1. The questions revised on this reference founder section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee relate to the assessments for the assessment years 1954-55, 1957-58 and 1958-59 made on the assessee under section 43 as the agent of a foreign entity known as M/s. Veerenigde Erstshandel Maatschappij N. V. ( hereinafter referred to as VEM) carrying on business in Holland. VEM, which arrived on its business in Holland, required iron and manganese ore, which it imported from India. It made its purchase direct from the Indian exporters. Its experience of its dealings with the Indian exporters was not very satisfactory inasmuch as it found that the goods imported were always not according to the specifications and the orders were either not executed or executed too late. In May, 1952, VEM, therefore, arrived at an arrangement with the assessee under which the assessee undertook to study and advise VEM on the possibility of acquisition of iron and manganese ore mines in India and to supervise the execution of contracts concluded by VEM with the Indian exporters of ores as to quantity, quality, time of delivery and transport until f.o.b. steamer. This arrangement was to continue for a year from the beginning of 1st of July, 1952, and VEM was to pay the assessee Pounds 112-10-0 per month by way of reimbursement of costs incurred by them on the exportation for acquisition of ore mines in India and a special remuneration to be mutually agreed upon between the parties from time to time on the basis of tonnage actually shipped and paid for, with regard to its advice and supervision of the contracts already entered into or to be entered into by VEM with the Indian exporters. Although the arrangement was for one year, it continued subsequently in respect of the advice to be given by the assessee to V. E. M. about the contract for the supply of ores already concluded and to be concluded thereafter and for the correct execution of those contracts, and remuneration was paid by VEM to the assessee in the assessment years with which we are concerned in the present case. In carrying on its transactions for the import of iron and manganese ore VEM directly placed orders with certain Indian exporters. The orders specified the quantity and quality of the goods, and the price payable at the specified rate on f.o.b. basis. On delivery of the goods on board the ship, on getting clean bills of lading, provisional invoice and the relevant analysis artifact as regards the quality of the materials, the Indian exporters could negotiate the documents in India as against letters of credit opened by VEM and obtain 95% of the f.o.b. value of the ores as advance. The goods were generally consigned to self by the Indian shippers but they were endorsed at the time the documents were negotiated, as aforestated in favour of VEM. The balance of the payment was to be made after the goods had reached their destination, had been weighed and assayed and accepted by VEM who had option to reject the goods if they were not according to the orders. After VEM who had option to reject the goods if they were not according to the orders. After VEM was satisfied about the quality and quantity of the goods, final invoices in accordance with the contract terms were made and the balance of the price was paid over to the Indian shippers. The freight and the insurance were paid by VEM. The assessee used to receive copies of the orders placed by VEM and it supervised the correct execution of the contracts as to the quantity, quality, time of delivery and transport until the goods reached the steamer. The assessee also reported to VEM regarding the financial stability of the local suppliers. On these facts the Income-tax Officer took the view that VEM had taxable income under section 42 of the Indian Income-tax Act and the assessee could be deeded to be its agent under section 43 of the Indian Income-tax Act. He accordingly proceeded to take necessary action and served a notice under section 43 on 20th March, 1957, and a notice under section 22 on the 25th March, 1957, in respect of the assessment year 1954-55. Similarly, in respect of the assessment years 1957-58 and 1958-59, he served notices under section 22 on 16th October, 1957, and 2nd August, 1958, respectively and notices under section 43 on the 29th September, 1959, in respect of both the years. It may be mentioned that the notices under section 43 and section 22 in respect of the first year, viz., assessment year 1954-55, were 'as read with section 34'. In the