TMI Blog1952 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... payment to Messrs. Kani Ram Hazari Mal by way of sales commission is allowable expense or not? 2. The applicant had at first stated the above questions in substance in the form of grounds of appeal to which the learned Commissioner took objection by his written reply dated the 9th November, 1944. The objection of the learned Commissioner is right that the applicant does not state the questions of law to be referred. The application for reference should be in a proper and correct form. The learned counsel for applicant has appreciated the position and has put in an application for amendment in order to remove the difficulty. We have permitted the applicant to amend the application. The questions stated above are the questions sought to be referred. It is common ground that question No. (1) is a question of law and we proceed to state the case. The Tribunal had before it an appeal for decision under Section 33(4) of the Act which was disposed of by an order dated 29th May, 1944. The applicant does not challenge any of the findings of fact arrived at in the said order but he only wants the questions of law that emerge therefrom to be stated to the Honourable the High Court of J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less expense 6,821 7 9 11,847 0 0 46,024 6 3 This was subsequently modified by a letter dated 25th August, 1941, in which the assessee-applicant contended that the managing agency remuneration should be assessed under Section 7 of the Act. The Income-tax Officer assessed the income under the head business under Section 10 of the Indian Income-tax Act and rejected the contention of the assessee-applicant. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal have concurred in the view; hence the question of law to be referred to the High Court. The findings of fact arrived at by the predecessor Bench and the reasons therefor incorporated in paragraph 4 of the order which is reproduced below:- Section 4 of the Partnership Act defines 'partnership' as the relation between persons who have agreed to share the profits of a business carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be held as servants or employees of the company, then on the death of any of the partners his successor-in-interest automatically becomes a servant of the company. This position cannot be maintained as there should be a contract of service before the relation of employer and employee can be created between the company and the new partner. The partnership deed read along with the agreement concluded between the firm and the company makes it clear that the firm is not an officer or the servant of the company in the strict sense of the word. The assessee firm has for a certain agreed remuneration consented to do the business of rendering services to the company. It was, however, contended on behalf of the assessee that as the definition of officer given in Section 2 of the Indian Companies Act includes a managing agent , the assessee must necessarily be taken to be a servant of the company. Section 2(1) of the Act provides:- In this Act unless there is anything repugnant in the subject or context- (ii) 'Officer' includes any Director, Managing Agent, Manager or Secretary........ It would thus appear that the definitions are confined to the purposes of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) which is stated as under:- Whether, in the circumstances of the case, the income derived by the applicant-firm both as managing and sole agents of Messrs. Shankar Sugar Mills Ltd., Captainganj, Gorakhpur, was rightly assessed under Section 10 or whether the income is assessable under Section 7 of the Indian Income-tax Act? The papers mentioned in the appendix will form part of the paper book. G. S. Pathak and C. S. Saran, for the assessee W. Dutt, for the Commissioner JUDGMENT The Judgment of the Court was delivered by BHARGAVA, J.--These two references arise out the assessment of the same assessee Messrs. Inderchand Hari Ram, Gorakhpur, in respect of two different assessment years, viz., 1940-41 and 1941-42. Since the question that arose was common to both the references, the Income- tax Appellate Tribunal, Allahabad, made one consolidated order of reference and, by it, referred the following question to this Court for opinion:- Whether, in the circumstances of the case, the income derived by the applicant-firm both as managing and sole agents of Messrs. Shankar Sugar Mills, Limited, Captainganj, Gorakhpur, was rightly assessed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Shankar Sugar Mills, Limited, and received commission on sales of sugar and income under some other heads which, after deduction of expenses, gave a net revenue of ₹ 11,847 in the previous year corresponding to the assessment year 1940-41. In the next year, the income from this sole agency business was ₹ 13,139. The total income of the assessee-firm in the two years in dispute was thus ₹ 46,024-6-3 and ₹ 47,579 respectively. The Income-tax Officer assessed this entire income of the assessee-firm in each of the years as income from business under Section 10 of the Indian Income-tax Act. The contention of the assessee-firm that the income received by it for working as managing agents as well as for working as sole agents of Messrs. Shankar Sugar Mills, Limited, should be treated as salary and assessed under Section 7 of the Act was rejected by the Income-tax Officer. The assessee appealed to the Appellate Assistant Commissioner of Income-tax and, on dismissal of the appeals, to the Income-tax Appellate Tribunal. The latter also dismissed the appeals and consequently, the assessee The only question to be decided in these references is whether the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. On the other hand, if the managing agent does not happen to be a servant of the company, then the payment would be made, under the agreement, for the work done as managing agent and not as salary for services rendered by him as a servant. It thus appears to be clear that, under the Indian Companies Act, a managing agent may either be a servant of the company or a mere agent without being a servant. In this connection, the definition of manager may also be considered. Manager has been defined to mean, a person who, subject to the control and direction of