MAZAGAON DOCK LTD. vs. THE COMMISSIONER OF INCOME-TAX AND EXCESS PROFITS TAX

CIVIL APPEAL No. 381/1956Supreme Court[1959] 1 S.C.R. 84812 May 1958Bench: 3 JudgesAuthor: T.L. VENKATARAMA AIYYAR, P.B. GAJENDRAGADKAR, A.K. SARKAR13 pages
AI SummaryDismissed

What were the facts?

Mazagaon Dock Ltd. (appellant), a resident Indian company, provided marine engineering and ship repair services. Its entire share capital was beneficially owned by two non-resident companies, P&O Steam Navigation Co. Ltd. and British Indian Steam Navigation Co. Ltd., whose business was plying ships for hire. An agreement stipulated that the appellant would repair the non-resident companies' ships at cost, without charging any profit. The Income-Tax Officer assessed the appellant under Section 42(2) of the Indian Income-tax Act, 1922, deeming profits that could reasonably have been derived. The Appellate Assistant Commissioner confirmed these assessments. The Appellate Tribunal, divided in opinion, had the President set aside the orders. The High Court, however, held Section 42(2) applicable, leading to this appeal.

What did the Supreme Court hold?

The Tribunal held that (1) the business subject to taxation under Section 42(2) is that of the resident, and the expression 'derived therefrom' refers to the resident's business. The charge is on the resident's business, not the non-resident's. (2) A person carries on business with another if their dealings form concerted and organized activities of a business character. In this case, the special agreement for repairs at cost, for use in the non-resident companies' own business, constituted carrying on business with the appellant, even if the non-residents derived no profit. The fact that the non-resident companies might not have made profits from these dealings does not detract from the character of their activities as business with the appellant. (3) The contention that profits under Section 42(2) must be separately assessed is rejected, as the charge is on the appellant's business, not a vicarious liability. The appeal was dismissed.

What were the issues?

1. Whether Section 42(2) of the Indian Income-tax Act, 1922, imposes a charge only on a business carried on by a non-resident, and therefore, no tax could be imposed on the business of the resident appellant. - Assessee's contention: Section 42(2) is applicable only to the business of a non-resident, not the resident appellant. - Revenue's contention: Not recorded. 2. Whether the condition for levying a charge under Section 42(2) that the non-resident must carry on business 'with' the resident is satisfied, given that the non-resident companies only had their ships repaired by the appellant. - Assessee's contention: The non-resident companies merely had their ships repaired, which does not constitute carrying on business with the appellant. - Revenue's contention: Not recorded. 3. Whether profits chargeable under Section 42(2) must be separately assessed and not added to the other profits or income of the appellant. - Assessee's contention: Profits under Section 42(2) are a vicarious liability and should be assessed separately. - Revenue's contention: Not recorded.

Which sections of the Income-tax Act were involved?

Section 42(2),Section 4(2),Section 34,Section 66(1),Section 66(A)

AI-generated summary — verify with the full judgment below

May za. 848 SUPREME COURT REPORTS [1959] MAZAGAON DOCK LTD. v. THE COMMISSIONER OF INCOME-TAX AND EXCESS PROFITS TAX (VENKATARAMA AIYAR, GAJENDRAGADKAR and A. K. SARKAR JJ.)

Income Tax-Non-resident carrying on business with resident- N o profit accruing from dealings between them-Assessment of resi- dent-Validity-" Business", meaning of-Indian Income-tax Act, I922 (II of I922), S. 42(2).

Under s. 42(2) of the Indian Income-tax Act, 1922, "Where a person not resident or not ordinarily· resident in the taxable territories carried on business with a person resident in the tax- able 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 purpose

The order continues below.

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