QAMAR SHAFFI TYABJI versus THE COI\LI\JLSSLONER, EXCESS PROFITS TAX, HYDERABAD

S. K. DAS, J.-These are two appeals with special leave from the ] udgment and Order of the High Court of Hyderabad dated April l 0, 1958, in two references under s. 48(3) of the Hyderabad Excess Profits Tax. Act. The question 1vhich the High Court answered against the assessee ir1 the said references was-

p. 547

"'Yhether in Lhe circumstances of the case, officers of the Exec." Profits Tax Department were right in treating the income of the assessee or

p. 548

lrnlustrial Trust Fune! 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 ans11·cred the question.

p. 548

The relevant: facts which led the question ans"·er arc these. There were two cot.ton mills in State of Hyderabad (as it was then known) called Azamjahi mills ancl Osmanshahi mills. They were public joint stock companies. By a Firman-e-Muharak of l 929 issued by the then Ruler of the State was formed an institution called the Industrial Trust Fund, the purpose of which was to help brgc and small industries on behalf of the Government of the State. The management of the Trust was entrusted to Committee which consistecl of three members of Government. 11·ho \\'ere called Trustees. By two agreements dated April 12, 1!!34, and July 27, 1 CJ34, 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 man::igemcnt of the business and affairs of mills and they were entitled to appoint employees were also entitled to delegate to other pet:sons all 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 ag-reements also dated April 12, I 0J4, and July 1934, the Trustees were appointed selling agents the mills. By two agreements both dated October J 'l'.l8, 1\'h ich 11·ere supplemental t.u rhe selling agency agree1nents inentionecl above, the Trustees 'verc given power to clelegate all or any of their powers, authorities, etc., to other persons subject to the aJ?proval the Board of Directors of the respective mills. October, 1938, the Trustees exercised their powers performed their functions under the agreements aforesaid through an Advisory Board, and Quamar Shaff1 Tyabji, appellant before us, was appointed chairman of the Advisory Board on a remuneration of Rs. l ,500 per month plus a certain commission. Sometime in 1'938 the Advisory Board was dissolved .. and on Decemher 1938, an agreement was entered into between

pp. 548–549

, d ll Cl I I f h t. e h 1 rustees an · the appe ant. a use . o t. e preamble of this agreement recited.:

p. 549, margin C

"The said Trustees are desirous of delegating such of. the powers, authorities and discretions as sµch 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 tlvo mills as aforesaid in and for the matters and purposes hereinafter mentioned."

p. 549, margin C

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 dele~~ated 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 fqr the managing agency was fixed at Rs. 2,000 per month and a commission of 2~ per cent. out of the commission of 12~ per cent. per annum on the annual profits p;tyable to the Trustees, subject to the condition that Osman· · shahi mills made an annual profit of Rs. 1,50,000 and the Azamjahi mills made an annual profit of Rs. 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 '/ 8-6 provided for the termination of the agreement anrl said that the shal! terminate on the rr•rnstces terminating: the earlier agrecn1cnl's 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 t.erms and conditions as may have been offered to them and on the further term that the managing· agent shall make arrangement to the sorisfaction 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 nm mills as also the balance then due of the unsecured loans (i.e., other than first debenture ]o,m) they have and may hereafter advance to the said two mills, so that the said managing agent shall have the first re- .. fusal thereof in the manner aforesaid, provided always that the said managing agent shall intimate to the said Trustees his acceptance of the said term 1rithin six weeks of the communication to him of the said offer and in the event of his omission to do so he shall he deemed to have not accepted the same. Clause 9 of the :igreement is also important. It said:

pp. 549–550, margin C

"The managing agent shall not assign the benefit of this agreement, the same being personal to himself."

p. 550

CLrnscs 10 and 11 related to the eventuality of winding up of the mills and its effect the appellant's rights under the agreement.

p. 550

L'nder the terms of the agreement dated December fi, l !)38, the appellant conducted the business of the mills, both as to management and selling. lie was assessed to excess profits tax for the two chargeable accountrng periods 13.'i IF and l 3'i2F, corresponding to October I, 194 I, to September 30, l '142, and October 1, 1942, to September .~o. 1943, respectively. The total income assessed for 30 IF was Rs. 2,3/ ,45 I, which included a sum of Rs. 2,l l ,230 representing the appellant's managing ag·ency allowance and commission. The total income for l 352F was Rs. 4,'l0,027 which included Rs. 1,45,77'i being the managing agency commission and allowance of the appellant.

p. 550

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.

p. 551

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; he 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.

p. 551

\Ve are unable to accept this line of argument' as correct. In Lahshminarayan 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 a:ncl 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 reasonable orders given in the course of his work. 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. Indeed, learned counsel for the appel- !ant accepts as correct. the distinction made above aml also accepts that the true relation between the Mills and the Trustees was that of principal and agent; but he 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. '~'e have examined the original agreement between the Mills and the Trustees elated April 12, 1934. Clause 9 of that agreement said that "the agents may regulate and conduct their proceeding> 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 lo 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 s. 194 of the Indian Contract Act.

pp. 551–552

In similar circumstances this Court has held that managing agency is business (sec L11/ishminamyan Rarn Gof1al and Son Ltd. v. The Gover11111ent of flyderabad (') and]. K. Trmt, Bombay v. The Commissioner of Income-tax Excess Profis Tax, Bombay ('). A consideration of the terms of the agreement of December 6, 1938, also leaves no mctnner 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 rebting to remuneration, cl. 7 relating to tcrmiintion of business and i-he clauses 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 all 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 cl. 9 which we had quoted e;ulier and said that it showed that the appellant could not assign any of the benefits under the agreement, which was personal to himself. vVe do not think that cl. 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 broqght him a substantial income. Learned counsel. for the , appellant has relied on the decision in lnderchand Bari Ram v. Commissioner of Income-tax, U.P. & C.P. ('), where the distinction between the definitions of managing agent and m<inager under the Indian Companies Act, 1913, was pointed out. '\,Ye 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? vVe 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. '

pp. 552–553

Therefore, the High Court correctly answered the question in the affirmative. The appeals fail and are dismissed with costs. As the appeals have beei1 heard together, there will be one set of costs.

p. 553

A pf;eals dismissed.

p. 553