# Bangalore Woollen, Cotton ct Silk Mills Co. Ltd v. Cwimis- T Anglo-French

- **Citation:** [1953] 1 S.C.R. 454
- **Court:** Supreme Court of India
- **Decided:** 1950-01-18
- **Case number:** Civil Appeal No. 12 of 1952
- **Bench:** Mehr Chand Mahajan, Das, Vivian Bose, Bhagwati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bangalore-woollen-cotton-ct-silk-mills-co-ltd-v-cwimis-t-anglo-french-34
- **Pages:** 10

## Headnote

Indian Income-tax Act (XI of 1922), ss. 42(1),42(3)-Nvnresident-Purchase of materials in India by established agencyWhether an." operation ''-Profits attributable to purchase, whether
assessable in India-"!Jusiness connection," meaning of.
Though a few isolated transactions of purchase of raw mate-
. rials in India by a ·manufacturer carrying on business outside
India may not amount, to the carrying on of an " operation" in
India within the meaning of s. 42 (3) of the Indian Income-tax
Act, where raw materials are purchased systematically and
habitually in India through an established agency having special
skill and competency in selecting the goods, such an activity wiil
be an "operation" within s, 42 (3), and the portion of the profits
•
S.C.R.
SUPREME COURT REPORTS
455
attributable to the purchases in India can be assessed to income1952
tax under s. 4'!(1) and (3) of the Indian Income-tax Act.
I •
.
Bangalore Woollen, Cotton ct Silk Mills Co. Ltd. v. Cwimis- T Anglo-French
sioner of Income-tax, Madras [1950] (18 I.T.R. 423), Coimnisstt:Jner ext.le Co., Ltd.
of Income-tax, Bombay v. Ahmedbhai Umarbhai ct Co. ([1950] S.C.R.
. v'.
335), Commissioners of Taxation v. Kirk ([1900] A.O.
588), 007n'1SSWnel' of
Rogers Pyatt Shellac Co. v. Secretary of State for India ([1925]
nco~e-tax,
I.L.R. 52 Cal. 1) and Webb Sons ct Co. v. Commissioner of IncameMa ras.
tax, East Punjab ([1950] 18 LT .R. 33) relied on.
An isolated transaction between a non-resident and a resident
in India without any course of dealings such as might fairly be
described as a business connection does not attract the application
of s. 42, but when there is a continuity of business relationship
between the person in India who helps to make the profits and the
person outside India who receives or realises the profits, such
relationship constitutes a business connection.

## Text

454
SUPREME COURT REPORTS
[1953]
1952
is not entitled to reopen the whole proceedings as the
,
z-F
1 further proceedings are limited to assessing that
ang o- rtnc I
•
f th •
h' h h
d
Textile co.' Ltd. port10n o
e mcome w 1c
as escape assessment.
v. '
We need not express any opinion on this;
The
Commissioner of question we have to answer is confined to the facts
Income-tax,
and circumstances of this case and those circumMadras.
stances are (1)-that no return was filed at any stage
Bose J.
of the case disclosing any income, profits or gains at
all, (2) that proceedings were later taken under section 34, and (3) in the course of these proceedings
the assessee claimed that a certain loss should be
determined and recorded.
Our answer is that that
cannot be done for the reasons we have given and
that c9nsequently the question referred was rightly
answered in the negative by the High Court.
1952
Dec. 22.
The appeal fails and is dismissed with costs.
Appeal dismissed.
Agent for the appellant:_ P. K. Mukherji.
Agent for the respondent : G. H. Rajadhyaksha.
ANGLO-FRENCH TEXTILE CO. LTD.
, v.
COMMISSIONER OF INCOME-TAX,
MADRAS.
(MEHR CHAND MAHAJAN, DAS, VIVIAN BOSE
and BHAGWATI JJ.]
Indian Income-tax Act (XI of 1922), ss. 42(1),42(3)-Nvnresident-Purchase of materials in India by established agencyWhether an." operation ''-Profits attributable to purchase, whether
assessable in India-"!Jusiness connection," meaning of.
Though a few isolated transactions of purchase of raw mate-
. rials in India by a ·manufacturer carrying on business outside
India may not amount, to the carrying on of an " operation" in
India within the meaning of s. 42 (3) of the Indian Income-tax
Act, where raw materials are purchased systematically and
habitually in India through an established agency having special
skill and competency in selecting the goods, such an activity wiil
be an "operation" within s, 42 (3), and the portion of the profits
•
S.C.R.
