Holding

The High Court was correct in holding that the Indian assessee had no business connection with the non‑resident companies, and therefore no liability under Section 9 of the Income‑Tax Act, 1961.

Summary

The assessee, T.I. & M. Sales Ltd., was assessed as a representative assessee for ten non‑resident companies and the Revenue claimed a "business connection" under Section 9 of the Income‑Tax Act, 1961, making the Indian company an agent under Section 163(1)(b). The assessee contended that no such connection existed, relying on an affidavit by its secretary detailing that contracts were concluded abroad, property passed outside India and the Indian company had no authority to accept offers. The Appellate Assistant Commissioner dismissed the assessee’s contentions, the Tribunal upheld the assessments but referred the matter to the Calcutta High Court, which held that there was no business connection. The Supreme Court affirmed the High Court, observing that a business connection must be real, intimate and must give rise to income in India, which was absent here. It also held that the affidavit, unchallenged by the Revenue, could be relied upon and that the Revenue had effectively waived its right to dispute the facts. Consequently, the appeals were dismissed.

Issues considered

Whether the Indian company had a "business connection" with the non‑resident companies within the meaning of Section 9 of the Income‑Tax Act, 1961.
Whether the relationship between the Indian company and the non‑resident companies amounted to an agency under Section 163(1)(b).
Whether the affidavit filed by the assessee’s secretary should be considered for determining the existence of a business connection.
Whether the Revenue waived its right to contest the facts stated in the affidavit.

Legislation cited

Income Tax Act, 1922s. 4, s. 42, s. 43
Income Tax Act, 1961s. 163(1)(a), s. 163(1)(b), s. 9
Income Tax (Appellate Tribunal) Rules, 1963s. Rule 10

Subjects

business connectionrepresentative assesseenon‑resident taxationSection 163agencyaffidavitwaiver of righttax assessment

Judgment

COMMISSIONER OF INCOME TAX, CALCUTTA
A
v.
T.l. & M. SALES LTD.

t APRIL 10, 1987

[R.S PATHAK C.J. AND RANGANATH MISRA, J.] B

Income Tax Act, 1961/Income Tax Act, 1922-Section 163(1)(b)I

l
Section 43-'Business Connection'-What amounts to-Dependent
upon a set of facts in a particular case.

The assessee-respondent was assessed to income tax as a repre-
sentative assessee of ten non-resident companies. The companies were
c
grouped under three heads-six in Group-A, three in Group-B and

~
one in Group-C. In regard to the companies under Group-A, the
assessee had no direct agreement but had dealings by virtue of its agree-
ment with the exporting company; as regards the three companies
under Group-B, the assessee had no business connection with them; D
and so far as the only company under Group-C was concerned, the
assessee's stand was that it had an agreement dated December 16, 1948
with the export company, but no liability accrued under the law in
respect of the transactions.
' The Income-tax Officer referred specifically to the agreement of E
-41'
1948 and refuted the stand of the company. He held that the agreement
was a clear authority that the non-resident had employed the Indian
Company for selling its goods in India on commission and that it brings
into existence a business connection between the two companies. He also

t held that the Group-A companies were connected with the Indian Com-
pany through the export company. F
,.: Appeals were filed by the assessee challenging the assessments
before the Appellate Assistant Commissioner. The assessee tried to
establish the actual course of dealing between the Indian Company and
the ten non-residents and contended that no liability under the Act
accrued. The Appellate Authority dismissed the contentions of the G

•
assessee by holding that the assessee had produced no proof of its asser-
tions and on the contrary had blocked the inquiry.
)

Before the Tribunal, an appeal was f.iled by the assessee. Along
with the grounds, an affidavit dated December 27, 1965 of the Secretary
of the assessee was also filed and it was stated therein that there was no H

883
884 SUPREME COURT REPORTS [1987] 2 S.C.R.

