C.K. Banerji, J.
1. This reference at the instance of the Commissioner of Income-tax, West Bengal-I, Calcutta, under Section 66(1) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act'), relates to the assessment years 1951-52 and 1952-53, for which the relevant previous years ended on the 31st March, 1951, and 31st March, 1952, respectively.
2. The assessee is a company resident in India with its mills in Gwalior. The income that accrued in the former State of Gwalior was entitled to concessional treatment while the income that accrued in Part A and C States (as they were then called) were liable to be taxed at full Indian rates of tax as levied by the Finance Acts.
3. The facts found and/or admitted as appearing in the statement of the case are as follows :
In the assessment for the assessment year 1951-52, originally made on the 14th October, 1955, profits were estimated by the ITO and assessed by him as being Part B State income and at a lower rate.
4. Subsequently, the ITO considered that action under Section 34(1) of the Act was called for and he, therefore, put up a proposal, for the same to the CIT. The relevant portion of the said proposal reads as under :
'Purchases of stores and raw materials were effected in Part A and C States and accordingly the profits accrued in relation to the purchasing operations done in Part A and C States. Such profits are estimated at Rs. 1,00,000 which have come to be included in Part B State income and assessed at a lower rate and, therefore, action under Section 34(1)(b) is called for.'
5. The Commissioner gave the necessary sanction and the ITO issued a notice on 31st March, 1956.
6. From the figures furnished by the assessee in the said reassessment proceedings the ITO found that the assessee had made purchases in Part A and Part C States during the year of a total sum of Rs. 1,11,19,117 on account of cotton, yarn, fibre, coal, diesel oil, machinery and stores. Deducting certain capital purchases, according to the ITO, purchases on revenue account amounted to Rs. 73,74,241 and he, therefore, sought to tax the same at full Indian rates. The assessee objected to the same and contended, inter alia, that the notices under Section 34(1)(b) of the Act were invalid. The ITO rejected the contentions of the assessee and apportioned the profits on the purchases made in Part A and Part C States at Rs. 2,91,402 at 25 per cent. of the total profits estimated by him against such purchases. He also estimated similar profits in respect of Ujjain branch of the assessee at Rs. 14,000 on an ad hoc basis. These amounts were brought to tax at full Indian rates.
7. The assessee appealed to the AAC. The AAC held that the ITO had no case for invoking Section 34(1) of the Act as all the particulars had been furnished earlier at the time of the original assessment. The AAC also dealt with the question of profits attributable to purchase operations by the assessee and held that the assessee did not have a purchasing agency or a depot and that no profits could be said to have accrued in India under Section 42 of the Act. Thus even on the merits, he held that the department had no case.
8. The facts in respect of the assessment year 1952-53 are identical to those relating to the assessment year 1951-52, except that there was no proceeding under Section 34 of the Act. The main question which arose for consideration of the ITO in the course of the assessment for this year was that there were purchases effected in Part A and Part C States. The ITO found that the net purchases utilised for manufacturing cloth came to Rs. 1,28,23,030. He arrived at the profits against such purchases and took 25 per cent. thereof as attributable to the purchases in Part A and Part C States. Thus, he worked out Rs. 8,97,305 as taxable at full Indian rate of tax.
9. The assessee appealed before the AAC and objected to the profits being apportioned to such purchases as were effected in Part A and Part C States and contended that the ITO was not justified in holding that any profit accrued in respect of such purchases. The AAC for the same reasons as recorded by him in his appellate order in respect of the assessment year 1951-52, accepted the said contention of the assessee.
10. The revenue preferred appeals from the orders of the AAC in respect of both the assessment years 1951-52 and 1952-53. Before the Tribunal the contention of the revenue was that the apportionment of profits related to the purchases effected in Part A and Part C States and was justified. For the assessment year 1951-52 it was further contended that the ITO was justified in taking action under Section 34(1) of the Act. In respect of both the said assessment years the Tribunal held that there was no material to suggest that the assessee effected these purchases in circumstances that permitted of an apportionment. There was nothing to show that the purchases were made in India systematically and that 'it was not a mere incidental circumstance, viz., that the assessee having its factory in the midst of the Indian provinces, some of the purchases were effected there also'. There was no agency employed by the assessee for selective purchases. There was also nothing to suggest that the assessee was able to make a higher margin of profits on account of its purchases in India. Accordingly, the Tribunal held that there was no basis for apportionment of the profits ratewise.
