as falls within Section 42(1) of the Act.
For these reasons, we think that the second question put to us should be answered in the negative.
As the applicant and the Income-tax Department have each succeeded and failed in one of the questions, we propose to make no order for the costs of this reference. A copy of this judgment will be sent to the Appellate Tribunal for the passing of such orders as are necessary to dispose of the case conformably with it.
We fix the fee of counsel appearing for the Income-tax Department at Rs. 500. There will be a period of one month from this date for him to file his certificate.
Reference answered accordingly.