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PETITIONER: QAMAR SHAFFI TYABJI

       Vs.

RESPONDENT: THE COMMISSIONER, EXCESS PROFITS TAX,HYDERABAD

DATE OF JUDGMENT: 18/04/1960

BENCH: DAS, S.K. BENCH: 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

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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 Con- tract 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.

JUDGMENT:        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 was-        548        " 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

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      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

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      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 thereunder  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  judg-        ment 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.

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      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 appel-        (1)  [1955] 1 S.C.R. 393.        552        lant 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

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      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.        554