CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 14491456 of 1974.
From the Judgment and Order dated 15/21.9.1972 of the Calcutta High Court in I.T.R Nos. 128 and 160 of 1967.
S.C. Manchanda, V.Gauri Shankar, M.B. Rao and Ms. A. Subhashini for the Appellants.
Dr. Devi Pal, H.K. Dutt, Ms. S. Seal and D.N. Gupta for the Respondent. The Judgment of the Court was delivered by
RANGANATH MISRA, J. These are appeals by the Revenue by special leave and are directed against the decision of the Calcutta High Court dated 15.9.1972 rendered upon references made under section 256(1) of the Income-tax Act of 1961. The Tribunal referred the following six questions for opinion of the Court:-
1. Whether on the facts and in the circumstances of the case and on a proper construction of the agreement between the Indian Company and the Export Company, the Tribunal was right in holding that the six non-resident companies in Group A had a business connection with the Indian Company and therefore that the Indian Company was correctly treated as an agent of the said non-resident companies under section 163 of the Income-tax Act, 1961? tive, then, whether on the facts and in the circumstances of profit could be deemed to accrue or arise in India to the six non-residents in the United Kingdom in respect of the goods sold by them to customers in India?
3. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement dated 22.3. 1955 between the Indian Company and Crane Packing Ltd. (company in Group-B), the Tribunal was right in holding that the non-resident company had business connection with the Indian Company and, therefore, the Indian Company was correctly treated as an agent of the said non-resident company under section 163 of the Income-tax Act, 1961? tive then, whether on the facts and in the circumstances of profit could be deemed to accrue or arise in India to the aforesaid non-resident company in respect of the goods sold by it to customers in India?
5. Whether, on the facts and in the circumstances of the case and on proper construction of the agreement dated 1.6.1954 between the Indian Company and Budy Tubing Co. (Australia) Pvt. Ltd. (non-resident company in Group-B), the Tribunal was right in holding that the non-resident company had business connection with the Indian Company and, therefore, the Indian Company was correctly treated as an agent of the said nonresident company under section 163 of the Income-tax Act, 1961? tive, then, whether on the facts and in the circumstances of profits could be deemed to accrue or arise in India to the aforesaid non-resident company in respect of the goods sold to the customers in India?
The short facts relevant for appreciating the background in which these questions arose are these--T.I.& M. Sales Ltd., assesseerespondent, was assessed to income tax as a representative assessee of ten non-resident companies. The Tribunal grouped the ten nonresident companies under three heads--six in Group-A, three in Group-B and one in Group-C. In regard to the companies under Group-A, the assesee had no direct agreement but had dealings by virtue of its agreement with the exporting company. So far as the three companies under Group-B are concerned, the assessee had no business connection with them and so far as the only company under Group-C is concerned, the assessee’s stand was that it had an agreement dated 16.12.1948 with the export company, but no liability accrued under the law in respect of the transactions. The Income-tax Officer referred specifically to the agreement of 1948 and refuted the stand of the assessee by saying:-
"The agreement of 6.12.1948 referred to above
which continued during the relevant years is
clear authority that the non-resident had
employed the Indian Company for selling its
goods in India on commission. The agreement
certainly brings into existence a business
connection between the two. The Indian Company
is in receipt of commission calculated with
reference to the aforesaid values of goods
sent not only by the non-residents, but also
by some manufacturers of the T.I. Group in the
United Kingdom with which the Indian Company
had no direct contract, but which supply goods
to India as per orders placed by the Indian
Company through the nonThe Income-tax Officer also found that the Group-A companies belonging to the T.I. Group were connected with the Indian Company through the export company.
Appeals challenging the assessment were taken to the Appellate Assistant Commissioner. Before him, the assessee tried to establish the actual course of dealing between the Indian Company and the ten non-residents and contended that no liability under the Act accrued. The Appellate Authority dismissed the contentions of the assessee by holding that "the assessee has produced no proof of its assertions and on the contrary, has blocked the enquiry by me thereon". Along with the grounds of the appeal filed before the Tribunal, an affidavit dated 27.12.1965 of Carol Sturart Cameron was filed. Cameron stated in that affidavit that he was the Secretary of the assessee and was in superintendence of the proceedings relating to the assessments of the assessee as representative-assessee of the ten nonresidents. In that affidavit, he denied the fact that before the Appellate Assistant Commissioner any obstruction was offered to an attempted probe by the said Appellate Authority. On the other hand, the affidavit stated that several documents were made available before the Appellate Authority and were available and actually placed before him and in case the Appellate Authority wanted any information or further documents to be produced, Cameron was prepared to do so. We shall again refer to the affidavit in its appropriate place later. Before the Tribunal, some argument was raised with reference to the affidavit but ultimately the Tribunal upheld the assessments but referred the questions indicated above for the opinion of the High Court. The High Court by the impugned judgment reported in 151 ITR 286 referred to the provisions of sections, 4, 42 and 43 of the Income-tax Act of 1922 corresponding to sections 5, 9 and 163 respectively of the Income-tax Act of 1961. In the light of the affidavit of Cameron, it took note of the fact that no attempt had been made by the Revenue to traverse the facts stated therein, referred to and relied upon the decision of this Court in the case of Commissioner of Income-tax, Punjab v. R.D. Aggarwal & Co., 56 ITR 20 and came to hold that there was no element of business connection and, therefore, the assessee was not liable. Questions 1, 3 and 5 were thus answered in the negative and against the Revenue and, therefore, Questions 2, 4 and 6 which were required to be answered only if the answer to the other three questions was in the affirmative did not arise.
