Lakshminarayan Ram Gopaland Son Ltd. Vs.
The Government of Hyderabad [1954] INSC 35 (1 April 1954)
BHAGWATI, NATWARLAL H.
DAS, SUDHI RANJAN JAGANNADHADAS, B.
CITATION: 1954 AIR 364 1955 SCR 393
CITATOR INFO :
RF 1954 SC 470 (65) R 1957 SC 846 (8,13) RF
1957 SC 852 (31) F 1960 SC1269 (6,7) R 1960 SC1279 (8) MV 1966 SC 843 (66) R
1966 SC1514 (13) RF 1973 SC 637 (9) RF 1977 SC1677 (5)
ACT:
Master and Servant-Principal and
Agent-Distinction between -Hyderabad Excess Profits Tax Regulation-Activities
which constitute business-Remuneration which constitutes income, profits or
gains from business.
HEADNOTE:
The difference between the relations of
master and servant and of principal and agent may be said to be this: a principal
has the right to direct what work the agent has to do: but a master has the
further right to direct how the work is to be done.
The positions of an agent, a servant and
independent contractor are distinguished as under:
An agent is to be distinguished on the one
hand from a servant, and on the other from an independent contractor. A servant
acts under the direct control and supervision of his master, and is bound to
conform to all reasonable orders given to him in the course of his work; an
independent contractor, on the other hand, is entirely independent of any
control or interference and merely undertakes to produce a specified result,
employing his own means to produce that result. An agent, though bound to
exercise his authority in accordance with all lawful instructions which may be
given to him from time to time by his principal, is not subject in its exercise
to the direct control or supervision of the principal. An agent, as such is not
9, servant, but a servant is generally for some purposes his master's implied
agent, the extent of the agency depending upon the duties or position of the
servant.
Held, that the position of the appellants in
the light of the principles stated above and the terms of the Agency Agreement
was that of the agents of the Dewan Bahadur Ram Gopal Mills Ltd., and they
carried on the general management of the business of the company subject to the
control and supervision of the Directors.
394 The control and supervision of the
Directors was, however, a general control and supervision and within the limits
of their authority the appellants as the agents of the company had perfect
discretion as to how that work of general management was to be clone both in
regard to the method and the manner of such work and therefore the circumstances
of the case together with the of power of sub-delegation reserved under the
Articles of Association established beyond doubt that the appellants were the
agents of the company and not merely the servants of the company remunerated by
wages or salary.
Held further, that various factors along with
the fixity of tenure, the nature of remuneration and the assign ability of
their rights were sufficient to prove that the activities of the appellants as
the agents of the company constituted a business and the remuneration which the
appellants received from the company under the terms of the Agency Agreement
was income, profits or gains from business and the appellants were rightly
assessed under the provisions of Hyderabad Excess Profits Tax Regulation.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 292 and 312 of 1950.
Appeals from the Judgment and Order of the
High Court of Judicature at Hyderabad (Ansari, Qamar Hasan and Manohar Pershad
JJ.) in Cases Nos. 180-181 of 1954 F. Ved Vyas, (S. K. Kapur and Ganpat Rai,
with him) for the appellant.
M. C. Setalvad, Attorney-General for India
(Porus A. Mehta, with him) for the respondent.
1954. April 1. The Judgment of the Court was
delivered by BHAGWATI J.-These are two appeals from the judgment and decision
of the High Court of Judicature at Hyderabad answering certain questions
referred at the instance of the appellants by the Commissioner of Excess
Profits Tax, Hyderabad, and adjudging the liability of the appellants for
excess profits tax in regard to the amounts recieved by them as remuneration
from the Dewan Bahadur Ramgopal Mills Company Ltd. as its Agents.
