Qamar Shaffi Tyabji Vs. The
Commissioner, Excess Profits Tax, Hyderabad [1960] INSC 78 (18 April 1960)
DAS, S.K.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1960 AIR 1269 1960 SCR (3) 546
CITATOR INFO :
E 1973 SC 637 (8)
ACT:
Excess Profits Tax-Managing Agency and
Selling Agency agreements-Construction-Delegation of Agency-Delegate, whether
agent or employee-Remuneration and commission derived by such
delegate-Liability to tax-Indian Contract Act, 1872 (9 of 1872), s. 194.
HEADNOTE:
By an order of the Ruler of the erstwhile
State of Hyderabad an institution was formed for the development of industries
on behalf of the Government, called the Industrial Trust Fund, to be managed by
a committee called Trustees. In 1934 the Trustees entered into agreements with
two cotton mills situated in the State by virtue of which they were appointed
secretaries, treasurers and agents of the said mills. They were given the
general management of the mills including the power to appoint employees and were
also appointed selling agents of the mills. By separate agreements the Trustees
were given power to delegate to other persons all or any of the powers under
the agreements subject to the approval of the Board of Directors of the
respective mills. On December 6, 1938, the Trustees entered into an agreement
with the appellant whereby they delegated their powers in his favour and
appointed him as the managing agent of their business as secretaries,
-treasurers and agents, as also selling agent of the two mills, subject to
their general control. The appellant was to hold the office of managing agent
and selling agent for the remaining period of the original managing agency and
selling agency agreements. The remuneration of the appellant for the managing
agency was fixed at Rs. 2,000 per month and a commission of 2 1/2 per cent. out
of the commission of 12 1/2 per cent. per annum on the annual profits payable
to the Trustees. For the selling agency a separate commission was payable on
the sale of different kinds of goods. Clause 9 of the agreement provided 547
that the managing agent shall not assign the benefit of the agreement, the same
being personal to himself. For the accounting years 1941-42 and 1942-43 the
appellant was assessed to excess profits tax, but he contended that the
Trustees of the Industrial Trust Fund were the managing agents as also the
selling agents of the two mills, that the Trustees employed him on certain
terms and gave him certain powers, and that he was not carrying on an
independent business of his own but was just carrying out the duties of an
employee of the Trustees. He claimed that his remuneration under the agreement
dated December 6, 1938, was merely salary and not income derived from business
and therefore not liable to excess profits tax :
Held, (1) that under the agreements of 1934
the Trustees as agents had express authority to name the appellant to act for
the principal in the business of agency and that therefore the appellant was
neither a servant nor a mere sub-agent, but an agent of the principal for such
part of the business of agency as was entrusted to him, within the meaning of
s. 194 of the Indian Contract Act, 1872.
(2)that on the true construction of the
agreement dated December 6, 1938, the appellant was undertaking a business of
his own in accepting the duties and responsibilities of a managing agent of the
two mills under the general control of the Trustees, and that, therefore, the
income derived by him as remuneration and commission was liable to excess profits
tax.
Lakshminarayan Ram Gopal and Son Ltd. v. The
Government of Hyderabad, [1955] 1 S.C.R. 393 and 1. K. Trust, Bombay v. The
Commissioner of Income-tax excess Profits Tax, Bombay, [1958] S.C.R. 65, relied
on.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 324 and 325 of 1957.
Appeals by special leave from the judgment
and order dated April 10, 1953, of the former Hyderabad High Court in E.P.T.
References Nos. 45215 and 453/5 of 1358 F. A.V.
Viswanatha Sastri, S. N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L.
Vohra, for the appellant.
K.N. Rajagopal Sastri and D. Gupta, for the
respondent.
1960. April 18. The Judgment of the Court was
delivered by S.K. DAS, J.-These are two appeals with special leave from the
Judgment and Order of the High Court of Hyderabad dated April 10, 1953, in two
references under s. 48(3) of the Hyderabad Excess Profits Tax Act. The question
which the High Court answered against the assesses in the said references was548
" Whether in the circumstances of the case, the officers of the
Excess-Profits Tax Department were right in treating the income of the assessee
or the Industrial Trust Fund as income from business." , The High Court
answered the question in the affirmative.
The point for decision before us is if the
High Court correctly answered the question.
The relevant facts which led to the question
and answer are these. There were two cotton mills in the State of Hyderabad (as
it was then known) called Azamjahi mills and Osmanshahi mills. They were public
joint stock companies.
By a Firman-e-Mubarak of 1929 issued by the
then Ruler of the State was formed an institution called the Industrial Trust
Fund, the purpose of which was to help large and small industries on behalf of
the Government of the State. The management of the Trust was entrusted to a
Committee which consisted of three members of the Government, who were called
Trustees. By two agreements dated April 12, 1934, and July 27, 1934, made
between the Trustees of the one part and the two mills of the other, the
Trustees were appointed secretaries, treasurers and agents of the said mills.
