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Commissioner of Income-tax Vs. Blackwood Hodge India Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 40 of 1964
Judge
Reported in[1970]76ITR107(Cal)
ActsIncome Tax Act, 1922 - Section 43
AppellantCommissioner of Income-tax
RespondentBlackwood Hodge India Pvt. Ltd.
Appellant AdvocateBiswarup Gupta and ;Ajoy Mitra, Advs.
Respondent AdvocateD. Pal and ;Murarka, Advs.
Cases ReferredTurner Morrison & Co. Ltd. v. Commissioner of Income
Excerpt:
- .....is the decision of the judicial committee in the case of commissioner of income-tax v. bombay trust corporation ltd. there what had happened was that the bombay trust corporation ltd. was a company having its office in bombay. there was also a company called the hong kong trust corporation, incorporated in hong kong. the said hong kong trust corporation lent money, from time to time, on deposit to the bombay trust corporation ltd. at the rate of 5 3/4 per cent. and the bombay trust corporation ltd. duly paid interest at the rate on the money deposited. the income-tax officer duly served a notice upon the bombay trust corporation ltd. in terms of section 43 of the indian income-tax act, 1922, that he intended to treat them as agents of the hong kong company, and after hearing the.....
Judgment:

Sabyasachi Mukharji, J.

1. The assessee is a resident-company and the present reference arises out of the assessment in respect of the assessment year 1957-58, the relevant previous year being the period from 1st November, 1955, to 31st October, 1956. In 1955, the Indian Industries Fair was held in New Delhi, wherein M/s. Auger & Turner Group Ltd., a non-resident U.K. company, was allotted a space in the fair ground. 5,000 sq. ft. of the space allotted to the U.K. company was let out by them to the assessee-company, for a consideration of Rs. 50,000. This amount was paid by the assessee-company to the UK. company in instalments, Rs. 23,310 being the payment during the relevant previous year for the assessment year 1957-58. The Income-tax Officer treated the assessee-company as the agent in India of the aforesaid U.K. company under Section 43 of the Indian Income-tax Act, 1922, and assessed a net income of Rs. 18,648 in its hands as the income of the non-resident, after deducting an estimated expense of Rs. 4,662.

2. The Appellate Assistant Commissioner, on appeal, set aside the order of the Income-tax Officer. He held that the assessee was not an agent of the non-resident company because the rent which the assessee paid to the nonresident was not received by the latter 'through' the assessee and there was no business connection between the assessee and the non-resident.

3. The revenue preferred an appeal before the Income-tax Appellate Tribunal. It was urged before the Tribunal that the word 'through' used in Section 43, in the facts and circumstances of this case, also meant 'from'. The Tribunal was unable to accept this contention. It was further argued on behalf of the revenue that the assessee had business connection with the non-resident. It was urged that an agreement between the resident company and the non-resident was an agreement between the two traders in their trading capacities and, as such, the amount of rent was paid in 7 instalments covering a period of 15 months. The Tribunal was of the opinion that a casual business cannot be held to establish business connection in terms of the section. Letting out of a property, according to the Tribunal, cannot, in the facts and circumstances of the case, be construed as a business connection between the lessor and the lessee. In these circumstances, the Tribunal was of the opinion that the assessee was not liable to be assessed under the provisions of Section 43 of the Indian Income-tax Act, 1922.

4. On a application being made under Section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to this court:

'Whether, on the facts and circumstances of the case, the Tribunal wasright in holding that the assessee was not an agent of the non-resident company within the meaning of Section 43 of the Indian Income-tax Act, beingnot a person having any business connection with the non-resident orthrough whom a non-resident was in receipt of any income, profits orgains?'

5. Section 43 of the Indian Income-tax Act, 1922 (leaving out the provisos, which are not material for the purpose of the present case), states:

'Any person employed by or on behalf of a person residing out of the taxable territories, or having any business connection with such person, or through whom such person is in the receipt of any income, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act, be deemed to be such agent.'