The Mills Company was registered on the 14th
February, 1920, at Hyderabad in the then territories of His Exalted Highness
the Nizam. The appellants were registered as a private limited company at
Bombay on 395 agreement was entered into between the Mills Company. and the
appellants appointing the appellants its Agents for a period of 30 years on
certain terms and conditions therein recorded. The appellants throughout worked
only as the Agents of the Mills Company and for the Fasli years 1351 and 1352
they received their remuneration under the terms of the Agency agreement. A
notice was issued under section 13 of the Hyderabad Excess Profits Tax
Regulation by the Excess Profits Tax Officer calling upon the appellants to pay
the, amount of tax appertaining to these chargeable accounting periods. The
appellants submitted their accounts and contended that the remuneration
received by them from the Mills Company was not taxable on the ground that it
is was not income, profits or gains from business and was outside the pale of
the Excess Profits Tax Regulation. This contention of the appellants was
negatived and on the 24th April, 1944, the Excess Profits Tax Officer made an
order assessing the income of the appellants for the accounting periods 1351
and 1352 Fasli at Rs. 8,957 and Rs. 83,768 respectively and assessed the tax
accordingly. An appeal was taken by the appellants to the Deputy Commissioner
of Excess Profits Tax who disallowed the same. An application made by the
appellants under section 48(2) for statement of the case to the High Court was
rejected by the Commissioner and the appellants filed a petition to the High
Court under section 48(3) to compel the Commissioner to state the case to the
High Court. An order was made by the High Court on this petition directing the
Commissioner to state the case and the statement of the case was submitted by
the Commissioner on the 26th February, 1946. Four questions were referred by
the Commissioner to the High Court’s as under:(1) Whether the Petitioner
Company is a partnership firm or a registered firm ? (2) Whether under the
terms of the agreement the petitioner is an employee of the Mills Company or is
carrying on business ? 396 (3)Whether the remuneration received from the MILLs
is on account of service or is the remuneration for business ? (4)Whether the
principle of personal qualification referred to in section 2, clause (4), of
the Excess Profits Regulation is applicable to the Petitioner Company ? These
questions were of considerable importance and were referred for decision to the
Full Bench of the High Court.
The Full Bench of the High Court delivered
their judgment the majority deciding the questions (2) and (3) which were the
only questions considered determinative of the reference against the
appellants. The appellants appealed to the Judicial Committee. But before the
Judicial Committee heard the appeals there was a merger of the territories of
Hyderabad with India. The appeals finally came for hearing before the Supreme
Court Bench at Hyderabad on the 12th December, 1950, when an order was passed
transferring the appeals to this Court at Delhi. These appeals have now come
for hearing and final disposal before us.
The questions (1) and (4) which were referred
by the Commissioner to the High Court at Hyderabad have not been seriously
pressed before us. Whether the appellants are a partnership firm or a
registered company the principle of exclusion of the income from the category
of business income by reason of its depending wholly or mainly on the personal
qualifications of the assessee would not apply because the income could not be
said to be income from profession and neither a partnership firm nor a
registered company as such could be said to be possessed of any personal
qualifications in the matter of the acquisition of that income.
The principal questions which were therefore
argued before the High Court at Hyderabad and before us were the questions (2)
and (3) which involved the determination of the position of the appellants
whether they were servants or agents of the Mills Company and the determination
of the character of their remuneration whether it was wages or salary or income,
profits or gains from business.
397 The appellants were registered as a
private limited company having their registered office in Bombay and the
objects for which they were incorporated were the following:
(1)To act as agents for Governments or Authorities
or for any bankers, manufacturers, merchants, shippers, Joint Stock Companies
and others and carry on all kinds of agency business.
(2)To carry on in India and elsewhere the
trade or business of merchants, importers exporters in all', their branches
etc. etc............
Under Article 115 of the Articles of
Association of the Mills Company the appellants and their assigns were'
appointed the agents of the Company upon the terms, -provisions and conditions
set out in the Agreement referred to in clause 6 of the Company's Memorandum of
Association.
Article 116 provided that the general
management of the business of the Company subject to the control and
supervision of the Directors, was to be in the hands of the Agents of the
Company, who were to have the power and authority on behalf of the Company,
subject to such control and supervision, to enter into all contracts and to do
all other things usual, necessary and desirable in the management of the,
affairs of the Company or in carrying out its objects and were to have power to
appoint and employ in, or. for the purposes of the transaction and management
of the affairs and business of the Company, or otherwise for the purposes
thereof, and from time to time to remove or suspend such managers, agents, clerks
and other employees as they thought proper with such powers and duties and upon
such terms as to duration of employment, remuneration or otherwise as they
thought fit and were also to have powers to exercise all rights and liberties
reserved and granted to them by the said agreement referred to in clause 6 of
the Company's Memorandum of Association including the rights and liberties
contained in clause 4 of the agreement. Article 1 18 authorised the agents to
sub-delegate all or any of the powers, authorities and discretions for the time
being vested in them, and in particular 398 from time to time to provide by the
appointment of an attorney or attorneys, for the management and transaction of
the affairs of the Company in any specified locality, in such manner as they
thought fit.
