# MAZAGAON DOCK LTD v. THE COMMISSIONER OF INCOME-TAX AND EXCESS PROFITS TAX

- **Citation:** [1959] 1 S.C.R. 848
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Bench:** Venkatarama Aiyar, Gajendragadkar, A. K. Sarkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mazagaon-dock-ltd-v-the-commissioner-of-income-tax-and-excess-profits-tax-1558
- **Pages:** 13

## Headnote

Income Tax-Non-resident carrying on business with residentN o profit accruing from dealings between them-Assessment of resident-Validity-" Business", meaning of-Indian Income-tax Act,
I922 (II of I922), S. 42(2).
Under s. 42(2) of the Indian Income-tax Act, 1922, "Where
a person not resident or not ordinarily· resident in the taxable
territories carried on business with a person resident in the taxable territories, and it appears to the Income-tax Officer that
owing to the close connection between such persons the• course
of business is so arranged that the business done by the
resident person with the person not resident or not ordinarily
resident produces to the resident either no profits or less
than the ordinary profits which might be expected to arise
in that business, the profits derived therefrom, or which may
reasonably be deemed to have been derived therefrom, shall be
chargeable to income-tax in the name of the resident person
who shall be deemed to be, for all the purposes of this Act, the
assessee in respect of such income-tax",
The appellant, a private limited company carrying on
business as marine engineers and ship repairers had its registered
office in Bombay and was resident and ordinarily resident in
India, but its entire share capital was beneficially owned by two
non-resident companies whose business consisted in plying ships
for hire. Under an agreement between them the ships plied for
hire by the non-resident companies were to be repaired by the
appellant company at cost, charging .no profits. The Income-tax
Officer made an assessment on the appellant company under
s. 42(2) of the lndian Income-tax Act, 1922. It was contended
for the appellant (r) that s. 42(2) imposed a charge only on a
business carried on by a non-resident and that therefore no tax
could be imposed on the business of the appellant, and (2) that
it was a condition for the levy of a charge unde.r that sub-section
that the non-resident must carry on business "'·ith the resident
and that in the instant case it was not satisfied, as all that the
non-resident companies did was only to get their ships repaired
by the appellant company:
•
Held, ~I) that the business which is the subject-matter of
•
taxation under s. 42(2) of the Indian Income-tax Act, 1922, is
that of the resident and not of a non-resident. The expression
S.O.R.
SUPREME COURT REPORTS
849
" derived therefrom " in that sub-section refers to the business
r958
of the resident.
Mazagaon
Dock Ltd.
v.
(2) that a person can be said to carry on a business with
another if the dealings between them form concerted and
organised activities of a business character.
The Commissioner
Where, as in the instant case, the non-resident companies of Income-tax &
got their ships repaired by the appellant, not as they might by Excess Profits Tax
any other repairer but under a special agreement that repairs
should be done by the appellant at cost, the non-resident companies must be held to have carried on business with the appellant within the meaning of s. 42(2) of the Act, even though the
non-resident companies might have derived no profits from the
dealings with the appellant.
Narain Swadeshi Weaving Mills v. The Commissioner of Excess
Profits Tax, [1955]
l S.C.R. 952 and Commissioners of Inland
Revenue v. Incorporated Council of Law Reporting, (1888) 3 Tax
Cas. 105, .relied on.
•,
C1viL APPELLATE JURISDICTION: Civil Appeal No.
381of1956.
Appeal by special leave from the judgment and
order dated February 24, 1955, of the Bombay High
Court in Income-Tax Reference No. 52/X of 1954.
N. A. Palkhival,a (with him, Jamshedji B. Kanga),
S. N. Andley, J. B. Dadachanji, P. L. Vohra and
Rameshwar Nath, for the appellant.
H. N. Sanyal, Additional Solicitor-General of India,
G. N. Joshi and R.H. Dhebar, for the respondent.
1958. May 12.
The Judgment of the Court was
delivered by
VENKATARAMA AIYAR J.-This is an appeal against
the judgment of the High Court of Bombay in a
reference under s. 66(1) of the Indian In

## Text

May za.
848
SUPREME COURT REPORTS
[1959]
MAZAGAON DOCK LTD.
v.