6. Mr. Biswarup Gupta, learned counsel for the revenue, contended before us that, in order to make a resident liable under Section 43, it would be sufficient either if: (1) the person be an employee of the non-resident, or (2) have business connection, or (3) through whom the non-resident is in receipt of any income, profits or gains, and if any of these conditions are fulfilled after the Income-tax Officer serves a notice under Section 43. In the case of Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, : [1953]23ITR152(SC) , the Supreme Court observed at page 162 (of 23 I.T.R.):

'Section 43, however, refers to a person (a) employed by or on behalf of a non-resident, (b) having any business connection with such non-resident, or (c) through whom such non-resident is in receipt of any income, profits or gains. A person who comes within one or other of these three categories may, under this section, be treated by the Income-tax Officer as agent of the non-resident and such person is for all the purposes of this Act to be deemed to be such agent. The third category refers to a person through whom the non-resident is in receipt of any income, profits or gains. The portion of Section 43, which refers to the person through whom the non-resident is in receipt of any income, profits or gains, does not necessarily attract the provisions of Section 42, for the income, profits or gains received by the person who is treated as agent under Section 43 may not fall within any of the several categories of income, profits or gains referred to in Section 42.'

7. It is, therefore, clear that if any of the three conditions mentioned in Section 43 is fulfilled and the notice has been given by the Income-tax Officer to treat the person as agent, then such a person would be deemed to be the agent of the non-resident. Here it is the admitted position that the assessee is not employed by the non-resident company. The main contention of the learned counsel for the revenue is that the payment of money in this case was through the resident assessee. The expression that really requires decision in this case is whether the rent that was paid by the assessee-company to the nonresident company for the use of its portion of land in the Indian Industries Fair in New Delhi was payment made 'through' the assessee company. The expression 'through' is different from the expression 'from'. If a payment is made directly by a person to another person that is not a payment made through him and that is the generally accepted interpretation of the expression. What is being argued in this case is that the expression 'through' in this case should be construed to mean, in the facts and circumstances of this case, as 'from'. We find that the legislature itself has made a distinction between these two expressions 'through' and 'from' in Section 42, where it has used the language 'all income, profits or gains accruing or arising whether directly or indirectly through or from any business connection'. It is clear, therefore that in Section 42 the expression 'though' was not intended to cover the expression 'from'. The question is, is there any reason to suppose that the legislature intended that the expression 'through' in Section 43 to have an extended meaning We have not been able to find any reason either in the scheme or the language of Section 43 of the Indian Income-tax Act, 1922. Reliance was placed by Mr. Gupta on the decision in the case of Commissioner of Income-tax v. Remington Typewriter Co. (Bombay) Ltd. , where the Judicial Committee was of the opinion that 'any person who comes within the terms of Section 43 is put by that section artificially into the position of agent and assessee under Section 42(1).' The Judicial Committee was also pleased to hold at page 44 that:

'It is not a question whether the Bombay company is in law the agent of the American company. The question is whether the facts of the case are such that the Bombay company can properly be deemed to be such agent, under Section 43. The answer depends upon whether in this case a business connection exists within the meaning of that section. For the reasons appearing above, their Lordships are of opinion that it does.'

8. Their Lordships of the Judicial Committee were not concerned in that case with the construction of the expression 'through' or whether it can he construed as 'from'. The next case relied upon by Mr. Gupta is the decision of the Judicial Committee in the case of Commissioner of Income-tax v. Bombay Trust Corporation Ltd. There what had happened was that the Bombay Trust Corporation Ltd. was a company having its office in Bombay. There was also a company called the Hong Kong Trust Corporation, incorporated in Hong Kong. The said Hong Kong Trust Corporation lent money, from time to time, on deposit to the Bombay Trust Corporation Ltd. at the rate of 5 3/4 per cent. and the Bombay Trust Corporation Ltd. duly paid interest at the rate on the money deposited. The Income-tax Officer duly served a notice upon the Bombay Trust Corporation Ltd. in terms of Section 43 of the Indian Income-tax Act, 1922, that he intended to treat them as agents of the Hong Kong company, and after hearing the Bombay Trust Corporation Ltd. as to the liability, he assessed them to income-tax and super-tax as agents of the Hong Kong company in respect of the amount of interest in the year of charge. There was an appeal to the Commissioner under section 30 of the Act. The Commissioner held in appeal that it was properly assessed and there was a reference to the High Court on the following questions:

