Satyanarayana Rao, J.
1. The following questions wera referred to us by the Appellate Tribunal under Section 66(1), Income-tax Act :
'1. Whether in the ciroumatances of this case, it is correct to hold that profits were received in British India within the meaning of Section 4 (1) (a) of the Act on the ground that some sale proceeds of goodi were received in British India.
2. Whether in the circumstances of this case the applicant company had any business connection in British India within the meaning of Section 42 (1) of the Act.
3. If the answer to question (2) is in the affirmative, whether any profits could reasonably be attributed to purchases of raw materials made by the managing agents in British India which would mean an 'operation' within the meaning of Section 42 (3).'
2. The year of assessment is 1939-40 and the accounting year is the period ending with 31-12-1938. The accounts of the assesses were kept on mercantile basis. The assesses is the Bangalore Wollen and Cotton and Silk Mills Co. Ltd., Bangalore, hereinafter called the 'company' and the managing agents of the company are Messrs. Binny & Co. (Madras) Ltd., hereinafter called the 'agents.'
3. The company was registered under the Mysore Companies Regulation (III  of 1895) and carries on business at Bangalore, in the manufacture of Wollen, Cotton and Silk goods. From the year 1935-36, the company was assessed only on the income derived from interest on Government securities. In the assessment year 1938-39, it was assessed by the Income-tax department on a sum of Rs. 41,878 from Government of India securities both taxed and tax-free. The assessment for the year included also a sum of RS. 1,52,296, the income claimed to have been received in British India by the company, and Rs. 51,099 as income which accrued to the nonresident company outside British India. The dispute relates to the two items of income which were included in the assessable income of the year.
4. The facts on which the assessment was made may now be briefly stated. Messrs. Binny & Co. Ltd., have their head office at Madras. They carry on various businesses at Madras. They were appointed managing agents by the company under an agreement dated 29-5-1920. Under this agreement the agents have to purchase raw cotton, wool, jute, silk and other fibres and all other articles or things required for the purpose or use of the company. They were also empowered to enter into contracts or agreements for the supply of those articles. The agents have to sail and dispose of wollen, cotton and silk and other materials manufactured by the company and for this purpose they were empowered to enter into contracts or agreements for the sale and delivery of the same. The agents have to keep and maintain regular accounts and are authorised to pay and receive moneys owing by or due to the mills and give all receipts and other proper discharges for moneys received by them. For the effectual management, working and carrying on of the business of the company, the agents were also empowered to engage and appoint managers, engineers and other persons required for the proper and effectual management and working of the company. There is also the residuary power of generally managing and conducting the business of the company to the best of their judgment and ability, but subject only to the superintendence, control and direction of the directors of the company. In consideration of the services rendered by the managing agents the agreement provided for the payment of a monthly remuneration of Rs. 3,500 and a commission of 10 per cent. of the net profits of the company in each year. They were also authorised to draw an allowance of Rs. 500 for the calendar month during every half year for which a dividend at the rate of 8 per cent. per annum has been paid by the company. From this short summary of the terms of the managing agency agreement, it is clear that the agents are entrusted with the complete control and management of the company, but subject, however, to such control and direction as the board of directors of the company may from time to time exercise or issue. In pursuance of this agreement, it is common ground that the agents managed the affairs of the company including the purchase of raw materials and sale of the manufactured goods. The sales of the goods were no doubt made in Bangalore city and under the agreement of sales, the price of the goods is payable by the buyer at Bangalore city ; and, when the price of the goods was cleared either by V. P. P., bill of exchange, or by a bank, the bank and post office are the buyers' agents, so far as the buyer is concerned. The managing agents buy raw products like cotton, wool, etc., in British India for the manufacture by the company at Bangalore city. It is also admitted that the agents acted as bankers of the company and that the following transactions were put through in the banking account of the agents : Credits : (a) Bills of exchange are collected by other banks and the proceeds remitted direct to the agents for the credit of the mills' account. (b) Cash remittances received through other banks. Disbursements: (a) Sterling remittances are made in London in payment of machinery, mill stores etc. (b) Cheques are drawn on the agents by the mills in payment for mill stores etc., purchased from Madras merchants and for railway freight paid to the M. S. M. Railway. (c) Bills of exchange drawn on the mills in payment for wool purchased by them in Australia are met by the agents. (d) Insurance premia payable in Madras are paid by the agents.
5. Besides the agents at Madras, Messrs. Grind lay and Co., Ltd., Bombay, also acted as bankers of the mills and the customers bills for the purchase of goods from the mills were received through the agents and Messrs. Grindlay and Co. Ltd., in British India. During the assessment year a large amount of the sale proceeds of the goods of the company was received by the agents in British India and credited in the accounts of the company with the agents who also as stated above acted ae bankers.
6. On these facts, the Income-tax Officer held that the non-resident company is liable to pay income-tax under two heads, (1) on the profits attributable to the sale proceeds received in British India, (2) profits that accrued and arose outside British India to the company by reason of business connection in British India. As the accounts required were not furnished to the Income-tax Officer, he made a computation of the income from business on the best information available from the records. He estimated the total income from business at Rs. 2,04,395 and apportioned this amount between income received in British India by reason of the fact that the sale proceeds of the goods of the company were received in British India within the meaning of Section 4 (1) (a) of the Act and income accruing outside British India which was attributable to the business of the company in British India. He adopted 75 per cent. of the income as income received in British India which amounted to Rs. 1,53,296. The balance of Rs. 51,099 was taken as income which accrued outside British India. From the facts stated above, he inferred that there was business connection of the company in British India within the meaning of Section 42 (1) of the Act and applying Section 42 (3) he arrived at the profits which were reasonably attributable to the operations carried out in British India.
7. The assessee appealed to the Appellate Assistant Commissioner who confirmed the assessment agreeing with the Income tax Officer. The Appellate Tribunal also agreed with the Appellate Assistant Commissioner. The two questions that were raised before the Tribunal were (1) that there wees no business connection of any sort of the company in British India and therefore there was no income which could be deemed to have accrued or arisen whether directly or indirectly in British India within the meaning of Section 42 (1) of the Act, and, therefore, Section 42 (3) had no application ; (2) that there was no receipt of any profits in British India within the meaning of Section 4 (1) (a). The questions referred to us practically cover the same ground.
