Sunanda Bhandare, J.:— M/s. Premnath Diesels Grainvaying Division, a partnership firm constituted on 2-4-1969 entered into a contract with a non-resident company M/s. International Grain Vaying Company Incorporated which was incorporated in U.S.A This contract was in connection with the operation in India of off-loading the grain from large tonnage vessels to the smaller ships along the Indian Coastline and providing suitable grain vayors and their operation for discharge of wheat from large vessels to the smaller ships. M/s. Premnath Diesel Grainvaying Division was to provide necessary supervisory and other staff for maintenance and operation of such grainvayors. M/S. Premnath Diesels Grainvaying Division ultimately dissolved on 1-4-1971. On 11-1-1972 the Income-tax Officer made an assessment for the assessment year 1969-70 on the non-resident company namely; M/s. International Grain Vaying Company Incorporated on a total income of Rs. 2,75,000 on the basis of return filed by the non-resident company. It appears that the non-resident company subsequently closed its business in India and its Managing Director and Director left India for New York. Thereafter, on 6-12-1972 the Income-tax Officer served a notice on M/s. Premnath Diesels Grainvaying Division requiring it to show cause why it should not be treated as agent of the non-resident under section 163 (1) (b) of the Income-tax Act, 1961. The appellant firm objected on the ground that it had no business connection with the non-resident company and it should not be charged to tax on the income of the non-resident. By his order dated 12-2-1974 the Income-tax Officer rejected this contention and treated M/s. Premnath Diesels Grainvaying Division as an agent of the non-resident company. On 2-3-1974 a demand notice for the recovery of amount of Rs. 2,55,294 was served on the appellant. M/s. Premnath Diesels Grainvaying Division preferred an appeal to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer in treating the appellant as an agent of the non-resident Company. An appeal was filed against that order before the Income-tax Appellate Tribunal, Delhi Bench ‘D’. The Income-tax Appellate Tribunal held that there was a business connection between the appellant and the non-resident Company within the meaning of Section 163(1)(b) and consequently M/s. Premnath Diesels Grainvaving Division was rightly declared as agent of the non-resident company. The Income-tax Appellate Tribunal however held that by declaring M/s. Premnath Diesels Grainvaying Division as an agent of the non-resident company, it did not automatically become liable to pay tax as a representative assessee in respect of the assessment made on the non-resident Company. On applications filed both by the Department and the assessee the Tribunal referred the case under Section 256 (1) to this Court for opinion. In the Reference Application [No. 261 (Del) of 1975-76 filed by the Department] the following question has been referred: —

“Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that M/s. Premnath Diesels Grainvaying Division held to be the agent of the non-resident company under section 163 would not be liable to pay tax as a representative assessee in respect of the assessment made on the non-resident company M/s. International Grainvaying Company Incorporated ?”

In Reference Application [No. 252 (Del) 1975-76 filed by the assessee] the following question has been referred: —

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the appellant had a business connection with M/s. International Grainvaying Co. Incorporated within the meaning of section 163 (1) of the Income-tax Act, 1961 ?”

2. Counsel for the assessee Shri G. C. Sharma made a two fold contention before us. Firstly, it was contended that there was no business connection between the assessee and the non-resident company since the assessee was only a labour contractor. It was, therefore, contended that the appellant was not an agent within the meaning of section 163 of the Income-tax Act. The second contention was that assuming there was a business connection between the present assessee and the non-resident company, no tax could be levied on the appellant as a representative assessee under section 161 of the Income-tax Act. It was submitted that once the Department having chosen to assess, the non-resident company it was not open for the Department to assess the appellant as a representative assessee of the non-resident. A concurrent assessment could not be made on an agent. This assessment would also be barred by time under section 149 (3) of the Income-tax Act since the original assessment against the non-resident company was made on 11-1-1972 and the order under section 163 (1) (b) was purported to be made on 12th February, 1974.