the directors, has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not. It is clear that there are only two main distinctions between a manager and a managing agent. The chief distinction is that a manager need only have the management of the whole affairs of the company whereas the managing agent is entitled to the management of the whole affairs of the company which means that any person, who actually happens to be managing the affairs in any capacity whatsoever, will be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servant of the company. The agreement merely appointed the firm as managing agent. The copy of Articles of Association contained in one of the appendices attached to the statement of the case also does not contain any clause clearly laying down that the assessee firm was being appointed as a servant of the company. It only recites that that firm, Messrs. Inderchand Hari Ram has been, since the incorporation of the company, and are on the date of the adoption of these Articles the managing agents of the company. The said firm Messrs. Inderchand Hari Rain, as it is at present constituted or as it may be from time to time constituted or their assigns or successors in business whether under the same or any other name, style or firm whether incorporated or unincorporated, shall be entitled to remain and continue as such managing agents (unless it be resigned by them) for a period of thirty-one years certain from the date of the incorporation of the company, and thereafter until they be removed therefrom by a special resolution of the shareholders of the company................ These words used in the Articles of Association do not give any indication that the assessee firm was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no evidence of any contractual relationship by which the assessee firm might have been given the status of a servant of the company. Learned counsel also referred to the remarks of Chagla, J., in Commissioner of Income-tax, Bombay City v. Lady Navajbai R.J. Tata [1947] 15 I.T.R. 8 at p. 14 to the effect that in the case of a director there may be special terms in the articles of association, or there may be an independent contract which may bring about contractual relationship between the company and the director and constitute the director an employee of the company; but independently of such special contract, a director of a company is not the employee of a company in support of his arguments that, by contractual relationship between the company and the director, a director can be constituted an employee of the company. This view is also of no assistance to the assessee in the present case where, as we have said before, there is no evidence at all to show that the agreement between the assessee and Messrs. Shankar Sugar Mills Limited, or the Articles or Memorandum of Association of the latter created any contractual relationship by which the assessee was constituted an employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. In the case before us also, the assessee is not an individual but a juristic person which can be brought into existence only for purposes permissible under the Indian Partnership Act. These purposes are, therefore, a matter to he considered when deciding whether the firm is carrying on a business or not. Rowlatt, J., in Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited* followed the above view of Lord Sterndale, M.R., 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 is doing it. Under section 4 of the Indian Partnership Act (No. IX of 1932), partnership is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Under this Act, therefore, the relationship of partners can be brought into existence only when there is a business carried on by all or any of them acting for all partners. Business under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, profession or vocation , used in this clause (iv) of Section 6 of the Act are precisely the words also used in Section 10 of the Indian Income-tax Act and they clearly include the full meaning of the word business as defined in the Indian Partnership Act. In fact, if at all, the three words, business, profession or vocation , used in the Indian Income-tax Act are wider than the word business in the Indian Partnership Act as including every trade, occupation and profession. The difference between the definitions of the word business in the Indian Partnership Act and in the Indian Income-tax Act is, therefore, of no consequence. The profits of a business using the word business as defined in the Indian Partnership Act would all be profits of a business, profession or vocation falling within Section 10 of the Indian Income-tax Act. Consequently, the profits, which the assessee-firm earned from their business of working as managing agents of Messrs. Shankar Sugar Mills, Limited, must be held to be their profits or gains from business, profession or vocation assessable to income-lax under Section 10 of the Indian Income-tax Act. Learned counsel for the assessee-firm argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls, Limited, and the securing of its managing agency were a single venture not involving any idea of continuity of business and consequently, it would not be correct to hold that the income accruing to the assessee-firm from the managing agency was income from business . We are not inclined to accept this contention for two reasons: Firstly, the work of the partnership firm was not to come to an end with the mere floating of the Shankar Sugar Mills, Limited, and securing of its managing agency. After the managing agency had been secured, the assessee-firm had to and did actually continue to work as managing agents of Messrs, Shankar Sugar Mills, Limited, and continued to manage its affairs. This continuous management of the affairs of the company was precisely the business of the assessee-firm which was one of the purposes of its formation under the Indian Partnership Act. In this case, therefore, there was a continuity of the business of the firm. Secondly, ever a single venture can sometimes constitute the business of a firm or a company. In In re Abenheim; Ex parte Abenheim**, Phillimore, J., held:- I think that from that time forward there can be no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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