8. Mr. Subbaraya Aiyar, the learned Advocate for the assessee, strenuously argued that mere purchase of raw material by the agents in British India did not) constitute a business connection within the meaning of Section 42 (1) and that the conclusion of the Income-tax authorities to the contrary was not justified on the facts. In order to elucidate the meaning of the expression 'business connection' the learned counsel on both sides drew our attention to several decisions which have considered the question. A detailed examination of these decisions however does not enable us to arrive at the exact meaning of the expression 'business connection' and define its scope and ambit. It is, however, clear that it is an expression of a very comprehensive nature and not necessarily confined to the definition of 'business' in Section 2 (4) of the Act. This is made clear by the decision of Sir George Rankin in the Privy Council case in Commissioner of Income-tax. Bombay v. Currimbhoy Ebrahim & Sons Ltd' . There, it was pointed out that the words 'business connection' and 'property' were not repetitions of the expressions 'business' and 'property' appearing in Section 6 where the beads of income are described. In view of this decision, the view expressed by the Calcutta High Court in Rogers Pratt Shellac Co. v. Secretary of State : AIR1925Cal34 and of the Rangoon High Court in Commissioner of Income tax, Burma v. Steel Bros. & Co Ltd., 3 Rang. 614 : A.I.R.1926 Rang. 97 , is not correct. In order to constitute a business connection there must be some continuity of relationship between a person in British India who makes profits and the resident who receives them. As observed by Rangnekar J. in Commissioner of Income-tax, Bombay v. National Mutual Life Association, Austrtlasia Ltd., : AIR1933Bom427 :
'The expression business connection' is ft more comprehensive expression as including not only the kinds of things specifically described as being included in the term, but the kind of things which are specifically mentioned in the English Act.' In the Eng ish Finance Act, II  of 1915, in Section 3 the words used are 'through or from any branch, factories, agency, receivership or management'.
I respectfully agree with the learned Judge when be pays at p. 534 :
'All that is necessary is that there should be a 'business' in British India a and 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.'
This was also the view accepted by the Allahabad High Court in Hira Mills Ltd. Cawnpore v. Income-tax Officer, Cawnpore : 14ITR417(All) . A business connection therefore may arise by reason of the existence of a branch of the non-resident company or organisation in British India or by the existence of a factory or even by the existence of an agent. Very often, there may be a subsidiary company in British India, subsidiary to the non-resident company, formed with the object of selling the manufactured goods or wares of the nonresident principal. The business connection may be even a connection arising out of financial relations. The non-resident business and the resident business may be two separate legal entities and they may be closely connected or associated either by reason of some common control or by reason of the non-resident company or firm financing the resident company or firm. The goods of a non-reaident company may be sold by a broker or commission agent residing in British India or the person resident may render various servicen to the non residents or conduct business activities. These are some of the factors which result in a business connection within the meaning of the section. The cases cited at the Bar fall under one or other of the categories enumerated above If there is only one isolated transaction between a nonresident and resident that would not constitute-a business connection (Vide Commissioner of Income-tax, Bombay v. Currimbhoy Ebrakim & Sons Ltd.
9. The cases cited afford some general guidance in deciding the question whether on the facts in a given case, a business connection is or is not established. It is from this point of view that the decisions relied on have to be examined. In Rogers Pyatt Shellac Co. v. Secretary of State : AIR1925Cal34 , the non-resident company which had its head office in New York had branch offices, agencies and factories in Calcutta and other places. It had also a factory in the United Provinces. The raw products were purchased in India and were worked up into a suitable form for export to America from the factory in the United Provinces. The existence of tbe factory and a branch at Calcutta certainly constitute a business connection. The case was decided under Section 83 (1), Income-tax Act, 1918, where also the same expression occurs. In Commissioner of Income-tax Burma v. Messrs Steel Brothers and Co. Ltd., 3 Rang. 614, a company incorporated in England and therefore non-resident in British India carried on various large business undertakings in Burma in connection with rice, timber and cotton. It bad rice mills, saw mills and cotton ginning mills and vegetable oil mills in Burma where the raw materials were worked up into forms suitable for shipping to tbe United Kingdom. It also exported raw commodities from Burma in the form purchased without working them. On these facts the inference is obvious that Section 42 (1) applied. One observation however, should be made with reference to this decision; the allowance of a reasonable commission on the sale as agent's commission to the London office as a reduction from the profits does not seem to be quite correct. In Commissioner of Income-tax, Burma v. H. M. Hajee Oosman 1937-5-I. T. R. 657 the assesses was a resident of Kathiawar outside British India. He carried on business of selling rice in Colombo. He had an agent and an office at Rangoon where rice was purchased for sale at Colombo. By reason of the existence of the office of the agent and the purchase of rice at Rangoon, the profits of the non resident made in Ceylon on the sale of rice purchased in Burma were held assessable under Section 42 (1) of the Act. No doubt, in that case the learned advocate for the assessee conceded business connection but it was observed that no other course was possible to take in view of the facts and it was treated as a clear case of business connection in British India and therefore the assessment was upheld. This case is very helpful in deciding the present case as the facts in the case before us, if any, are stronger and in favour of upholding a business connection. The case in Commissioner of Income-tax v. Metro Goldwyn Mayer India Ltd. : 7ITR176(Bom) , a decision by Sir John Beaumont C. J. and Rangnekar J. arose out of peculiar facts. A non-reeident company which was incorporated in New York entered into an agreement with Metro-Goldwyn Mayer Ltd. who was the aasessee whereunder the exclusive rights in certain motion pictures owned by the non-resident company were transferred to the assessee. The agreement contained various stipulations defining the conditions under which the pictures could be exploited by the assessee. The agreement was construed to be a licence and not a sale and that the relationship brought about by the agreement was connection of business within Section 42 (1) of the Act. Beaumont C. J. in cotisidering the meaning of the expression 'through or from any business connection' observed that it connotes some element of continuity in the relationship between the person in India who makes the profits and the non-resident who receives them and the necessity of the existence of some element of continuity in the relationship between the parties was emphasised. In the case before the learned Judges even though the transaction was a single transaction, as the operations extended over a longer period this element of continuity was held to exist. The case in Commissioner of Income-tax, Bombay Presidency v. Bombay Trust Corporation Ltd. was a case where the relationship was one of financing a resident trust in British India. The entire capital of the Hongkong Company was used to finance the trust and therefore a business relationship existed.
