T. L. Venkatarama Aiyar, J. - (1.) 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.
(2.) The appellant is a private limited Company incorporated under the Indian Companies Act, and is carrying on business as marine engineers and ship repairers. 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. and O. Steam Navigation Co. Ltd., and the British Indian Steam Navigation Co. Ltd., whose business consists in plying ships for hire. Under an agreement entered into with the two Companies aforesaid, which will be referred to hereinafter as the non-resident Companies, the appellant repairs their ships at cost, and charges no profits. Now, the point for determination is whether, on these facts, the appellant is chargeable to tax under S. 42(2) of the Act. That sub-section runs as follows: "Where a person not resident or not ordinarily 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 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."
(3.) 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 year 1944-1945 and 1945-1946 and of excess profits tax for the account years 1943-1944, 1944-1945 and 1945-1946. Against these five orders, the appellant preferred appeals to the Appellate Assistant Commissioner, who by his order dated July 3, 1952, confirmed the same. Then there was a further appeal by the appellant to the Appellate Tribunal, and the Bench which heard the same having been divided in its opinion, the matters came up for hearing before the President, who by his order dated March 19, 1954, held that .S. 42 (2) was inapplicable and he accordingly set aside the orders of assessment of income-tax and excess profits tax made on the appellant. On the application of the Department, 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 appellants' assessment under S. 42 (2).";