Shoorji Vallabhdas & Co. Vs. The
Commissioner of Income-Tax/Excess Profits Tax, Bombay  INSC 79 (19 April
CITATION: 1960 AIR 1162 1960 SCR (3) 557
Income-tax-Place of accrual of
income-Business of transporting cargo to Ports in and outside British
India-Managing Agency commission, a Percentage of freightage-Managing agents
services performed in British India-Liability to tax of entire managing agency
commission-Excess Profits Tax Act, 1940 (15 of 1940), s. 5, Proviso 3-Indian
Income-tax Act, 1922 (II of 1922), s. 14 (2)(C).
The appellant was the managing agent of a
company which was, at the relevant time, carrying on the business of
transporting cargo in boats which touched ports in British India and in the
Indian State of Cochin and other States.
Under the managing agency contract the
remuneration payable to the appellant was expressed in the following terms:
" That the managing agent shall as and by way of remuneration for its
services receive a commission of ten per cent. Of the gross freight charged to
the shippers... Such remuneration shall be payable to the managing agents at
the place where the same is earned by the company unless otherwise requested by
the managing agent." The Income-tax Officer and the Excess Profits Tax
Officer assessed the appellant to tax in respect of the whole of the managing
commission received by it on the footing that the entire commission accrued or
arose in British India. The appellant claimed that a part of the managing
agency commission accrued in the Indian States and not in British India and
that it would be entitled to an apportionment of the managing agency commission
and to claim exemption from tax in respect of the commission which accrued
outside British India under s. 14(2)(c) of the Indian Income-tax Act, 1922, and
the third proviso to s. 5 of the Excess Profits Tax Act, 1940. The Appellate
Tribunal found that except booking and collecting some freight at Cochin, all other
important and responsible work of managing the company was done from the head
office at Bombay and not from Cochin:
Held, that normally the commission payable to
the managing agent of a company accrues at the place where the business is
actually done, that is, where the services of the managing agent are performed,
and as on the finding in the present case the appellant practically performed
all the services at Bombay, the commission which it earned though computed on
the percentage of freight, accrued or arose in British India.
Commissioner of Income-tax, Madras v. K. R.
M. T. T. Thiagaraja Chetty and Co.,  S.C.R. 258, followed.
Commissioner of Income-tax, Bombay v.
Ahmedbhai Umarbhai and Co., Bombay,  S.C.R. 335 and Commissioner of Income
tax, Bombay Presidency and Aden v. Chunilal B. Mehta,  6 I.T.R. 521,
distinguished, 73 558 Sall and industries Agencies Ltd., Bombay v. Commissioner
of Income-tax, Bombay City,  18 I.T.R. 58, considered.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 305 of 1955.
Appeal by special leave from the judgment and
order dated March 31, 1952, and March 2,1953, of the Bombay High Court, in
Income-tax Reference No. 48 of 1951.
R.J. Kolah, Sohrab N. Vakil and S. N. Andley,
for the appellant.
C.K. Daphtary, Solicitor-General of India, R.
Ganapathy Iyer and D. Gupta, for the respondent.
1960. April 19. The Judgment of the Court was
delivered by S.K. DAS, J.-This is an appeal with special leave from the
judgment and orders dated March 31, 1952, and March 2, 1953, of the High Court
of Bombay in an Income-tax Reference No. 48 of 1951 made by the Income-tax
Appellate Tribunal, Bombay, under s. 66(1) of the Indian Income-tax Act, 1922,
and s. 21 of the Excess Profits Tax Act, 1940.
We may shortly state the relevant facts
first. The assessee, Messrs. Shoorji Vallabhdas and Company, Bombay, appellant
herein, is a firm registered under the Indian Income-tax Act. It held the
managing agency of three companies, namely-(1) the Malabar Steamship Company
Ltd., (2) the New Dholera Steamships Ltd., and (3) the New Dholera Shipping and
Trading Company Ltd., for the periods material in this case. The appellant as
also the aforesaid three managed companies were resident in the taxable
territories within the meaning of the Indian Income-tax Act. The business of
the Malabar Steamship Company Ltd. and of the New Dholera Steamships Ltd. was
to carry cargo in cargo boats which touched ports in British India, Cochin
State, Travancore State and ,Saurashtra, as they were then known.