THE COMMISSIONER OF INCOME-TAX AND
EXCESS PROFITS TAX
(VENKATARAMA AIYAR, GAJENDRAGADKAR and
A. K. SARKAR JJ.)
Income Tax-Non-resident carrying on business with residentN o profit accruing from dealings between them-Assessment of resident-Validity-" Business", meaning of-Indian Income-tax Act,
I922 (II of I922), S. 42(2).
Under s. 42(2) of the Indian Income-tax Act, 1922, "Where
a person not resident or not ordinarily· resident in the taxable
territories carried on business with a person resident in the taxable territories, and it appears to the Income-tax Officer that
owing to the close connection between such persons the• course
of business is so arranged that the business done by the
resident person with the person not resident or not ordinarily
resident produces to the resident either no profits or less
than the ordinary profits which might be expected to arise
in that business, the profits derived therefrom, or which may
reasonably be deemed to have been derived therefrom, shall be
chargeable to income-tax in the name of the resident person
who shall be deemed to be, for all the purposes of this Act, the
assessee in respect of such income-tax",
The appellant, a private limited company carrying on
business as marine engineers and ship repairers had its registered
office in Bombay and was resident and ordinarily resident in
India, but its entire share capital was beneficially owned by two
non-resident companies whose business consisted in plying ships
for hire. Under an agreement between them the ships plied for
hire by the non-resident companies were to be repaired by the
appellant company at cost, charging .no profits. The Income-tax
Officer made an assessment on the appellant company under
s. 42(2) of the lndian Income-tax Act, 1922. It was contended
for the appellant (r) that s. 42(2) imposed a charge only on a
business carried on by a non-resident and that therefore no tax
could be imposed on the business of the appellant, and (2) that
it was a condition for the levy of a charge unde.r that sub-section
that the non-resident must carry on business "'·ith the resident
and that in the instant case it was not satisfied, as all that the
non-resident companies did was only to get their ships repaired
by the appellant company:
•
Held, ~I) that the business which is the subject-matter of
•
taxation under s. 42(2) of the Indian Income-tax Act, 1922, is
that of the resident and not of a non-resident. The expression
S.O.R.
SUPREME COURT REPORTS
849
" derived therefrom " in that sub-section refers to the business
r958
of the resident.
Mazagaon
Dock Ltd.
v.
(2) that a person can be said to carry on a business with
another if the dealings between them form concerted and
organised activities of a business character.
The Commissioner
Where, as in the instant case, the non-resident companies of Income-tax &
got their ships repaired by the appellant, not as they might by Excess Profits Tax
any other repairer but under a special agreement that repairs
should be done by the appellant at cost, the non-resident companies must be held to have carried on business with the appellant within the meaning of s. 42(2) of the Act, even though the
non-resident companies might have derived no profits from the
dealings with the appellant.
Narain Swadeshi Weaving Mills v. The Commissioner of Excess
Profits Tax, [1955]
l S.C.R. 952 and Commissioners of Inland
Revenue v. Incorporated Council of Law Reporting, (1888) 3 Tax
Cas. 105, .relied on.
•,
C1viL APPELLATE JURISDICTION: Civil Appeal No.
381of1956.
Appeal by special leave from the judgment and
order dated February 24, 1955, of the Bombay High
Court in Income-Tax Reference No. 52/X of 1954.
N. A. Palkhival,a (with him, Jamshedji B. Kanga),
S. N. Andley, J. B. Dadachanji, P. L. Vohra and
Rameshwar Nath, for the appellant.
H. N. Sanyal, Additional Solicitor-General of India,
G. N. Joshi and R.H. Dhebar, for the respondent.
1958. May 12.
The Judgment of the Court was
delivered by
VENKATARAMA AIYAR J.-This is an appeal against
the judgment of the High Court of Bombay in a
reference under s. 66(1) of the Indian Income-tax Act,
1922, hereinafter referred to as the Act.
The appellant is a private limited company incorporated under the Indian Companies Act, and is carrying on business as marine engineers and ship repairers.
V enkatarama
Aiyar ].
Its registered office is in Bombay and it is resident
and ordinarily resident in India. Its entire share
capital is beneficially owned by two British companies,
the P. & 0. Steam Navigation Co. Ltd., and the British.
Indian Steam Navigation Co. Ltd., .whose business
•
850
SUPREME COURT REPORTS
[1959]
consists in plying ships for hire. Under an agreement
entered into with the two companies aforesaid, which
Ma.zagaon
will be referred to hereinafter as the non-resident comDock Ltd.
v.
panies, the appellant repairs their ships at cost, and
Th• Commissioner charges no profits.
