COMMISSIONER OF INCOME TAX Vs. MAZAGAON DOCK LIMITED

JUDGEMENT

(1.) THE assessee is a limited liability company (sic)irrying on the business of marine engineers and (sic)ip -repairers. It is resident and ordinarily resident, (sic)he entire share capital of the assessee company beneficially owned in equal shares by two British companics, the P. and O. Steam Navigation Co. and the British India Steam Navigation Co. Ltd. The business of the assessee company includes repair and maintenance of shins and an arrangement was arrived at between the assessee company and the P. and O. Steam Navigation Co. and the British India Steam Navigation Co, that the assesses company will repair the ships of these two companies at cost price and will charge no profit. Therefore the result of the assessee company carrying on the business of repairing ships of these two British companies was that it made no profit for the relevant assessment years. The income -tax authorities took the view that Section 42(2) applied to the case. They worked out the profit which would have ordinarily been made out of this business activity on the part of the assessee company and assessed it to tax, and the question that arises for our consideration is whether on these facts Section 42 (2) applies.

(2.) NOW , Section 42(1) deals with the income, profits or gains which arise through a business connection in India which a non -resident may have, and such income, profits or gains of the non -resident are made liable to tax, and the tax has to be imposed either in his name or in the name of his agent which may be appointed under the provisions laid down in the Act, and if the tax is imposed in the name of the agent, then the agent is deemed to be for all purposes of the Act the assessee in respect of such income -tax. Section 42(2) deals with an entirely different set of circumstances. A resident may carry on business in the taxable territories with a non -resident and there may be a close connection between the resident and the non -resident and by reason of that close connection the resident may not make any profit out of the business that it is carrying on with the non -resident. The Legislature lays down that if such a situation arises, it will not permit the non -resident to deprive the Indian revenue of the tax on the profits which the resident would ordinarily have made. In the case of Section 42(2) the tax is to be imposed in the name of the resident person who shall he deemed to be for all purposes of the Act the assessee in respect of such income -tax. Therefore it seems that whereas Section 42(1) is aimed at the income, profits or gains which the nonresident might make and which might escape taxation but for the provisions contained in that subsection, the provisions of Sub -section (2) are aimed at the resident whose profits would escape taxation but for the provisions contained in that sub -section.

(3.) NOW , Mr. Palkhivala says that there must be an equation between the business of the nonresident and the resident, and it is only then it could be said that the non -resident carries on business with the resident. According to him the sub -section would only be made applicable if in this case the non -resident did the same business as the resident; in other words, it is only if the non -resident did the business of repairing ships, which is the same business as that of the resident, that subsection would have any application. We do not understand why the section requires such an equation. It is difficult to understand why, if the resident carries on business with the nonresident - - and that position is not disputed by Mr. Palkhivala - - it would not equally be said that the non -resident carries on business with the resident. If the Mazgaon Docks in repairing ships of the two shipping companies is carrying on business with those two shipping companies, equally and as clearly the two shipping companies are carrying on business with the Mazgaon Docks. Business is not a unilateral act. Business is brought about by a transaction between two or more persons, and if there is an activity which is a business activity and that activity is carried on between two persons, then each is carrying on business with the other and not only one party to that activity is carrying on business with the other. All that is necessary in order that it could be said that a non -resident is carrying on business with a resident is that the non -resident must carry on in activity in relation to the resident, which activity can be characterised as a business activity. It is perfectly true that every activity of a non -resident in relation to a resident would not be a business activity. But if the activity is sufficiently continuous and if the activity is in relation to the business of the non -resident, then there is no reason to suggest that the non -resident is not carrying on business with the resident.