S.C. MANCHANDA J. - These are two references under sections 66(1) and 66(4) of the Income-tax Act (hereinafter referred to as the Act).
The question of law which has been referred for the opinion of this court is :
'Whether the purchase of goods (which are not required to undergo any further manufacturing or other process or treatment) by the Indian State branches of a resident assessee from merchants in British India for the purpose of sale thereof (either in Indian States or in British India) can be rightly regarded as one of the operations contemplated by section 42(3) of the Indian Income-tax Act, 1922 ?'
Reference No. 71 relates to assessment year 1944-45 while Reference No. 77 relates to assessment year 1943-44.
The assessee is a Hindu undivided family which was carrying on business of cloth at Ajmer. The assessee opened a branch in Kishangarh in an Indian State on the 23rd of October, 1941. This branch business was carried on in the name and style of Shyam Lal Ram Sarup. The relevant assessment years are 1943-44 and 1944-45, the respective accounting years being the 23rd of October, 1941, to the 8th of November, 1942, and 9th of November, 1942, to 29th of October, 1943. The assessee was a resident of British India, as it then was. The Kishangarh branch was purchasing goods in different parts of India, such as Bombay, Ahmedabad, Karachi, etc. Goods were also purchased from Vinod Mills, Ujjain, and from other mills of Rajputana State. The Kishangarh branch purchased the goods from parties in British India of the total value of Rs. 4,73,699 in the assessment year 1943-44 and Rs. 8,49,796 in the assessment year 1944-45. The total amount of purchases in the assessment year 1943-44 were all sold in the Indian States but in the assessment year 1944-45 out of a total purchase of Rs. 8,49,796 from parties of British India, goods worth Rs. 3,41,900 were sold in British India. Therefore, the net purchases of Rs. 5,07,896 were those which were sold in the Indian State itself.
The assessee claimed that the provisions of section 42(1) read with section 42(3) of the Act had no application to mere purchases made in British India and as such no profit was attributable or could be deemed to arise from such purchasing operations. The Income-tax Officer, in view of the large number of purchasing transactions, held that there was a business connection with the merchants in British India. He further held that the provisions of section 42(3) were attracted and estimated the profit of such operations ar 7 1/2 per cent. gross as deemed profits under section 42(3) of the Act.
The Appellate Assistant Commissioner confirmed the assessments. On further appeal to the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal) it was contended that there was no business connection in British India and, therefore, the provisions of section 42(1) and 42(3) were not applicable. The Tribunal rejected the contention but held that the reasonable rate to be applied should be 5 per cent. instead of 7 1/2 per cent. gross profit applied by the Income-tax Officer. An application was thereupon made for a reference to this court which was acceded to and the question stated hereinabove has been referred for the opinion of this court.
Mr. Sethi, the learned counsel for the assessee, has contended that the mere purchase of goods in British India does not constitute a business operation and no profit can be deemed to arise out of purchasing operation simpliciter. The question that arises has to be decided on the facts and circumstances of the particular case. It is not possible in a case like this to generalise. What has to be seen is whether the purchasing operations are mere stray or casual transactions or they represent a systematic course of purchasing in British India. A stray or an isolated purchasing operation may not amount to a business operation within the meaning of section 42(3) of the Act but if the transactions are spread over the whole year and run into several lakhs, it will be difficult, if not impossible, to resist the conclusion that such purchasing operations do constitute business operations within the meaning of section 42(3) of the Act. The Supreme Court, in the case of Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax, have laid stress on the continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises the profits for the purpose of constituting a business connection. It is also pointed out that it is not every business activity that comes within the expression 'operation' to which the provisions of section 42(3) are attracted. These provisions have no application unless, according to known and accepted business customs and usages, the particular activity is regarded as a well defined business operation. Activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule. Distribution of profits of different business operations or activities can only be made for sufficient and cogent reasons and if the transactions are only few and far between, it cannot ordinarily be said that the isolated acts were in their nature 'operations' within the meaning of that expression.
The question that has been referred appears to assume, on the basis of the finding given by the Tribunal, that there was a business connection within the meaning of the expression in section 42(1) of the Act. The only real question which has been referred is as to whether the purchase operations, which run into lakhs and which are with numerous parties in British India, constitute a business operation. The transactions not being isolated or stray but being spread over a large period and of a repeated nature, they, in our judgment, partake of the character of business operation. Our attention was invited to the decisions of the Orissa High Court in Rahim v. Commissioner of Income-tax and the Lahore High Court in Jiwan Das v. Commissioner of Income-tax. These cases are, however, clearly distinguishable as they are decisions which were given before the enactment of sub-section (3) of section 42 by the Income-tax Amendment Act, 1939.
For these reasons we answer the question referred in the two references in the affirmative and against the assessee with costs which we assess at Rs. 300 (100 ?) in each of the cases. Counsels fee is also assessed at the same figure.
Question answered in the affirmative.