Now, the point for determination
of Income-tax & is whether, on these facts, the appellant is chargeable
Excess p,ofits Tax to tax under s. 42(2) of the Act. That sub-section runs
as follows :
·
Venkalaran1a
" 'Vhere a person not resident . or not ordinarily
Aiyar J.
resident in the taxable territories carries on business
with a person resident in the taxable territories, and it
appears to the Income-tax Officer that owing to the
close connection between such persons the course of
business is so arranged that the business done by the
resident person with the person 'not resident or not
ordinarily resident produces to the resident eitijer no
profits or less than the ordinary profits which might
be expected to arise in that business, the profits
derived therefrom, or which may reasonably be
deemed to have been derived therefrom, shall be
chargeable to income-tax in the name of the resident
person who shall be deemed to be, for all the purposes
of this Act, the assessee in respect of such incometax."
"
The Income-tax Officer, Bombay who dealt with
the matter took the view that the appellant company
had so arranged its business with the non-resident
companies that it did not produce any profits to it,
and that was because it was those companies that
really owned its share capital, and that therefore the
profits which it could ordinarily have made but for
their close financial connection were liable to be
taxed under s. 42(2), and he computed the same at
Rs. 6,80,000 for the account year 1943-1944, at
Rs. 4,67,559 .for the account year 1944-1945 and at
Rs. 4,68,963 for the account year 1945-46. On the
basis of the above findings, orders of assessment of
income-tax were made for the account years 1944-1945
and 1945-1946 and of excess profits tax for the account
years 1943-1944, 1944-1945 and 1945-1946. Against
• ·these fivll orders, the appellant preferred appeals to
the Appellate ,Assistant Commissioner, who by his
,
s.c:R,
SUPREME COURT REPORTS
851
order dated July 3, 1952, confirmed the same. Then
z958
there was a further appeal by the appellant to the
d h
Mazagaon
Appellate Tribunal, and the Bench which hear t e
Dock 'Lt@.
same having been divided in its opinion, the matters
v;
came up for hearing before the President, who by his The Commissio1ie•
order dated March 19, 1954, held that s. 42(2) was of Income-ta':< &
inapplicable and he accordingly set aside the orders of Excess Profits Tax
assessment of income-tax and excess profits tax made
Venkatarama
on the appellant. On the application of the DepartAiyar J.
ment, the Tribunal referred the following question for
the opinion of the High Court of Bombay :
" Whether on the facts and in the circumstances
of the case any income falls to be included in the
-appellant's assessment under s. 42(2)."
The reference was heard by Chagla
C. J. and
Tendplkar J. who by their judgment dated February 24, 1955, held that, on the facts found, s. 42(2) was
applicable and that the appellant was liable to be
assessed to income-tax and excess profits tax under
that section. The appellant applied under s. 66(A) for
leave to appeal against this judgment to this court,
and that application was dismissed.
The appellant
thereafter applied for and obtained leave to appeal to
this Court under Art. 136, and hence this appeal.
It must be mentioned that on December 31, 1948,
an order of assessment had been made in respect of
the income-tax payable by the appellant for the
account year 1943-1944, and therein, the profits
chargeable under s. 42(2) had not been included.
But
subsequently, the Income-tax Officer took action under
s. 34 of the Act, and on May 29, 1953, made an order
assessing the appellant to tax for that year on the
profits deemed to have been made by it under s. 42(2),
and against that order, an appeal is pending before
the Appellate Assistant Commissioner .• That order is
not the subject-matter of the present proceedings,
which are concerned only with the assessment of
income-tax for the account years 1944-1945 and
1945-1946 and of excess profits tax for the account
years 1943-1944, 1944-1945 and 1945-1946.
Now, the sole point for determination in ehis appeal •
is whether on the facts found the appellant is· chargeable to tax under s. 42 (2) of the Act.
MI'. Palkhivala,
852
SUPREME COURT REPORTS
[1959]
I958
learned counsel for the appellant, contends that it is
not, and urges two grounds in support of his conten-
~::;c:;;
tion: (1) that s. 42(2) imposes a charge only on a
v.
business carried on by a non-resident, and that there.