The Agency agreement which was executed in
pursuance of the appointment under Article 115, provided that the appellants
and their assigns were to be the Agents of the Company for a period of 30 years
from the date of registration of the Company and they were to continue to act
as such agents until they of their own will resigned. The remuneration of the
appellants as such Agents was to be a commission of per cent on the amount of
sale proceeds of all yarn cloth and other produce of the Company (including
cotton grown) which commission was to be exclusive of any remuneration or wages
payable to the bankers, Solicitors engineers, etc., who may be employed by the
appellants for or on behalf of the Company or for carrying on and conducting
the business of the Company. The appellants were to be paid in addition all
expenses and charges actually incurred by them in Connection with the. business
of the Company and supervision and management thereof and the appellants were
entitled to appoint any person or persons in Bombay to act as their Agents in
Bombay and any other places in connection with the business if the Company.
Clauses 3 and 4 of the agency agreement are
important and may be set out in extenso :
3. Subject to the control and supervision of
the Directors, the said Lachminaravan Ramgopal and Son Limited shall have the
general conduct and management of the business and affairs of the company and
shall have on behalf of the company to acquire -by purchase lease or otherwise lands
tenements and other Buildings and to erect maintain alter and extend factores
ware-houses, engine house and other buildings in Hyderabad and' elsewhere in
the territories of His Exalted Highness the Nizam and in India -and to
purchase, pay for, sell, resell, and repurchase machinery, engines, plant, raw
cotton, waste, jute, wool and 399 other fibres and produce, stores and other
materials and to manufacture yarn cloth and other fabrics and to sell the same
either in the said territories as well as elsewhere in India and either on
credit or for cash, or for present or future delivery, and to execute become
parties to and where necessary to cause to be registered all deeds, agreements,
contracts, receipts and other documents and to insure the property of the
Company for such purposes and to such extent and in such manner as they may
think proper; and to institute, conduct, defend, compromise, refer to
arbitration and abandon legal and other proceedings, claims and disputes in
which the Company is concerned and to appoint and employ discharge, re-employ
or replace engineers. managers, retain commission dealers, muccadums, brokers,
clerks, mechanics, workmen and other officers and servants with such powers and
duties and upon such terms as to duration of office remuneration or otherwise
as they may think fit ; and to draw, accept endorse, negotiate and sell Bills
of Exchange and Hundies with or without security and to receive and give
receipts for all moneys payable to or to be received by the company and to draw
cheques against the moneys of the company and generally to make all such
arrangements and do all such acts and things on behalf of the Company, its
successors and assignsas may be necessary or expedient and as are not
specifically reserved to be done by the Directors.
4.The said Lachminarayan Ramgopal & Son
Ltd., shall be at liberty to deal with the Company by way of sale to the
Company of cotton all raw materials and articles required for the purpose of
the Company and the purchase from the Company of yarn cloth and all other
articles manufactured by the Company and otherwise, and to deal with any firm
in which any of the shareholders of the said Lachminarayan Ramgopal & Son
Ltd., may be directly or indirectly concerned provided always such dealings are
sanctioned passed or ratified by the Board of Directors either before or after
such dealings.
Clause 8 provided that two of the members for
the time being of the appellants were at the option of the 400 appellants to be
the ex-officio Directors of the Company and clause 9 empowered the appellants
to assign the agreement and the rights of the appellants there under subject to
the approval and sanction of the Board to any person, firm or Company having
authority by its constitution to become bound by the obligations undertaken by
the appeallants.
No materials other than these 'were placed by
the appellants either before the Income-tax Authorities or the High Court and
the questions that arise before us have to be determined only on these
materials. If on the construction of these documents we arrive at the
conclusion that the position of the appellants was not that of servants but the
agents of the Company the further question would have to be determined whether
the activities of the appellants amounted to the carrying on of business. If
they were not the servants of the Company, the remuneration which they received
would certainly not be wages or salary but if they were agents of the Company
the question would still survive whether their activities amounted to the
carrying on of business in which case only the remuneration which they received
from the Company would be income, profits or gains from business.