A obstruction to the proceedings before the Appellate Assistant Commis-
sioner with regard to the attempted probe by the Appellate Anthority
and that several docnments were made available. before the Appellate
Authority and were actually placed before him, and in case the Appel-
late Authority wanted any information or fnrther docnments to be pro-
B dnced, the Secretary was prepared to do so.

The Tribnnal did not deal with the aforesaid affidavit on the
ground that it was not necessary for the purpose of determining
whether the Indian Company could be appointed agent under Section
163 of the Act. It upheld the assessments and referred to the High Court
the questions whether the non-resident companies had business connec·
C lion with the Indian Company and whether the Indian Company was
correctly treated as an agent of the said non-resident companies under
Section 163 of Income-tax Act, 1961.

The High Court held that the Indian assessee had no business
D connections with the non-resident companies within the meaning of
Section 9 of the Act.

Dismissing the appeals of the Revenue, this Court,

HELD: 1. The High Court was right in holding that the Indian
E · assessee had no business connections with the non-resident companies
within the meaning of Section 9 of the 1961 Act. Unless the matter
comes under Section 163(1)(a) of the Act, there will be. no liability for
assessment. [893F]

2. Whether a relationship would amount to "business connec·
F tion'' as provided in Section 163(1)(b) of the Income-tax Act of 1961 for
the purpose of giving rise to the liability under Section 9(1) of the Act
would depend upon a set of facts arising in a particular case. [889F·G]

3. The order of the Appellate Assistant Commissioner shows that
the Secretary appeared before him at the hearing on September 3 and 4,
G 1965 and the appeals were dismissed by order dated September 17,
1965. [890F]

4. Ordinarily, the High Court should have declined to use the
assertions in the affidavit for the purpose of recording findings of fact
and if, at all, in its opinion the affidavit was to be utilised, the matter should
H have gone before the Tribunal for a fresh disposal of the appeals. [892H]
C.l.T. v. T.l.M. SALES [MISRA, J.] 885

5. In the instant case, the High Court relying upon the affidavit of A
the Secretary of the assessee had found that during the hearing of the
appeals before the Appellate Assistant Commissioner, the Secretary
had produced certain records to show the manner in which the business
had been carried on and the nature of the transactions. The Tribunal
obvionsly fell into an error in brushing aside the affidavit. The facts
stated therein had a direct bearing on the point in issue, namely, B
whether there was any business connection between the assessee and the
non-resident companies. [889G-H; 891C-D]

6. The assessments relate to a period about a quarter of a century
back and by its conduct, the Revenue appears to have waived its right to
dispute the facts asserted in the affidavit on one hand by not challenging C
its admissibility and on the other by not disputing the contents thereof.
It would not be appropriate at this stage to put back the matter to the
stage of the second appeal before the Tribunal. [893D-E]

Commissioner of Income Tax, Punjab v. R.D. Aggarwal and
Company and another, [1965] 56 ITR 20, referred to. D

CIVIL APPELLAT,E JURISDICTION: Civil Appeal Nos.
1449-1456 of 1974.

From the Judgment and Order dated 15/21.9.1972 of the
CalcuttaHighCourtinI.T.RNos.128and 160of1967. E

S.C. Manchanda, V. Gauri Shankar, M.B. Rao and Ms. A. Sub-
hashini for the Appellants.
~·
Dr. Devi Pai, H.K. Dutt, Ms. S. Seal and D.N. Gupta for the
Respondent. F

The Judgment of the Court was delivered by

RANGANATH MISRA, J. These are appeals by the Revenue by
special leave and are directed against the decision of the Calcutta High
Court dated 15.9.1972 rendered upon references made under section G
256(1) of the Income-tax Act of 1961: The Tribunal referred the fol-
lowing six questions for opinion of the Court:-

I. Whether on the facts and in the circumstances of the
case and on a proper construction of the agreement between the
Indian Company and the Export Company, the Tribunal was H
886 SUPREME COURT REPORTS [1987] 2 S.C.R.

right in holding that the six non-resident companies in Group A
A
had a business connection with the Indian Company and there-
fore that the Indian Company was correctly treated as an agent
of the said non-resident companies under section 163 of the
Income-tax Act, 1961?