Th• Commissioner fore no tax cou Id be imposed under that provision on
of Income-tax <>- the business of the appellant who is a resident; and
Excess Profits Tax (2) that it is a condition for the levy of a charge under
V•nkatarama
s. 42 (2) that the non-resident must carry on business
Aiyar J.
with the resident, and that in the instant case it is not
satisfied. The first ground does not appear to have
been put forward in the Court below, but before us it
has been presented with .great elaboration and pressed with considerable insistence. The argument in
support of it may thus be stated: S. 42 (2) imposes a
charge on profits of a business, actual or notional, when
the conditions specified therein are satisfied ; bq,t the
section does not, in terms, say who the person is whose
business is liable to be taxed, but that that can only
be the non-resident is clear from other parts of the
section.
Thus, the tax is imposed under s. 42 (2) on
profits " derived " from business, which must mean
profits actually made therein. Ex hypothesi, the resident
has so arranged his business that it produces little or
no profits to him. If it has produced some profits,
then they are taxable in his hands even apart from
this provision, and if he has made no profits, then the
word "derived" would be inapplicable to his business.
Therefore, the profits " derived " and taxable under
the section can have reference only to the business of a
non-resident. Then again, the profits are chargeable
under this section in the name of the resident. If the
profits chargeable under s. 42(2) accrue from a business
of the resident, he would be the person who would,
even apart from the section, be liable for the tax, and
in that situati"n, the expression "in the name of the
resident" would be inappropriate. It would make
sense if, in fact, the profits accrued in a business carried
on by a person other than the resident, and the legislature sought to tax them in his hands. The true
intention behind the legislation, it is said, is that the
• profits of the non-resident should be taxed, but that
the tax should fall on the resident by reason of his
S.C.R.
•SUPREME COURT REPORTS
853
close connection with the non-resident. Support for
r95s
this contention is sought in'the provision in s. 42 (2)
that the resident shall be deemed to be the assessee for
1::C~ag::;
all purposes of the Act.
The word " deemed "
v.
imports, it is argued, a legal fiction, and if it was the The Commissioner
business of the resident that was intended to be taxed, of Income-tu and
then he is, in fact, the assessee, and it would be Excess Profits Tax
inconsistent with that position that he should be
Venkatarama .
treated as an assessee by a legal fiction. It is also
Aiyar J.
urged that sub-ss. (1) and (3) of s. 42 deal with the
profits of a non-resident and prescribe the conditions
under which and the manner in which the tax could
be imposed and collected, and s. 42 (2) must, in this
setting, be construed as referring to the business of the
non-resident.
Tlulre would have been considerable force in this
argument, had there been any ambiguity or uncertainty in the wording of s. 42 (2) as to whether it is
the business of the resident that is sought to be taxed
or that of the non-resident. But that is not so.
The
language of the enactment imposing the charge is too
plain to admit of any doubt. Now, s. 42 (2) is, it may
be noted, in two parts. The first part commencing
with the opening words " Where a person not resident" and ending with the words "which may
reasonably be deemed to have been derived therefrom" prescribes the conditions on which the charge
arises. It does not of itself impose the charge. That
is done by the second part, which provides that "the
profits derived therefrom or which may reasonably be
deemed to have been derived therefrom shall be chargeable to income-tax." The word "therefrom" is very
important for the purpose of the present discussion.
In the context, it can refer only to the business of the
resident, and it is this business therefooo that is the
subject of the charge under s. 42 (2). It was suggested
for the appellant that the word "therefrom" has
reference to the arrangement between the non-resident
and the resident, but apart.from the fact that such a
construction would, on the grammar of it, be untenable;
it is impossible to conceive how an arrangement relat: •
ing to the conduct of business can, .as ~uch·, be the
854
SUPREME COURT REPORTS
[1959]
subject-matter of income-tax, apart from the business
in which profits or gains are made. The language of
~az;g~o~•
the section is clear beyond all reasonable doubt as to
0
' v. ' ·
what it is that is sought to be taxed under this section.
The Commis;foner That is only the business of the resident and not that
of Income·tax & of the non-resident. In thiS view, it is only necessary
Excess Profits Toxto consider whether there is anything in the wording
of the other parts of s. 42 (2) relied on for the appellant,
which precludes us from giving effect to the plain
import of the word "therefrom".
, Venkat(fra,n'a
Aiyar .. ].
It is on the expression " profits derived " in the
charging part of the enactment that the appellant
leans heavily in support of his position that it is the
business of the non-resident that is really intended to
be taxed.
But then, those words do not stand alone.