10. Commissioner of Income-tax v. Remington Typewriter Co. Ltd. is an instance of a subsidiary company brought into existence in a very ingenious manner to avoid the tax if possible; but the attempt did not succeed. The case in Commissioner of Income-tax, Bombay, v. National Mutual Association, Australisia Ltd., 57 Bom. 519 : : AIR1938Bom427 is an instance of a branch office in British India. The company was incorporated in Victoria and its head office was at Melbourne. It was an insurance company and made certain profits particularly from income derived from investments in British India. The profits derived from participating policies are profits or gains accruing or arising to the asseesee company directly or indirectly through or from a business connection or property in British India and are liable to tax under Section 42 (1), Income-tax Act. The Privy Council decision in Bank of Chettinad Ltd. v. Commissioner of Income-tax, Madras , was a case where the entire system of banks in and outside British India were controlled by the same people and the Pudukottah Bank was formed to finance the Eanadukathan Bank. The Kanadukatban Bank was in British India. There was a bunk at Pudukottah which bad also a brunch at Kaulalam pur. The Kanadukathan Bank had a branch at Bentong. The Bentong branoh of the Kanadukathan Bank did no money-lending business and the only duty of that bank was to receive hundies from Kaulalampur branch of the Pudukottah bank and to pass them to Rangoon branch after making the necessary entries in the books. The six items of amounts which were in question represented moneys used in the Rangoon business of the Kanadubathan Bank and it was held that the substance of those loans represented moneys lent by Pudukottah bank to Kananukathan Bank. The two banks were controlled by the Raja and members of the family and the main function of the Pudukottah Bank was to finance the Kanadukathan Bank; and the loans advanced to the latter bank represented a large part of the capital of the Pudukottah Bank. This again was an ingenious attempt to make it appear that there was no business connection and to keep the profits of the money lending out of the reach of the income-tax in British India. This circuitous process did not, however, escape from income-tax as there was clearly a business connection as held by the Privy Council. The decision in Commissioner of Income-tax v. Remington Typewriter Co. Ltd., 55 Bom. 243 : A. I. R. 1981 P. C. 42, was referred to and was applied to the facts of that cape. In the Remington Typewriter Co. case , the Bombay Company was formed expressly for the purpose of acquiring from the American company and carrying on American company's business and selling its manufactured goods. There was no doubt no contractual relationship between the Bombay company and the American company which compelled the Bombay company to purchase manufactures of the American company but there was a continuous flow of business between the two companies and the ultimate control of the Bombay company vested in the American company which practically owned all the shares in the Bombay company. From these facts an inference of business connection in British India was drawn.
11. It is unnecessary to refer to other cases but the decision in Hira Mills csae : 14ITR417(All) draws the line as in that case it was held that no business connection was established. The question what constitutes business connection was fully considered in the judgment but as in that case the brokers were ''freelance' 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. Thia 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 on the point. The gooda in that case were no doubt sold in India to customers but notwithstanding thia fact, Section 42 (1) was not applied as there was no business connection.
12. From the facts found in the present case lit is not difficult to infer a business connection of the non-resident company in British India. The raw material was purchased by the agents in British India continuously for several years. The sale proceeds of the manufactured goods were collected by them in British India and were credited in their books to the account of the company as they acted also as bankers. They met all the expenditure from out of the collections in their hands, paid for the purchase, and made also other payments referred to in the managing agent's accounts. They were given absolute discretion with reference to the purchases as to when to buy, where to buy and at what rate. It is a well known fact that Messers. Binny and Co. are very successful managing agents and it is for that reason that they must have been chosen by the company as managing agents. The purchase of goods continuously to meet the requirements of manufacture in the mills required skill and judgment and that is exclusively vested in the managing agents. Practically the entire management of the business was left to the agents and though it is said that they had an office also at Bangalore it is clear that most of the activities connected with the management of the business at Bangalore were carried out in British India. The facts in my opinion clearly establish a business connection in British India and the finding of the Appellate Tribunal is in the circumstances justified.
13. The second contention is that the sale proceeds received by the agents in British India were not received as profits as such at the moment the sale proceeds were received in British India and, therefore, there was no receipt of the profits of the business in British India during the accounting period. This contention is based on the fact that the profits of the business are determined only at the end of the year and the realisations include the circulating capital, the permissible deductions and profits. In other words, according to the assessee at the time of the receipt of the sale proceeds it was a compoaite sum and the receipt contemplated by Section 4 (1) (a) is the receipt of profits as such. At no point of time argued the learned counsel for the assessee, could it be said that the receipt in the present case by the agent of the sale proceeds was a receipt of profit. It is inapt to call the receipt as a receipt of profit. Further, what was received during the accounting period cannot be deemed to be profit until the accounts are taken at the end of the year and the profits ascertained, so ran the argument. There is no warrant for the contention that the receipt of the profits at the moment and at the point of receipt must be profit as such. The aale proceeds undoubtedly included profits if the business of the year ended in profit. What is required under the section is that the profits should be received and if the sale proceeds included profits, the mere fact that along with the profits the circulating capital and other amounts not entering into the profits were received would not make the receipt any the less a receipt of the profit. The answer to this contention is provided by two Privy Council decisions which in my opinion are conclusive on! the point.
14. The first of the cases is Commr. of Income-tax, Bombay Presidency & Aden v. Chunilal B. Mehta . In that case it will be noticed that the proceeds of the purchase and sale in respect of dealings in differences were effected in New York and were received there. The business profits were not ascertained and the contention was raised that the profits of the assessee's foreign transactions are but part of the profits of his Bombay business and must be computed as a whole since all profits and all losses have their effect on the final figure. This in substance, amounts to saying that until the profits are ascertained by the final casting of the accounts there could be no receipt of the profits at the place where the transactions were carried on. This contention was not accepted by the Judicial Committee which, as pointed out, if accepted, would result in the anomalous position of the tax being really levied upon the whole or upon none of the profits of the business according as it is or is not earned out in British India. What the Act is concerned with is the accrual and the arising of the profits and the receipt of such profits. It may be that at the end of the period the business might end in a loss in which case there will be no profits at the moment of the receipt of the sale proceeds; but, if it ended in profits at the moment the sale proceeds were received, they would certainly have included the profits. The mere fact that no separation and identification of the profits took place would not affect the character and the nature of the receipt if the amount included also profits within it. The other case is the decision of the Privy Council in Commr. of Income-tax v. S. L. Mathias . In that case also at the time the sale proceeds of the coffee, after it was dried and cured at Mangalore, was sold and received there was no separation of the profits but yet the Judicial Committee held that the assesses was liable to pay tax in respect of such portion of the price as represented the profits which were received at Mangalore, in British India. It was observed at p. 187,
'but in the High Court It was pointed out that the income was received in British India as the proceeds of all sales were paid to the assesses in Mangalore and so much of the price as represented profit was there received for the first time.'