assessment proceedings he held that the assessee could be treated agent of VEM and the income of the latter under section 42 could be taxed in the hands of the assessee. According to the Income-tax Officer, in respect of the procurement of the ore from India in the course of its business activity it had a business connection in Indian and profits or gains apportionable to the purchasing activity in India could be said to have arisen or accrued to VEM from the said business connection. The V. E. M.'s business connection in India was with the assessee and consequently in respect of the income, profits and gains which could be deemed to have accrued or arisen from the said business connection under section 42 could be assessed fin the hands of the assessee as the agent of VEM under section 43. The Income-tax Officer accordingly estimated the total profits of VEM on the goods imported from India at 10% of their export price and the profit apportionable to the business connection in India which pertained to the procurement in India as 1/4 thereof. The Income-tax Officer's order was confirmed in appeal by the Appellate Assistant Commissioner. In further appeal to the Tribunal it was contended that there was no business connection of VEM with the assessee and moreover no part of the profit of VEM could be deemed to have arisen or accrued by reason of any such business connection. Consequently, the assessee could not be treated as the agent of VEM under section 43 nor could VEM be said to have any income accruing or arising to it under section 42. It was also argued that the proceedings instituted were invalid and defective for want of proper compliance with the provisions of the Act. It was urged that the proceedings for the first assessment year were barred by time and for the subsequent two years they were vitiated inasmuch as the notices under section 43, which had to be issued in the first instance before notices under section 22 were issued, were issued subsequently. The Tribunal rejected all the contentions. It held that the connection of VEM with the assessee was a business connection and that a part of the profit pertaining to the procurement of ore from the Indian exporters could be deemed to have arisen or accrued to VEM through such business connection. VEM, therefore, had taxable income under section 42 which could be assessed in the hands of the assessee as its agent under section 43. It also held that the notices for the assessment year 1954-55 were issued within the time within which assessment was possible with the aid of section 34 and as to the other two years the opportunity required to be given to the assessee under section 43 was duly given before any assessment order was made against it and consequently there was no such non-compliance with the provisions as would result in vitiating the assessment for the said two years. The Tribunal accordingly confirmed the orders passed by the departmental authorities and dismissed the appeals.
2. The assessee made an application to the Tribunal under section 66(1) seeking to raise six questions. The Tribunal found that one of the mix questions, viz., question No. 1, which was asked for by the assessee, did not arise out of its order. As to the remaining questions, the Tribunal found that they arose on its order. It accordingly consolidated the said five questions into four question reaffirmed by it and referred them to this court. They are as follows :
1. Whether, having regard to the curse of transactions between the assessee, VEM and the Indian shippers as given above, VEM was liable to tax under section 42
2. It the answer to question No. 1 is in the affirmative, whether having regard to the memorandum dated 23-5-1952 and the services rendered by the assessee, the assessee was liable to be treated as an agent under section 43 of VEM, the non-resident, and if so, to what extent
3. Whether the issue and service of notice under section 43, after the relevant notice under section 22(2) were served, invalidation the assessee meats for 1957-58 and 1958-59
4. Whether the assessment for 1954-55 is invalid because the assessee was given an opportunity to place the objection to the application of section 43 after the notice under section 22(2) read with section 43 was served on the assessee ?'
The question, which was refused by the Tribunal, was in these terms :
'Whether the assessment upon the applicant as an agent of the non-resident, VEM, for the assessment year 1954-55 is barred by limitation and otherwise valid in law ?'