B 2. If the answer to question No. 1 is in the affirmative,
then, whether on the facts and in the circumstances of the case,
the Tribunal was justified in holding that any profit could be
deemed to accrue or arise in India to the six non-residents in the
United Kingdom in respect of the goods sold by them to cus-
tomers in India?
c 3. Whether, on the facts and in the circumstances of the
case and on a proper construction of the agreement dated
22.3.1955 between the Indian Company and Crane Packing Ltd.
(company in Group-B), the Tribunal was right in holding that the
non-resident company had business connection with the Indian
D Company and, therefore, the Indian Company was correctly
treated as an agent of the said non-resident company under sec-
tion 163 of the Income-tax Act, 19617

4. If the answer to question No. 3 is in the affirmative
then, whether on the facts and in the circumstances of the case,
E the Tribunal was justified in holding that any profit could be
deemed to accrue or arise in India to the aforesaid non-resident
company in respect of the goods sold by it to customers in India?

5. Whether, on the facts and in the circumstances of the
case and on proper construction of the agreement dated 1.6.1954
F between the Indian Company and Budy TJbing Co. (Australia)
Pvt. Ltd. (non-resident company in Group-BJ, the Tribunal was
right in holding that the non-resident company had business con-
nection with the Indian Company and, therefore, the Indian
Company was correctly treated as an agent of the said non-
resident company under section 163 of the Income-tax Act,
G 1961?

6. If the answer to question No. 5 is in the affirmative,
then, whether on the facts and in the circumstances of the case,
the Tribunal was justified in holding that any profits could be
deemed to accrue or arise in India to the aforesaid non-resident
H company in respect of the goods sold to the customers in India?
C.I.T. v. T.l.M. SALES [MISRA, J.] 887

The short facts relevant for appreciating the background in
A
'-1 which these questions arose are these-T.I. & M. Sales Ltd., assessee-
respondent, was assessed to income tax as a representative assessee of
ten non-resident companies. The Tribunal grouped the ten non-
resident companies under three heads-six in Group-A, three in
Group-B and one in Group-C. In regard to the companies under
Group-A, the assesee had no direct agreement but had dealings by B

~ virtue of its agreement with the exporting company. So far as the three
companies under Group-B are concerned, the assessee had no busi-
ness connection with them and so far as the only company under
• "' Group-C is concerned, the assessee's stand was that it had an agree-
ment dated 16.12.1948 with the export company, but no liability
accrued under the law in respect of the transactions. The Income-tax
Officer referred specifically to the agreement of 1948 and refuted the
c
'-i stand of the assessee by saying:-

"The agreement of 6.12. 1948 referred to above which con-
tinued during the relevant years is clear authority that the
non-resident had employed the Indian Company for ·selling D
its goods in India on con1mission. The agreement certainly
brings into existence a business connection between the
two. The Indian Company is in receipt of commission cal-
t culated with reference to the aforesaid values of goods sent
not only by the non-residents, but also by some ma nu-
facturers of the T.I. Group in the United Kingdom with E
' which the Indian Company had no direct contract, but
which supply goods to India as per orders placed by the
Indian Company through the non-residents ............ ".
~
J The Income-tax Officer also found that the Group-A companies be-
longing to the T.I. Group were connected with the Indian Company F
through the export company.

Appeals challenging the assessment were taken to the Appellate
Assistant Commissioner. Before him, the assessee tried to establish
the actual course of dealing between the Indian Company and the ten
non-residents and contended that no liability under the Act accrued. G
-..,: The Appellate Authority dismissed the contentions of the assessee by
holding that "the assessee has produced no proof of its assertions and,
on the contrary, has blocked the enquiry by me thereon". Along with
the grounds of the appeal filed before the Tribunal, an affidavit dated
27. 12.1965 of Carol Sturart Cameron was filed. Cameron stated in that
affidavit that he was the Secretary of the assessee and was in superin- H
888 SUPREME COURT REPORTS [1987] 2 S.C.R.