This position was accepted by the Privy Council and the aesessee was held liable to pay tax in respact of the profits which were received in British India.
15. Reliance was placed on behalf of the assessee upon cases relating to remittances and decisions interpreting agreements or contracts under which profits became payable. These decisions in my opinion bear no analogy to the question now under consideration. In the case of remittances from foreign business, the presumption is that they included profits if the profits of the foreign business exceeded the remittances. But the presumption is a rebuttable presumption and it is always open to the assessee to show that the remittances came out of the capital. No doubt when the remittance leaves the till, it leaves only as money and not as sale proceeds but the presumption comes into play and until rebutted it is assumed that it represents profits. It will be open not only to show that it was in fact remitted out of the capital but that in the year in respect of which the remittances were made no profits in fact had accrued to the business; or, the money may be identified with money which was borrowed and remitted. All these are some of the modes by which the presumption is rebutted but they are not exhaustive. To thess classes of cases, the decisions in In re Govindram Tansukhrai, (1944) L T. R. 450 (ALL.) and Commissioner of Income-tax v. Ramachandra Keshardeo : 16ITR150(Patna) belong. No useful purpose would be served in examining in detail this class of decisions relied on on behalf of the assessee. The other class of cases relates to construction of particular documents under which the time of the accrual of the profits had to be determined. To this type, the decisione in Hiralal Kalyanmal, In re (1913) 11 I. t. r. 128 : : AIR1943Bom98 and Absalom v. Tdllot, (1944) A. C. 204 : 113 L. J. K. B. 369 belong. The facts in the latter case are somewhat peculiar. The assessee in that case was a speculative builder erecting working class houses for sale. The purchaser usually paid a small initial deposit but the greater part of the balance was an advance on the first mortgage by a building society. The assessee advanced the remainder of the purchase price and obtained a second mortgage under which the debt was made repayable with interest by instalments. The assessment to income-tax was made on the basis that the whole of the purchase price including sums receivable under the second mortgage represented the actual value of the property sold. The majority opinion of the House of Lords was that the sums agreed to be paid to the assessee for a period of years should not be assessed for income-tax in the year of the contract as profits earned for that year at the face value of the sum agreed to be paid. There was a difference of opinion even among the majority of the learned Lords as to the mode of valuation of the debts with which we are not now concerned in this case. But the importance of the case is that the value of the debt was not treated at the face value and as representing the purchase price. This decision does not support the contention advanced on behalf of the assessee in the present case. The passage in 17 Halsbury (Lord Hailsham) para. 224, p. 119, which was referred to in the course of the arguments by the assessee's learned advocate does not help the assessee. In that paragraph the general principles as to trade receipts have been enunciated in the following words :
'The general principle is that receipts are trade receipts in the period in which the money becomes due, though it may be that the payment of the money is postponed by the custom of the trade or by contract or otherwise, or even that the amount due is not actually known at the time of delivery of goods or performance ot services. Thus when a continuing contract is made for the manufacture and delivery of goods, the contract price being due on cr after delivery, such price is not a trade receipt at the date of the contract nor when the whole contract is completed but as and when the goods tire delivered. As regards debts due to a trader at the end of any year of period, no allowance is made in arriving at the profits of the period, except to the extent that such debts are bad or doubtful. Thus items may become trade receipts irrespective of actual payment and waiist in practice in some cases, accounts are submitted to and accepted by the revenue authorities on the basis of the cash receipts and expenses of a year or period, such accounts do not necessarily represent the correct legal basis of computation of profit.'
This paragraph, in my opinion, is helpful to the Crown rather than to the assessee.
16. It was also urged that the sale proceeds are in the nature of a debt and that therefore they cannot be treated as a receipt of profit. The argument is founded on the fact that according to the contracts of sale, the goods were deliverable at Bangalore and the price was also payable at that moment at Bangalore. It was not paid immediately but was collected by the agents on subsequent dates. Under the terms of the contracts of sale, the agent is treated as also an agent of the buyer for purposes of receipt of sale proceeds. From these facts, it was argued that the sale must be treated as a credit sale and not a sale for cash; and that, in any event, the receipt of the purchase price by the agent must be attributed to his capacity as agent of the buyer. There is no force in any of these contentions. It is admitted that though the amount was received as agent by the buyer immediately it was credited by the agent as agent of the company in the accounts. There is nothing to substantiate the plea that the sales were sales on credit. No doubt in a sense until the price is paid the amount due by the buyer to the seller is a liability in the nature of a debt; but that would not alter the character of the purchase price when it was actually paid by the buyer to the agent of the sellec. It continues to be a receipt of the sale proceeds notwithstanding that there was a delay in the payment of the amount. As pointed out by the Court of Appeal in Westminster Bank Ltd. v. Riches, (1945) 2 ALL. E. R. 111 : 1945 Ch. 381 in the case of interest payable under a statute it does not lose ita character and its quality as interest because it was awarded as compensation for loss or delay. Nor does its non recurrence exclude it from the words of the taxing Act. It is, therefore, difficult to accept the contention that the unpaid purchase money changed its character into a debt and therefore caaaed to be profits.
17. The sale proceeds received during the Calendar year 1938, a statement of which is appended below, would give an idea of the magnitude of the operations which were carried on in British India by the agents on behalf of the company. They run to several lakha and it is not contended before ua that the business in the accounting year ended in a loss.
18. For these reasons I am of opinion that the queations 1 to 3 referred to ua must be answered in the affirmative and in favour of the Crown. The asseasee must pay the costs of the Income-tax Commissioner which I fix at Rs. 250. 19. Statement showing particulars of monies received by Messrs Binny and Co. (Madras) Ltd., Madras, on the account referred to in the letter dated 13-4-1943.
'For the calendar year 1938 (Ist January 1938 to 31st December 1938) woollen and cotton cloth.
Rs.as.ps.Shipments to Rangoon, Penang, Fiji etc., B/E drawn by Messrs Binny & Co., Madras
4,20,438100Bills drawn through the P. & O. Banking Corporation Ltd., proceeds to Messrs. Binny & Co. (Madras) Ltd., Madras
11,93,40690Sales to the Buckingham and Carnatio Co. Ltd., Madras
4,98,594104Sales to Messrs. Binny & Co. (Madras) Ltd., Madras
2,438113Woollen and cotton cloth428150Stores2,009123Sales to officers of Messrs. Binny & Oo. (Madras) Ltd., Madras, paid by cash, notes and other sundry payments through Messrs. Binny & Co. (Madras) Ltd.