3. The Tribunal's reason for refusing the question was that the contention that the assessment for the said year was barred by limitation was neither raised before the Tribunal nor before the departmental authorities and could not, therefore, be said to be arising out of its order. The assessee has taken out a notice of motion asking this court to require the Tribunal to draw up a supplementary statement of the case referring the said question also to this court, on the ground that the question asked for was merely an aspect of the question agitated before the Tribunal. The notice of motion, however, does not survive in view of certain subsequent events. Having regard to the view expressed by the Tribunal that the question was not raised before the Tribunal or the departmental authorities, of the assessee applied to the Income-tax Officer for a rectification of the error apparent on the face of the record on the ground that on the decision of the Bombay High Court in Miscellaneous Application No. 327 of 1957, which was decided on the 1st April, 1958, the assessment for the assessment year 1954-55 was clearly barred by limitation. It was urged that the decision of the Bombay High Court disclosed an error apparent on the fact of the record of the order made by the Income-tax Officer and the assessee was, therefore, entitled to ask for the rectification thereof under section 154 of the Income-tax Act, 1961. Although the said application was rejected by the Income-tax Officer and the decision was confirmed in appeal by the Appellate Assistant Commissioner, the Tribunal upheld the contention of the assessee as by the time the matter came before the Tribunal, the Bombay High Court's decision had even been confirmed in appeal by the Supreme court in S. S. Gadgil v. Lal and Co. The Tribunal accordingly allowed the appeal of the assessee and directed the Income-tax Officer to ratify the order accordingly. Against the said decision of the Tribunal the department has asked for a reference under section 66(1) and the same has been also granted by the Tribunal, and the said matter, which is Income-tax Reference No. 102 of 1968, has also come before this court. The question raised on the said reference is 'whether, on the facts and in the circumstances of the case, it was competent to the Income-tax Officer to ratify under section 154 of the Income-tax Act, 1961, the original assessment order dated 31st March, 1959 ?'
4. Mr. Mehta for the assessee has, therefore, stated that in view of the matter raised on the said question having been dealt with under the rectification application and consequently having been the subject-matter of the other reference, the notice of notion would not survive. In view of these facts, the notice of motion must be dismissed. We order accordingly.
5. Coming now to the first two questions, which may conveniently be considered together, the main questions to be considered are whether the connection, which the assessee had with VEM, constituted a business connection of VEM so as to enable the Income-tax Officer to regard the assessee as the deemed agent of VEM for the purpose of section 43 assessment and whether through such business connection as VEM may be having with the assessee, could any part of the profits or gains of VEM in its trading activity be deemed to have arise or accrued to VEM It is the contention of Mr. Mehta that it may be that VEM had some connection with the assessee. It may also be that the nature of the connection may be commercial connection in the sense that it may have something to do with the commercial activity of VEM. That, however, would not constitute it a business connection unless the connection was with the business activity as such of VEM. Mr. Mehta's contention is that the connection of the assessee with VEM only concerned with the rendering of some services by the assessee to VEM which were not directly concerned with any part of its business activity in India, which was the purchase of ore for its business. So far as the purchases were concerned, the orders were placed directly with the Indian exporters and the orders were executed by them and goods delivered on board the ship as per their contracts. Neither were the orders placed through the assessee nor were the goods supplied as per the orders, collected by the assessee and forwarded to a VEM. The assessee's services, though related to the activity of purchase, did not as a matter of fact form any part of the said activity. The expression 'business connection', says the learned advocate, postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories : the relation between the two contributing to the earning of income by the nonresident in his trading activity, and that no part of services rendered by the assessee in the present case contributed to the earning of income by the non-resident in its trading activity.
6. Now, the expression 'business connection' has not been defied in the Indian Income-tax Act although the word 'business' is defied as including any trade, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The expression 'business connection', as has been often said, has a wide though uncertain meaning. It admits of no precise definition and the solution of the question depends upon the facts and circumstances of each case. In a recent case of the Supreme court in Commissioner of Income-tax v. R. D. Aggarwal and Co. the broad characteristics of the concept of business connection as contemplated by section 42 of the Indian Income-tax Act have been enumerated. It is observed :
'Business connection contemplated by section 42 involves a relation between a business carried on by a non-resident 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 predicates an element of continuity between the business of the non-resident and the activity in the taxable territories, as stray or isolated transaction not being normally 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 between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In such cases the question whether there is business connection firm or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. The expression 'business connection' postulates a resale and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity.'