They are associated with the words "or whic:O may
reasonably be deemed to have been derived", and this
association has its origin in the preceding clause
"produces to the resident either no profits or less than
the ordinary profits which might be expected to arise
in that business". This clause contemplates two
classes of cases, one where the business of the resident
produces no profits and the other where it produces
less than the normal profits. The charge is imposed
on both these classes of cases, and the word "derived"
has reference to the latter, w bile the words " profits
which may reasonably be deemed to have been
derived" relate to the former. That both these
clauses relate to the business of the resident is clear
from the words " to the resident " occurring therein.
The word " derived" in s. 42 (2) must therefore be
interpreted as referring to the business of the resident.
The respondent sought further support for this conclusion in the words "which may reasonably be
deemed to have been derived" in s. 42(2), and contended that those words could apply only to a business
which does not yield profits, and that will fit in, in the
context, only with the business of the resident and not
of the non-resident. The answer of the appellant to
this contention is that the words in question should be
• construed as meaning not notional profits but such
proportion of th~ actual profits of the non-resident a~
S.C.R.
SUPREME COURT REPORTS
8155
could reasonably be apportioned to the business in
r9_s8
India. Reliance was placed in support of this contention on Rr. 33 and 34 of the Indian Income-tax
Maz,:,gaon
R 1
Dock Ltd.
u es, 1922. Rule 33 provides for the determination
v.
of the profits of a non-resident in cases falling within The Commissioner
S. 42(1), and one of the modes prescribed for such of Income-ta:< &.
determination is to fix an amount which bears the E:<cess Profits Tax
same proportion to the total profits of the non-resident
Venkatarama
as the Indian receipts bear to the total receipts in the
Aiyar J.
business. Rule 34 then provides that "the profits
derived from any business carried on in the manner
referred to in s. 42 (2) may be determined for the
purposes of assessment to income-tax according to the
preceding rule". Now, the argument of Mr. Palkhivala is that the interpretation put on s. 42 (2) by the
rule"making authorities as manifest in R. 34 is that
the business chargeable under s. 42 (2) is that of the
non-resident, and that the words "which may reasonably be deemed to have been derived therefrom" had
reference to the apportionment of the Indian, out of
the total profits. We see no force in this contention.
There is nothing in R. 34 to justify the· assumption
that the rule-making authorities considered either that
s. 42 (2) applied to the business of a non-resident or
that the words "which may reasonably. be deemed to
have been derived therefrom" meant apportionment
of the Indian out of the world profits of the non-resi~
dent.· And even if those be the assumptions on which
the Rule is based, that can have no effect ·on the true
interpretation of s. 42 (2).
And whatever doubts one
might have had as to the meaning to be given to the
words "derived therefrom or which may reasonably
be deemed to have been derived therefrom" if they
had to be construed in isolation, in the context of the
section and read in conjunctibn with the' words " fo
the resident " and " therefrom ", there cannot be any
doubt that they have reference to the business of the
resident and not that of the non-resident.
The word "or" in the clause would appear to be
rather inappropriate, as it is susceptible of the interpretation that when some profits are made ·but they •
109
856
SUPREME COURT REPORTS
[1959]
r95B
are less than the normal profits, tax could only be
imposed either on the one or on the other, and that
Mazagaon
Dock Ltd.
accordingly a tax on the actual profits earned would bar
v.
the imposition of tax on profits which might have been
The Commission" received. Obviously, that could not have beenintend0! Income-tax & ed, and the word "or" would have to be read in the
•
Excess Prnfits Tax context as meaning "and". Vide Maxwell's Interv,nkatamna
pretation of Statutes, Tenth Edn. pp. 238-239. But
, ·
J
that, however, does not affect the present question
-'1 tyar
.
which is whether the word "derived" indubitably
points to the business of the non-resident as the one
taxable under s. 42 (2), and for the reasons already
given, the answer must be in the negative.
The appellant also relied on the clauses in s. 42 (2)
that 'the profits shall be chargeable to tax in the name
of the resident' and that 'he shall be deemed to be the
assessee for all purposes of the Act' as indicating that
it is not the business of the resident that is really
sought to be taxed .. But these clauses are explainable
with reference to the fact that the profits taxed are
not actual profits but what are deemed to be profits.
