A) ABSTRACT / HEADNOTE

The Supreme Court in Commissioner of Income-Tax/Excess Profits Tax, Bombay City v. Messrs. Bhogilal Laherchand including Batliboi & Co. ([1954] SCR 444), resolved the pivotal question regarding the scope of Section 42(1) of the Indian Income-tax Act, 1922, and its applicability to resident assessees. This case originated from the assessment year 1943–44 concerning a Hindu Undivided Family conducting business across British India and the princely Mysore State. The Income-tax Officer had attributed a portion of the Mysore branch’s profits to British India under the deeming fiction of Section 42(1), which was contested on the ground that such fiction applied solely to non-resident entities.

The Supreme Court reversed the Bombay High Court’s restrictive interpretation and held that Section 42(1) encompassed both resident and non-resident assessees, expanding the jurisdictional reach of Indian tax laws. It emphasized that post-1939 amendments—particularly the deletion of “residing out of British India”—indicated a legislative intent to include all entities, regardless of residency. This interpretive shift overruled earlier narrow readings such as in Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. ([1945] 13 ITR 405).

The Court clarified the statutory fiction inherent in the term “deemed to accrue,” marking a significant development in Indian income-tax jurisprudence, especially for cross-border and intra-national business operations. This judgment thus laid a foundational precedent for interpreting deemed income, business connection, and territorial nexus under Indian tax law.

Keywords: Section 42(1), deemed income, resident assessee, business connection, territorial nexus

B) CASE DETAILS

i) Judgement Cause Title:
Commissioner of Income-Tax/Excess Profits Tax, Bombay City v. Messrs. Bhogilal Laherchand including Batliboi & Co., Bombay

ii) Case Number:
Civil Appeal No. 160 of 1950

iii) Judgement Date:
18th December 1953

iv) Court:
Supreme Court of India

v) Quorum:
Mehr Chand Mahajan CJ, S.R. Das, Ghulam Hasan, Jagannadhadas JJ.

vi) Author:
Justice Mehr Chand Mahajan

vii) Citation:
[1954] SCR 444

viii) Legal Provisions Involved:
Section 42(1) of the Indian Income-tax Act, 1922
Section 4, Section 14(c) of the Indian Income-tax Act, 1922

ix) Judgments Overruled by the Case (if any):
Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. ([1945] 13 ITR 405)

x) Case is Related to which Law Subjects:
Taxation Law, Constitutional Law, Statutory Interpretation, Public Finance Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This appeal arose from the decision of the Bombay High Court under Section 66(1) of the Indian Income-tax Act, 1922, involving the determination of whether a portion of the profits from a non-taxable territory (Mysore State) could be taxed in British India under Section 42(1). The Income-tax Officer deemed Rs. 37,500—half the profit from Mysore sales—to have accrued in British India due to the business connection of the Mysore branch with Bombay and Madras branches.

The High Court held against the Revenue by restricting Section 42(1) only to non-residents, relying on the earlier Bombay precedent. The Revenue appealed to the Supreme Court under a certificate granted by the High Court, leading to a detailed examination of the textual, purposive, and historical construction of the statute.

D) FACTS OF THE CASE

The assessee, a Hindu Undivided Family, operated businesses in Bombay, Madras, and Mysore, which were treated as a single composite entity for tax purposes. During the relevant accounting period (10 October 1941 – 8 November 1942), the Mysore branch purchased goods worth Rs. 2,45,455 from the Bombay and Madras branches. The Income-tax Officer estimated these purchases at Rs. 3,00,000 and determined profits of Rs. 75,000 on resale in Mysore.

Relying on Section 42(1), the officer held that Rs. 37,500—half the profit—was deemed to accrue in British India due to the interconnected operations and intra-entity transfers. However, the Income-tax Tribunal ruled that the assessee, being a resident, was outside the purview of Section 42(1), citing Western India Life Insurance Co. Ltd.. The Revenue then referred the matter to the Bombay High Court, which answered the question in the negative. This led to the Supreme Court appeal.

E) LEGAL ISSUES RAISED

i) Whether Section 42(1) of the Indian Income-tax Act, 1922, applies to a resident assessee?

ii) Whether the profits earned in a non-taxable territory (Mysore) could be deemed to arise in British India through business connection?

iii) Whether the deletion of the phrase “residing out of British India” from Section 42(1) expanded its applicability?