7. It would thus be seen that in order to constitute a 'business connection' as contemplated by section 42, there just be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity. In that case, the non-resident was an exporter of goods to be sold in the Indian market. The assessee canvassed orders from the dealers in Amritsar for the supply of goods and communicated them to certain non-resident exporters. The assessee had no authority to accept the orders on behalf of the non-resident. The orders were accepted by the non-residents, price was received by them and delivery was also given, outside the taxable territories. For the services of canvassing orders rendered by the assessee, he was paid a certain amount of commission on the sales. Applying the principles, which were relevant for the purpose of determining the question as to whether a business connection existed or not, the Supreme Court held that, on the fats of the case, there was no business connection. In coming to the said conclusion, it was points doubt that the business activity of the non-resident consisted of selling its goods and the entire activity took place took place outside the taxable territories; price was received and the delivery of the goods was given also outside the taxable territories. There was no operation such as procuring raw materials or manufacture of finished goods, nor did the sale or delivery of the goods against price take place within the taxable territories. Undoubtedly there was some commercial activity carried on by the assessee relating to this trading activity of the non-resident but it considered merely of canvassing of orders and nothing more. The assessee had no authority to book orders as such or to accept them on behalf of the non-resident. The assessee's activity merely facilitated the making of offers by the merchants in the taxable territories to purchase goods manufactured by the non-resident. If the said offers were accepted by the non-resident, business would resulted But if they were not accepted, no business resulted from the activity. All though, therefore, there was some commercial activity on the part of the assessee, non-resident, it had not a real and intimate connection with the trading activity of the non-resident.
8. Mr. Mehta has relied strongly on this case and has argued that the present case before us falls in the line so this case. He has pointed out that in the present case before us also no direct part was taken by the assessee in the purchase of the raw materials by the non-resident in the taxable territories. The contracts for the supply of raw materials were entered into directly between the non-resident and the Indian exporters, the goods were shipped by the exporters and the price was also paid direct to the exporters. Just as in the case before the Supreme Court, the assessee had merely canvassed for orders and forwarded them to the non-resident and had thus merely rendered some service in connection with the trading activity without the service being actually connected with any part of the trading activity as such, the assessee in the present case also has performed only certain services relating to the purchases effected directly by the non-resident with the Indian exporters. In our opinion, the facts of the case before the Supreme Court are clearly distinguishable from the facts before us and we do not thing that we can agree with Mr. Mehta's submission that the case before us falls in the line of the said case.
9. In the first place, in the case before the Supreme Court, the business activity of the non-resident, which consisted of the sale of this goods, took place solely outside the taxable territories. The business activity of the non-resident if the case before us consisted in part of the procurement of the iron ore from the taxable territories and, consequently, a substantial part of the business activity of the non-resident took place in the taxable territories. It is with this substantial part of the business activity that the connection with the assessee was established by the non-resident. It has been admitted by the assessee in a note submitted by it to the Income-tax Officer that the reason why VEM entered into an arrangement with the assessee was because its experience of the Indian exporters was not satisfactory and it had found that there was not a proper performance on the part of the Indian exporters of the contrast entered into by them for the supply of ore. Thus, the quality of goods shipped was not according to the specifications of the goods ordered and the goods were sometimes not shipped or shipped too late. this conduct on the part of the Indian exporters was involving VEM in considerable loss and, in order to avoid the said loss and fin order to be assured of a regular and proper supply of the ore, they had established the present connection with the assessee requiring them in the first place, to advice them on the capability and reliability of the suppliers to supply the goods and further to supervise every contract entered into by VEM with the exporter right up to the time the goods were put on board the ship. The supervision which was required to be exercised by the assessee with regard to the execution of the contracts related to their satisfying themselves that orders were being properly executed as to quality, quantity, time of delivery and transport of the goods on board. It will thus be seen that the activity of the assessee and is connection with the business activity of the non-resident did not merely consist of advising the non-resident as to the advisability of centering into contract with certain Indian exporters, it went much further and concerned itself with the activity of procuring raw material itself. The assessee's part corresponded to an organisation set up by the non-resident in the taxable territories for the purpose of ensuring a regular and proper supply of the raw materials. Although the contracts for the supply of ore were entered into directly with the exporters and proceed was also paid to them directly, due and proper performance of the contracts, which was an important part of the activity of the procurement of the raw material, was entrusted to the assessee. The part played by the assessee in the activity of procurement of raw material was a real and intimate part, which was contributing to the improvement of the profits of the non-resident and preventing its losses. The non-resident, for the purpose of its business activity, was very much interested in procuring ore from Indian exporters in a steady, regular and proper manner. Its experience with the Indian exporters was not satisfactory and in the interest of its business it was anxious to see that the difficulties in the way of a proper procurement of the raw material were removed. It, therefore, got into an arrangement whereby the said result could be achieved. In our opinion, therefore, the case before us is not similar to the case before the Supreme Court on which Mr. Mehta relied. On the other had, having regard to principles which are laid down in the said case for the purpose of determining whether a business connection exists or not, we are of the opinion that the answer to the question in the present case must be in the affirmative.