The distinction between a servant and an
agent is thus indicated in Powell's Law of Agency, at page 16 : -(a)Generally a
master can tell his servant what to do and how to do it.
(b) Generally a principal cannot tell his
agent how to carryout his instructions.
(c) A servant is under more complete control
than an agent, and also at page 20:(a)Generally, a servant is a person who not
only receives instructions from his master but is subject to his master's right
to control the manner in which -he carries out those infructions. An agent
receives his principal's instructions but is generally free to carry out those
instructions according to his own discretion 401 (B) Generally, a servant, qua
servant, has no authority to make -contracts on behalf of his master'
Generally, the purpose of employing an agent is to authorise him to make
contracts on behalf of his principal.
(c) Generally, an agent is paid by commission
upon effecting the result which he has been instructed by his principal to
achieve. Generally, a servant is paid by wages or salary.
The statement of the law contained in
Halsbury's Laws of England-Hailsham Edition-Volume 22, page 113, paragraph 192
may be referred to in this connection :"The difference between the
relations of master and servant and of principal and agent may be said to be
this: a principal has the right to direct what work the agent has to do: but a
master has the further right to direct how the work is to be done." The
position is further clarified in Halsbury's Laws of England-Hailsham
Edition-,Volume 1, at page. 193, article 345 where the positions of an agent, a
a servant and independent contractor are thus distinguished : " An agent
is to be distinguished on the, one hand from a servant, and on the other from
an independent contractor.
A servant acts under the direct control and
supervision of his master, and is bound to conform to all reasonable orders
given him in the course of his work; an independent contractor, on the other
hand, is entirely independent of any control or interference, and merely
undertakes to produce a specified resulted employing his own means to produce
that result. An ament, though bound to exercise his authority in accordance
with all lawful instructions which may be given to him from time to time by his
principal, is not subject in its exercise to the direct control or supervision
of the principal. An -agent, as such is not a servant, but a servant is
generally for some purposes his master's implied agent, the extent of the
agency depending upon the duties or position of the servant' "Considering
the position of the appellants in the light of the above principles it is no
doubt true that the 52 402 appellants were to act as the agents of the Company
and carry on the general management of the business of the Company subject to
the control and supervision of the Directors. That does not however mean that
they acted under the direct control and supervision of the Directors in regard
to the manner or method of their work. The Directors were entitled to lay down
the general policy and also to give such directions in regard to the management
as may be considered necessary. But the day to day management of the business
of the Company as detailed in Article I 1 6 of the Articles of Association and
clause 3 of the Agency Agreement above set out was within the discretion of the
appellants and apart from directing what work the appellants had to do as the
agents of the Company the Directors had not conferred upon them the further
right to direct how that work of the general management was to be done. The
control and supervision of the directors was a general control and supervision
and within the limits of their authority the appellants as the agents of the
Company had perfect discretion as to how that work of general management was to
be done both in regard to the method and the manner of such work. The appellants
for instance had perfect latitude to enter into agreements and contracts for
such purpose and to such extent and in such manner as they thought proper. They
had the power to appoint, employ, discharge, reemploy or replace the officers
and servants of the Company with such powers and duties and upon such terms as
to duration of office remuneration or otherwise as they thought fit. They had
also the power generally to make all such arrangements and to do all such
things and acts on behalf of the Company, as might be necessary or expedient
and as were not specifically reserved to be done by the Directors. These powers
did not spell a direct control and supervision of the Directors as of a master
over his servant but constituted the appellants the agents of the Company who
were to exercise their authority subject to the control and supervision of the
Directors but were not subject in such exercise to the direct control or
supervision of the principals. The liberty given to the appellants under clause
4 of the Agency 403 Agreement to deal with the Company by way of sale and
purchase of commodities therein mentioned also did not spell a relation as
between master and servant but empowered the appellants to deal with the
Company as Principals in spite of the fact that under clause 8 of the Agreement
two of their members for the time being were to be the ex-officio Directors of
the Company. The power to assign the Agreement and the rights of the appellants
thereunder reserved to them under clause 9 of the Agency Agreement though
subject to the approval and sanction of the Board was hardly a power which
could be vested in a servant. There was further the right to continue in
employment. as the agents, of the Company for a period of 30 years from the
date of the registration thereof and thereafter until the appellants of their
own will resigned, which also would be hardly consistent with the employment of
the appellants as mere servants of the Company. The remuneration by way of
commission of 2-1/2 per cent. of the amount of sale proceeds of the produce of
the Company savoured more of the remuneration given by a principal to his agent
in the carrying out of the general management of the business of the principal@
than of wages or salary which would not normally. be on such a basis. All these
circumstances together with the power of sub delegation reserved under Article
118 in our opinion go to establish that the appellants were the agents of the
Company and not merely the servants of the Company remunerated by wages or salary.