SUPREME COURT REPORTS
455
attributable to the purchases in India can be assessed to income1952
tax under s. 4'!(1) and (3) of the Indian Income-tax Act.
I •
.
Bangalore Woollen, Cotton ct Silk Mills Co. Ltd. v. Cwimis- T Anglo-French
sioner of Income-tax, Madras [1950] (18 I.T.R. 423), Coimnisstt:Jner ext.le Co., Ltd.
of Income-tax, Bombay v. Ahmedbhai Umarbhai ct Co. ([1950] S.C.R.
. v'.
335), Commissioners of Taxation v. Kirk ([1900] A.O.
588), 007n'1SSWnel' of
Rogers Pyatt Shellac Co. v. Secretary of State for India ([1925]
nco~e-tax,
I.L.R. 52 Cal. 1) and Webb Sons ct Co. v. Commissioner of IncameMa ras.
tax, East Punjab ([1950] 18 LT .R. 33) relied on.
An isolated transaction between a non-resident and a resident
in India without any course of dealings such as might fairly be
described as a business connection does not attract the application
of s. 42, but when there is a continuity of business relationship
between the person in India who helps to make the profits and the
person outside India who receives or realises the profits, such
relationship constitutes a business connection.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 12 of 1952. Appeal from the Judgment and
Order dated the 18th January, 1950, of the High
Court of Judicature at Madras (Satyanarayana Rao
and Viswanatha Sastri JJ.) in Case Referred No. 27
of 1947.
0. T. G. Nambiar (S. N. Mukherjee, with him) for
the appellant.
M. 0. Setalvad, Attorney-General for India, and O. K.
Daphtary, Solicitor-General for India (G. N. Joshi and
P.A. Mehta, with them) for the respondent.
1952. December 22. The Judgment of the Court
was delivered by
MAHAJAN J. -This is an appeal from the judgment
of the High Court of Judicature at Madras dated 18th
January, 1950, delivered on a reference by the Incometax Appellate Tribunal under section 66(1) of the
Indian Income-tax Act, whereby the High Court
answered the two questions referred in the affirmative.
The appellant is a public limited company incorporated in the United Kingdom and owns a spinning
and weaving mill located at Pondicherry in French
lnd.ia. The year of account of the appellant is the
calendar year. In the year 1939 no sales of yarn or
cloth manufactured by the company were effected in
59
456
SUPREME COURT REPORTS
[1953)
1952
British India, though in the previous year snch sales
AllgZo-French were effec_ted.
All the p_urch~s.es of co_tton \equired
Textile 00 , Ltd. for the mills were made zn British India by Messrs.
v.
&st & Co., Ltd.
Under an agreement between the
Commissioner of appellant and Messrs. Best & Co., Ltd., Madras,
Income-tax,
dated 11th July, 1939, Messrs. Best & Co., Ltd. were
Madras.
constituted the agents of the appellant for the purMahojan J.
poses of its business in In.dia.
Messrs. Best & Co.,
Ltd. have under the terms of the agreement full
powers in connection with the business of the appel-
'lant in the matter of purchasing stock, signing bills
and other negotiable instruments and receipts and
settling, compounding or compromising any claim by
or against the appellant.
The agents are empowered
to borrow money on behalf of the appellant and to
make advances. They are also expected to secure the
best commissions, brokerages, rebates, discounts and
other allowances in respect of and in connection with
the business of the appellant. They are enjoined to
keep proper accounts of the appellant and to pay over
to the appellant the sum standing to its credit. They
are remunerated by a salary of Rs. 6,500 per month
and a percentage commission on the profits made.
During the relevant year all the purchases of cotton
required for the .mill at Pondicherry were made by the
agents in.British India and no purchases were made
through any other agency.
The agents exercised
their judgment and skill and purchased such qualities
and quantities of cotton and at such prices as they in
their experience considered most advantageous in the
interests of the company.
Prior to 1939-40 the appellant was assessed to income-tax in British India on the profits computed on
a turnover basis earned by the sales in British India
of the goods manufactured by the appellant. In the
course of the assessment year 1939-40 the appellant
stated that it discontinued its business in British
India with effect from 1st April, 1939, and claimed
relief under section 25(3) which was granted. In
the course of bis further enquiries the. Income-tax
Offl9er found that thou~h the appellant was not
J
S.C.R.