10. Another case to which Mr. Mehta has invited our attention is the case in Hira Mills Ltd. v. Income-tax Officer, Cawnpore. In that case non-resident sold his goods in the taxable territories through an agent appointed by him. He also sold goods through other brokers, who were not in his employment but merely canvassed orders for him. They had, however, no authority to book orders or to accept them on behalf of the non-resident. The orders canvassed by the brokers were sent to the non-resident, who either accepted or rejected them. It was held in that case that, in respect of the sales for which the orders were canvassed by the brokers, the assessee could not be said to be having a business connection such as is contemplated by section 42. In our opinion, the facts of this case are similar to the facts in the Supreme Court case and, as we have already pointed out earlier, very much different from the facts of the case before us.
11. Mr. Mehta has then invited our attention to a case of the Nagpur High Court reported as Jethabhai Javeribhai v. Commissioner of Income-tax. In that case a non-resident purchased in Baroda State, tobacco for a resident of British Indian for the Latter's bidi business and the non-resident was paid by the resident a commissioner at certain percentage of the total value of the goods purchased by him. It was contended that the commission paid by the resident to the non-resident on the goods purchased by him constituted taxable income of the non-resident under section 42 by reasons of the business connection in British India. It was held that the commission paid to the non-resident had reference solely to the purchases made outside British India and was in no way affected by the business done in British India and the commission earned by the non-resident did not accrue or arise to him through or from a business connection in British India within the meaning of section 42 of the Income-tax Act. In our opinion, this case is entirely of a different kind from the one before us. In that case the income, which was the commission earned by the non-resident, did not arise out of any activity within British India but out of the activity, which was solely performed outside the taxable territories. There was no activity in British India which had contributed to the earning of the said income. The learned judges observed as follows :
'There is no warrant for holding that purchase and supply of raw material to a resident manufacturer by a non-resident would render the commission earned by the latter liable to tax under section 42(1) in the absence of anything to show that there was any course of dealing between the resident and the non-resident or that the commission earned by the non-resident was made to depend on business done in British India. The commissioner paid to the non-resident had reference solely to the purchases made outside British India and was in no way affected by the business done in British India. The principle is clear that something more than mere rendering of services out of British India for remuneration to a resident businessman is necessary to establish a business connection within the meaning of that expression in section 42(1).'
12. In our opinion, on the fats of the case before us, there was business connection of the non-resident with the assessee in the taxable territories and a part of the income, profits and gains could be deemed to have accrued or arisen to the non-resident through the said business connection in the taxable territories. According to him the assessee's connection extended to the whole of the said purchase activity, and consequently the entire amount of 25% of the total profits estimated by him could be said to be taxable income under section 42.