Under these agreements the Trustees were given the general conduct and
management of the business and affairs of the mills and they were entitled to
appoint employees and were also entitled to delegate to other persons all or
any of the powers, authorities, discretions, etc., under the agreements subject
to the approval of the Board of Directors of the respective mills. By two other
agreements also dated April 12, 1934, and July 27, 1934, the Trustees were
appointed selling agents of the mills. By two agreements both dated October 16,
1938, which were supplemental to the selling agency agreements mentioned above,
the Trustees were given power to delegate all or any of their powers,
authorities, etc., to other persons subject to the approval of the Board of
Directors of the respective mills. Till October, 1938, the Trustees exercised
their powers and performed their functions under the agreements aforesaid
through an Advisory Board, and Quamar Shaffi Tyabji, appellant before us, was
appointed chairman of the Advisory Board on a remuneration of Rs. 1,500 549 per
month plus a certain commission. Sometime in 1938 the Advisory Board was
dissolved, and on December 6, 1938, an agreement was entered into between the
Trustees and the appellant. Clause 11 of the preamble of this agreement
recited:
" The said Trustees are desirous of
delegating such of the powers, authorities and discretions as such secretaries,
treasurers and agents as also as such selling agents of the said two mills as
aforesaid as are hereinafter mentioned to and appointing the said Quamar Shaffi
Tyabjee as the managing agent of the business of the said trustees as such
secretaries and treasurers and agents as also as such selling agents of the
said two mills as aforesaid in and for the matters and purposes hereinafter
mentioned." The agreement then recited that the approval of the Board of
Directors of the two mills having been obtained, the appellant was appointed
managing agent of the business of the Trustees as secretaries, treasurers and
agents and also as selling agents of the two mills. Clause 2 of the agreement
detailed the powers of the appellant which were the same as those of the
Trustees to conduct and manage the business of the two mills, subject however
to the general control of the Trustees. In other words, the full powers of
management and of the selling agency in relation to both the mills were
delegated to the appellant. Clause 3 said inter alia that the appellant would
hold the office of managing agent and selling agent for the remaining period of
the original managing agency and selling agency agreements. The remuneration of
the appellant for the managing agency was fixed at Rs. 2,000 per month and a
commission of 21 per cent. out of the commission of 121 per cent. per annum on
the annual profits payable to the Trustees, subject to the condition that
Osmanshahi mills made an annual profit of Rs. 1,50,000 and the Azamjahi mills
made an annual profit of RE;. 2,00,000. For the selling agency a separate
commission was payable on the sale of different kinds of goods subject again to
the condition that the annual profits of the two mills did not fall below a
particular figure. Clause 6 of the agreement related to the appointment and
duties of a mill expert, Clause 7 72 550 provided for the termination of the
agreement and said that the agreement shall terminate on the Trustees
terminating the earlier agreements in their favour, provided however that in the
event of the said Trustees deciding to transfer the said respective agreements
and the rights there under to any one they shall in the first instance offer
the same to the said managing agent on the same terms and conditions as may
have been offered to them and on the further term that the managing agent shall
make arrangement to the satisfaction of the said Trustees for the payment to
them in cash or otherwise of the moneys they have spent in purchasing the
managing agency rights of the said two mills as also the balance then due of
the unsecured loans (i.e., other than first debenture loan) they have and may
hereafter advance to the said two mills, so that the said managing agent shall
have the first refusal thereof in the manner aforesaid, provided always that
the said managing agent shall intimate to the said Trustees his acceptance of
the said term within six weeks of the communication to him of the said offer
and in the event of his omission to do so he shall be deemed to have not
accepted the same. Clause 9 of the agreement is also important. It said :
" The managing agent shall not assign
the benefit of this agreement, the same being personal to himself."
Clauses 10 and II related to the eventuality of winding up of the mills and its
effect on the appellant's right,; under the agreement.
Under the terms of the agreement dated
December 6, 1938, the appellant conducted the business of the mills, both as to
management and selling. He was assessed to excess profits tax for the two
chargeable accounting periods 1351F and 1352F, corresponding to October 1,
1941, to September 30, 1942, and October 1, 1942, to September 30, 1943,
respectively. The total income assessed for 1351F was Rs.
2,37,451, which included a sum of Rs.
2,11,230 representing the appellant's managing agency allowance and commission.
The total income for 1352F was Rs. 4,90,027
which included Rs. 4,45,775 being the managing agency commission and allowance
of the appellant.
551 Before the Excess Profits Tax authorities
the appellant contended that he was only an employee of the Industrial Trust
Fund and his remuneration under the agreement dated December 6, 1938, was
merely salary and not income derived from business and therefore not liable to
excess profits tax. The Excess Profits Tax authorities negatived this
contention, and as required by the High Court the Commissioner of Income-tax,
Hyderabad, referred the question of law which we have set out at the beginning
of this judgment to the High Court for decision.