4,593130Payment of our bills to Messrs. Binny & Oo. (Madras) Ltd., Madras, by Messrs. H. A. R Md. & Sons, Madras, for our credit20,29080
20. Viswanatha Sastri J.--The statement of the case exhibits an economy of facts which is embarrassing but for which the Department is not responsible. Beyond the managing agency contract between Messrs. Bmny and Co. and the assessee, a blank indent form and a statement filed before the Appellate Assistant Commissioner giving particulars of certain receipts and disbursements through Maaara. Binny and Co., Madras, nothing has been placed before us. When the Income-tax Officer called for particulars and accounts to enable him to determine the income of the assessee the latter stated in reply as follows :
'As we have no income in British India we are not forwarding the information asked for by you. This company doea not crime under your jurisdiction either under Section 4 (1) (a) or Section 42(3).'
If the contention of the assesses is correct in law no further question arises and the assessment would be bad. If however the contention is unsustainable in law even then no further question would arise, the computation of the assessee's income not raising any question of law.
21. The assessee is the Bangalore Woollen Cotton and Silk Mills Ltd., a public company registered in the Mysore State, and is a nonresident foreigner. The mills where cotton, woollen and silk fabrics are manufactured, by the company are situate in Bangalore. The company does extensive buainees and its goods are sold far and wide in India and abroad, Messrs. Binny and Co. (Madras) Ltd., a well known public company registered and having its office at Madras, is the managing agent of the assessee company under the terms of an agreement dated 29-5-1920, entered into between them at Madras. In my opinion, sufficient attention has not been paid to the terms of the managing agency contrast by the Tribunal. Under the arrangement, Binny and Co., hereinafter called the 'agents' had to buy all raw materials in the shape of cotton, wool, silk, jute and other fibres and all other articles like plant, machinery etc., required by the assessee company hereinafter called 'the milk'. The agents had full discretion with reference to the conduct of the business of the mills. Tbe agents had to sell and dispose of all goods manufactured by the mills and realise the price. The agents had to disburse all monies required for the purchase of raw materials and machinery and plant and the payment of salaries and wages of the establishment of the mills. The agents were empowered to engage and appoint managers, engineers and workmen. The agants were to be paid a monthly remuneration of Rs. 3500 for their services and 10 per cent of the net profits of the mills. It is stated that the agents had an office at Bangalore, The agents are an old, well-established and reputed business organisation in Madras who manage other similar concerns. The directors of the mills exereise some sort of occasional general control.
22. Though the goods are sold and delivered at Bangalore, as stated in the case agreed to by both the parties, the agents collect the price of the goods and keep the realisations with themselves as bankers of the mills. Bills of exchange are collected by other banks and remitted to the agents at Madras and credited by them to the mills. Cash remittances are also received through other banks by the agents at Madras. The agents pay the price of the raw materials and machinery and plant whether purchased in British India or outside. Bills of exchange drawn on the mills for the purchase of raw materials in foreign countries are met by the agents at Madras and cheques are drawn on the agents by the mills for payment of the goods and stores purchased. Insurance premia payable in Madras are also paid by the agents. Messrs Grindlay and Co. Ltd., of Bombay also acb as bankers and collect and realise monies on behalf of the mills, the realisations representing the sale pro-ceeds of goods sold to merchants in British India. As already stated the case has proceeded on the assumption that the goods are manufactured and sold at Bangalore and deliveries are also effected there. There is a clause in the printed blank indent form that the price of the goods sold was payable by the purchasers to the agents of the mills who are also treated for this purpose as the agenta of the purchasers. The Income-tax Officer computed the income of the mills received in British India and a proportionate part of the income of the mills arising out of business connection in British India for the year of the account ending with 31-12-1938. The assessment has been confirmed on appeal and by the Tribunal. The following three questions have been referred to us by the Tribunal :
'1. Whether in the circumatinees of this case it is correct to hold that the profits were received is British India within the meaning of Section 4 (1) (a) of the Act on the ground that some sale proceeds of goods were received in British India ?
2. Whether in the circumstances of this case the applicant company had any business connection in British India within the meaning of Section 42(1) of the Act?
3. If the answer to question 2 is in the affirmative whether any profits could reasonably be attributed to purchases of raw materials made by the managing agents in British India which would mean an operation within the meaning of Section 42 (3) '
23. Dealing with the first question, Mr. Sub-baraya Aiyer, the learned advocate for the assessee, has advanced several reasons why our answer should be in the negative. His main arguments on this head may be summarised as follows : There word only ree.ipts of monies by the agents in British India in the year of account and these sums were no doubt credited to the mills in the accounts of tbe agents who were functioning as tbe backers of the mills. But the sums so received were not received as income, profits or gains and the monies credited to the mills in the year of account did not and could not constitute profits and gains of that year. In order to attract Section 4 (1) (a) cf the Act, monies when received mast be received as profits and gains. The mere receipt of money is nothing. Profits and gains can only be ascerfained if the accounts are finally cast and till that is done, it is impossible to predicate of any or all the receipts for a particular year that they represent the profits or gains of the year. Till that stage is reached, receipts of moneys by a trader or a merchant are merely receipts of the circulating capital of the business and it cannot be postulated that there has been a profit or loss. So ran the argument which was sought to be supported by the citation of a formidable number of cases.
24. The next head of argument is that there was no receipt of profits by the agents but only a realisation of debts due to the mills. I may summarise the arguments on this head in this way. The goods were all sold and delivered at Bangalore. Even if the price was payable at the expiry of a period of credit usually allowed to customers by the mills it became a debt payable to the mills by the buyer on the date of the sale and in the account of the mills, which are kept on a mercantile basis, it is so treated. There is a book entry of the receipt of the price by the mills and a debiting of the amount to the buyer in the books of the mills on the date of sale. There cannot be a second receipt of the same price when the money is subsequently realised by the agents from the buyers. These receipts of money can only be regarded as realisations of debts and outetandings. Here again a considerable body of case law has been cited in support of the contention. Since these two contentions overlap they can be considered together.