'(1) Whether the interest paid by the Bombay Trust Corporation Ltd. to the Hong Kong Trust Corporation Ltd, on loans taken by the Bombay Trust Corporation Ltd. from the Hong Kong Trust Corporation Ltd. is profits or gains accruing or arising to the Hong Kong Trust Corporation Ltd. directly or indirectly through or from any business connection or property in British India ?

(2) Whether such interest is liable to income-tax under the Indian Income-tax Act ?

(3) Whether the Bombay Trust Corporation Ltd. can be treated as the agents of the Hong Kong Trust Corporation Ltd, for the purpose of Section 42 of the Income-tax Act in respect of the interest so paid by the Bombay Trust Corporation Ltd, to the Hong Kong Trust Corporation Ltd. ?

(4) Whether the Bombay Trust Corporation Ltd, can be deemed to be assesses under Section 42 of the Act in respect of any income-tax which might be levied on the interest so paid by the Bombay Trust Corporation Ltd. to the Hong Kong Trust Corporation Ltd. ?

(6) Whether the relation between the Bombay Trust Corporation Ltd. and the Hong Kong Trust Corporation Ltd, was not purely that of a borrower and lender and whether the Bombay Trust Corporation Ltd. as borrower could be deemed to fee the agent of the lender, the Hong Kong Trust Corporation Ltd., under Sections 42 and 43 of the Income-tax Act in respect of interest payable on such loan and in respect of any income-taxthat may be chargeable on such interest ?'

9. The court answered the questions submitted to them as follows:

'(1) Yes, from a business connection, but it also arises directly under Section 4, Sub-section 1, and Section 6(iv) and (vi).

(2) Yes.

(3) and (4). No. because the Bombay company is not in receipt of any such, interest on behalf of the Hong Kong company as required by Section 40.

(5) The relation between the two companies is that of borrower and lender, but having regard to Section 43, the Bombay company, though deemed to be an agent of the Hong Kong company for the purposes of Sections 40 and 42, should not be assessed as they were not in receipt of income.'

10. Thereupon, there was an appeal to the Privy Council and the Judicial Committee was of the opinion that the High Court was 'clearly right in holding that the interest in question was a profit or gain accruing or arising to a person residing out of British India, to wit the Hong Kong company from a business connection in British India, and therefore falling under the words of Section 42.' But the High Court held that the 'term 'agent' was used in the same sense as 'agent' is used in Section 40, i.e., a person who receives the said profits and gains, and as the respondents, the Bombay corporation, did not receive the money, but on the contrary paid it, they answered questions Nos. 3 and 4 in the negative.' The Judicial Committee was unable to accept the said view of the High Court. Their Lordships were pleased to observe that:

'Their Lordships are unable to accept this view, as they feel constrained by the explicit words of Section 43, which being explicit must Rule whatever may be the general considerations as to what the legislature was minded or was likely to do. Taking the words as they stand, the respondents have a business connection with the Hong Kong Company and 'through them' the company is in receipt of profits or gains.'

11. It appears, therefore, their Lordships of the Judicial Committee having come to the conclusion that there was a business connection between the Bombay corporation and the Hong Kong company, held that the receipt of money by the Hong Kong company was receipt of money through the Bombay corporation. Their Lordships were not concerned with the question, where there is a direct payment by one person to another independent of any business connection between the payer and the payee whether that payment could be construed as payment through him, as contemplated by Section 43 of the said Act.