Even though the position of the appellants
qua the Company was that of agents and not servants as stated above it remains
to be determined whether the work which they did under the Agency Agreement
amounted to carrying on business so as to constitute the remuneration which
they received there under income, profits or gains from business. The
contention which was urged before us that the appellants only worked as the
agents of the Mills Company and no others and therefore what they did did not
constitute a business does not avail the appellants. The activities in order to
constitute a business need not necessarily be concerned with several.
individuals or concerns. They would constitute 404 business in spite of their
being restricted to only one individual or concern. What is relevant to
consider is what is the nature and scope of these activities though either by
chance or design these might be restricted to only one individual or concern.
It is the nature and scope of these activities and not the extent of the
operations which are relevant for this purpose.
The activities of the appellants certainly
did not come within the inclusive definition of business which is given in
section 2 clause 4 of the Excess Profits Tax Regulation, Hyderabad. Business is
there defined to include any trade, commerce or manufacture or any adventure in
the 'nature of a trade, commerce or manufacture or any profession or vocation
but not to include a profession carried on by an individual or by individuals
in partnership if the profits of the profession depend wholly or mainly on his
or their personal qualifications unless such profession consists wholly or
mainly in the making of contracts on behalf of other persons or giving to other
persons of advice of a commercial nature in connection with the making of
contracts. The work which the appellants did under the terms of the Agency
Agreement constituted neither trade, commerce or manufacture or any adventure:
in the nature of trade, commerce or manufacture nor was it a profession or
vocation. , The activities which constitute carrying on business need not
necessarily consist of activities by way of trade, commerce or manufacture or
activities in the exercise of a profession or vocation. They may even consist
of rendering services to others which services may be of a variegated
character. The considerations which apply in the case -of individuals in the
matter of determining whether the activities constitute a business within the
meaning of the, inclusive definition thereof set out above may not apply in the
case of incorporated companies. Even though the activities if carried on by
individuals might constitute business in that sense they might not constitute
such business when carried on by incorporated companies and resort must be had
to the general position in law in order to determine whether the incorporated
company was carrying on business ad 405 as to constitute the income earned by
it income' profits or gains from business. Reference may be made in this
context to William Esplen, Son and Swainston, Limited v. Commissioners of
Inland Revenue (1). In that case a private limited company was incorporated for
carrying on business as naval architects and consulting engineers.: Before the
formation of the company, a partnership had existed for many year between three
persons who, on incorporation, became the sole shareholders and directors of
the company. The partnership had carried on the profession. of naval architects
and consulting engineers and the work done by the company was identical in
character with that formerly done by the partnership which it succeeded. The
work done by the company was identical in all respects with the work of a
professional naval architect and consulting engineer, and was performed by the
said three shareholders and directors of the company personally. A question
arose whether the company was carrying on a profession within the meaning of
section 39 paragraph C of the Finance (No. 2) Act, 1915. It was contended that
it carried on a profession of naval architects and consulting engineers because
the members composing it were three naval architects. That contention was
however negatived and it was held that even though what was to be looked at was
the character of the work done by the company, it was not carrying on the
profession of the naval architects within the meaning of the section, because
for that purpose it was of the essence of a profession that the profits should
be dependent mainly upon the personal qualifications of the person by whom it
was carried on and that could only be an individual. A company such as that
could only do a naval architect's work by sending a naval architect to its
customers to do what they wanted to be done and it was held that the company
was not carrying on a profession but was carrying on a trade or business in the
ordinary sense of the term.