The appellant became the managing agent of
the Malabar Steamship Company Ltd. with effect from April 1, 1943, and the firm
consisted of Shoorji Vallabhdas and his two sons.
Formerly, Shoorji Vallabhdas alone was the
managing agent of the Malabar Steamship Company Ltd. and a managing agency
agreement dated September 16, 559 1938, was executed between the managing agent
and the managed company, and that agreement as varied by two subsequent deeds
dated June 26, 1942, and December 7, 1943, constituted the contract of managing
agency between the appellant and the managed company. Under the managing agency
contract the remuneration payable to the appellant after September 1, 1943, was
expressed in the following terms:
" That the remuneration of the Managing
Agents as and from 1st September one thousand nine hundred and forty-three
shall be ten per cent. (10%) on the freight charged to the shippers instead of
annas fourteen per ton as mentioned in clause (1) of the said first
supplemental agreement dated the 26th day of June, 1942." The managing
agency agreement dated June 8, 1946, between the appellant and the second
managed company, New Dholera Steamships, Ltd., provided inter alia as follows:
" That the Managing Agents shall as and
by way of remuneration for their services in relation to the shipping business
of the Company receive a commission of ten per cent. (10%) of the gross freight
charged to the shippers and/or passage money charged to the passengers. Such
remuneration shall be payable to the Managing Agents at the place where the
same is earned by the Company unless otherwise requested by the Managing
Agents. The remuneration of the Managing Agents in relation to the business of
the Company other than the shipping business shall be (10%) ten per cent. on
the gross profits that may be earned in such business." It may be stated
here, however, that no question arose as to the remuneration of the Managing
Agent in relation to business other than shipping business, because no business
other than shipping business was carried on by the managed company during the
The third managed Company, viz., the New
Dholera Shipping and Trading Company Ltd., confined its business during the
relevant accounting period to stevedoring and trading only.
The managing agency agreement also dated June
8, 1946, with the, third 560 managed company provided inter alia for the
payment of remuneration in the following terms:
" That the Managing Agents shall as and
by way of remuneration for their services receive a commission at the rate of
25 per cent. of the net profits of the company.
Such remuneration shall be payable to the
Managing Agents at the place where the same is earned by the Managing Agents
unless otherwise requested by the Managing Agents." The appellant was
assessed to income-tax for three assessment years, namely, 1945-1946, 1946-1947
and 19471948, the previous years being the financial years 19441945, 1945-1946
and 1946-1947 respectively. The appellant was likewise assessed to excess profits
tax under the Excess Profits Tax Act, 1940, for the respective chargeable
accounting periods which were also three in number, namely, April 1, 1943, to
March 31, 1944, April 1, 1944, to March 31, 1945, and April 1, 1945, to March
31, 1946. The Income tax Officer and the Excess Profits Tax Officer assessed
the appellant to tax in respect of the whole of the managing agency commission
received from the three managed companies on the footing that the entire
managing agency commission accrued or arose in British India. The appellant
went up in appeal to the Appellate Assistant Commissioner from the assessment
orders on the ground inter alia that a part of the managing agency commission
received from the three managed companies accrued in the Cochin and Travancore
States and not in British India and was therefore exempt from tax under the
relevant provisions (as they stood at the material time) of the Indian
Income-tax Act, 1922, and the Excess Profits Tax Act, 1940. Thus, the dispute
was about the place of accrual of the in. come in question. As to the managed
companies, the Income-tax authorities accepted the position that the profits of
the three managed companies partly accrued in British India and partly in the
Indian States; but they did not accept the claim of the appellant that part of
its managing agency commission from the three managed companies accrued or
arose in the Cochin and Travancore States. The Appellate Assistant Commissioner
by different orders all dated 561 May 4,1950, dismissed all the appeals. The
Appellant went in appeal to the Income-tax Appellate Tribunal. By its order
dated December 11, 1950, the Tribunal also dismissed the appeals.
