What is the central issue in this case?

Whether the company had a 'business connection' in British India under Section 42(1), so that a part of its profits became taxable in India.

Why did the Court talk about apportionment of profits?

Because only some operations happened in British India. Tax applies to the portion of profits reasonably linked to those Indian operations.

Did the agency for buying cotton in British India create tax liability?

Yes, it showed a business connection. But tax is limited to the part of profits tied to the Indian activities, not the whole income.

Which court decided the case and when?

Madras High Court, reported as AIR 1951 Mad 597.

What should students remember from this case?

Business connection can exist even with limited Indian operations, but only the attributable share of profits is taxable in India.

Law Easy

02 November, 2025

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The Anglo-French Textile Co. Ltd. v. CIT (AIR 1951 Mad 597) — Business Connection & Profit Apportionment | The Law Easy

The Anglo-French Textile Co. Ltd. v. CIT

Madras High Court 1951 High Court Bench AIR 1951 Mad 597 Income Tax ~6 min read

Author: Gulzar Hashmi India Published: 01 Nov 2025

business connection Section 42(1) profit apportionment

Quick Summary Issues Rules Facts Arguments Judgment Ratio Why It Matters Key Takeaways Mnemonic IRAC Glossary FAQs Related

Quick Summary

This case explains when a foreign company is taxed in India because of a business connection. The company had a mill in French India (Pondicherry) but bought cotton through agents in British India. The Court held: there is a business connection, but tax covers only the slice of profit that fairly belongs to the Indian operations.

Citation: AIR 1951 Mad 597
Court: Madras High Court

Core Statute: Section 42(1), Income-tax Act
Holding: Apportion profits; tax only Indian-attributable part

Issues

Did the company have a business connection in British India under Section 42(1)?
If yes, should profits be apportioned so that only the part linked to Indian operations is taxed?

Rules

If only some profit-making steps happen in British India, tax is limited to the reasonable share of profits from those steps.
Section 42(1) covers income from a business connection in India; Section 42(3) guides apportionment.

Facts (Timeline)

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Company & Location: Anglo-French Textile Co. Ltd., incorporated in the U.K., ran a spinning and weaving mill at Pondicherry (then French India). It made yarn and cloth there.

Indian Purchases: All cotton purchases were done in British India by Best & Co. Ltd., Madras, acting as the company’s agents for India with wide powers. Agents earned a monthly salary and profit-linked commission.

Pre-1939 Assessments: Profits from sales in British India were assessed to income tax.

1939–40: Company said it had discontinued business in British India from 1 April 1939 and got relief under Section 25(3).

Re-assessment: The Income-tax Officer held there was still a business connection in British India and assessed a portion of profits under Sections 42(1) & 42(3). The AAC and Tribunal upheld it. The matter reached the High Court.

Timeline visual for key facts in the Anglo-French Textile Co. case

Arguments

Appellant (Company)

Core manufacturing and sales decisions were outside British India; cotton buying alone should not trigger full tax.
If any link exists, only a fair share of profits (attributable to Indian buying) can be taxed.

Respondent (Revenue)

Agents in Madras had wide authority; this created a real and continuous business connection.
Profits flowed from connected operations; tax could be levied on income linked to India.

Judgment

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The High Court allowed the appeal. It said the company’s income could not be treated as wholly arising in India. There must be a proper allocation between income from Indian operations and income from operations outside India. Only the Indian-attributable part is taxable here.

Judgment visual for Anglo-French Textile Co. case

Ratio (Legal Principle)

Where only part of the operations leading to profits is carried on in British India, the law directs apportionment. Indian tax applies only to the portion of profits reasonably attributable to operations performed in India.

Why It Matters

Clarifies how cross-border businesses face Indian tax when some steps occur in India.
Builds the idea that nexus is about real links, not mere presence.
Protects against over-taxation by insisting on fair profit attribution.

Key Takeaways

Business connection can arise through empowered agents operating in India.
Tax follows the value created in India, not the entire global profit.
Apportionment is a legal requirement when operations are split across borders.
Relief or discontinuance in one year does not erase historic nexus if activities continue.

Mnemonic + 3-Step Hook

Mnemonic: “BUY-MAKE-TAX-SLICE”

BUY in India by agents → shows connection.
MAKE outside India → not all profit is Indian.
TAX only where nexus exists.
SLICE profits fairly by apportionment.

3-Step Hook

Find the Indian link (agents/operations).
Measure the value done in India.
Apportion and tax only that slice.

IRAC Outline

Issue	Rule	Application	Conclusion
Is there a business connection in British India? If yes, how much profit is taxable?	Section 42(1) + 42(3): tax income from business connection; apportion where only part of operations are in India.	Agents in Madras purchased cotton with broad powers. This created the link. But manufacturing and much selling were outside India.	Yes, business connection exists. Tax only the apportioned profits tied to Indian operations.

Glossary

Business Connection: A real link between foreign profits and activities carried out in India.
Apportionment: Splitting total profits to match where the value was created.
Agency: When one party acts with authority for another.

FAQs

It creates a connection if the buying is part of a continuous business setup. But tax is only on profits reasonably linked to that Indian activity.

Because manufacturing and other profit-making steps occurred outside India. Only the part of profit tied to Indian steps can be taxed.

AIR 1951 Mad 597; Section 42(1) and 42(3); principle of apportionment of profits.

No. PE is a treaty term. “Business connection” is a domestic law concept. They overlap in idea (nexus), but they are not identical.

Publication & SEO Block

CASE_TITLE: The Anglo-French Textile Co. Ltd. v. CIT
PRIMARY_KEYWORDS: business connection; Section 42(1); profit apportionment
SECONDARY_KEYWORDS: agency in India; Best & Co.; Pondicherry; British India; income attribution

PUBLISH_DATE: 01 Nov 2025
AUTHOR_NAME: Gulzar Hashmi
LOCATION: India
Slug: the-anglo-french-textile-co-ltd-v-cit

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