A tendence of the proceedings relating to the assessments of the assessee y
as representative-assessee of the ten non-residents. In that affidavit,
I
he denied the fact that before the Appellate Assistant Commissioner
any obstruction was offered to an attempted probe by the said Appel-
late Authority. On the other hand, the affidavit stated that several
documents were made available before the Appellate Authority and
B were available and actually placed before him and in case the Appel-
late Authority wanted any information or further documents to be
produced, Cameron was prepared to do so. We shall again refer to the f-
affidavit in its appropriate place later. Before the Tribunal, some argu- _..;.
ment was raised with reference to the affidavit but ultimately the •
Tribunal upheld the assessments but referred the questions indicated
c above for the opinion of the High Court. The High Court by the
impugned judgment reported in 151 ITR 286 referred to the provisions
of sections, 4, 42 and 43 of the Income-tax Act of 1922 corresponding y
to sections 5, 9 and 163 respectively of the Income-tax Act of 1961. In '
the light of the affidavit of Cameron, it took note of the fact that no
attempt had been made by the Revenue to traverse the facts stated
D therein, referred to and relied upon the decision of this Court in the
case of Commissioner of Income-tax, Punjab v. R.D. Aggarwal &
Co., 56 ITR 20 and came to hold that there was no element of business
connection and, therefore, the assessee was not liable. Questions 1, 3
and 5 were thus answered in the negative and against the Revenue +
and, therefore, Questions 2, 4 and 6 which were required to be
E answered only if the answer to the other three questions was in the
affirmative did not arise.

In 56 ITR 20, this Court held:-

"A relation to be a business connection must be real
F and intimate, and through or from which income must
accrue or arise whether directly or indirectly to the non-
resident. The expression business connection undoubtedly
means something more than business. A business connec-
tion in section 42 involves a relation between a business
carried on by a non-resident which yields profits or gains
G and some activity in the taxable territories which contri-
butes 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
H may take several forms it may include carrying on a part of
C.I.T. v. T.l.M. SALES [MISRA, J.] 889

the main business or activity incidental to the main business A
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
B
which income, profits or gains arise or accrue to a non-
resident must be determined upon the facts and circum-.
stances 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- c
resident. But it must in all cases be remembered that by
section 42, income, profit or gain which accrues or arises to a
non-resident outside the taxable territories is sought to be
brought within the net of the Income-tax Jaw, and not in-
come, profit or gain which accrues or arises or is deemed to
D
accrue or arise within the taxable territories. Income re-
ceived or deemed to be received, or accruing or arising or
deemed to be accruing or arising within the taxable teritories
in the previous year is taxable by section 4(1)(a) & (c) of the
Act, whether the person earning is a resident or non-resi-
dent. If the agent of a non-resident receives that income or is
E
entitled to receive that income, it may be taxed in the hands
of the agent by the machinery provision enacted in section
40(2). Income not taxable under section 4 of the Act of a
non-resident becomes taxable under section 42( 1) if there
subsists a connection between the activity in the taxable ter-
ritories and the business of the non-resident, and if through F
or from that connection income directly or indirectly arises."

Whether a relationship would amount to "business connection"
as provided in section 163( l)(b) of the Income-tax Act of 1961 for
the purpose of giving rise to liability under section 9(1) of the Act
would depend upon a set of facts arising in a particular case. The High G
Court, relying upon the facts stated in the affidavit of Cameron, has
found that during the hearing or the appeals before the Appellate
Assistant Commissioner, Court had produced certain records to show
the manner in which the business had been carried on and the nature
of the transactions. The Appellate Assistant Commissioner in his
order indicated:- H
890 SUPREME COURT REPORTS [1987] 2 S.C.R.