The appellant then made an application to the
Tribunal to refer certain questions of law which arose out of its order, to the
High Court of Bombay. The Tribunal referred two such questions:
" (1) Did a part of the managing agency
commission earned by the assessee accrue or arise in the Cochin State inasmuch
as the managing agency commission is computed on the basis of the freight
earned by the managed company in the Cochin State or otherwise? (2)Did the
whole or part of the dividend income accrue or arise in the Cochin State ?
" The expression Cochin State in the questions obviously referred to both Cochin
and Travancore States. On March 31, 1952, the reference came up for
consideration before the High Court, and after hearing Counsel, the High Court
reformulated the first question as follows:
" Where the actual business of managing
agency was done which yielded the commission which is sought to be taxed?
" The High Court directed the Tribunal to submit a supplemental statement
of the case on the first question as reformulated. The second question was not
pressed by learned counsel for the appellant and does not now survive.
The Tribunal submitted a supplemental
statement of the case on August 29, 1952. The reference was finally heard on
March 2, 1953, and the High Court answered the question by saying that the
actual business of the managing agency which yielded the commission was done at
Bombay and not at Cochin.
In arriving at the conclusion the High Court
proceeded on the footing that the finding of the Tribunal in effect was that
barring freight and collecting it at Cochin, all other important and responsible
work of managing the managed companies was done from the head office at Bombay.
It has been argued on behalf of the appellant
that the High Court erroneously reformulated the question, 562 and that the
real question of law is whether on the facts and circumstances of the case, any
part of the managing agency commission accrued outside British India so that
the appellant would be entitled to an apportionment of the managing agency
commission and to claim exemption from tax in respect of the commission which
accrued outside British India under s. 14(2)(c) of the Indian Income-tax Act,
1922 (as it then stood) and the third proviso to s. 5 of the Excess Profits Tax
Act, 1940. It has been further contended, that in view of the findings of the
Tribunal that (a,) the commission earned was a percentage of the freight and
passage money received by two of the managed companies in Cochin and Travancore
States, (b) a part of the commission was payable there and (c) a part of the
services was also rendered by the appellant as managing agent in those States,
the High Court was in error in coming to its conclusion that the whole of the
managing agency commission accrued or arose in Bombay. While we agree with
learned counsel for the appellant that the real question in this case is
whether any part of the managing agency commission accrued outside British
India, we do not agree with him that the High Court was wrong in reformulating
the question. The Tribunal formulated the, question as though the computation
of the appellants remuneration on the basis of freight determined the place of
accrual; in this the Tribunal was in error, and the High Court rightly pointed
out that the test to be applied was not how the remuneration was to be computed
or quantified, but where the services were performed by the appellant, which
yielded the profits sought to be taxed. The High Court rightly reformulated the
question on that basis, and asked the Tribunal to submit a supplemental
statement of the case on the materials available and placed before it by the
appellant bearing on the question as reformulated by the High Court.
What did the Tribunal find in this case as to
the place where the actual business was done, i.e., the services were performed
by the appellant as managing agent, which yielded the commission ? After
referring to the agreements relating to the computation of remuneration, the
Tribunal said in its order dated 563 December 11, 1950, that (a) from time to
time one of the partners of the appellant firm went to Cochin to, attend to the
business, (b) the managed companies had an officer in Cochin, and (c) the
payments said to have been made to certain employees at Cochin were fictitious.
