Judgement Law Rep. 58 Ind. App. 42 ( 1930- 1931) C ommissioner of I.T. v. Remington Typewriter C ompany 182 Appeal (No. 42 of 1929) from an order of the High Court (March 20, 1928) upon a reference under s. 66, sub-s. 2, of the Indian Limitation Act, 1922. The effect of the order appealed from was to set aside assessments to income-tax and super-tax for the years 1924-5 and 1925-6 made upon the respondent company as agent for the Remington Typewriter Co. of New York. The learned judges (Marten C.J. and Kemp J.) were of opinion that there was a business connection within the meaning of ss. 42 and 43 of the Act between the respondent company and the New York company, but they held (following their decision reversed by the Privy Council in Income-tax Commissioner v. Bombay Trust Corporation (I)) that having regard to s. 40 of the Act the respondent company could not be assessed, as it had not received the income in question. This matter is reported at 52 Bom. 726. The material facts and provisions of the Act appear from the judgment. 1930. Nov. 20. Dunne K.C. and Reginald Hills for the appellant. The decision of the High Court was based entirely upon the view that s. 40 of the Act must be read with ss. 42 and 43, and that therefore a person is not to be deemed an agent for a non-resident person under s. 43 and assessable under s. 42, sub-s. 2, unless he has received the profits taxed. In Income-tax Commissioner v. Bombay Trust Corporation (1) the Board held that that view was wrong. The High Court found that the New York company had a business connection with the respondents. There being no appeal from that finding the respondents cannot now contend to the contrary. In any case the Board held in the above appeal that a " business connection " existed, and here the facts are stronger. Sir Patrick Hastings K.C. and Stamp for the respondents. There was no " business connection" between the New York company and the respondents within the meaning of ss. 42 and 43. Such a connection resulted neither from the fact of the shareholding nor the fact that the respondents were regular customers of the New York company, nor from both these facts. There was no " business connection" between the New York company and the respondents within the meaning of ss. 42 and 43. Such a connection resulted neither from the fact of the shareholding nor the fact that the respondents were regular customers of the New York company, nor from both these facts. The respondents can raise this point in support of the decision in their favour without a cross-appeal. The point was taken without objection in the Bombay Trust case (( 1929) L. R. 57 I. A. 49.), although there was no cross-appeal. That decision does not affect the assessments of 5 per cent, on purchases. Those assessments were in respect of a trade profit made not in British India but in America. Even if there was a " business connection " the profit was not made " through " it. The words in s. 42, sub-s. 1, should be read " through any business connection or from property." The word " through " connotes cases in which the resident person, by payment of dividends or otherwise, is a conduit pipe for a profit made in British India. This part of the assessments could be made only under s. 42, sub-s. 2, and upon proof of " substantial control exercised by the non-resident person." To apply s. 42, sub-s. 1, to an alleged profit made out of British India would be to give the provision a startlingly wide effect, and would render s. 42, sub-s. 2, useless. Dunne K.C. replied. Dec. 16. The judgment of their Lordships was delivered by LORD RUSSELL OF KILLOWEN. The dispute in this appeal has, by reason of a recent decision of their Lordships Board, been reduced to small compass. A statement of the relevant facts is, however, necessary. Law Rep. 58 Ind. App. 42 ( 1930- 1931) C ommissioner of I.T. v. Remington Typewriter C ompany 183 Assessments, in respect of the two financial years 1924- 1925 and 1925- 1926, were made under the Indian Income-tax Act, 1922 (hereinafter referred to as " the Act "), upon the Remington Typewriter Co. (Bombay), Ld., as agent for the Remington Typewriter Co. of New York. This last mentioned company is a company incorporated in the United States of America and carries on the business of manufacturing and selling the well known Remington typewriting machine. (Bombay), Ld., as agent for the Remington Typewriter Co. of New York. This last mentioned company is a company incorporated in the United States of America and carries on the business of manufacturing and selling the well known Remington typewriting machine. These two companies may be conveniently referred to as the Bombay company and the American company respectively. The assessments were made in respect of (1.) dividends paid by two Indian companies—namely, the Remington Typewriter Co. (India), Ld., and the Remington Typewriter Co. (Madras), Ld., to the American company in respect of its shareholding in the two Indian companies ; (2.) dividends paid by the Bombay company to the American company in respect of its shareholding in the Bombay company ; and (3.) profits presumed to have been made by the American company on the sales of its typewriters to the other three companies. The Bombay company was registered under the Indian Companies Acts on December 19, 1921, with a capital of 600,000 rupees, divided into 60,000 shares of 10 rupees each, its principal object being to enter into and carry into effect the agreement next mentioned. By an agreement dated January 18, 1922, the Bombay company bought from the American company the goodwill of its business in a