13. The next question then is as to be liable to be taxed under section 42. Income-tax Officer has estimated the business profits of the non-resident at 10 per cent. of the value of the goods exported by the Indian exporters, and he has estimated 25 per cent. of the said profits as attributable to purchasing activity in connection with the procurement of raw material in the taxable territories. According to him the assessee's connection extended to the whole of the said purchase activity, and consequently the entire amount of 25% of the total profits estimated by him could be said to be taxable income under section 42 of the Act.
14. Mr. Mehta has complained that the apportionment of 25 per cent. of the profits to the purchasing activity is improper and unreasonable. According to him, 10 per cent. at the most could be apportioned to the said activity and he has in that connection invited our attention to a cases reported as Annamalais Timber Trust and Co. v. Commissioner of Income-tax. Secondly, he says that the entire purchase activity could not be said to have been completed on the goods going on board the ship but only when the goods reached the destination and were weighed band assed and found to be satisfactory by the non-resident and accepted by it. The entire activity of purchases, therefore, could not be said to have been arrived on in the taxable territories and the whole part of the profit attributable to the purchasing activity could not be said to have arisen as a result of the business connection in the taxable territories. We are not impressed by the said submission of Mr. Mehta. 25 per cent, no doubt, is some guess-work done by the Income-tax Officer, but substituting it by 10 per cent. again would be nothing more than including in further guess-work. There is no material before us which would show the total extent of the business activity of the non-resident. We do not know whether its business activity consisted of merely purchasing of ore in markets; whether its business activity consisted of merely purchasing of ore in markets; whether it could profitable purchase and sell it in other markets, where it could be sold at a profit, or whether the ore procured by it from the taxable territories was for the purpose of manufacture of goods and the manufacture and the sale of the finished goods were also parts of tits business activity. We also do not know the entire extent of the business of the non-resident. If the assessee had supplied proper material before the income-tax authorities on the basis of which a more definite and certain apportionment could have been made, the position would have been different. On the material, as it stands, we cannot say that the Income-tax Officer has erred in making his calculations.
15. Coming then to the third (sic) question, the only argument urged before the Tribunal was that in respect of the assessment for the assessment year 1954-55, although the notice under section 43 was issued on the 20th March, 1957, and a notice under section 22 was issued five days later on the 25th March, 1957, no opportunity had been given to the assessee to show cause why he should not be assessed as an agent under section 43 before the notice under section 22 was issued to him.
16. Now, the factual position is that a notice under section 43, which was issued on the 20th March, 1957, informed the assessee of the intention of the Income-tax Officer to treat him as an agent of VEM for the assessment year 1954-55 and gave him an opportunity to show cause against it if he so hose at 11 o'clock on the 25th March, 1957. On the said day, it appears, the assessee asked for time to show cause, but his request was refused and the notice under section 22 was issued. It cannot, therefore, be said that no opportunity was given to the assessee to show cause as required under the law. The assessee had not availed of the opportunity which was given to him and wanted some further opportunity, which the Income-tax Officer had declined to provide. That, however, did not mean that there was a non-compliance with the provisions of section 43. It was also sought to be argued before the Tribunal that, at any rate, it was not only necessary to give an opportunity to the assessee, but it was further necessary for the Income-tax Officer to come to a decision and serve the said decision on the assessee before a notice under section 22 could be issued to him. The Tribunal had rejected the said argument in view of the decision of the Privy Council in Commissioner of Income-tax v. Nawal Kishore Kharanti Lal, and Mr. Mehta has not repeated it before us in the present reference. In our opinion, therefore, the third question also must be answered against the assessee.
