Law:

Section:

JUDGMENT Chagla, CJ.-The assessee is a limited liability company carrying on the business of marine engineers and ship-repairers. It is resident and ordinarily resident. The entire share capital of the assessee company is beneficially owned in equal shares by two British companies, the P. & O. Steam Navigation Co. and the British India Steam Navigation Co. Ltd. The business of the assessee company includes repair and maintenance of ships and an arrangement was arrived at between the assessee company and the P. &. O. Steam Navigation Co. and the British India Steam Navigation Co. that the assessee 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. 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…

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