territory therein defined, which included the Bombay Presidency, Central Provinces and certain other adjoining portions of India. The consideration for the sale was the sum of six lakhs to be paid and satisfied by the allotment to the American company or its nominees of 60,000 fully-paid shares in the Bombay company. The purchase was duly completed, and the American company holds all the shares of the Bombay company with the exception of three shares, each of which stands in the name of a nominee of the American company. As regards the other two Indian companies the position as between them and the American company is in substance the same, their respective business territories between them covering the rest of India. The sections of the Act with which this appeal is principally concerned are the sections which constitute Chapter V. of the Act dealing with " Liabilty in Special Cases " ; in particular, ss. 40, 42 and 43. Sect. The sections of the Act with which this appeal is principally concerned are the sections which constitute Chapter V. of the Act dealing with " Liabilty in Special Cases " ; in particular, ss. 40, 42 and 43. Sect. 40 deals with the case of a guardian trustee or agent of any person being a minor, lunatic or idiot or residing out of British India being in receipt on behalf of such person of any income, profits or gains chargeable under the Act. Sect. 42, sub-s. 1, deals with the case of profits and gains accruing or arising to a person residing out of British India directly or indirectly through or from any business connection or property in British India. It provides that such profits and gains shall be deemed to be income accruing or arising within British India and that they shall be chargeable to income-tax in the name of the agent of any such person. Sect. 42, sub-s. 2, deals with the case of certain persons not resident in British India carrying on business with persons resident in British India, where the course of business between the two is so arranged that the business done by the resident in pursuance of his connection with the non-resident produces to the resident either no profits or less than the ordinary profits which might be expected; and it provides that the profits derived therefrom or which might reasonably be deemed to have been derived therefrom shall be chargeable to income-tax in the name of the resident. Sect. 43 provides (amongst other things) that any person having any business connection with a person Law Rep. 58 Ind. App. 42 ( 1930- 1931) C ommissioner of I.T. v. Remington Typewriter C ompany 184 residing out of British India, upon whom the income-tax officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person, shall for all the purposes of the Act, be deemed to be such agent. The Bombay company, under s. 66 of the Act, required the Commissioner of Income-tax, Bombay, to refer to the High Court certain questions of law. The Commissioner accordingly drew up a statement of the case and referred it, with his own opinion thereon, to the High Court. The questions so referred were in the following terms — 1. Whether the profits of the Remington Typewriter Co. The Commissioner accordingly drew up a statement of the case and referred it, with his own opinion thereon, to the High Court. The questions so referred were in the following terms — 1. Whether the profits of the Remington Typewriter Co. of New York upon goods exported to British India are or can be held to be chargeable to income-tax and super-tax under s. 42, sub-s. 1, of the Act or otherwise. 2. Whether super-tax upon dividends received by the Remington Typewriter Co. of New York from the Remington Typewriter Co. (Bombay), Ld. the Remington Typewriter Co. (India), Ld., and the Remington Typewriter Co. (Madras), Ld., can under s. 42, sub-s. 1, of the Act or otherwise be charged against and collected from an agent. 3. Whether the Remington Typewriter Co. (Bombay), Ld., is or can be held to be the agent of the Remington Typewriter Co. of New York under s. 43 of the Act. In answer to the reference, the High Court (Marten C.J. and Kemp J.) on March 20, 1928, made the following order — " For the reasons stated in the accompanying judgment, the Court gives the following answers to the questions submitted to it—Questions I. and II.—The Bombay company, though an agent of the American company within the meaning of s. 43 of the Act, cannot be assessed to income-tax or supertax under s. 42, sub-s. 1, of the Act or otherwise in respect of any profits made by the American company on the sale . of its goods to the Bombay company, inasmuch as the Bombay company was not in receipt on behalf of the American company of the profits in question as is requisite under s. 40. For similar reasons, the Bombay company is not liable to be assessed to super-tax upon dividends paid to the American company by the Calcutta company or the Madras company; nor upon dividends of its own shares paid by it to the American company. Super-tax upon dividends in the Bombay company can be recovered by deduction by the principal officer of the Bombay company under ss. 57 and 58 of the Act. Super-tax upon dividends in the Bombay company can be recovered by deduction by the principal officer of the Bombay company under ss. 57 and 58 of the Act. Question III.