Case Note & Summary
The Supreme Court of India decided a reference arising from income tax assessments made on a private limited company engaged in marine engineering and ship repair. The company, resident and ordinarily resident in India, had its entire share capital beneficially owned by two British non-resident shipping companies, P. & O. Steam Navigation Co. Ltd. and British Indian Steam Navigation Co. Ltd., whose business was plying ships for hire. Under an agreement with those companies, the resident company repaired their ships at cost, charging no profits. The Income-tax Officer treated the arrangement as one where the close connection between the companies resulted in no profits to the resident company, and accordingly invoked Section 42(2) of the Indian Income-tax Act, 1922 to assess deemed profits of Rs. 6,80,000 for the account year 1943-1944, Rs. 4,67,559 for 1944-1945, and Rs. 4,68,963 for 1945-1946. Orders of assessment were made for income tax for 1944-1945 and 1945-1946 and for excess profits tax for 1943-1944, 1944-1945 and 1945-1946. The Appellate Assistant Commissioner confirmed the assessments, but the Income-tax Appellate Tribunal, after a division of opinion and a hearing before its President, held Section 42(2) inapplicable and set aside the orders. On a reference at the instance of the Department, the Bombay High Court held that Section 42(2) applied and the company was liable. The company appealed to the Supreme Court by special leave. Before the Supreme Court, the appellant advanced two main contentions. First, it argued that Section 42(2) imposed a charge only on a business carried on by a non-resident, and therefore no tax could be imposed on its business as a resident. Second, it contended that the condition that the non-resident must carry on business with the resident was not satisfied because the non-resident companies had merely got their ships repaired and had not carried on any business with the appellant. The Revenue maintained that the plain language of Section 42(2) targeted the resident's business and that the special repair arrangement at cost, coupled with the close financial connection, fell squarely within the provision. The Supreme Court rejected the appellant's contentions. It held that Section 42(2) is in two parts: the first part sets out the conditions, while the second part imposes the charge on 'the profits derived therefrom or which may reasonably be deemed to have been derived therefrom'. The word 'therefrom' refers only to the business of the resident, so the business subject to tax under the section is that of the resident and not the non-resident. The Court observed that the language of the enactment was too plain to admit doubt. On the second issue, the Court held that a person can be said to carry on business with another if the dealings between them form concerted and organised activities of a business character. In this case, the non-resident companies got their ships repaired by the appellant not as they might by any other repairer but under a special agreement that repairs should be done at cost. This arrangement constituted carrying on business with the appellant within the meaning of Section 42(2), even though the non-resident companies derived no profits from the dealings. The Court relied on Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax and Commissioners of Inland Revenue v. Incorporated Council of Law Reporting. Accordingly, the Supreme Court dismissed the appeal and upheld the applicability of Section 42(2) to the appellant, affirming its liability to income tax and excess profits tax on the deemed profits.
Headnote
A) Income Tax - Charge under Section 42(2) - Resident's Business Taxable - Indian Income-tax Act, 1922 (11 of 1922), Section 42(2) - The Supreme Court interpreted the charging provision as targeting the business of the resident person, not the non-resident; the expression "derived therefrom" refers to the business of the resident. The Court rejected the appellant's argument that the section imposed tax only on a non-resident's business, holding that the language of the provision was plain and unambiguous. Held that the resident company's business was the subject matter of taxation under the section. B) Income Tax - "Carries on Business With" - Meaning and Scope - Indian Income-tax Act, 1922 (11 of 1922), Section 42(2) - A person carries on business with another if the dealings between them form concerted and organised activities of a business character. The non-resident companies' getting their ships repaired by the resident appellant under a special agreement that repairs be done at cost, rather than as any other repairer, constituted carrying on business with the appellant. Held that this condition was satisfied even though the non-resident companies derived no profits from the dealings. C) Income Tax - Precedents on Business Activity and Profit Motive - Application of Established Principles - Indian Income-tax Act, 1922 (11 of 1922), Section 42(2) - The Court relied on Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax and Commissioners of Inland Revenue v. Incorporated Council of Law Reporting to support that business dealings need not always yield profits to constitute carrying on business. Held that the arrangement, though profitless to the non-residents, still fell within the section because of the concerted and organised business character of the repair services.
Issue of Consideration
Whether Section 42(2) of the Indian Income-tax Act, 1922 applies to tax a resident company on deemed profits from its business with non-resident companies where repairs were done at cost under a close connection; and whether non-resident companies can be said to have carried on business with the resident company.
Final Decision
Appeal dismissed. The Supreme Court upheld the Bombay High Court's decision that Section 42(2) of the Indian Income-tax Act, 1922 applied, and the appellant was liable to income tax and excess profits tax on deemed profits from its business with non-resident companies.
Law Points
- Legal points not extracted
- Section 42(2) charges resident's business not non-resident's
- expression derived therefrom refers to resident's business
- carrying on business with requires concerted and organised activities
- special repair agreement at cost constitutes carrying on business with
- non-resident need not derive profits from dealings