SUPREME COURT REPORTS
451
selling its goods in British India and earning a profit
1952
thereby, it continued to have an active business con-
.
· B · · h I d' h
·
d
h
·
A.nglo-Jfrenoh
ne~t10n m
n~1s
n ia a vm;s re gar tot e way. lll Textile Co., Ltd.
which the busmess of purchasmg goods and maten!!ls
v.
for the mills was carried on. 'rhereupon the Income- Commissioner of
tax Officer held that s,uch purchases of cotton in
IncomG-tax,
" British India constituted a business connection in
Madras.
British India and that the profits attributable to the
purchases were liable to tax under sections 4'2(1) and
4'2(3) of the Act.
'rhe net income of the company
was computed to be Rs. '2,81,176 and ten per cent. of
this sum was apportioned under section 42(3) of the
Act as being the profits and gains reasonably attributable to that part of the business operations which
were carried out in British India.
The appellant appealed against the said order of the Income-tax Officer
to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. A further
appeal by the appellant to the Tribunal was unsuccessful.
At the instance of the appellant, the Tribunal
stated a case and referred the following questions for
the decision of the High Court under section 66(1)
of the Act:-
" 1. ·whether in the circumstances of this case the
assessee-company had any business connection in
British India within the meaning of sections 4'2(1)
and 42(3) of the Income-tax Act?
'2. Whether any profits could reasonably be attributed to the purchase of entire cotton made in British
India by tlrn secretaries and agents of the assesseecompany within the meaning of sectfons 4'2(1) and
42(3) of the Income-tax Act?"
'rhe High Court answered both these questions in
the affirmative and, in our opinion, rightly.
The learned counsel for the appellant reiterated
before us the arguments that he had addressed in the
High Court and contended that on the facts of this
case there was no scope for the finding thrtt any profits or gains accrued to the assesseo directly or
}fahajan J.
,
458
SUPREME COURT REPORTS
[1953]
1952
indirectly through or from any business connection in
A
1 F
h India. It was argued that a mere purchase of ra;w
T,;;1 :-0 :.'."~td. materials or goods in British India does not result in
v.
the.accrual or arising of profits and that the profits
Commissioner of on the sale of goods arise and accrue only at the place
Income-tax,
where the sales are effected and that in the present
Madra,,
case, there being no sales effected in British India in
MahojanJ •. the year of account 1939, n(l profits accrued or arose
to the company in British India nor could any profits
be deemed to have accrued or arisen in British India.
In support of his proposition, the learned counsel
placed reliance on a number of cases" inter alia, on
Board a/Revenue v. Madras Export Co.('), Jiwan Das
v. Commissioner of Income-tax, Lahore ('), Rahim v.
Commissioner of Income-tax( 3 ), Commissioner of Incometax, Bombay v. We.itern India Life Insurance Co.('),
Commissioner of Income-tax v. Little's Oriental Balm
Ltd.('). Most of these decisions were given under
the Act of 1922, before the insertion of section 42 (3)
in the Act-of 1922 by the amending Act of 1939.
As against the cases relied upon by the learned
counsel for the app-ellant, several authorities have
been cited to us which have proceeded on
the
footing that even purchase of raw materials could
be an operation in connection with a business and
if it was carried on in British India it might make
the profits attributable to such operation taxable
under section 42 of the. Indian Income-tax Act.
The case Rogers Pyatt Sh~llac Co. v. Secretary of
State for India(
0
) is one of the leading decisions on
this point.
This case was decided under section 33
of the Indian Income-tax Act, 1918, and 1ihe judgment shows that the principle followed in the case
was similar to that which was subsequently embodied
in section 42 (3) of the Income-tax Act, 1922.
The
question referred to the High Court in that case was
in these terms:-
"Is this company which purchased shellac and
mica in India for sale iu the opeu market in America
(I) (r923) U,.R. 46 Mad. 360,
(2) (1929) l.L.R. IO Lah. 657,
(3) A.I.R. I049 Orissa. 69,
(4) A. l.R. 1946 Born, r85.
(s) (r950) 18 LT.R. 849.
(6) (1925) I.L.R.- 52 Cal. I.
-
-
S.C.R. SUPREME COURT REPORTS
459
liable to be assessed to income~tax and super-tax
1962
under either Income-tax Act VII of 1918 or Act XI
,,
Anglo-IF·rench
of 1922 and the Super-tax Act, VIII of 1917.