17. We then come to last (sic) question. The facts necessary to be noticed in connection with the said question are that in respect of the assessment year 1957-58 the notice under section 22 was issued on the 16th October, 1957, and the notice under section 43 was issued subsequently on the 29th September, 1959, and for the subsequent year 1958-59 the notice under section 22 was issued on the 2nd August, 1958, and the notice under section 43 was issued on the 29th September, 1959. Now, what is argued on behalf of the assessee is that it is necessary for a valid assessment under section 43 that a notice under section 43 must precede a notice under section 22. It is argued that on the language of section 43 it is only on the service of notice intimating the assessee of the intention to treat him as the agent of the non-resident that he could be deemed to be such an agent. In other words, unless the notice is served, the person could not be deemed to be an agent under section 43 and unless he could be deemed to be an agent, no proceeding can be initiated for making an assessment on him. It is, therefore, argued that the service of a notice under section 43 is a condition irritant to the initiation of an assessment proceeding against an agent under section 43 of the Indian Income-tax Act.
18. We do not think that the contention raised by Mr. Mehta is sustainable. Having regard to the scheme of sections 42 and 43, if the requirements of section 42 are satisfied, a deemed income accrues or arises to the non-resident in the taxable territories and becomes taxable under the Indian Income-tax Act. Section 43 is a section for facilitating the assessment of such deemed income by making it assessable in the hands of a deemed agent. A deemed agent of the non-resident is a person, who has such relation with the non-resident as is specified in the section, namely, that he must be employed by or on behalf of the non-resident or he must have a business connection with him or the non-resident must be in receipt of income, profits or gains through him. If there be a person, who stands in the specified relationship with the non-resident, the section empowers the Income-tax Officer, if he so chooses, the assessee him in respect of the deemed income of the non-resident under section 42 by intimating him of his intention to do so and after giving him an opportunity to show cause to dispute his liability. His liability to be assessed arises by reason of his relationship with the non-resident and the notice and the opportunity to be given to him are the procedural steps to be taken before the liability is enforced by making as assessment on him. They are not the foundation of his liability and are only intended to provide a safeguard to him by allowing him to dispute his liability before it is enforced against him. In the present case the notice under section 22 has admittedly been issued to the assessee within time. This notice itself was addressed to him as the agent of the non-resident. The notice, therefore, apprised the assessee of his intention to treat him as the agent of the non-resident. It, however, did not comply with the further requirement of section 43, viz., that it did not afford him an opportunity to show cause why he should not be so assessed. That opportunity, however, was given to him by the subsequent notices and it was only after the said opportunity was given to him that the assessment was made on the assessee. Both the procedural steps required to be taken under section 43 are, therefore, complied with in the present case. It may be pointed out that the section does not provide that the notice of the intention of the Income-tax Officer to treat the person as a deemed agent of the non-resident has to be given in a special form and independently or prior to the notice under section 22 so that it can be argued that the requirement as to notice cannot be treated as complied with by the notice under section 22 issued in the present case. Nor is there anything in the section which requires that the opportunity to show cause must be given at the very initial stage and unless the said opportunity is given the assessment proceedings against the person cannot even be initiated. The contention of the assessee, therefore, that the assessment is invalid by reason of the proper procedure under section 43 not having been followed by the Income-tax Officer cannot be sustained. Moreover, the irregularity pointed out by the assessee is at best a procedural irregularity which, on the fats of the case, has caused no prejudice to the assessee. It may also be pointed out that no grievance as to this procedural irregularity had been made by the assessee bore the Income-tax Officer. For all these reasons, we are of the opinion that the Tribunal was right in taking the view that the assessments for the assessment years 1957-58 and 1958-59 were not invalidated, as contended by the assessee.
19. In the result, therefore, our answer to the questions arising on Income-tax Reference No. 67 of 1962 are as follows :
Question No. 1 in the affirmative.
Question No. 2 : first part, in the affirmative, and the second part, to the extent found by the Income-tax officer.
Question Nos. 3 and 4 in the negative.
We then come to the companion Reference No. 102 of 1968 relating to the correctness of the rectification of the assessment order for the assessment year 1954-55 under section 154 of the Indian Income-tax Act.
We have already mentioned the facts relating to the said question which is as follows :
'Whether, on the facts and in the circumstances of the case, it was competent to the Income-tax Officer to rectify under section 154 of the Income-tax Act, 1961, the original assessment order date 31st March, 1959 ?'