25. Before reference is made to the cases cited it is necessary to make a preliminary observation. According to the principles of mercantile accountancy the profits of the mills are ascertained by comparing on the one side the amount representing the total of, (a) the value of the goods or stock on hand at the beginning of an accounting period, (b) the cost of purchases, and (c) the expences of conducting the business or undertaking during the accounting period with the amount representing (i) the value of the stock on hand at the end of the period and (2) the amount realised by eale- of the goods on the other Bide. According to tbia system of accounting an item becomes a trade receipt on the day when it is receivable even though the date of receipt is postponed. Similarly, an item becomes an admissible outgoing of the business on the day on which it becomes a debt due from the business irrespective of the date of ita actual payment. If, for instance, goods are sold by the mills today, the sale price is brought into today's account and will form part of the total sales in the profit and loss account of the mills even though the price may be payable next month. Similarly, if goods have been bought by and for the mills, the purchase price has to be entered in the account the moment the property in the goods has passed to the mills, though payment niay not be made till afterwards and this item will go to form part of the total purchases. Debts remaining due at the end of the period of account should be brought in at their full value unless they are found to be bad or doubtful, This is the general rule though an exception has been recognised in the case of payments spread over a long period of years under a contract about which there has been some difference of opinion between the learned Lords who decided the case of Absalom v. Talbot, (1944) A C. 204 : 113 L. J. K. B. 869. It is further necessary to state that a deduction in respect of future loss anticipated but unascertained by the end of the accounting ptriod is cot allowable for income-tax purposes though it may be a prudent business precaution in the case of a merchant who wishes to ascertain how much of the profits he can spend away on his own purposes. In certain circumstances, sums received in respect of sales can properly be placed to a suspense account in order to meet possible losses on other sales in which event it becomes necessary to identify tbe time when the receipts are to be brought into account : Commissioner of Taxes v. Melbourne Trusts Ltd., 1914 A. C. 1001 :A. I. R. 1914 P. C 230. Lastly it has to be stated that it is the inconre of the 'previous year' that is charged under the Aot, For the purposes of computing profits, each year is a self-contained period of time and the profits of that year alone should be computed for purposes of income-tax, Losses sustained in previous years cannot be deducied in computing the profits of the account year in the absence of a special provision allowing the carrying forward of such losses, Commr. of Income tax, United Provinces of Agra & Oudh v. Basantrai Takhat Singh, 55 ALL. 452: A.I.R. 1938 P. C. 180 and Commr. of Income-tax, C. P. & Berar v. S. M. Chitnavis . No deduction is permissible for tax purposes in respect of a future loss which is unascertained by the end of the accounting period, however prudent it may be for the trader to make provision for such a loss: Whimster & Co. v. Inland Revenue Commissioners, (1926) 12 T. C. 813, Edward's Collins & Sons Ltd. v. Inland Revenue Commissioners, (1924) 12 T. C. 778. The Income-tax authority is entitled to ascertain and assess to tax the profits and gains of the previous year of a trader or a merchant even though he had not cared to cast his accounts and find out whether he had made a profit or loss. The rights of the revenue authority cannot be made to depend on the way the tax-payer's accounts have been prepared nor are they concluded by the character of the book-keeping relating to the business : Edinburgh Life Assurance Co. Ltd, v. Lord Advocate, (1910) A. C 143 : 79 L. J. P. C. 41. Glenboig Union Fireclay Co, Ltd. v. Inland Revenue Commissioners, (1922) 12 T. C. 427 at pp. 447, 461.
26. Judged in tbe light of the above settled principles of income-tax law and mercantile accountancy, I am of the opinion that tbe contention of the mills is untenable. If accepted it leads to very strange and anomalous results. According to the argument a mere receipt of money is not a receipt of profits, becauee the amount received may be merely a capital receipt and may on may not contain a component profit and indeed may carry with it an element cf loss. Unless the accounts are made up at the end of the year and the resulting profit or loss of the year's trade is ascertained you cannot say you have received any profit. Tberefore, a receipt of money daring the course of a year does not mean a receipt of profits. The logical result of accepting this argument would be that there is no profit when you receive money during a year and there can be no receipt of money after the end of the year when you cast the accounts. The truth is that when money is received, it does not wear any label as profit or loss or as circulating capital or otherwise. The circulating capital of a business is represented by such of its assets as form the stock in trade which is bought and sold or bought and manufactured and then sold. The operations by which circulating capital is turned into stock, the stock is sold and the money realised is again utilised, in the purchase of stock for being sold again are compendiously called the turnover of a business. If as a result of the turnover during a period of one year you find something in excess of your circulating capital it is the profit and if there is a deficiency, it is the loss of the business. Every time there is a receipt of money there is embedded in it a profit or loss but the actual amount of the profit or loss for the year is determined at the end of the year by ascertaining the surplus of the receipts from the trade or business over the expenditure necessary for the purpose of earning those receipts. The total amount of profit or loss is quanlified at the end of the year but every receipt of money during the year contributes to the quantum of the profit or loss as finally ascertained. It is erroneous in my opinion to argue that profits are received only after the year's account is made up and not during the year as in fact and in truth they have been received.
27. Reliance has been placed by the learned advocate for the aseessee on cases dealing with foreign remittances. In re Govindram Tansukrai, : 12ITR450(All) and Ramachandra Keshardeo's case : 16ITR150(Patna) , it was hold that the profits of a foreign business in a year could not be determined till the expiration of the year and therefore they could not properly be held to be comprised in the remittances made to India from abroad daring the pendency and in the course of the year. With reference to cash remittances from abroad there is a presumption that a trader trading in a foreign country will not remit his capital which he would require for the conduct of his business but only the profits which he has made from the business. But this is a presumption rebuttable by evidence that there were no profits at all or that the money remitted was identifiable as money to crowed abroad. In the present case we have not to consider the receipt of money whose origin is not known. We have to deal with monies identifiable and identified as the price of goods sold and delivered by the agents of the mills. As soon as the accounts for the year are made up there is no reason why the excess of the receipt over disbursements should not be held to be the profitis of that year received by the agents during the year. Reference has been made to the Pondichery Rly. Co. Ltd. v. Commr. of Income-tax, Madras and to the observations of Kania J. in Hiralal Kalyewmal's case : 11ITR128(Bom) . But these two cares are not in point. The share of the profits due to the railway company in the one case and the commission due to the agent in the other case were payable under contracts and covenants entered into between the parties under which it was only on the ascertainment of the basic profits that the payment to the rail way company or the commission agent had to be made. Consequently, the profits could be said to be received only on the ascertainment of the figures on the basis of which the profits had to be fixed and paid. There is nothing inherent in the nature of the business in the present case that profits must be or can be ascertained only on a particular day or after the lapse of a particular time. The accounts of a trader or merchant can be cast monthly, quarterly, half yearly or yearly as he chooses and his profits can be ascertained for any given period on the lines already indicated.
