MAHAJAN J. - This order will dispose of Income-tax References Nos. 11 and 13 of 1958. These reference have been made under section 66(1) of the Income-tax Act by the Income-tax Appellate Tribunal, Delhi Bench. In both these references, the following questions of law have been stated for our opinion :
'1. Whether on the facts and in the circumstances of this case the notice dated March 29, 1954, issued under section 22 read with section 34 of the Indian Income-tax Act was validly served on the assessee ?
2. Whether the relationship between the assessee and the nonresident fell within the meaning of the expression business connection as used in section 42(1) of the Indian Income-tax Act ?
3. If the answer to the second question is in the affIrmative whether on the facts and in the circumstances of this case any profits or gains accrued or arose or could be deemed to have accrued or arisen to the non-resident on account of the business connection of the non-resident with the assessee during the previous year under consideration ?'
The facts giving rise to these references are not in dispute, and are similar except with this difference that in Income-tax Reference No. 11 of 1958, the non-resident is a Belgium firm (Comptoirs Laininers Osterieth S. A. Anvers), whereas in Income-tax Reference No. 13 of 1958 it is an Italian firm (Filaturae Tessitura Di Tollegno Biella). The alleged agent who is sought to be taxed under section 42(1) of the Act for the income which has accrued to these non-resident firms from their business connection in India is the same, namely R.D. Aggarwal & Co., Bazar Ghanta Ghar, Amritsar. This firm is constituted of two partners, Dev Raj Aggarwal and Shiv Narain Aggarwal with equal shares. The only connection this partnership has with the non-resident companies is that they canvass orders for them and forward the same to them for compliance. The option to comply with them is solely with the non-resident companies. Any order that is complied with entitles the partnership firm to a commission carrying from 1 1/2 per cent. to 2 1/2 per cent. There is no appointment of the partnership firm as their agents by the non-resident companies. These non-resident companies carry on the business of exporting worsted woollen yarn to the taxable territories i.e. India. The dispute does not relate to the income, which the assessee firm has earned on account of the commission received from the non-resident companies. It is the profit made by the non-resident companies that is sought to be taxed and for that purpose a notice was issued under section 34 of the Act by the Income-tax Officer to the partnership firm R.D. Aggarwal & Co. The notice is in these terms :
'Whereas I have reason to believe that your income assessable to income-tax in the year ending March 31,1953, has escaped assessment, I hereby require you to deliver to me not later than May 4, 1954 or within 35 days of the receipt of the notice a return in the attached form of you total income and total world income assessable for the said year ending March 31,1953. This notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax Simla'.
This notice was served through Bhagat Ram, Process server. How the service was effected has been set out below. This I have taken from the statement of the case :
'The process servers report on the back of the copy of the notice returned to the Income-tax Officer reads as follows :
It is submitted that on inquiry I came to know that the different members of the family have different opinions. One says something, another says another thing. From this I conclude that they are evading service of the notice.
It appears that the process server returned the notice to the Income-tax Officer and thereafter the Income-tax Officer ordered as follows :
I authorise Shri Bhagat Ram to affix notice under section 34 for 1952-53 in the cases of Ms R.D. Aggarwal Agent of Comptoirs Lainiers Osterieth S.A. Anvers (Belgium).
(Sd.) G. R. Bahmani I. T. O., C-Ward, Amritsar. March 31,1954.
The subsequent report of the same date made by the said process server reads as follows :
It is submitted that according to the order one notice under sectaion 34 has been affixed on the shop. Hence this report. (Sd.) Bhagat Ram, Process server. March 31,1954.
Affixed in my presence.
(Sd.) Chaudhary Charan Singh. (Sd.) Sant Lal Chug, I. T. I. March 31,1954.
Statement of Bhagat Ram process server.
It is submitted that a copy of the notice under section 34 has been affixed on the shop in the presence of Inspector Shri Sant Ram Chug. At that time, Illaqa Chaudhary was also present'.