11. For the assessment year 1951-52, the Tribunal further held that as all the facts were already before the ITO he was not justified in initiating reassessment proceedings. The Tribunal, therefore, disallowed both the appeals.
12. The two questions for the assessment year 1951-52 and one question for the assessment year 1952-53, as set out hereunder have been framed by the Tribunal:
'1. Whether, on the facts and in the circumstances of the case, the reopening of the assessment under Section 34(1)(b) of the Indian I.T. Act, 1922, is valid ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no justification for apportionment of any profits to the purchases effected in Part A and Part C States :
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no justification for apportionment of any profits to the purchases effected in Part A and Part C States ?'
13. On question No. 1 for the assessment year 1951-52, Mr. B. L. Pal, learned counsel for the revenue, contended that the proceedings under Section 34(1 )(b) of the Act was validly initiated by the ITO and he acted in consequence of information in his possession.
14. Dr. Debi Pal, the learned counsel for the assessee, submitted that the contention of the revenue before the Tribunal was that at the time of the original assessment, the ITO was not aware that purchases had been effected in India and subsequently obtained full information only fronHhe assessee's letters and statement dated 29th October, 1956, and 6th October, 1956, in the course of the subsequent year's assessment was misconceived and was not borne out by the reassessment order.
15. Dr. Pal also relied on the following observations of the Tribunal:
'It appears, therefore, that at the time the assessment was completed, the ITO had been made aware and consequently noticed the fact that some of the purchases had been effected in India also'
16. and contended that this finding of fact by the Tribunal has not been challenged in this reference by the revenue.
17. Mr. B. L. Pal, in reply, contended that even assuming that purchases had been effected in India was known to the ITO, the ITO's mind had been adverted to the legal significance of that fact and that the discovery of this 'legal significance of that fact' later, amounts to 'information' which entitled him to reopen the assessment.
18. Mr. Pal relied on the decision of the Supreme Court in Kalyanji Mavji and Co. v. CIT : 102ITR287(SC) , wherein their Lordships have laid down that Section 34(1)(b) of the Act would apply to cases where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the ITO.
19. Mr. Pal relying on the above, therefore, contended that, due to such oversight, inadvertence or mistake, the ITO in his original assessment applied the concessional rate and, therefore, the matter could be validly reopened under Section 34. This case of oversight or inadvertence or mistake appears to be an after-thought and was not the case of the ITO who made the reassessment order. At no earlier stage, this case was urged on behalf of the revenue.
20. We are, therefore, unable to accept the contentions of Mr. Pal and hold that the reopening of the assessment for the assessment year 1951-52 is not valid.
21. On the second question, common to both the assessment years, Mr. B. L. Pal, drew our attention to Section 42 of the Act and in particular to Sub-sections (1) and (3) thereof which read as under :
'(1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories, or through or from any property in the taxable territories or through or from any asset or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind or through or from the sale, exchange or transfer of a capital asset in the taxable territories, shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax:.....
(3) In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories.'
22. Mr. Pal next cited the decision of the Supreme Court in Anglo-French Textile Co. Ltd. v. CIT (No. 2) : 23ITR101(SC) and relied on the following observations at p. 107 of the report:
'.....it is not every business activity of a manufacturer that comes within the expression 'operation' to which the provisions of Section 42(3) are attracted. These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well-defined business operation. Activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule.'
23. Relying on the above Mr. Pal contended that apportionment was based on legal principles as laid down by the Supreme Court. He submitted that there was no dispute that the assessee purchased cotton and other raw materials in Part A and Part C States systematically and to a considerable extent in both the assessment years 1951-52 and 1952-53.
24. It was clear that the assessee in its business carried on or carried out an 'operation', that is, purchase of raw materials in Part A and Part C States, and, therefore, income or profits or gains which is attributable to that part of the operation of the assessee should be taxed in India.