—Yes." From this it appears that the High Courts view was that the Bombay company, although an agent of the American company within the meaning of s. 43 of the Act, could not be assessed in respect of profits or gains accruing or arising to the American company, and covered by the description used in s. 42, sub-s. 1, of the Act, unless the Bombay company had been in receipt thereof on behalf of the American company. In other words, the High Court held that the word " agent " in s. 42, sub-s. 1, was used in the same sense as that in which the word " agent " is used in s., 40—namely, a person who receives the profits and gains. In adopting this view, the High Court followed an opinion which they had already expressed in a previous reference made to them at the requirement of the Bombay Trust Corporation, Ld. see I. L. R. 52 B. 702. In that case a Hong Kong company had advanced to the Bombay Trust Corporation, Ld., large sums on deposit at interest. The corporation was assessed as agent of the Hong Kong company in respect of the payments of interest on the sums advanced. The High Court, while holding that the interest paid was a profit or gain accruing or arising to the Hong Kong company from a Law Rep. 58 Ind. App. 42 ( 1930- 1931) C ommissioner of I.T. v. Remington Typewriter C ompany 185 business connection in British India within s. 42, sub-s. 1, also held that though the corporation was to be deemed the agent of the Hong Kong company under s. 43, it could not be assessed in respect of the interest, because it had not been in receipt of it, as required by s. 40. This view of s. 42, sub-s. 1, and s. 43 must now be treated as erroneous. This view of s. 42, sub-s. 1, and s. 43 must now be treated as erroneous. An appeal from the order of the High Court in the last mentioned case was brought before their Lordships Board last year, and the appeal was allowed upon the ground that any person who comes within the terms of s. 43 is put by that section artificially into the position of agent and assessee under s. 42, sub-s. 1 Commissioner of Income-tax v. Bombay Trust Corporation. (L. R. 57 I. A. 49.) That decision of the Board concludes the present appeal if the facts of this case establish (a) that the profits or gains in question accrued or arose to the American company " directly or indirectly through or from any business connection .... in British India," and (6) that the Bombay company had " any business connection " with the American company. Upon this part of the case the affirmative answer given by the High Court to question III. was based upon the view that the necessary business connection existed in the present case. Although no appeal was lodged by the respondents against that part of the High Courts order, their Lordships took the view that the appellants appeal raised for consideration the correctness of every part of the High Courts order. The question whether the necessary business connection existed was accordingly argued before the Board. As a result of that argument their Lordships feel, no doubt, that the answer given by the High Court to question III. was correct. The Bombay company was formed for the express purpose of acquiring from the American company and carrying on in a particular area the American companys business of selling the American companys manufactures. Although no contractual obligation exists by which the Bombay company is compelled to purchase any of the manufactures of the American company, the flow of business between the two companies is secured by the fact that the ultimate and complete control of the Bombay company is vested in the American company, which owns all its shares. It is not a question whether the Bombay company is in law the agent of the American company. The question is whether the facts of the case are such that the Bombay company can properly be deemed to be such agent, under s. 43. It is not a question whether the Bombay company is in law the agent of the American company. The question is whether the facts of the case are such that the Bombay company can properly be deemed to be such agent, under s. 43. The answer depends upon whether in this case a business connection exists within the meaning of that section. For the reasons appearing above their Lordships are of opinion that it does. For the same reasons their Lordships think that a business connection exists in the present case within the meaning of s. 42, sub-s. 1, not only between the Bombay company and the American company, but also between the American company on the one hand and each of the two other Indian companies on the other hand. The necessary business connection having thus been established, there can in their Lordships opinion be no doubt that the profits and gains in question accrued or arose to the American company " directly or indirectly through or from a business connection in British India." For these reasons their Lordships are of opinion that the appeal succeeds, and in their Lordships view, the correct form of order to make in this and similar cases is to amend the order of the High Court so as to bring it into conformity with the decision of the Board. Law Rep. 58 Ind. App. 42 ( 1930- 1931) C ommissioner of I.T. v. Remington Typewriter C ompany 186 The order of the High Court should be amended so as to run thus " The Court gives the following answers to the questions submitted to it Question I.—Yes, under s. 42, sub-s. 1, of the Act. Question II.—Yes, under s. 42, sub-s. 1, of the Act. Question III.—Yes. The Court directs that the Commissioner do recover the costs of this reference and that the costs be taxed by the taxing master as on the original side scale." The respondents must pay the costs of this appeal. A petition by the appellant for the admission of a supplemental record was not opened before their Lordships. This will be dismissed with costs to be set off against the costs of the appeal. Their Lordships will humbly advise His Majesty accordingly.