When a partnership firm comes into existence
it can be predicated of it that it carries on a business, because partnership
according to section 4 of the Indian Partnership Act is the relation between
persons who have (1) (1919] 2 K.B. 731.
406 agreed to share the profits of a business
-carried on by all or any of the acting for all. (See Inderchand Hari Ram V. Commissioner
of Income-tax, U.P & C.P.(1)). But when a company is incorporated it may
not necessarily come into existence for the purpose of carrying on a business.
According to section 5 of the Indian
Companies Act any seven or more persons (or, where the company to be formed
will be a private company, any two or more persons) associated for any lawful
purpose may by subscribing their names to a memorandum of
association.............................. form an incorporated company, and the
lawful purpose for which the persons become associated might not necessarily be
the carrying on of business. When a company is incorporated for carrying out
certain activities it would be relevant to enquire what are the objects for
which it has been incorporated. As was observed by Lord Sterndale, M.R., in
Commissioners of Inland Revenuev. The Korean Syndicate Limited(2) :
" If you once get the individual and the
company spending exactly on the same basis, then there would be no difference
between them at all. But the fact that the limited company comes into existence
in a different way is a matter to be considered. An individual comes into
existence for many purposes, or per. haps sometimes for none, whereas a limited
company comes into existence for some particular purpose, and if it comes into
existence for the particular purpose of concessions and turning them to
account, then that is a matter to be considered when you come to decide whether
doing that is carrying on a business or not." Justice Rowlatt followed the
above view of Lord Sterndale, M.R., in Commissioners of Inland Revenue v. Birmingham
Theatre Royal Estate Co., Limited(1), and held that " when you are
considering whether a certain form of enterprise is carrying on business or
not, it is material to look and see whether it is a company that it; doing
it." The objects of an incorporated company as laid down in the Memorandum
of Association are (1) [1952] I.T.R. 108.
(2) (1921) 12 Tax Cas. 181 at P. 202.
(3) (1923) I2 Tax Cas. 580 at P. 584.
407 certainly not conclusive of the question
whether the activities of the company amount to carrying on of business.
(See Indian Law Reports 55 Calcutta 1059 and
(1951] 19 I.T.R. 571). But they are relevant for the purpose of determining the
nature and scope of such activities.
The objects of the appellants in this case
inter alia were to act as agents for Governments or Authorities or for any
bankers, manufacturers, merchants, shippers, Joint Stock Companies and others
and carry on all kinds of agency business. This object standing by itself would
comprise within its ambit the activities of the appellants as the agents of the
Company and constitute the work which they did by way of general management of
the business of the company an agency business. The words " carry on all
kinds of agency business " occurring at the end of the object as therein
set out were capable of including within their general description the work
which the appellants would do as agents for Governments or Authorities or for
any bankers, manufacturers, merchants, shippers and-others when they acted as
agents of the Company which were manufacturers inter alia of cotton piece goods
they would be carrying on agency business within the meaning of this object.
Apart however from this there is the further fact that there was a continuity
of operations which constituted the activities of the appellants in the general
management of the Company a business. The whole work of management which the
appellants did for the Company within the powers conferred upon them under
Article 116 of the Articles of Association and clause 3 of the Agency Agreement
consisted of numerous and continuous operations and comprised of various
services which were rendered by the appellants as the agents of the Company.
The appellants were also entitled though with the sanction or ratification by
the Board of Directors either before or after the dealings to enter into
dealings with the Company by way of sales and purchases of various commodities.
There was nothing in the Agency Agreement to prevent the appellants from acting
as the agents of other manufacturers, Joint Stock Companies etc., and the appellants
could have as well acted as the agents of other 408 concerns besides the
Company. All these factors taken, into consideration along with the fixity of
tenure, the nature of remuneration and the assignability of their rights, are
sufficient to enable us to 'come to the conclusion that the activities of the
appellants as the agents of the Company constituted a business and the
remuneration which the appellants received from the Company under the terms of
the Agency Agreement was income, profits or gain from business.
The appellants were therefore rightly
assessed for excess profits tax and these appeals must stand dismissed with
costs.
Appeal dismissed.
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