TMI Blog1965 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ore or less, similar, we have heard the references together and propose to dispose them of together by a common order. Before we consider the questions referred to us, it would be necessary to set out the relevant facts of the cases which are beyond controversy. The assessees concerned in these two references are joint managing directors of Messrs. Eastern Tea Estates (P.) Ltd., a private limited company, incorporated under the Companies Act, hereinafter referred to as the company. Their powers and duties are set out in articles 46 to 54, 56, 59, 60, 61 and 68 of the articles of association of the company. It may be seen from article 46 of the above articles that the joint managing directors of the company are to hold office on a monthly remuneration of Rs. 1,000 each and 5 per cent commission on sales besides actual travelling expenses, etc., incurred in connection with the business. It is also provided in this article that they would hold office till their death but would have the option to resign by giving notice in writing. The two assessees who are the joint managing directors of the company submitted their income-tax returns for the assessment years 1955-56, 1956-57 and 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the joint managing directors, that is, the assessees herein, had not shown receipt of any income by way of commission in the returns filed by them for the calendar years 1954 and 1955. Subsequent to the completion of the assessment of the company's income on February 25, 1959, notices were served on the assessees on March 19, 1959, under section 34(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act, in regard to the assessment years 1955-56 and 1956-57 and on the basis of those notices the 5 per cent. commission that was debited in the company's accounts as payable to the joint managing directors was respectively added to their remuneration of Rs. 1,000 per month, in respect of which the assessees had already submitted their returns, and acting under section 34 of the Act, the Income-tax Officer made the impugned reassessments. The assessees contended that their income of Rs. 1,000 per month was only a remuneration and represented a business income and not a salary, that, therefore, they could only be assessed under section 10 of the Act and not under section 7; that the 5 per cent. commission which had not, in fact, been received by them, could not have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gratuity and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are due to him from, whether paid or not, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer; and for the purposes of this sub-section advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received: ........" The portion of section 10 of the Act, relevant to the case under enquiry, is extracted below : " 10. Business:-- (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. " Section 34(1)(a) of the Act reads as follows : " 34. Income escaping assessment :-- (1) if-- (a) The Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual receipt of the same. On the basis of these facts the Income-tax Officer served a notice under section 34(1)(a) on the ground that the commission, to which the assessees had been entitled, should also have been shown as income and their failure to do so amounted to a non-disclosure fully and truly of all material facts necessary for their assessment and accordingly added back the commission which had become due and payable to the assessees' salary of Rs. 12,000 received during each calendar year and made up the total amount as representing the income, and on that basis levied income-tax under section 7 of the Act, treating the assessees as the paid-servants and employees of the tea company and their income as salary received in that capacity. The main contention of Mr. Ray in this regard is that in the instant case there can be no question of any failure on the part of the assessees to disclose all material facts necessary to make the assessment. He contended that the Income-tax Officer was aware of the articles of association of the company and that the assessees were entitled to commission at 5 per cent. on sales; more so, in view of the fact that in the year immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years, but within the period of eight years, from the end of the year in question. " Their Lordships proceeded further to examine the precise scope of the disclosure which the section demanded and observed as follows : " The words used are 'omission or failure to disclose fully and truly all material facts necessary for his assessment for that year.' It postulates a duty on every assessee to fdisclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in comi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly without objection. The assessment was completed on March 28, 1957, and, on the same day, the assessments for the years 1955-56 and 1956-57 were also completed by the same Income-tax Officer. (2) The same Income-tax Officer made assessments on the tea company and the articles of association of that company, which was before the Income-tax Officer, showed that commission at 5% on sales of tea was payable to the assessee at the end of each calendar year. (3) The Income-tax Officer's remarks in the tea company's assessment for 1955-56 show that the assessee had explained before the Income-tax Officer at the time of his original assessment that I nothing was actually drawn by them during 1954 and 1955'." "The above facts to which our. attention has been drawn are borne out by the records and admit of no controversy. It must, therefore, follow that the Income-tax Officer knew, when he completed the original assessments, that the commission on sales of tea had accrued due to the assessee. The Income-tax Officer had been assessing the commission in the hands of the appellant on receipt basis in the past up to the assessment year 1954-55 and it is manifest that in the original ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it on July 17, 1944, in the Ahmedabad branch of the said bank. Thereupon, the Income-tax Officer issued a notice for reassessment under section 34(1)(a) on the 24th March, 1954, and by a revised assessment order, added the sum of Rs. 1,10,000 on the 15th October, 1954, on the ground that the assessee had omitted or failed to disclose fully and truly all the material facts necessary for his assessment for that year and that consequently the income, profits or gains chargeable to income-tax had escaped assessment. This order of the Income-tax Officer was upheld by the Appellate Assistant Commissioner. But the Tribunal, after considering the account books and the examiner's report, reversed this order on the ground that it could not be said on the facts and circumstances of the case that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the year 1945-46. So holding, the Tribunal refused to make a reference to the High Court. On these facts, the Supreme Court held, following the decision in Calcutta Discount Co. Ltd. v. Income-tax Officer, that