Tomtils co., Ltd.
And it was answered in the affirmative.
The sam13
v.
line of reasoning was adopted by the Rangoon High Commissioner of
Court in Commissioner of Income-tax, Burma v. Steel
Income-tax,
Bros. Co.(1). Among recent cases on this point which
Madras.
were decided under section 42 of the Income-tax Act,
MahaJan J.
1922, can be mentioned the case of Motor Unionlnsurance Co. Ltd. V; Commissioner of Income-tax, Bombay(2 )
:md that of Webb Sons & Co. v. Commissioner of
Income-tax, East Pitnjab(3).
In the last case, the
assessee company which was incorporated in the
United States of America was carrying on in America
the business of manufacturing carpets. Its only
business in British India was the purchase through
its agent in British India, of wool as raw material for
use in the manufacture of carpets. It was held that
the purchase was au operation within the meaning of
section 42 (3) and the profits from such purchases
could be deemed to arise in British India and it was
consequently assessable under section 42 (3) of the
Indian Income-tax Act.
The questions referred to
the High Court in this case and relevant to this
· enquiry were these :-
.
"(i) Is mere purchase of raw material an operation within the meaning of section 42 (3) of the Act?
(ii) Can any profit arise out of mere purchase
of raw material?"
While answering these questions in the affirmative
it was said:-
"It is clear that the purchase of raw material by a
firm of manufacturers is one of the processes or operations which contributes to an appreciable degree to
the ultimate profit which is realized on the sale of
manufactured articles."
There is thus no uniformity of judicial opinion on
the question that the mere act of purchase produces
no profit.
(r) (1926) I.L.R. 3 Rang. 6q •
. (2) A.LR. 1945 Born. 285,
(3J [1950] 18 I.T.R. 33·
460
SUPREME COUR1' REPORTS
(i953]
1902
In our judgment, the contention of the learned
A
I-:;;-
1 counsel for the appellant, and on which his whole
q~-·-·
.
.
Textile co., Ltd. argument is founded, that it is the act of sale alone
v.
fr"om which the profits accrue or arise can no longer,
Commission•" oJbe sustained and has to be repelled in view of the
Income-tax,
decision of this Court in Commissioner of Income-tax,
Madras.
Bombay v. Ahmedbooi Urnwrbhai <f: Co. (1 ).
'rhat was
MahajanJ.
a case that arose under the Excess Profits Tax Act,
XV of 1940.
A firm which was resident in British
India and carried on the business of manufacturing
and selling groundnut oil, and owned some oil mills
within British India also owned a mill in Raichur in
the Hyderabad State where oil was manufactured.
The oil manufactured in Raichur was sold partly
within the State of Hyderabad and partly in Bombay.
It was held by this Court that the profits of that part
of the business, viz., the manufacture of oil at the
mill in Raichur accrued or arose in Raichur even
though the manufactured oil was sold in Bombay
and the price was received there, and accordingly,
that part of the profits derived from sales in Bombay
which was attributable to the manufacture of the oil
in Raichur was exempt from excess profits tax under
the proviso to section 5 of the Act. Heference in this
case was made to the decision of the House of Lords
in In.re Cornm·issioners of Taxation v. Kirk (2), whereiD. it was held that where income was in part derived
from the extraction of ore from the soil of New
South \Vales Colony, and from the convers!on in the
latter colony of the crude ore into a merchantable
product, this income was assessable under the New
South 'Wales Land and Income Tax Assessment Act
of 1895, section 15, sub-sections 3 and 4, nowithstanding that the finished products were sold exclusively
outside the colony.
Lord Davey while delivering
the judgment of the Privy Council observed as
follows;-
"It appears to their Lordships that there are four
processes in the earning or production of this income
-(1) the extraction of the ore from the soil; ('.l) the
(I) [195oj S.C.R. 335·
(•) [1900] A.C. 588.
,
--..
S.C.R.
SUPREME COURT REPORTS
461
conversion of the crude ore into a merchantable pro1952
duct, which is a manufacturing process; (3) the sale Anglo-French
of the merchn.ntable product; ( 4) the receipt of the Tea·tile Co., J,td.
moneys arising from the sale. All these processes :tre
v.
necessary stages which terminn.te in money, and the Commissioner of
inc.ome is the money resulting less the expenses attendIncome-tax,
Jladra.~.
ant on (ill the stages. The first process seems to their
Lordships clearly
w~thin sub section 3, and the
,tlahaj"" J.
second or manufacturing process, if not within the
meaning of 'trade' in sub-section 1, is certainly included in the words 'any others ource whatever' in
sub-section 4.