In the supplementary statement, the Tribunal pointed out that it was not known
whether the' partner who went to Cochin went in his capacity as partner of the
appellant firm or as a director of one of the managed companies; the appellant
firm had rented a flat at Cochin on Rs. 20 per month and maintained some
employees at Cochin for securing freight;
and the local office of the appellant firm at
Cochin rented at Rs. 10 per month maintained only one book containing cash,
journal and ledger. The Tribunal concluded its supplementary statement thus:
"As for the staff maintained at Cochin,
it was alleged that K. P. Joshi and subsequently G. H. Narechania were paid Rs.
18,000 each year. The so-called payment was disallowed by the Appellate
Tribunal. It observed that debit entries in regard to the salaries paid by the
asessee firm were collusive and fictitious. As for the presence of the partners
of the assessee firm at Cochin, it appears from the Appellate Assistant
Commissioner's order that it was admitted before him that none of the partners
of the firm ever attended to the company's business at Cochin or Alleppey.
"There is no clear evidence on the
record as to what the assessee firm did as the managing agents of the three
managed companies; in other words, how the assessee firm was carrying on the
managing agency business. The partners of the assessee firm (not necessarily
all) were on the Board of Directors of the managed companies. They held a large
number of shares in the managed companies. The Malabar Steamship Co. Ltd. had
an office of its own "to secure freight ". The Cochin office of the assessee
firm, as far as one could make out, did practically nothing, except receive 10%
of the gross freight at Cochin and retain the net, income therefrom ", 564
fact reached by the Tribunal-where did the commission payable to the managing
agent accrue ? It is well to remember that the problem in this case is not so
much when the commission accrued as where it accrued, though the question as to
where and when may be interlinked. We think that normally, the commission
-payable to the managing agents of a company accrues at the place where the
services are performed by the managing agents. It was so held by this Court in
K. R. M. T. T. Thiagaraja Chetty and Company v. Commissioner of Income-tax,
Madras, No. 2(1). The assessee in that case, Thiagaraja Chettiar, claimed that
a portion of the commission or-edited to it in the company's accounts accrued
to it in the Indian States where the company had opened branches for selling
yarn and as the commission was not remitted to British India, it was not
assessable to tax. This Court observed:
"The short answer to this argument is
that the business of the company was carried on in British India, that the
commission earned by the firm on the profits made by the company in the States
arose out of one indivisible agreement to charge the reduced commission of 5
per cent. on the profits of the company and that the managing agents had been
doing the business of the agency in British India and not in the States. It is
not suggested that the managing agents performed any functions in the
States." The same question of the place of accrual arose in a somewhat
different context in Commissioner of Income-tax, Bombay Presidency and Aden v.
Chunilal B. Mehta (2) where a person resident in British India and carrying on
business there controlled transactions abroad, and the question was it he was
liable to pay tax upon profits derived by him from contracts made for the
purchase and sale of commodities in various markets-Liverpool, London, New
York, etc. The assessee disputed his liability in respect of such profits on
the ground that they were not profits " accruing or arising in British
India ". It was held that the mere fact that the profits made depended on
the exercise in (1) (1953) 24 I.T.R 535.
(2)  6 I.T.R. 521.
565 British India of knowledge, skill and
judgment on the part of the assessee did not mean that the profits arose or
accrued in British India, and there was no necessity &rising out of the
general conception of a business as an Organisation that the profits of the
business must arise only at one place, namely, the place of central control of
the business. Delivering the judgment of the Privy Council in that case, Sir
George Rankin observed:
" The words "accruing or arising
the British India" may be taken, provisionally and in the first place, as
an ordinary English phrase which derives no special meaning from the Act. The
alternative " accruing or arising in" and the antithesis between
these words and the words " received in " or " brought into
" afford no safe inference of any special meaning. " Profit accruing
or arising in British India " are words which in their ordinary meaning
seem to require a place to be assigned as that at 'which the result of trading
operation comes, whether gradually or suddenly, into existence".........................................