3. In support of his first contention reliance was placed by Mr. G. C. Sharma on the judgment of the Supreme Court in the case of Commissioner of Income-tax, Punjab v. R. D. Aggarwal and Company, 56 (1965) ITR 20 (1). The Supreme Court while interpreting the term ‘business connection’ within the meaning of Section 42 (1) of the Indian Income-tax Act, 1922 held:

“The expression “business” is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression “business connection” and its precise connotation is vague and indefinite. The expression “business connection” undoubtedly means something more than “business”. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.

A relation to be a “business connection” must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident.

In the case before the Supreme Court though the assessee was having commercial activity with the non-resident inasmuch as orders were procured by the assessee for the non-resident company, which resulted in contracts for sale by the non-resident of goods to merchants at Amritsar, the Supreme Court held that there was no real and intimate relation between the non-resident company and the Indian assessee and, therefore, no business connection resulted from this transaction between the assessee and the non-resident company. Section 42 (1) of the Indian Income-tax Act, 1922 is pari matria with section 163 (1) (b) of the Income-tax Act. It was submitted by the counsel that the present case stood on stronger footing. In the present case the appellant was only a labour contractor who provided necessary supervisory and other staff for maintenance of operation of grainvayors. According to the contract dated 8-4-1968 between the appellant and the non-resident Company, the appellant was to be paid direct expenses in and towards the actual cost of the labour and supervisory staff plus additional provision for gratuity and provident fund for the labour and certain office and miscellaneous expenses. Counsel submitted that if the appellant had refused to supply the labour the non-resident Company could have engaged labour directly or through other sources and the business of the non-resident Company would not have affected in any manner whatsoever. There was no profit sharing between the non-resident Company and the appellant firm. No amount was paid by the appellant Company to the non-resident Company and in fact a sum of Rs. 2,18,432 was paid by the non-resident Company to the appellant for which the appellant firm was separately assessed and tax on that income had already been paid.

4. Mr. Wazir Singh, learned counsel for the Department submitted that it was not necessary to have any profit sharing between the non-resident Company and the appellant firm in order to show that there was a business connection between the two. It was submitted that there was intimate relation between the non-resident Company and the appellant Company inasmuch as all the work was done by the appellant Company. Reliance was placed by the counsel for the Department on the judgment of the Supreme Court in the case of Barendra Prasad Ray and others v. ITO ‘A’ Ward, foreign section & others, (1981) (1) 129 itr 295 (2). The Supreme Court while dealing with the question whether the expression ‘business connection’ would also include professional connection between a solicitor and a barrister held that the expression ‘business’ does not necessary mean trade or manufacture only. The expression included within its scope professions, vocations and callings. The word ‘business’ is one of wide import and meant an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn an income. In that case the Supreme Court observed that the barrister Mr. Blanco White who came to India and appeared before the Calcutta High Court, though not paid by the Calcutta Solicitor, was engaged by the Solicitor at Calcutta on instructions from the London solicitor. Mr. Blanco White could not have appeared before the Calcutta High Court unless he was assisted or instructed by a solicitor to do so. The Supreme Court, therefore, held that the connection was not a casual one and it was real and intimate relation. The facts of the case before the Supreme Court were different than the facts of the present case. The relationship between a solicitor and barrister in a dual system is of a peculiar nature. A barrister in this system cannot argue a case in court unless he is instructed and assisted by a solicitor. In the present case, if the firm had refused to assist the non-resident Company in procuring labour the non-resident company could have directly engaged labour and carried on the business activity. The profits or the business of the non-resident Company could have been earned by the non-resident Company even without the assistance of the appellant firm.

5. It is not disputed that in the present case the appellant apart from procuring labour supplied, supervisory and other services for which the appellant was paid actual expenses and commission. The non-resident Company carried on its, business activity because of the contract with the Government of India under PL-480 Programme. The services rendered by the appellant could have been rendered by any other labour contractor or could have been obtained by the non-resident Company by engaging direct labour. There was, therefore, no real & intimate relation between the appellant and the non-resident Company. The appellant cannot, therefore, be held, to be an agent having any business connection with the non-resident as envisaged under section 163 (1) (b) of the Income-tax Act, 1961.