F) PETITIONER / APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that:

The legislative intent behind the 1939 amendment clearly removed the restriction of residency. The phrase “any person” in Section 42(1) deliberately replaced “person residing out of British India,” indicating inclusion of residents. This modification was also in harmony with the new framework introduced in Section 4(1), which defined total income for residents as including income deemed to accrue in India.

They stressed that Section 42(1) is a charging provision, applicable based on the business connection alone, not the residential status. The appellants also referenced Section 14(c) which excludes Part B State income unless it falls under Section 42, hence reaffirming that even residents may be taxed under Section 42 when income arises through such connection.

Furthermore, the petitioner relied on jurisprudence from Sutlej Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal (AIR 1950 Cal 551), and Commissioner of Income-tax v. Ahmedabad Umarbhai & Co. ([1950] SCR 335) to affirm that residency does not constrain the operation of the deeming fiction.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that:

The respondent urged a narrow construction of Section 42(1), arguing it solely applies to non-residents, supported by the marginal note which historically read “non-residents.” They referenced the Bombay High Court’s earlier ruling in Western India Life Insurance Co. Ltd. ([1945] 13 ITR 405), which confined the application to non-residents, asserting that the section operated only to rope in foreign-sourced income of non-residents when such income arose from a business connection within British India.

Additionally, the respondent argued that if the assessee was resident and already covered under Section 4(1)(b)(i), the operation of Section 42 was redundant. Thus, applying Section 42(1) to residents would amount to duplicative taxation, which the legislature could not have intended.

H) RELATED LEGAL PROVISIONS

i) Indian Income-tax Act, 1922

• Section 4(1)(b)(i) – Total income includes income deemed to accrue to residents in British India.
  Link to Provision

• Section 42(1) – Deems certain income to accrue in British India if arising through business connection.
  Link to Provision

• Section 14(c) – Exempts income accruing in Part B States unless assessable under Section 42.
  Link to Provision

H) JUDGEMENT

a. RATIO DECIDENDI

i) Section 42(1) applies to both resident and non-resident assessees. The Court held that the removal of the words “residing out of British India” in 1939 signaled a clear intent to widen the scope of the provision. It reasoned that deeming income to accrue due to a business connection does not depend on residency.

The Court overruled the narrow reading of Western India Life Insurance Co. and affirmed that Section 42(1), read with Section 4 and 14, reflects an integrated framework to ensure territorial and business nexus-based taxation, irrespective of residency.

b. OBITER DICTA 

i) The Court observed that reliance on marginal notes or chapter titles is legally irrelevant for construing statutory provisions. Quoting Balraj Kunwar v. Jagatpal Singh (26 All. 393), it clarified that marginal notes cannot override unambiguous statutory text.

c. GUIDELINES 

• Avoid reliance on marginal notes for interpretation where the statutory language is clear.

• Residency does not restrict the application of Section 42(1); business connection suffices.

• Deeming provisions must be interpreted to give full effect to statutory charging sections.

• Territorial nexus and not residency is the key test under Section 42(1).

• Section 14(c) ensures income from Part B States can be taxed via Section 42 even for residents.

I) CONCLUSION & COMMENTS

The Supreme Court’s ruling established a foundational principle in Indian tax jurisprudence—that deeming fictions under income-tax law transcend residential status when tethered to business connection in the taxable territories. The judgment harmonized legislative amendments post-1939, aligning Section 42(1) with the global income taxation framework under Section 4(1).

By recognizing the broad and purposive legislative intent, the Court averted a regressive and formalistic interpretation and restored a balance between territorial jurisdiction and fiscal reach. This decision significantly bolsters the Indian Revenue’s capacity to tax inter-territorial intra-entity transactions, particularly in the context of erstwhile princely states or foreign branches.

J) REFERENCES

a. Important Cases Referred:

[1] Commissioner of Income-tax v. Western India Life Insurance Co. Ltd., [1945] 13 ITR 405
[2] Sutlej Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal, AIR 1950 Cal 551
[3] Commissioner of Income-tax/Excess Profits Tax, Madras v. Parasuram Jethanand, AIR 1950 Mad 631
[4] Commissioner of Income-tax, Bombay v. Ahmedabad Umarbhai & Co., [1950] SCR 335
[5] Balraj Kunwar v. Jagatpal Singh, 26 All. 393

b. Important Statutes Referred:

[6] Indian Income-tax Act, 1922, Section 4(1)(b)(i)
[7] Indian Income-tax Act, 1922, Section 42(1)
[8] Indian Income-tax Act, 1922, Section 14(c)