12. Dr. Debi Prasad Pal, appearing for the assessee, drew our attention to a decision of the Rangoon High Court in the case of Commissioner of Income-tax v. P.V.R.M. Visalakshi Achi [1937] 5 I.T.R. 448, where their Lordships had occasion to consider the decision of the Judicial Committee.

13. We are of the opinion that, in the circumstances of this case, it cannot be said that the rent was paid by the assessee-company to the nonresident company was a payment to the non-resident company 'through' the assessee-company.

14. It was next-contended that, in the facts and circumstances of the case, there was business connection between the assessee-company and the nonresident company and, as such, the assessee-company should be deemed to be the agent of the non-resident company. In the aforesaid decision of the Rangoon High Court in Commissioner of Income-tax v. P.V.R.M. Visalakshi Achi it was held that where a non-resident money-lender makes loan to a resident in British India, such loan does not necessarily emanate from a business connection with the borrower. In that case the Rangoon High Court held that the loans were isolated transactions and there was nothing to show that a series of loans were advanced or interest taken by the assessee in the borrower's business was such as to constitute a course of dealing amounting to business connection. In Commissioner of Income-tax v. R.D. Aggarwal & Co., : [1965]56ITR20(SC) , the Supreme Court construed the expression 'business connection' in Section 42 of the Indian Income-tax Act, 1922. The Supreme Court observed as follows at page 24 of the said judgment:

'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, a 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 nonresident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is business connection from 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. A relation to be a 'business connection' must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident.'

15. It may be mentioned here that in the decision of Commissioner of Income-tax v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 I.T.R. 395 (P.C.) advance of 9 loan by a nonresident was held not to constitute business connection. There, what had happened was Currimbhoy Ebrahim & Sons Ltd., a private limited company carrying on business as managing agents of various companies and as dealers in cloth, obtained a loan from the Nizam of Hyderabad and executed a document in Bombay and as security for repayment of the loan, deposited shares in joint stock companies and created an equitable mortgage of immovable properties in British India. The loan was to be repaid in Hyderabad, then an Indian State. The taxing authorities treated the private company as agent in the taxable territories of the Nizam within the meaning of Section 43 of the Indian Income-tax Act and assessed to tax the interest on the loan which the taxing authorities regarded as profit or gain which was deemed to have accrued or arisen to the Nizam through or from a business connection or property in British India within the meaning of Section 42(1) of the Act. The Judicial Committee held that the loan transaction was an isolated transaction. There being nothing to show that the Nizam had at any time interest, direct or indirect, in the respondent-company, there was no business connection in British India within the meaning of Section 42 of the Act between the company and the Nizam and the interest on the loan did not constitute a profit or gain accruing or arising to the Nizam, directly or indirectly, through and from any business connection or property in British India, chargeable to income-tax. The phrase 'business connection.' is different from the word 'business'.

16. In view of the above, in the facts and circumstances of the case, there is nothing to indicate that there was any relation between the trading activity, etc., in the taxable territories of the non-resident company and the trading activities outside as a result of which this rent was paid. Furthermore, some isolated receipts resulting from a solitary transaction between a lessor and a lessee cannot, in our opinion, be termed as business connection. From the facts of the instant case it appears that this was an isolated transaction. There is nothing to show that, as a result of any activity within the taxable territories, any income of the non-resident company has arisen outside the taxable territories. On the authority of the aforesaid decision of the Supreme Court in the case of Commissioner of Income-tax v. R.D. Aggarwal & Co., it is not possible for us, in the facts and circumstances of this case, to hold that in respect of this transaction there was any business connection between the assessee-company and the nonresident company.

17. In that view of the matter, we are of the opinion that the decisionarrived at by the Tribunal was right and the question referred to us must be answered in the affirmative and against the revenue. The Commissioner of Income-tax will pay the costs of this reference.

Deb, J.

18. I agree.


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