"The assessee submits that the contracts for the supply of
A goods ordered by the Indian buyers are accepted in the
foreign country, that the property in the goods shipped
passes to the Indian buyers at the port of shipment in the
foreign country, that the payment for the goods is received
by the non-residents in the foreign country that the sale and
B purchases are as between principal and principal and,
therefore, cannot be said that the non-residents have either
a business connection in India or have any income which
could be deemed to accrue or arise in India as attributable to
any operation carried out in India. I may here touch briefly
on that the assessee has produced no proof of these asser-
' lions and, on the contrary, has blocked enquiry by me
c therein."

"The assessee is aggrieved that in the orders under
section 143, the Income-tax Officer assumed ipsi dixit that
the sales were made in India. It submits that while it is true
D that the non-residents' products were sold to persons in
India, that does not conclude the question and, on the facts
of this case, the property in the goods sold passed to the
Indian buyers outside India and, therefore, the Income-tax
Officer's axiomatic assumption that there were any sales in
India is incorrect and if there were no sales in India, there
E is no income which could be deemed to accrue or arise in
India by invoking the provisions of section 9 as no opera-
tion is carried out in India."

The order of the Appellate Assistant Commissioner shows that Came-
ron appeared before him at the hearing on 3.9.1965 and-4.9.1965 and
F the appeals were dismissed by order dated 17.9.1965.
-
This Court's judgment in C./. T. v. R.D. Aggarwal & Co. (supra)
was pronounced on 6th of October, 1964. The order of the Appellate
Assistant Commissioner makes casual reference to this judgment but
the ratio thereof had not been put to use in any manner and the same
G does not appear to have had any perceptible effect on the decision of
the Appellate Assistant Commissioner.

Along with the memorenda of appeal filed before the Tribunal,
the assessee filed the affidavit of Cameron. That affidavit is dated
27 .12.1965. The Revenue had notice of it and the Tribunal in its deci-
1'1 sion has stated "along with the grounds of appeal before us, there is an
C.l.T. v. T.l.M. SALES (MISRA, J.) 891

affidavit by Shri Cameron setting out the course of dealing and alleg- A
ing that several of these representatives files were inspected by the Ap-
pellate Assistant Commissioner at the time of hearing of the appeals."
The Tribunal however did not dealt with the affidavit by saying:-

"For the purpose of a decision as to whether the Indian
company could be appointed agent under section 163 by B
virtue of business connection with the non-resident
companies, it is not necessary to go into the terms of the
affidavit. These facts might have a bearing on the quantum
of the income deemed to arise to the non-resident com-
panies from the business connection."

The Tribunal obviously fell into an error in brushing aside the affidavit
c
for the reason it indicated. The facts stated in the affidavit had a direct
bearing on the point in issue, namely, whether there was any business
connection between the assessee and the non-resident _companies.

In course of the argument of the matter before the High Court, D
sumptuous reference was made by the counsel for the Revenue to the
affidavit of Cameron. The judgment of the High Court says:-

"Mr Pal (for the department) submits that the affidavit of
Mr. Carol Stuart Cameron, Secretary of the Indian Com-
pany affirmed on 27.12.1965 which was filed before the E
Appellate Tribunal contains facts which must be read in the
light of the agreement between the parties.?"

This would indicate that there was no objection to the accep-
tance of the affidavit and use of its content while dealing with the
matter and the High Court relied upon the affidavit and stated:- F

"In our case, the facts as they appear from the documents
on record and the affidavit of Mr. Cameron referred to
above, which incidentally has not been traversed by the
department are (a) procuring of raw materials and manu-
facture of finished goods took place outside the taxable G
territories, (b) contracts for saie of goods were entered
into outside the taxable territories, (c) price was received
by the non-residents outside the taxable territories and (d)
delivery was also made outside the taxable territories.
Moreover, Cameron in his affidavit categorically states that
the orders which were sent from India were accepted by the H
892 SUPREME COURT REPORTS [1987] 2 S.C.R.

non residents in London and intimation of such acceptance
A
was communicated either to the Indian company or to the
Indian customers and the orders became binding contracts
y
only after being accepted in this manner. In other words,
the Indian company had no authority to accept any offers
on behalf of any of these non-residents whether they be-
B longed to Group-A or Group-8. The department, as we
have stated, has not adduced any evidence to contradict the
facts stated by Cameron either from the course of dealings
between the parties or otherwise."