28. There are observations is the decided cases which also tend to negative the contention of the assessee In Chunilal Mehta's case there is the following passage in the judgment of the Judicial Committee:
''Profits are frequently if not ordinarily regarded as arising from many transactions each of which has a result--not as if the profits need to be disintegrated with difficulty but as if they were an aggregate of the partinular results.'
In Mathias case , the same Tribunal in dealing with a casa where coffee grown in Mysore was sold in British India held that the business operations should not be arbitrarily cut up and that so much of the price as represented profita was received in British India for the first time. In Ahmedbhai Umarbhai & Co. v. Excess Profits Tax Officer, III Circle A. I. R. 1948 Bom. 425 : 50 Bom. l. r. 349 and tbe Hira Mill's case : 14ITR417(All) it was held that profits were realised on the sale of commodities produced or manufactured and were realised at the time when the goods were sold.
29. Reference was made on behalf of the assessee to a series of English decisions in support of the argument that receipts in a mercantile accountancy system include debts receivable by the trader or merchant and that what was done by the agents in the present case was merely the realisation of the debts due from buyers and not a receipt of profits. Though there is nothing to show that all the sales were credit sales still it may be assumed that there might have been credit sales to a considerable extent. It is said that profits must be 'certiorated' before they can be received and realisation of debts is not receipt of profits. In Commissioner of Taxes v. Melbourne Trust Ltd., (1914) A. C. 1001 : A. I. R. 1914 P. C. 230, Lord Ducedin observed :
'As regards the question when a profit is earned their Lordships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary oases this synchronises with the realisation of the sums which swell the assets of the person or company and which entering the account go to bring out the balance which is deemed profit.'
I do not see anything is these observations in favour of the assessee's contention. In Whim ster's case (1925) 12 T. C. the Lord President observed that the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn such profits according to the ordinary principles of commercial accounting and subject to the specific provisions of the Income-tax Act. A trader may prefer to carry his profits forward or put them to reserve rather than consume or divert them. But they are nonetheless profits of the year or accounting period to which the accounts relate and as such assessable to income-tax. Reliance was placed on the following passage in the judgment :
'After all, it is inevitable that profits should be ascertained at intecvals of time more or leas fixed, whether the object is to certiorate the trader of his commercial position or to submit his profits to assessment to a tax.'
In my opinion, this passage is no authority for the position that profits can be said to be received only if and only after an account is taken, though in truth, all the monies have been actually received before the accounts are cast. Whenever the accounts may be made up the receipts contain the profits of the year and the profits are imbedded in the receipts during the year. The case above cited was followed by Rowlatt J., in Glamorgan Coal Co.'s case, (1923) 12 T. C. 1023 . The relevant passage is as follows :
'The way it is looked at and must be looked at, is this, that that sort of expenditure is expenditure on the running of the business as a whole for each year and the income is the income of the business as a whole for tbe year without trying to trace items of expenditure as earning particular Items of profit.'
30. The decision of Rowlatt J., was affirmed by the Court of Appeal and by the House of Lords. These decisions ace only authority for the position that the balance of profits and gains for purposes of income tax is determined independently of the way in whioh the trader uses such balance or may use such balance in future and no deduction is permissible for tax purposes in respect of a future loss which is unascertained by the end of the accounting period, however prudent it may be for the trader to make some provision for such a loss. Unless a loss hag been actually incurred in the amounting period in question or an expenditure has been incurred in that period though not disbursed in cash, it is not a proper deduction in computing the profits for tax purposes. In Doughty v. Commissioner of Taxes, (1927) A. C. 327 : 96 L. J. P. C. 45, there was a realisation sale in connection with the winding up of a business. In such a case receipts mast be considered to be capital receipts and not profits or gains. The position would be different in the case of a running business or if the receipts related to sales of the stock-in-trade of the business even though such sales were effected in the course of winding up. In the latter case the difference between the sale price and the cost of acquisition of the stock would be profits and gains and not capital receipts.
31. It has been fonnd in mercantile practice that cash accounts kept on the basis of actual receipts and expenses may not truly represent the correct profit of a period especially in the case of a continuing business where contracts are made for the manufacture and delivery of goods, the price being due on or after delivery. In such cases the mercantile system of accounting, if properly applied, would reflect the true profits more faithfully than the cash payments. 'Valuation is an art, not an exact science. Mathematical certainty is not demanded, not indeed is it possible.' Gold Coast Sleotion Trust Co. v. Humphrey. (1948) A. C. 459. Therefore, it is that Sections 10 (2) (xi) and (v) and 13 of the Act recognise this mercantile system of accounting as a basis for computation of profits and gains. Where, as in the present case, the accounts are kept according to the mercantile accountancy system, Section 13 of the Act makes such a method of accounting a compulsory basis of computation of gains and profits unless the income cannot properly be deduced therefrom. In such a system of accounting trade debts owing at the relevant account period but then unpaid are included in the computation of profits and per contra bad and doubtful debts are deducted to the extent to which they are estimated to be bad. That trade debts though unpaid may be profits and gains according to the mercantile accountancy system was held in Bamkumar Kedarnath's case : 5ITR261(Bom) . It is not permissible for an assesses to adopt the mercantile basis of accounting for the purpose of his business and insist on a cash basis for arriving at the profits for purposes of assessment to income-tax : Commr. of Income-tax v. Subramaniam Chettiar, 60 Mad. 765 : A.i.r. 1927 Mad. 841 , In Westminster Bank v. Riches, (1945) 2 ALL. E.B. 111, cited by Mr. Rama Rao Sahib, it was held that if a composite sum is decreed by Court and it consists of a principal sum as well as interest awarded by way of damages for wrongful detention of money the interest portion of the decree is severable and taxable as interest. The right of the Crown to levy the tax on interest was held to be unaffected by its being merged with the principal in a single judgment debt and thereby lost its identity. This case, however, has no direct bearing on tbe present point. But for the reasons already stated, I hold that there was a receipt of profits in British India by the assesses within the meaning of Section 4 (1) (a) of the Act, and I answer the first question referred to us in the affirmative.