The Income-tax Officer examined the Inspector and the Illaqa Chaudhary and Bhagat Ram, process server. Even though the Illaqa Chaudhary denied any knowledge of the affixation the Income-tax Officer believed the factum of the affixation of the notice by the process server in the presence of the Inspector and the Illaqa Chaudhary, particularly in view of the attestation of the Illaqa Chaudhary made on the report of the process server. It appears from the record that Bhagat Ram, process server, was again examined at the instance of the assessee on January 5,1955 and he stated that the notice was affixed on the office premises of the assessee and not at any other place.
The contentions raised by R. D. Aggarwal and Company before the Tribunal were :
'1. The notice dated March 29,1954 has not been legally served and hence the proceedings initiated under section 34 are null and void.
2. That the assessee is not an agent of the non-resident and there is no business connection between the non-resident and the assessee within the meaning of that expression as used in section 42(1) of the Indian Income-tax Act. It was contended by the assessee that the agreement of agency was entered into between the non-resident and the assessee on March 24, 1951 and as part of the order solicited by the assessee were solicited and nor did they have any business connection with the non-resident.
That in any case no profits could be deemed to have accrued or arisen to the assessee in respect of the operation of soliciting orders during the previous year under consideration inasmuch as the canvassing and the acceptance of the order took place 'before the year under consideration and the assessee cannot be made liable for any profit that accrued or arose of deemed to have accrued or arisen to the non-resident in respect of those transactions in the previous year under consideration.
4. That in any case, the non-resident did not make any profit in the transactions of sale of worsted woollen yarn made in the taxable territories inasmuch as the sales were made at a loss.'
The Tribunal in agreement with the Department held :
'1. That the service of the notice was proper :
2. that the relationship between the assessee and the non-resident was that of a principal and agent and that such relationship fell within the meaning of the expression business connection in section 42 of the Indian Income-tax Act :
3. That profits accrued or arose to the non-resident at the time when delivery of the goods took place and the payments were admittedly received in the previous year under consideration and therefore the profits attributable to the operation of canvassing and acceptance of the order must be deemed to have accrued or arisen to the non-resident in the previous year under consideration : and
4. That there was no material to hold that the sales were effected at a loss and that the non-resident did actually make profits and that the profits attributable to the operations carried on by the non-resident through the agency of the assessee be estimated at 2 per cent. of the sales.'
On an application by Messrs R. D. Aggarwal & Co., the Tribunal under section 66(1) of the Income-tax Act has stated three questions of law already set out in the earlier part of this opinion.
So far as the first question is concerned the learned counsel for the assessee did not press it. Its answer therefore must be returned in the affirmative.
As we are of the view that the answer to the second question must be returned in the negative, the third question does not arise for our consideration.
The reasons why the answer to the second question must be returned in the negative may now be stated.
In order to fasten liability on the non-resident companies or their alleged agent there has to be a 'business connection' in the taxable territories (Indian) out of which the income sought to be taxed has accrued or arisen. What is the meaning and scope of the expression 'business connection' has been the Subject-matter of numerous decisions. It has been repeatedly held that this expression cannot be precisely defined, and the Legislature, in the words of Sir Iqbal Ahmed C.J., in Hira Mills Ltd. v. Income-tax Officer, Cawnpore 'has apparently deliberately chosen to uses words of wide, if uncertain, meaning. ' Reference may also be made to the observations made by the Nagpur High Court in Jethabhai Javeribhai v. Commissioner of Income-tax which are in these terms :
'The expression business connection is of very wide import. The Legislature has refrained from giving a precise definition of the words, business connection. In the absence of a definition by the Legislature itself, it is not possible to lay down any principle of universal application as to what is covered by the words business connection. The decisions of the Privy Council only serve to illustrate whether an inference of business connection ought to be drawn or not according to the particular facts of the case under consideration. Thus where as in the Bombay Trust Corporation case or the remington Typewriter Companys case or the Bank of Chettinad case the resident and the non-resident work in close convert with a view to producing profit it is difficult to draw inference. Where however as in Currimbhoy Ebrahims case the non-resident has no interest direct or indirect in the resident company and there is only a single transaction between the non-resident company and there is only a single transaction between the non-resident and the resident resulting in gain to the former without any further evidence of course of dealing between the parties the inference of business connection cannot be drawn.'