On behalf of the appellant it has been
submitted that on a true construction of the relevant agreements the Industrial
Trust Fund was the managing agent as also the selling agent of the two mills;
the Trustees employed the appellant on certain terms and gave him certain
powers, and therefore the appellant,, an individual and not a firm, was not
carrying on an independent business of his own; be was just carrying out the
duties of an employee of the Trustees in spite of his being described as
managing agent in the agreement of December 6, 1938. His income, therefore, was
not income derived from business.
We are unable to accept this line of argument
a.,; correct.
In Lakshminarayan Ram Gopal and Son Ltd. V.
The Government of Hyderabad (1) this Court had occasion to explain the position
of an agent, a servant and an independent contractor. It was there pointed out
that the difference between the relations of master and servant and of
principal and agent lay in 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. An agent has 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
reason. able orders given in the course of his work. An agent though bound to
exercise his authority in accordance with all lawfull 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. Indeed, learned
counsel for the appellant accepts as correct the distinction made above and
also accepts that the true relation between the Mills and the Trustees was that
of principal and agent; but be contends that as between the Trustees and the
appellant the relation was one of master and servant. We consider that this
contention is wholly unsound. We have examined the original agreement between
the Mills and the Trustees dated April 12, 1934. Clause 9 of that agreement
said that "the agents may regulate and conduct their proceedings in such
manner as they may from time to time determine and may delegate all or any of
their powers, authorities and discretions as secretaries, treasurers and agents
of the company to such person or persons and on such terms and conditions as
they may think fit, subject to the approval of the Board of Directors of the
company." The delegation in favour of the appellant was made under this
clause. The position was therefore this: the Trustees as agents had express
authority to name another person to act for the principal in the business of
the agency, and they named the appellant with the approval of the Board of
Directors. Therefore, the appellant, was neither a servant nor a mere
sub-agent. He was an agent of the principal for such part of the business of
the agency as was entrusted to him. The position in law was as laid down in s.
194 of the Indian Contract Act.
In similar circumstances this Court has held
that managing agency is business (see Lakshminarayan Ram Gopal and Son Ltd. v.
The Government of Hyderabad (1) and J. K. Trust, Bombay v. The Commissioner of
Income-tax Excess Profits Tax, Bombay (2 ). A consideration of the terms of the
agreement of December 6, 1938, also leaves no manner of doubt, in the matter.
Full powers of the Trustees as managing agents were delegated to the appellant
under cl. 2 of the agreement, subject only to the general control of the
Trustees and the clause stated that the appellant was to conduct and manage the
business and affairs of the two mills. Clause 3 relating to the tenure of the
managing agency, cl. 4 relating to remuneration, cl. 7 relating to termination
of business and the clauses (1) [1955] 1 S.C. R. 393 (2) [1958] S C.R. 65.
553 relating to the eventuality of winding up
of the mills -all these were appropriate to a business undertaking only and
quite inappropriate to a relation of master and servant.
The extent of the delegation of powers was
also indicated by cl. 5 which said inter alia that the managing agent (meaning
the appellant) must observe and perform ail the terms and conditions of the
earlier managing agency and selling agency agreements in favour and on the part
of the Trustees; in other words, the entire managing agency business was handed
over to the appellant. Learned counsel for the appellant emphasised el. 9 which
we had quoted earlier and said that it showed that the appellant could not
assign any of the benefits under the agreement, which was personal to himself.
We do not think that el. 9 changed the
quality of the relation between the Trustees and the appellant. The managing
agency agreement must be read as a whole, and so read the conclusion which
clearly emerges is that the appellant was undertaking a business of his own in
accepting the duties and responsibilities of a managing agent of the two mills
under the general control of the Trustees. The appellant was a man with
previous business experience and held an agency of the Eastern Federal Union
Insurance Co., which brought him a substantial income. Learned counsel for the
appellant has relied on the decision in Inderchand Hari Ram v. Commissioner of
Income-tax, U. P. & C. P. (1), where the distinction between the
definitions of managing agent and manager under the Indian Companies Act, 1913,
was pointed out. We do not think that that decision gives any help to the
appellant. The question really is one of construction of the relevant
agreements; what do their terms show a relation of master and servant or an
agency business? We have no doubt in our minds that what clearly emerges from
the terms of the agreement of December 6, 1938, is a business of managing
agency accepted and undertaken by the appellant.
Therefore, the High Court correctly answered
the question in the affirmative. The appeals fail and are dismissed with costs.
As the appeals have been heard together, there will be one set of costs.
Appeals dismissed.
(1) [1952] 22 I.T.R. 108.
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