20. The Income-tax Officer and the Appellate Assistant Commissioner have both held that it was not competent to the Income-tax Officer to do so and rejected the application of the assessee. The Tribunal, on the other hand, held that there was clearly an error apparent on the face of the record and the Income-tax Officer was competent to entertain the application of the assessee and to right the said order as prayed for by the assessee. It accordingly allowed the appeal, set aside the orders passed by the departmental authorities and directed the Income-tax Officer to rectify the assessment order and pass the necessary consequential order. On the said decision of the Tribunal the Commissioner asked for a reference and the present reference has been made under section 66(1) at the instance of the Commissioner.
21. Now, it is not disputed that on merits the assessment order in respect of the assessment year 1954-55 was clearly illegal and invalid and without jurisdiction. It is also not disputed that on the decision of the Bombay High Court in Miscellaneous Application No. 327 of 1957 decided on the 1st April, 1958, and the subsequent Supreme court decision in S. S. Gadgil v. Lal & Co. confirming the said decision of this court, there was an error apparent on the case of the record of the assessment order for the assessment year 1954-55. What was, however, contended was that in the first place the Income-tax Officer's order, which was sought to be ratified having been record in the appellate order of the Appellate Assistant commissioner and of the Income-tax Appellate Tribunal, the Income-tax Officer was not competent to rectify the same. Secondly, it was urged that the Income-tax Officer's jurisdiction under section 154 of the Income-tax Act, 1961, only extends to the amendment of the order and not to the cancellation thereof. The rectification claimed by the assessee in the present case wanted the order to be annulled as begin invalid. It is not within the power of the Income-tax Officer under section 154 to rectify the order by channeling the order itself. Both these contentions have been negatives by the Tribunal and in our opinion rightly.
22. As to the merger, the Income-tax Officer's order, which has merged in the order of the Appellate Assistant Commissioner and the Tribunal is only to the extent to which is was taken in appeals before the said authorities. In view of the observations of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd., which are reproduced in the order of the Appellate Tribunal, Mr. Joshi, learned counsel for the revenue, has fairly conceded that he will not be able to rely strongly on the merger argument and has consequently not seriously pressed the said point before us. On the other point, however, he has urged that section 154 having spoken merely of an amendment of the order, the scope of the jurisdiction of the Income-tax Officer under the said section is limited and cannot extend to the cancellation of the whole order.
23. We are not prepared to agree with the said submission. The power intended to be given under section 154 is to rectify an error apparent on the fact of the record. Amendment of the order is the consequence of the rectification and its purpose is to give effect to the rectification. If the rectification involves an amendment, which will affect the whole of the order, it cannot be said that simply because of the use of the word 'amend', which normally may not mean the cancellation of the whole order, the Income-tax Officer should be powerless to rectify the mistake or error which is apparent on the face of the order. The word 'amend' with reference to legal documents means correct an error and the expression 'amend the order' would mean correct the error in the order. Under section 154 power to rectify the error is to be exercised by correcting the error in the order and the correction must, therefore, extend to the elimination of the error. What the effect of the elimination of the error will be on the original order will depend upon each case. It may be that the elimination of the error may affect only a part of the order. It may also be that the error may be such as may go to the root of the order and its elimination may result in the whole order falling to the ground. In our opinion the Income-tax Officer will be able to amend or correct the order to the extent to which the correction is necessary for rectification of the error an such correction may extend either to the whole of the order or only to part of it. In our opinion, therefore, the Tribunal was right in the view that it has taken and the question raised on the reference must consequently be answered against the department.
24. Our answer accordingly to the said question is in the affirmative.
25. The assessee will pay the costs of the Commissioner in Income-tax Reference No. 67 of 1962 and the Commissioner will pay the costs of the assessee in Income-tax Reference No. 102 of 1968. There will be no order as to costs on the notice of motion.