COMMISSIONER OF INCOME TAX MYSORE Vs. IMPERIAL TOBACCO COOF INDIA LTD
LAWS(KAR)-1949-9-1
HIGH COURT OF KARNATAKA
Decided on September 26,1949

COMMISSIONER OF INCOME-TAX, MYSORE Appellant
VERSUS
IMPERIAL TOBACCO CO. OF INDIA LTD. Respondents


Referred Judgements :-

ERICHSEN V. LAST [REFERRED TO]
ELLIMAN SONS AND CO. V. CORRINGTON AND SON LTD. [REFERRED TO]
NANDLAL BHANDARI MILLS LTD.,CAWNPORE V. COMMR. OF INCOME-TAX C.P. AND U.P. [REFERRED TO]
COMMR. OF INCOME-TAX,BOMBAY V. METRO GOLDWYN (INDIA) LTD. [REFERRED TO]
WEISS BIHELLER AND BROOKS LTD. V. FARMER [REFERRED TO]
COMMISSIONER OF INCOME-TAX, BOMBAY VS. REMONGTON TYPEWRITER COMPANY (BOMBAY ) LIMITED [REFERRED TO]


JUDGEMENT

- (1.)This is a reference by the Commissioner of Income-tax under Section 66(2), Mysore Income tax Act. The assessee is a company registered under the Indian Company's Act which has its head office in Calcutta and is engaged in the manufacture and sale of cigarettes. The manufacturing establishment is at Calcutta but the sales are effected all over India including Mysore the Company does not sell the goods directly in the market and has provided a special machinery for carrying on the business. It has depots in several towns or cities one of which is at Madras to cater to the demands of the surrounding area for portions of which a "distributor" or "customer" as he is called since 1941 is appointed. During the period between 1st August 1935 and 15th November 1944, the depot in Madras was shifted to Bangalore C and M Station. In the year relevant to the case there were 43 "customers" of the company in Mysore each of whom had to operate within a particular, defined "territory". These "customers" purchased the goods in the C and M Station depot at wholesale prices and sold tem with a margin of profit to the "dealers" and these in turn sold the goods to the "retailers" from whom the smoker or consumer brought the articles. In some cases the "customer" also sold the goods to the "retailer" and had an additional profit. The goods were paid for by the "customers" in the C and M station and if taken on credit a deposit was necessary. The prices at which the sales had to be effected by each of these, the places within which the "customers" are to function are fixed by the company.
(2.)The exact relations between the company and the "customers" the nature and extent of the control the company exercises over them and the consideration therefor are all matters of oral understanding. At any rate no written agreement touching these has been produced. In the affidavit filed before the Commissioner the Manager of the depot at Madras refers to the instruction from the Head Office that "No written agreement or rules should be issued to now distributors. All arrangements with distributors to be made verbally" and to the terminable without notice, and says that there were "no arrangements with 'customers' having legal effect or having binding obligations on either side". Nevertheless in some of the letters by the company to the customers, it is written "whilst the arrangements are subject to termination without notice we trust in actual practice they will prove to be the prelude to a long and profitable period of mutual trading co-operation". Instances of termination as a matter of fact are found to be rare and with the exception of one all the "customers" have remained undisturbed. In addition to the limitations as regards the area and the prices to which the "customers" were subject, they were not free to sell other goods or goods from others which may interfere with the sales of the company's products. They had also to furnish thrice a month a statement of the existing stock to the company. The intimation was to be made and orders placed for fresh supplies in the forms supplied by the company when goods became stale or were found excessive the "customers" could return the same and receive payment from the company. The company had employed a special staff of Inspectors for the purpose of checking whether these instructions or conditions are adhered to and report to the company the need for changes, appointment of additional 'customers', and other steps to be taken for expansion and improvement of the business. This in brief was the modus operandi of the business.
(3.)The Manager of the company's depot was served on 3rd April 1944 with a notice under the Income-tax Act by the Additional Deputy Commissioner of Income-tax, Companies Circle, calling upon him to make a return of the total income of the company during the year ending on 30th June 1943. The depot Manager denied liability and on the information obtained after enquiries in the matter the Deputy Commissioner passed an order holding that the company had business connection in Mysore and was liable to pay the tax. The order of assessment was upheld by the Commissioner on appeal by the company. The assessment it is mentioned relates to the year beginning with 1st April 1942 and ending on 1st April 1943. The company sought for and obtained the present reference. the question formulated by the Commissioner for determination is: "Whether on the facts and circumstances of the ease the applicants can be held to have any income accruing or arising to them directly or Indirectly through or from any business connection in Mysore under Sections 4 ad 42(1), Mysore Income-tax Act." Section 4 (1) of the Act reads: "Save as hereinafter provided, this Regulation shall apply to all income, profits or gains, as described or comprised in Section 6, from whatever source derived, accruing or arising, or received in Mysore, or deemed under the provisions of this Regulation to accrue, or arise or to be received in Mysore." Section 6 of the Act enumerates the heads of income, profits or gains of which No. (iv) is business and (iv) is other sources chargeable to income tax. Section 42 (1) states: "In the case of any person residing out of Mysore all profits, or gains accruing or arising to such person, whether directly or indirectly through or from any business connection in Mysore.....shall be deemed to be income accruing or arising within Mysore and shall be chargeable to income-tax either in his name or in the name of his agent...."


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