6. We now come to the second contention raised by Mr. G. C. Sharma, Advocate for the appellant. It is an admitted fact that the non-resident Company. M/s. International Grainvaying Incorporated filed its return on 25-8-1969 and was assessed under section 143 (3) of the Income-tax Act on 11-1-1972. It was only on 12th February, 1974 that an order under, section 163 (1) (b) was passed by the Income-tax Officer declaring the present appellant as an agent and treating him as a representative assessee of the non-resident. In none of the cases cited by counsel on both the sides an order under section 163 (1) (b) was sought to be made after the non-resident was assessed on the return filed by the non-resident and without giving any opportunity to the agent to make its objections and subjecting it to the normal process of the assessment under the Income-tax Act.

7. In the case of Commissioner of Income-tax v. Claggett Brachi & Co. Limited, 100 (1975) ITR 46 (3) the Andhra Pradesh High Court held that the department cannot make the assessment on both the agent and the principal. If on exercise of the option the assessment is made on the agent, the authorities cannot make an assessment on the principal. The Andhra Pradesh High Court in this case was dealing with a question of reassessment proceedings and whether the same could be started against the principal instead of on the agent when original assessment was made on the agent.

8. Reference may be made to the full Bench judgment of the Punjab & Haryana High Court in the case of Commissioner of Income-tax v. Kanhaya Lal Gurumukh Singh, (1973) 87 ITR 476 (4) where the majority expressed the view that sections 246 and 249 of the Income-tax Act leave no manner of doubt that the Income-tax Officer has to pass an order under section 163 before initiating proceedings by issuing a notice under section 148 of the Act. In that case simultaneously notices were issued both under section 163 and section 148 of the Act. In the present case, no notice was issued to the appellant asking it to file a return. The assessment was made on the non-resident, and only a demand notice was issued on the appellant, for the recovery of the amount after declaring it an agent under section 163, that too after the period of 2 years had expired. It was open to the Income-tax Officer to assess either the representative or the non-resident at the initial stage. However, once the non-resident Company was assessed, the representative assessee could not be assessed after the statutory period of two years had expired. In fact, on the date when an order under section 163 (1) (b) was passed, no assessment could have been made on the appellant since two years had already expired, which is a requirement under section 149 (3) of the Income-tax Act. Therefore, even if the appellant was treated as an agent having business connection with the non-resident he could not be taxed without assessment being made on him. There is no doubt that the appellant had to be given an opportunity of being heard as to its liability. Therefore, a notice under section 139 (2) calling for a return of income would be essential. In the present case by denying this opportunity the appellant was also denied the valuable right of appeal to challenge the quantum of tax. If the Income-tax Department finds that the agent is to be taxed as representative assessee then the Department must call upon the agent to file the return and then only the agent can be taxed as a representative assessee. The Department having chosen to assess the non-resident, assuming the appellant could be treated as an agent, could not tax the agent as representative assessee.

9. The only thing that could be done at this stage would be under section 167 of the Act to recover the amount of tax payable by the non-resident from the assets which had vested in the hands of the agent. In the present case no property of the non resident had vested in the hands of the agent. Therefore, no recovery could be made under section 167 of the Act. In any event the question of recovery of tax was not before the Appellate Assistant Commissioner. The only question before the Appellate Assistant Commissioner was whether the appellant could be treated as an agent under section 163 (1) (b) of the non-resident.

10. We, therefore, answer the first question in Reference Application No. 261 (DEL of 1975-76) in the affirmative in favour of the assessee and against the Department and the second question in Reference Application No. 252 (DEL of 1975-76) is the negative in favour of the assessee and against the Department. The parties are left to bear their own costs.

References answered in favour of the assessee.