" Their Lordships are not laying down
any rule of general application to all classes of foreign transactions, or even
with respect to the sale of goods. To do so would be nearly impossible and
wholly unwise. They are not saying that the place of formation of the contract
prevails against everything else. In some circumstances it may be so, but other
matters-acts done under the contract, for examplecannot be ruled out a priori.
In the case before the Board the contracts were neither framed nor carried out
in British India; the High Court's conclusion that the profits accrued or arose
outside British India is well-founded." A similar view was expressed in
two earlier decisions: (1) In Re: The Aurangabad, Mills Ltd.(") where a
reference was made to Commissioner of Taxation v. Kirk, (1900) Appeal Cases,
page 588 and it was pointed out that the circumstance that the affairs of the
company were directed from Bombay was not the determining test was the test was
where the processes (1)  I.L.R. 45 Bom. 1286, 74 566 which yielded the
income were carried out and that was outside British India; (2) The
Commissioner of Income-tax, Bombay Presidency v. Messrs. Sarupchand Hukamchand
of Bombay, a firm (1) where the assessees acted as the secretaries, treasurers
and agents of a mill company registered at Indore, outside British India, and
under the terms of agreement, the assessees were entitled to charge and receive
as selling agents commission on the gross sale proceeds of all cloth produced
by the mill and the company opened a shop in Bombay for the sale of cloth
produced by the mill which was managed by the assessees. The sale proceeds were
sent to Indore and the assessees were paid the commission at Indore. The question
arose whether the commission was liable to be assessed to income-tax in Bombay,
and it was held that the income accrued in British India.
In Commissioner of Income-tax, Bombay v.
Ahmedbhai Umarbhai and Co, Bombay (2) this Court dealt with a case where a firm
resident in British India carried on the business of manufacturing and selling
groundnut oil; it owned some oil mills within British India and a mill in
Raichur in the Hyderabad State where oil was manufactured. One of the questions
for decision was whether the profits of that part of the business, viz., the
manufacture of oil at the mill in Raichur accrued or arose in Raichur within
the meaning of the third proviso to s. 5 of the Excess Profits Tax Act, 1940. A
majority of Judges held that the profits arose in Raichur, and in a composite
business, the profits need not arise at one place only but may arise at more
than one place and an apportionment may be necessary. This was not, however, a
case of managing agency.
We now come to the decision in Salt and
Industries Agencies Ltd., Bombay v. Commissioner of Income-tax, Bombay City(3)
a decision of the same learned Chief Justice, in respect of which learned
counsel for the appellant has made some very serious comments. The facts of
that case were these : the assessees, a company incorporated in Bombay were the
managing agents of another company incorporated in Bombay and having its salt
works at Aden and at Kandla in the Kutch (1)  I.L.R. 55 Bom. 231 (2)
 S.C.R. 335.
(3) [1950) 18 I.T.R. 58.
567 where the board of directors met, the
books of account were maintained and various types of work connected with the
company were done. Under the managing agency agreement the assessees were
entitled to a commission at the rate of 12 1/2 per cent. per annum on the
annual net profits of the company and in any event a minimum of Rs. 30,000 per
The agreement also provided that such portion
of the commission as was attributable to the net profits of the company arising
or accruing in the Indian State was to be paid to the managing agents in such
State and that with regard to the minimum commission half of it was to be. paid
in the State. In pursuance of the assessees' articles of association the board
of directors passed a resolution delegating a particular director to guide the
company's operation in the State of Kutch and during the year of account that
director supervised the salt works at Kandla.
The question was whether the sum of Rs.
88,O65 representing assessee's commission attributable to the salt works at
Kandla accrued or arose at Kandla or in British India.
First, the learned Chief Justice referred to
the test to be applied in order to determine where the profits of the assessee
company accrued or arose, and he said that the test was to find out where the
actual business of the company was done which yielded the profits sought to be
taxed. In that connexion he said:
" The work of the managing agents must
be looked upon as a unit and not as divided up into so many different
categories, to each one of which a certain portion of the commission earned by
the managing agents can be attributed or allocated.".