32. The second question presents some difficulty caused in the main by the vague and wide language employed by Section 42 (1) of the Act. The faets bearing on this question have already been stated. The words 'business connection' in Section 42 (1) of the Act are different from and wider and more extensive than, though not unrelated to, the word 'business' which is defined in Section 2 (4) of the Act. The mere fact that there is an isolated transaction between the parties without any course of dealings such as might fairly be described as a 'business connection' does not attract Section 42 (1). To constitute a business connection, there must be some continuity of relationship between the person in British India wbo helps to make the profits and the person who receives or realises them. See Commr. of Income tax, Bombay v. Currimbhoy Ibrahim & Sons Ltd. on appeal from 57 Bom. 651 : : 1ITR341(Bom) . Commr. of Income-tax, Bombay v. National Mutual Association of Australasia, 57 Bom. 519 : : AIR1933Bom427 , Metro Goldwyn Mayer Co.'s case, : AIR1939Bom257 . There are three requisites for Section 42 (1) to come into play. There must be a business in British India, a connection with that business and the accrual of profits and gains through or from that connection. This analysis, however, pushes back the problem only by one stage. There is no definition of the words 'business connection' and the legislature has deliberately chosen words of wide though uncertain import (See Hira Mills' case : 14ITR417(All) . It is difficult to extract from the language of Section 42 or from the decisions a comprehensive principle which would serve as a guide for all cases. One can only take the particular facts and circumstances and decide whether the case falls within the words of Section 42 (1) or outside them. Different types of cases have arisen which have attracted the operation of Section 42. Some of the earlier decisions of the High Courts in India took the view that the mere carrying on of a business in British India made the resulting profits and gains liable to tax wherever they accrue or arise, but the Privy Council in Chunilal Mehta's case definitely rejected that view and held that the place where the profits or gains accrued was the test of liability to tax even in the case of residents. Sections 4, 4-A and 4-B of the Act have since been amended so as to make residents liable to tax in respect of profits and gains accruing or arising outside British India and to bring within the category of 'residents' several persons who otherwise would have been nonresidents.
33. The decided cases all of which have been cited to us may be very briefly grouped and noticed. Where a non-resident enters into a financing arrangement with a lesident in British India, and on the facts of the contractual arrangements profits in the ehape of interest accrue to the non-resident but not in British India, euch profits were deemed to accrue or arise in British India (Bombay Trust Corporation case . This case is now expressly provided for by Section 42 (1) of the Act. Where there is no contractual relationship between the non-resident and the resident but owing to the close connection between such persons the non-resident is able to control the operations of the resident and to direct the flow of business in such a manner as to produce to the resident no profits, or less than the normal or ordinary profits, the nonresident is directly absorbing the bulk of the profits, these profits are also deemed to ariee OB accrue to the non-resident in British India (Remington Typewriter Co. case , Bank of Chettinad case . Where the 'business connection' does not exist in the shape of any dealings in British India but is apparent from dealings outside British India between a non-resident and a resident company both of which are substantially controlled by the same persons as share-holdera the non-resident's profits have been held to fall under Section 42 (1) and taxable here. (Bank of Chettinad case . Where the transaction between a non-resident and a resident is disguised as an out and out sale but in reality it is in the nature of a continuing licence to the resident to exploit for profit an asset belonging to the non-resident there is a business connection between them, the profits arising out of which could be deemed to accrue to the non-resident; Metro Goldwyn Mayer's case A. I. R. 1939 Bom. 267 : 183 I. C. 540. Where the non-resident has a branch or agency in British India which buys and exports commodities which are sold abroad for profits or where the agents or branch in British India collects monies here as insurance premia and remits them to a foreign principal who invests them abroad and receives interest there is a business connection as a result of which profits arise though outside British India. Such profits are deemed to arise and accrue here and are taxed under Section 42: Rogers Pratt Shellac Cos.' case , Steel Brothers' case, 3 Bang, 614 : A. I. R. 1926 Bang 97, Haji Mohammad Haji Oosman's case (1937) 5 I. T. R. 657 , National Mutual Association of Australisia case, 57 Bom 619 : : AIR1933Bom427 and Nandalal Bhandari Mills Ltd., Cawnpore v. Commr. of Income-tax, C. P. & U. P : AIR1939All593 . A business connection may exist even without any regular agency or branch established in British India. In other words 'business connection' is not equivalent to carrying on a business in British India but is of wider import: See National Mutual Associaiton of Australasia case, 57 Bom. 519 : : AIR1933Bom427 , Hira Mills Ltd. case : 14ITR417(All) ; Currimbhoy's case . The observations to the contrary in Rogers Pratt Shellac Cos.' case : AIR1925Cal34 and Steel Brothers' case, 8 Bang. 614 : A. I. R. 1926 Rang. 97 no longer hold good. This does not mean that every non-resident manufacturer who sells goods outright to a consignee in British India is liable to tax under Section 42 (1) when the consignments are irregular or casual or made to various persons without any regular establishment or agency: Hira Mill's case : 14ITR417(All) .
34. In the present case the assesses is a nonresident. The company is registered in Mysore, the mills are situated and the goods are also manufactured there. Contracts for sale of the manufactured goods are alao entered into in the State. The agents of the mills are a reputed and well-established company registered and having their offices in Madras. The agents buy all the raw materials, machinery and plant and other requirements of the mills from places all over India and outside India and pay for these purchases from Madras. The sales of the manufactured goods are effected only by the agents and the entire price is realised and kept by the agents who also make all disbursements connected with the business. The agents are experienced managers of cotton mills and they are given powers of widest description under the managing agency contract. In these circumstances I find it difficult to say that the finding of the Appellate Tribunal that the aesessee, a non-resident, had a business connection in British India and the income, profits and gains, apportioned under Section 42 (3) are assessable to Indian income-tax is erroneous. I answer the second question referred to ue in the affirmative.
35. The answer to the third question is also in the affirmative. Prices fluctuate in the cotton, woollen and silk markets. The raw produce also differs considerably in quality and in its adaptability to different types of goods. Considerable experience and skilful judgment are necessary if suitable raw materials at favourable market rates are to be selected and purchased, and this is what the agents are doing from Madras. Having regard to the volume and regularity of the purchases made by the agents from Madras it is reasonable to attribute a portion of the profits to the purchase of raw materials by the agents in British India. Such selection and large scale purchase would be an 'operation' within the meaning of Section 42 (3) of the Act. I agree with my learned brother's direction regarding the costs of this reference.