25. In support of his contentions Mr. Pal strongly relied on the judgment of the Supreme Court in the above case of Anglo-French Textile Ltd. (No. 2) : 23ITR101(SC) . The facts in that case were that the assessee was a foreign company owning a spinning and weaving mills in Pondicherry in French India. The assessee appointed agents who purchased cotton for the said mills. The question was, whether any portion of the purchase attributable to the portion of the cotton purchased in British India could be apportioned under Section 42(3) of the Act. The Supreme Court in its judgment referred to the decision of the House of Lords in Commr. of Taxation v. Kirk  AC 588, wherein it was held that where income was in part derived from the extraction of ore from the soil of New South Wales Colony, and from conversion of the crude ore into a merchantable product in that colony, such income was assessable under the New South Wales Land and Income-tax Assessment Act of 1895, notwithstanding that the finished products were sold exclusively outside the colony. Lord Davey, while delivering the judgment, inter alia, observed as follows:
'There are four processes in the earning or production of this income --(1) the extraction of ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the moneys arising from the sale. AH these processes are necessary stages which terminate in money, and the income is the money resulting, less the expenses attendant on all the stages.'
26. The Supreme Court after noting the above observations of Lord Davey stated as under (p. 107):
'On a parity of reasoning it can well be said in this case that the profits accrue or arise to the appellant from three business processes or operations, those being (1) the purchase of cotton in British India ; (2) its conversion by the process of manufacture in Pondicherry into yarn or cloth; and (3) the sale of the merchantable product, and those have to be apportioned between these three operations.'
27. Mr. Pal next relied on a decision of the East Punjab High Court in the case of Chas J. Webb Sons and Co, Inc. Philadelphia v. CIT . Here an American company carrying on its business in America of manufacturing carpets, purchased through its agent wool in British India as raw materials for use in the manufacture of carpets. Their Lordships of the East Punjab High Court were of the view that purchase of the wool was an 'operation' within the meaning of Section 42(3) of the Act and profits attributable to such purchase was taxable in India.
28. In the case before us there is no such finding that the activities of the assessee were well defined or were not of a casual or isolated character or that the raw materials were purchased systematically or habitually and/or through an agency. On the contrary, admittedly, there was neither any agency nor any agent was appointed by the assessee for purchase of any of the raw materials in Part A and Part C States as found by the Tribunal.
29. Dr. Debi Pal has contended in reply that the Tribunal has found as a fact that there are no materials to suggest that the assessee effected the purchases in the circumstances that permit apportionment; and that there is nothing to show that those purchases were systematically made in India and that they were not mere incidental circumstances of the assessee's business as its factory was in the midst of Indian territory. No agency was employed by the assessee for the purchases and that there was nothing to suggest that the assessee was making a higher margin of profit by reason of such purchases in India. None of these findings have been challenged by the revenue and as such it was not open to the revenue to claim apportionment in the face of such findings.
30. Dr. Pal drew our attention to the observations of the Supreme Courtin the Anglo-French Textile Co.'s case : 23ITR101(SC) as follows:
'Distribution of profits on different business operations or activities ought only to be made for sufficient and cogent reasons and the observations made here are limited to the facts and circumstances of this case. In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature 'operations' within the meaning of that expression. In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place of purchase. Such activity appears to us to be well within the import of the term 'operation' as used in Section 42(3) of the Act. It is not in the nature of an isolated transaction of purchase of raw materials.'
31. Dr. Pal cited another decision of the Supreme Court in CIT v. R. D. Aggarwal and Co. : 56ITR20(SC) and relied on the following observations (p. 24) :
'A business connection in 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 is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a 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.'
32. In the instant case, no 'operations' or activities were carried on or carried out by the assessee in the taxable territories either by itself or through an agent so as to attract the provisions of Section 42(3) of the Act so that there may be any apportionment of any profits attributable to the purchases effected by the assessee in Part A and Part C States.
33. We, therefore, answer question No. 1 for the assessment-year 1951-52 in the negative and in favour of the assessee and question No. 2 for the assessment year 1951-52 and the only question, being question No. 3 for the assessment year 1952-53 in the affirmative and in favour of the assessee. There will be no order as to costs.
Dipak Kumar Sen, J.
34. I agree.