It was argued that if it was the intention of the legislature that what was not profits.should be deemed to
.be profits, that should .have been independently provided for before the tax is imposed, and that in the
absence of such a provision, the word " deemed " must
be constl'Ued as referring. not to notional profits being
treated as actual profits, but to a person who is not,
..
in fact1 an assessee, being treated as an assessee. · We
see no substance in this argument. There is no reason
why an enactment should not both declare notional
profits as taxable profits and at the same time impose
a charge on the resident in respect of those profits, and
that, quite clearly, is what s. 42 (2) has done. It may
be that its lapguage is not "felicitous. But there can,
however, be no mistaking· its sense that it is the resident that is to be dealt with as assessee in respect of
profits which he had not, in fact, made.
Nor do we see much force in the argument that
s. 42, sub-ss. (1) and (3) relate to income of the nonresident and thats. 42(2) which is wedged in between
• them_ should therefore be
interpreted as
having
S.C.R.
SUPREME COURT REPORTS
857
reference to the profits of the non-resident. If tlie
1958
language of s. 42(2)' is clear that it is the resident
who is chargeable to tax, it is of no consequence that
!:~ag~~;
under s. 42, sub-ss. (1) and (3) it is the non-resident
v.
that is taxed, It should be remembered that s. 42rhe Commissioner
occurs in Ch. V headed "Liability in Special Cases·"; of Income-ta:r and
and S. 42(2) is a liability which is out of the ordinary Excess Profits Tax
run, and it is not inappropriate to deal with it in
Ven;:;;,ama
s. 42, because while s. 42(1) seeks to bring within the
Aiyar 1.-
ambit of taxation the profits of a non-resident· which
accrue. in India, s. 42(2) · seeks to tax the resident in
respect of profits which he would.have normally made
but for his business association with a non-resident.
On the other hand, on the construction contended for
by the appellant s. 42(2) would become practically useless because a non-resident whose profits could .be
taxed under s. 42(2) could also be taxed under s. 42(1),
as also the resident if he were the agent. Norie of the
considerations put forward by the appellant is of
sufficient· weight to displace the conclusion to be drawn
from the words-" to the resident" and" therefrom" irl
s. 42(2), and we must hold thrut the business which is
the subject,matter of ·taxation under that provision
is that of the resident and not of a non-resident. This
contention °must accordingly be found against the
appellant. •.
'
·
We shall next consider the second ground urged in
./
support of the appeal that it is a condition for the levy
of a charge under s. 42(2) that a non-resident should
carry on business with the resident, and that, on the
facts found, that condition is not satisfied, and that ·
therefore the tax is unauthorised. It· is argued that
the business of the non-resident' companies is to ply
ships for hire, and that the appellant has no concern
with that; ·that . the ,business of the a:J:'pellant is' to
repair ships and that the non-resident' companies have
no connection , with that ··business ; · and" that· all
that the non-resident· Companies do is to get their ships
repaired by the appellant;'. and that does not amtiurit ·
to carrying oh •any business with the app~llant. ·~
person who regularly purchases his goods from a parti-
•
cular dealer does not, it is said, carry en b1;1siness with
1958
Mazagaon
Dock Ltd.
858
SUPREME COURT REPORTS
[1959]
that dealer, and on the same analogy, in getting their
ships repaired by the appellant the non-resident companies cannot be said to carry on business with them
in the real sense of that word.
v.
Th• Commissioner
We are unable to agree with this contention. The
of Income-tax & word " business" is, as has often been said, one of
Excess Profits Tax wide import and in fiscal statutes, it must be construed
Venkataratna
Aiyar J ..
in a broad rather than a restricted sense. Discussing
the connotation of the word "trade '', Scott L. J.
observed in Smith Barry v. Gordy (1):
" The history of judicial decisions has been
similar, showing a strong tendency not to restrict the
scope of Schedule D ; a tendency which was, we think,
in sympathy with the general social . and economic
outlook of the country. There is hardly any activity
for gaining a livelihood and not covered by the .other
Schedules, which does not seem to us to be swept into
the fiscal net by the Schedule D."
" The word 'business' connotes", it was observed by
this Court in Narain Swadeshi Weaving Mills v. The
Commissioner of Excess Profits Tax ('), "some real, substantial and systematic or organised course of activity
or conduct with a set purpose." Now, it may be conceded that when a person purchases bis requirements
from a particular dealer, be cannot without more be
said to carry on business with him; But here there is
much more.
The non-resident companies send their
ships for repair to the appellant, not as they might to
any other repairer but under a special agreement that
repairs should be done at cost. And further unlike
customers who purchase goods for their own consumption or use, the non-resident companies get their ships
repaired for use in what is admittedly their business.