In 56 ITR 20, this Court held:-
"A relation to be a business connec-
tion must be real and intimate, and through or
from which income must accrue or arise whether
directly or indirectly to the nonresident. The
expression business connection undoubtedly
means something more than business. A business
connection in section 42 involves a relation
between a business carried on by a non-resi-
dent which yields profits or gains and some
activity in the taxable territories which
contributes directly or indirectly to the
earning of those profits or gains. It predi-
cates an element of continuity between the
business of the non-resident and the activity
in the taxable territories, a stray or isolat-
ed transaction is normally not to be regarded
as a 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 the non-resident through
an agent.or it may merely be a relation be-
tween the business of the non-resident and 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 a nonresident must be determined upon the
facts and circumstances of the case."
"A relation to be a business connec-
tion must be real and intimate, and through or
from which income must accrue or arise whether
directly or indirectly to the nonresident. But
it must in all cases be remembered that by
section 42, income, profit or gain which
accrues or arises to a non-resident outside
the taxable territories is sought to be
brought within the net of the Income-tax law,
and not income, profit or gain which accrues
or arises or is deemed to accrue or arise
within the taxable territories. Income re-
ceived or deemed to be received, or accruing
or arising or deemed to be accruing or arising
within the taxable teritories in the previous
year is taxable by section 4(1)(a) & (c) of
the Act, whether the person earning is a
resident or non-resident. If the agent of a
non-resident receives that income or is enti-
tled 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 a non-
resident becomes taxable under section 42(1)
if there subsists a connection between the
activity in the taxable territories and the
business of the non-resident, and if through
or from that connection income directly or
indirectly arises."
Whether a relationship would amount to "business connection" as provided in section 163(1)(b) of the Income-tax Act of 1961 for the purpose of giving rise to liability under section 9(1) of the Act would depend upon a set of facts arising in a particular case. The High Court, relying upon the facts stated in the affidavit of Cameron, has found that during the hearing or the appeals before the Appellate Assistant Commissioner, Court had produced certain records to show the manner in which the business had been carried on and the nature of the transactions. The Appellate Assistant Commissioner in his order indicated:-
"The assessee submits that the contracts for
the supply of goods ordered by the Indian
buyers are accepted in the foreign country,
that the property in the goods shipped passes
to the Indian buyers at the port of shipment
in the foreign country, that the payment for
the goods is received by the non-residents in
the foreign country that the sale and pur-
chases are as between principal and principal
and, therefore, cannot be said that the non-
residents have either a business connection in
India or have any income which could be deemed
to accrue or arise in India as attributable to
any operation carried out in India. I may here
touch briefly on that the assessee has pro-
duced no proof of these assertions and, on the
contrary, has blocked enquiry by me therein."
"The assessee is aggrieved that in
the orders under section 143, the Income-tax
Officer assumed ipsi dixit that the sales were
made in India. It submits that while it is
true that the non-residents’ products were
sold to persons in India, that does not con-
clude the question and, on the facts of this
case, the property in the goods sold passed to
the Indian buyers outside India and, there-
fore, the Income-tax Officer’s axiomatic
assumption that there were any sales in India
is incorrect and if there were no sales in
India, there is no income which could be
deemed to accrue or arise in India by invoking
the provisions of section 9 as no operation is
carried out in India." The order of the Appellate Assistant Commissioner shows that Cameron appeared before him at the hearing on 3.9.1965 and 4.9.1965 and the appeals were dismissed by order dated 17.9.1965.
This Court’s judgment in C.I.T.v.R.D. Aggarwal & Co. (supra) was pronounced on 6th of October, 1964. The order of the Appellate Assistant Commissioner makes casual reference to this judgment but the ratio thereof had not been put to use in any manner and the same does not appear to have had any perceptible effect on the decision of the Appellate Assistant Commissioner.
Along with the memoranda of appeal filed before the Tribunal, the assessee filed the affidavit of Cameron. That affidavit is dated 27.12.1965. The Revenue had notice of it and the Tribunal in its decision has stated "along with the grounds of appeal before us, there is an affidavit by Shri Cameron setting out the course of dealing and alleging that several of these representatives files were inspected by the Appellate Assistant Commissioner at the time of hearing of the appeals." The Tribunal however did not dealt with the affidavit by saying:-
"For the purpose of a decision as to whether
the Indian company could be appointed agent
under section 163 by virtue of business con-
nection with the non-resident companies, it is
not necessary to go into the terms of the
affidavit. These facts might have a bearing on
the quantum of the income deemed to arise to
the non-resident companies from the business
connection." The Tribunal obviously fell into an error in brushing aside the affidavit for the reason it indicated. The facts stated in the affidavit had a direct bearing on the point in issue, namely, whether there was any business connection between the assessee and the non-resident companies.