So far as relates to these two processes, therefore,
their Lordships think that the income was earned and
arising and accruing in New South Wales."
On a parity of reasoning it can well b'1 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, 9,nd those have to be
apportioned between these three operations.
'rhe
same line of reasoning was adopted by the Madras
High Court in Bangalore Woollen, Cotton rf: Silk Mills
Co. Ltd. v. Commissioner of Income-tax, Madras( 1 ).
There it was held thn,t the purchase of raw materials
by the managing agents in British India would be an
operation within the meaning of section 42(3) and it
was reasonable to attribute a portion of the profits to
such purchases in British India.
After a careful consideration of the decided cases on
the subject and in view of the insertion of section 42
(3) in the Act of 1922 by the amending Act of 1939,
we have reached the conclusion that in the present
state of the law there is hardly any scope for main-·
taining the view contended for by the learned
counsel for the appellant and we therefore agree with
the High Court in repelling it.
While maintaining
the view taken by the High Court in this case we wis4
462
SUPREME COURT REPORTS
(1953]
1952
to point out that it is not every business activity
A
l "'·
1 of a manufacturer that comes within the expression
ng O-J_•1enci
"
,
,,
h" h h
. ,
Textile co., Ltd. operat10n ·to w 10 t e prov1S1ons of section 42(3)
v.
are attracted. These provisions have no application
Commi,,io1.er of unless according to the known and accepted busiInoome-tax,
ness notions and usages the particular activity is
Madras.
regarded as a· well defined business operation. ActiMahajan J.
vi ties which are not well defined or are of a casual
or isolated character would not ordinarily fall within
the ambit of this rule.
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.
The first
contention of the assessee is therefore negatived.
The learned counsel argued in a rather half-hearted manner that there was no business connection of
the assessee in British India.
This contention does
not require serious consideration. An isolated transaction between a non-resident and a resident in
British India without any course of dealings such
as might fairly be described as a business connection
does not attract the application of section 42, but
when there is a continuity of business relationship
between the person in British India who helps to make
~he profits and the person outside British India who
receives or realizes the profits, such relationship does
ccnstitute a l;rnsio,ess connec~ion. rn ~his <)a,se t)lere
S.C.R.
SUPREME COURT REPORTS
463
was a regular agency established in British India for
1952
the purchase of the entire raw materials required for Angl:;,.,,,0,.
the manufacture abroad and the agent was chosen by Textile co., Ltd.
reason of his skill, reputation and experience in t!:ie
v.
line of trade.
The terms of the agency stated in the Commissioner of
earlier part of this judgment fully establish that
Income-tax,
Messrs. Best & Co. Ltd. were carrying on something
M~•·
almost akin to the business of a managing agency in • Mahajan J.
India of the foreign company and the latter certainly
had a connection with this agency.
We therefore
negative this contention of the learned counsel
as well.
For the reasons given above we uphold the view
taken by the High Court .and dismiss the appeal
with costs:
Appeal dismissed.
Agent for the appellant: P. K. Mukherii.
Agent for the respondent : G. H. Rajadhyaksha.
COMMISSIONER OF INCOME-TAX~ MADRAS
v.
MTT. AR. S. AR. ARUNACHALAM CHETTIAR.
tMEHR CHAND MAHAJAN, DAS and BHAGWATl JJ.]
~
Indian Income-tax Act (XI of 1922), ss. 30, 33, 34, 66 (1) and
1952
Dec. 22.
....
( 2)-0rder of Appellate Tribimal directing Income-tax Officer to allow
certain deductions-Income-tax Officer adding certain other items in
computing income-Appeal to Appellate Assistant CommissionerMaintainability-Order of Appellate Tribunal under inherent
powers directing Income-tax Officer to revise his order-Gornpetency
of reference.
-
By an order dated August 20, 1943, the Appellate Tribunal
directed that certain deductions claimed by the assesses should be
allowed.
The matter came back to the Income-tax Officer and he
made an order on September 26, 1945, but did nop issue any fresh
notice of demand.
The assesses appealed to the Appellate Assistant Commissioner complaining that in his order of September 26,
tbe Income-tax Officer had wron~ly includeil a sum of Rs. 13,000
QQ