These are clearly trading activities, organised and continuous in their character . and it will be difficult to
escape the conclusion that they constitute business.
We are not even concerned in this appeal with the
larger question whether the activities of the nonresident companies in connection with the repair of
the ships amount to carrying on of business. \Vhat
• 'We have to decide is whether having regard to the
(1) (1946) 28 Tax Cas. 250, 259.
(>) [1955] I S.C.R. 952. 96~ •
.
S.O.R.
SUPREME COURT. REPORTS
859
course of dealings between the non-resident companies and the appellant it can be sii.id of the former that
Ma11agaon
they carry on business with the latter within the
Dock Ltd.
meaning of s. 42(2). Now, it should be observed that
v.
s. 42 speaks not of the non-residents carrying on busi- The Commissioner
ness in the abstract but of their carrying on business 0! Income-tax 0with the resident, and in the context, it must include Execs.< Profits Tax
all activities between them having relationship to their
Venkatarama
business. That is the view taken by the learned
Aiyar ].
Judges in the Court below, and we are in agreement
with it.
In this connection, reference may be made to s. 42(1)
under which a charge is imposed on income, profits or
gains accruing to a non-resident through ai:iy business
connection in the taxable territories. In Commissioner
of ln~ome-tax v. Currimbhoy Ebmhim & Sons (1), it was
observed by the Privy Council that business connection in s. 42(1) is different from business as defined in
s. 4(2) of the Act. " The phrase ' business ()onnection ',
observed Sir George Rankin," is different from, though
not unrelated,to, the word 'business ' of which there is
a definition in the Act". And in Anglo-French Textile Co., Ltd. v. Commissioner of Income-tax, Madras (2),
this Court has observed that "when there is a continuity of business relationship between the person in
British India who helps to make the profits and the
person outside British India who receives or realises
his profits, such relationship does constitute a business
connection". Vide also the observations in Bangalore
Woollen, Cotton and Silk Mills Go. Ltd. v. Commissioner
of Income-tax, Madras (3). The words "where a person
not resident in the taxable territories carries on business with a person resident" in s. 42(2) must be
similarly interpreted, and a non-resident should be
held to carry on business with a residept, if the dealings between them form concerted and organised
activities of a business character. We are accordingly
of opinion that, on the facts found, the non-resident
Companies must be held to have carried on business
with the appellant as provided in s. 42(2).
(1) [1935] 3 I..T.R. 395.
(2) [1953] S.C.R. 454.
(3) [1950] 18 I.T.R. 423; 433: 4;4·
•
860
SUPREME COURT REPORTS
[1959]
rgsB
It was argued that the result of this arrangement
was only to reduce the repairing charges and enable
Mazagaon
h
h
b
Dock Led.
t e non-resident Companies tot ere y make a saving;
v.
that that was not profit or gains of a business liable to
The Commissioner be taxed under the Act, and the decisions in Tennant
of Income-tax & v. Smith(') and In re Major John (2) were cited in supExcess P•ofits Tax port of this position. But, as already held by us, the
Venkataram•
subject-matter of the tax under s. 42(2) is the business
Aiyar J.
of the resident and not that of the non-resident, and
what we have to decide is not whether the nonresident Companies made profits in their dealings
with the appellant but whether what they did was
business, and for that purpose it is immaterial that the
business was carried on by them in such manner that
no profits could accrue to them therefrom. Vide the
observations of Coleridge C. J. at p. 113 in Commissioners of Inland Revenue v. Incorporated Council of
Law Reporting (3). The fact therefore that the nonresident Companies could derive no profits from the
dealings with the appellant· would not detract from
their character as business with the appellant. This
contention must, therefore, be rejected.
•
It was finally contended that the profits chargeable
under s. 42(2) must be separately assessed and not added on to the other profits or income of the appellant.
This contention is based on the assumption that
s. 42(2) imposes on the appellant, a vicarious liability,
the charge being in reality on the profits of the nonresident. On our finding that the charge is on the
business of the appellant and not of the non-resident
Companies, this contention does not survive.
In the result, the appeal fails and is dismissed with
costs.
•
Appeal dismissed .
(1) [1892]• 3 Tax Cas. 158.
(2) (1938] 6 I.T.R. 434 .
• (3) [1888] 3 Tax Cas. 105.
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