Suhas Chandra Sen, J. - (1.) The Tribunal has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 " Whether, on the facts and in the circumstances of the case, the sum of Rs. 10 lakhs or any part thereof is taxable in the hands of the assessee or arisen in India ?"
(2.) The assessment year involved is 1966-67, for which the relevant accounting period is the calendar year 1965. The assessee is a non-resident company which entered into three separate agreements dated March 12, 1964, for erecting a plant for the production of graphite and rendering services in connection therewith, Graphite India Ltd. (hereinafter described as "the Indian company ") was to pay to Messrs. Great Lakes Carbon Corporation Rs. 14,00,000 under the agreement. The facts found by the Tribunal as stated in the statement of case are as under : The assessee is a non-resident company. Its accounting year for the assessment year 1966-67 was the calendar year 1965. Proceedings under Section 147 were initiated in the above case by the Income-tax Officer by recording, inter alia, the following reasons : "This is a case of a non-resident which entered into three agreements dated March 12, 1964, viz., (i) Engineering and Construction Agreement, (ii) Operation Agreement and (iii) Export Sales Agreement with Messrs. Graphite India Ltd. for erecting a plant for the production of graphite and rendering services in connection therewith. According to paragraph 4 of the Engineering and Construction Agreement, in consideration of services rendered up to the date of setting up the plant, the Indian company was to pay to Messrs. Great Lakes Carbon Corporation Rs. 10,00,000 upon receipt of the appropriate authorities as set out in Clause 9 of the agreement dated May 7, 1962. The agreement dated June 7, 1962, was not produced. Though the plant got set up only in 1967, yet the payment was made in 1965 (May 28, 1965), when the consideration was utilised for issuing equity capital of the Indian company. Twenty-five per cent. of the equity capital of the Indian company is held by Messrs. Great Lakes Carbon Corporation and, as per paragraph 7 of the Engineering and Construction Agreement, the plant was to be handed over to Messrs. Graphite India Ltd. after the production starts. This meant that Messrs. Great Lakes Carbon Corporation were actively associated in the setting up of the plant in India and as such the remuneration received by them is for the services rendered in India. Moreover, the payment has been received in India in the shape of equity capital of the Indian company. Though, under the agreement, some services are rendered abroad, the payment in respect of the same having been received in full in India, it becomes taxable under Section 5(2)(a). I have, therefore, reason to believe that this income of Rs. 10,00,000 has escaped assessment for failure on the part of the assessee to file the return of income in time and for which no notice under Section 139(2) of the Income-tax Act, 1961, was issued."
(3.) The assessee-company filed its return of income pursuant to the notice under Section 148 on January 17, 1979, disclosing an income of Rs. 96,000 by way of dividend. It claimed that the sum of Rs. 10,00,000 was not taxable in India because no part of it has accrued or has arisen in India. The Income-tax Officer held that there was close financial and managerial association between Messrs. Great Lakes Carbon Corporation (hereinafter described as " the American company " ) with the Indian company and the total receipt was treated as business income of the American company.;