He then went on to consider when the right to
managing agency commission arose in that case and came to the conclusion, which
was decisive in his opinion, that it arose when all the accounts of the working
of the company were submitted to the head office in Bombay and the profits were
determined therefore, the sum of Rs. 88,065 accrued or arose to the assessees
in Bombay and not in the Indian State both for purposes of income-tax and
excess profits tax.
568 Now, learned counsel for the appellant
has no quarrel with the decision in so far as it laid down that (a) the test is
to find out where the business is actually done, i. e., where the services are
performed, and (b) the right to managing agency commission arose in that case
when all the accounts of the working of the company were submitted to the head
office in Bombay and the profits were determined.
Learned counsel has contended that in the
case under our consideration the services were performed partly in British
India and partly in Cochin and the right to managing agency commission arose as
soon as the freight was paid at least in respect of two of the managed
companies. He has submitted, however, that the learned Chief Justice was in
error if he intended to lay down a rule of universal application that the work
of the managing agents must always be looked upon as a unit and can never to be
divided into categories. It is contended that the services of a managing agent
can be performed at more than one place, and legally it is possible to
apportion the commission and attribute a part of it to services rendered
outside the taxable territories.
We consider it unnecessary in the present
case to decide the question of performance of services and resultant
apportionment, if any, on a theoretical or hypothetical basis, because the case
can be disposed of 'on the short ground that on the findings of the Tribunal,
the remuneration of the managing agents accrued at Bombay. We had referred
earlier to the findings reached by the Tribunal. These findings show that
except for an attempt at make-believe, no services were really performed by the
appellant at Cochin. No doubt, some freight was secured and paid for at Cochin.
But the managed company also had an office at Cochin to secure freight. It has
been argued that under the terms of the managing agency agreements, the
managing agents employed the staff, etc., and for two of the companies which carried
on the cargo business, securing freight was the principal part of the managing
agency business. The High Court, however, rightly. pointed out:
569 " In our opinion, it is not possible
to read the managing agency agreement in that light. All that clause 2 of the
agreement does is to lay down the standard by which the commission is to be
computed and determined, and it lays down two different standards, one with
regard to the shipping business and the other with regard to the other
businesses, but as far as the business of the managing agency is concerned
their responsibilities and their duties are integrated duties and
responsibilities which are set out in the different clauses of the agreement.
It is impossible to contend that they had not to supervise, control and manage
the shipping business and, as we have already said the business of a shipping
company is vastly more detailed and responsible than the mere task of finding
people to go by ship or send their goods by ship and for that purpose paying freight.
Freight is merely the resultant profit which accrues to a shipping company. In
order that that profit should result the company has got to have ships, it has
got to have seaworthy ships, it has got to have sailors and officers, it has
got to look to the repairs of the ships, the renovation of the ships and the
replacements of the ships. All this is part of the shipping company's business
and all this business had to be attended to by the managing agents and the
question is, where did they attend to this business. The finding on this
question is clear.
The finding, in effect, is that barring
booking freight, and collecting freight at Cochin, all other important and
responsible work of managing the managed companies was done from the head
office at Bombay and not from Cochin." On the findings reached, the
position in law is quite clear.
The decisions to which we have referred
clearly establish that normally, the commission payable to the managing agents
accrues at the place where the business is actually done, that is, where the
services of the managing agents are performed. In this case the appellant
practically performed all the services at Bombay, and therefore the commission
which it earned though computed on the percentage of freight and/or passage
money in respect of two of the managed companies, accrued or arose in British
570 India. As to the third managed company whose business was stevedoring and
trading and the remuneration was payable at 25 per cent. of the net profits,
there can be no doubt that the remuneration accrued at Bombay. Therefore, the
High Court of Bombay correctly answered the question against the appellant.
The appeal accordingly fails and is dismissed