"The position, therefore, is that in a case like this
there can be no business connection unless the Indian asses-
c see has the authority to accept offers or to enter into con-
tracts on behalf of the non-resident~ The Tribunal has
found that in the case of one company only there was an
express prohibition against acceptance of offers. But in the
other contracts there was no such express prohibition. The
D Tribunal has granted relief in the case of express prohibi-
tion but has taken a different view with regard to those
contracts in which there was no such prohibition. In our
opinion, having regard to the facts stated by Cameron and
the course of dealings between the parties, absence of ex-
press prohibition, in the instant case, is immaterial. It is
E true that the Indian company was the sole agent of the
Group-B companies. But it appears, from the evidence on
record that in spite of being the sole agent, the Indian
company had no authority given to it by the Group-8 com-
panies to accept offers on their behalf. So far. as Group-A
companies are concerned, there was no privity of contract
F at all either of agency or of any other variety. In these
premises we cannot but hold that the Indian assessee had
no business connections with the non-resident companies
belonging either to Group-A or Group-8 within the mean-
ing of section 42 of the 1922 Act corresponding to section 9
of the 1961 Act."
G
'Learned counsel for the appellant was very critical about the manner
in which the High Court utilised the affidavit and came to its conclu-
r
sions regarding the facts in dispute. The criticism is not without force.
Ordinarily, the High Court should have declined to use the assertions
in the affidavit for the purpose of recording findings of fact and if, at
H all, in its opinion the affidavit was to be utilised, the matter should
C.I.T. v. T.J.M. SALES [MISRA. J.] 893

have gone before the Tribunal for a fresh disposal of the appeals. The A
facts of this case are, however, somewhat peculiar. Rule 10 of the
Income-Tax (Appellate Tribunal) Rules, 1963 provides:-

"Where a fact which cannot be home out by or is contrary
to the record is alleged, it shall be stated clearly and con-
B
cisely and supported by a duly sworn affidavit."
•
It is the stand of the respondent that Cameron's affidavit came
within the ambit of Rule 10 and had, therefore, been filed along with
the memoranda of appeals before the Tribunal. We are satisfied that
the Revenue had full notice of the affidavit and as pointed out by the
High Court, it did not dispute the facts stated in the affidavit by filing C
objection or counter thereto. The affidavit had not been rejected by
the Tribunal but had only been brushed aside by saying that it was not
relevant. Before the High Court, counsel for the Revenue also used
the affidavit. We do not think it would be appropriate at this stage to
accept the submission made at the Bar on behalf of the appellant and D
put back the matter to the stage of the second appeal before the
Tribunal. The assessments relate to a period about a quarter of a
century back and by its conduct, the Revenue appears to have waived
its right to dispute the facts asserted in the affidavit on one hand by not
challenging its admissibility and on the other, by not disputing the
contents thereof. We have been told during the hearing of the appeals E
that .Cameron is now dead. Once the facts stated in the affidavit are
accepted, the ratio of the decision of this Court in C.I.T. v. R.D.
Aggarwal & Co. (supra) would be fully applicable and the High Court
has utilised the ratio in that decision to find out whether any business
connection between the assessee and the non-resident companies had
been established. There is no dispute that unless the matter comes F
) under section 163(l)(a) of the Act, there will be no liability for assess-
ment. In that view of the matter, these appeals have to fail.

The appeals are therefore dismissed but without any order for
costs.

N.P.V. Appeals dismissed. G