In course of the argument of the matter before the High Court, sumptuous reference was made by the counsel for the Revenue to the affidavit of Cameron. The judgment of the High Court says:-
"Mr Pal (for the department) submits that the
affidavit of Mr. Carol Stuart Cameron, Secre-
tary of the Indian Company affirmed on
27.12.1965 which was filed before the Appel-
late Tribunal contains facts which must be
read in the light of the agreement between the
parties. ?".
This would indicate that there was no objection to the acceptance of the affidavit and use of its content while dealing with the matter and the High Court relied upon the affidavit and stated:-
"In our case, the facts as they appear from
the documents on record and the affidavit of
Mr. Cameron referred to above, which inciden-
tally has not been traversed by the department
are (a) procuring of raw materials and manu-
facture of finished goods took place outside
the taxable territories, (b) contracts for
sale of goods were entered into outside the
taxable territories, (c) price was received by
the non-residents outside the taxable territo-
ries and (d) delivery was also made outside
the taxable territories. Moreover, Cameron in
his affidavit categorically states that the
orders which were sent from India were accept-
ed by the
non residents in London and intimation of such
acceptance was communicated either to the
Indian company or to the Indian customers and
the orders became binding contracts only after
being accepted in this manner. In other words,
the Indian company had no authority to accept
any offers on behalf of any of these non-
residents whether they belonged to Group-A or
Group-B. The department, as we have stated,
has not adduced any evidence to contradict the
facts stated by Cameron either from the course
of dealings between the parties or otherwise."
"The position, therefore, is that in
a case like this there can be no business
connection unless the Indian assessee has the
authority to accept offers or to enter into
contracts on behalf of the non-residents. The
Tribunal has found that in the case of one
company only there was an express prohibition
against acceptance of offers. But in the other
contracts there was no such express prohibi-
tion. The Tribunal has granted relief in the
case of express prohibition but has taken a
different view with regard to those contracts
in which there was no such prohibition. In our
opinion, having regard to the facts stated by
Cameron and the course of dealings between the
parties, absence of express prohibition, in
the instant case, is immaterial. It is true
that the Indian company was the sole agent of
the Group-B companies. But it appears, from
the evidence on record that in spite of being
the sole agent, the Indian company had no
authority given to it by the Group-B companies
to accept offers on their behalf. So far as
Group-A companies are concerned, there was no
privity of contract at all either of agency or
of any other variety. In these premises we
cannot but hold that the Indian assessee had
no business connections with the non-resident
companies belonging either to Group-A or
Group-B within the meaning of section 42 of
the 1922 Act corresponding to section 9 of the
1961 Act." Learned counsel for the appellant was very critical about the manner in which the High Court utilised the affidavit and came to its conclusions regarding the facts in dispute. The criticism is not without force. Ordinarily, the High Court should have declined to use the assertions in the affidavit for the purpose of recording findings of fact and if, at all, in its opinion the affidavit was to be utilised, the matter should have gone before the Tribunal for a fresh disposal of the appeals. The facts of this case are, however, somewhat peculiar. Rule 10 of the Income-Tax (Appellate Tribunal) Rules, 1963 provides:-
"Where a fact which cannot be borne out by or
is contrary to the record is alleged, it shall
be stated clearly and concisely and supported
by a duly sworn affidavit."
It is the stand of the respondent that Cameron’s affidavit came within the ambit of Rule 10 and had, therefore, been filed along with the memoranda of appeals before the Tribunal. We are satisfied that the Revenue had full notice of the affidavit and as pointed out by the High Court, it did not dispute the facts stated in the affidavit by filing objection or counter thereto. The affidavit had not been rejected by the Tribunal but had only been brushed aside by saying that it was not relevant. Before the High Court, counsel for the Revenue also used the affidavit. We do not think it would be appropriate at this stage to accept the submission made at the Bar on behalf of the appellant and put back the matter to the stage of the second appeal before the Tribunal. The assessments relate to a period about a quarter of a century back and by its conduct, the Revenue appears to have waived its fight to dispute the facts asserted in the affidavit on one hand by not challenging its admissibility and on the other, by not disputing the contents thereof. We have been told during the hearing of the appeals that Cameron is now dead. Once the facts stated in the affidavit are accepted, the ratio of the decision of this Court in C. LT. v.R.D. Aggarwal & Co. (supra) would be fully applicable and the High Court has utilised the ratio in that decision to find out whether any business connection between the assessee and the non-resident companies had been established. There is no dispute that unless the matter comes under section 163(1)(a) of the Act, there will be no liability for assessment. In that view of the matter, these appeals have to fail. The appeals are therefore dismissed but without any order for costs. N.P.V. Appeals dismissed.