In this case the decision in Hira Mills case was referred to without any adverse comment. In Commissioner of Income-tax v. National Mutual Life Association of Australasia Mr. Justice Rangnekar tried to explain the meaning of the term 'business connection' and observed as under :
'All that is necessary is that there should be a business in British Indian and a connection between a non-resident person or company and that business, and that the non-resident person or company has earned an income through such connection.'
No useful purpose will be served in examining the cases cited before us for each one of those case turns on its own facts and they have been examined by the Allahabad High Court in Hira Mills case by the Madras High Court in Bangalore Woollen Cotton and Silk Mills Co. Ltd. v. Commissioner of Income-tax and by the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax. So far as the present cases are concerned they seem to be almost identical on facts with Hira Mills case and in our view the observations in that case apply with full force to the present case before us. It is for that reason that I have taken the liberty to quote in extenso from that decision. At page 430 of the report, while dealing with that case, the following observations occur :
'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 in the limited sense that a substantial part of the assessees output found its way into consumption in British Indian. 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 India 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 Indian. 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 facts that the assessee may have paid the brokers a commission and certain out of pocket expenses, if and 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 derive the profits or gains on those transactions 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 Indian 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.'
These observations fully apply to the facts of the present cases, as I have already said. Here also the alleged agent is nothing more than a free lance broker. He has not been appointed by the non-resident companies. He is not bound to canvass business for them. Whatever orders he canvasses are at his sweet will and if those orders are ultimately carried out the non-resident companies give him a certain amount of commission, which varies from 1 1/2per cent. to 2 1/2 per cent. As a matter of fact, the entire sale transaction is completed outside the taxable territories is the canvassing by the alleged assessee agent for the good of the non-resident companies. Such a connection which is of a very loose nature and has no firm basis cannot in our opinion be held to be 'business connection' within the meaning of section 42(1) of the Act.
Mr. Awasthy strongly relied on the following observations of the Supreme Court in Anglo-French Textile Co.s case at page 108 :
'... but when there is a 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, such relationship does constitute a business connection.'
In the first instance, these observations must be taken to be with reference to the peculiar facts of that case and have no general application. It would be of interest to note that after the aforesaid observations, their Lordships of the Supreme Court made a particular reference to the facts of that case and what follows clearly explains the meaning and the scope of the aforesaid observations. What follows may now be set out :
'In this case there was a regular agency established in British India for the purchase of the entire raw materials required for the manufacture abroad and the agent was chosen by reason of his skill reputation and experience in the line of trade. The terms of the agency stated in the earlier part of this judgment fully established that Messrs. Best and Co. Ltd. were carrying on something almost akin to the business of a managing agency in India of the foreign company and the latter certainly had a connection with this agency.'
It will also be of interest to note that Hira Mills case has also stood the test of time and its correctness has not been doubted so far. As a matter of fact the Madras High Court in Bangalore Woollen Cotton and Silk Mills case at page 437 of the report observed as under :
It is unnecessary to refer to other cases but the decision in Hira Mills case draws the line as in that case it was held that no business connection was fully considered in the judgment but as in that case the brokers were free-lance brokers who were not bound to canvass the business on behalf of the mills and were not subject to the control of the mills, the existence of a business connection was not established. This decision is very instructive, if I may say so with respect, as it throws considerable light and gives guidance to determine whether there is or is not a business connection and reviews the earlier decisions customers but, notwithstanding this fact, section 42(1) was not applied as there was no business connection.'
That being so, the answer to the first question must be returned in the affirmative, to the second question, as I have already said, in the negative, and in view of our answer to the second question, the third question does not arise for our opinion.
The references are answered accordingly.
The assessee will be entitled to the costs, which are assessed at Rs. 200 in each reference.
KHOSLA, C.J. - I agree.
References answered accordingly.