the one condition that must be fulfilled before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the part of the assessees to fully disclose all relevant circumstances enabling the Income-tax Officer to make a proper assessment of the income, etc., for the purpose of income-tax. As we have already pointed out, the Income-tax Officer was fully aware of all the facts, and as all the primary facts were before him and within his knowledge, the mere fact that the return did not contain a reference to a particular income earned, although not received, would not make any difference. On a consideration of the above decisions of the Supreme Court bearing on the subject, we are clearly of opinion that before the action could be taken by the Income-tax Officer under section 34(1)(a) of the Act, the Income-tax Officer must have been satisfied that there was failure on the part of the assessee either : (a) to make a return of his income under section 22 for any year; or (b) to disclose fully and truly all material facts necessary for his assessment for that year; and this failure or omission must have resulted in the income, profits or gains chargeable to income-tax having escaped assessment for the year in question or having been under-assessed, etc., as indicated in the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere employees of the tea company or whether they, were the joint managing agents thereof, we have got to look into the articles of association of the company, which deal with the nature of the duties of the assessees, their rights and privileges, the terms and conditions governing them and, the nature of the powers and the control of management exercisable in regard to the affairs and business of the company. As already pointed out, the relevant articles in the articles of association that require to be looked into are articles 46, 47, 49 to 54 and 59 to 61 and 68. These articles occur under the heading 'managing directors'. Article 46 provides for the appointment of the joint managing directors by the board of directors for the better management and direct control and supervision of the affairs of the company. The assessees have been shown in the articles as having been appointed as the first managing directors of the company, on a remuneration of Rs. 1,000 each per month and 5 per cent. commission on sales besides actual travelling and other allowances, etc. They are to hold office as the joint managing directors till their death, although they are given the option to resign by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared insolvent by a court or if they were found guilty of misappropriation of the funds of the company by a competent court. Articles 59 and 60 provide for the maintenance of proper books of accounts and of true accounts of the sums, monies received and expended, as well as of the assets and liabilities of the company. From the above articles of association dealing with the powers and duties of the joint managing directors, Mr. Ray contended that the provisions in these articles clearly disclosed that the joint managing directors were to be the agents of the company and not mere employees or servants. In support of this contention, he relied on the following distinctive features, governing the relations between the company and the assessees, which, according to him, would clear the position and leave the matter in no doubt : (1) The manner of doing the work is left to the joint managing directors. (2) There is no provision for any direct and close supervision of their work by the board of directors or other authority. (3) The joint managing directors are given the right to delegate their powers to other persons indicated. (4) They are appointed for life. (5) They cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent, as such, is not a servant, but a servant is generally for some purposes his master's agent, the extent of the agency depending upon the duties or position of the servant, and in some cases an independent contractor may also be an agent." In volume 25 of Simond's Edition of Halsbury's Laws of England, the following statement of the distinction between an agent and a servant occurs, which may be quoted with advantage : " Para. 874. PRINCIPAL AND AGENT. The difference between the relations of master and servant and of principal and agent is, in general, that 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. A person who is subject to no directions as to the time he is to devote to the work of another is an agent and not a servant; but a person who is required to give a definite amount of his time thereto, although allowed to exercise-his discretion as to the place and manner of his work, is a servant and not an agent. The circumstance that a person is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Acts, 13th edition (1957), at page 643, the position of a managing director has been contra-distinguished from a clerk or a servant. It is observed that, although the expression " clerk or servant " has been given a wide interpretation, that, expression could not be held to cover a managing director. Reliance was placed by Buckley also on the same decision reported in In re Newspaper Proprietary Syndicate Ltd. : Hopkinson v. Newspaper Proprietary Syndicate. In that case, it was contended that a "clerk or servant" of a company is entitled to payment, in priority to other creditors, in respect of wages or salary in the winding-up of his company, and it was claimed that the managing director was also entitled to the same benefit. In that connection, the question came to be considered whether a managing director could be held to be a "clerk or servant". The following observations are material and may be quoted : " I think the claim cannot be supported. A managing director is certainly not a 'clerk' of the company. Is he a 'servant' of the company ? This proposition was negatived by the Court of King's Bench in Dunston v. Imperial Gas Light and Coke Co., where it was pointed out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the agency was to continue for a period of thirty ;ears and as they were to continue to act as such agents until they of their own will resigned, their Lordships held that these provisions made the appellants agents of the company and not merely servants. In that case, the remuneration of the appellants as such agents was to be a commission of 21% on the sale proceeds of the produce of the company. In that connection, their Lordships relied on the distinction between an agent and a servant indicated in Powell's Law of Agency, at pages 16 and 20, extracted below : " The distinction between a servant and an agent is thus indicated in Powell's Lam of Agency, at page 16 : " (a) Generally a master can tell his servant what to do and how to do it. (b) Generally a principal cannot tell his agent how to carry out his instructions. (c) A servant is under more complete control than an agent." and also at page 20 : " (a) Generally, a servant is a person who not only receives instructions from his master but is subject to his master's right to control the manner in which he carries out those instructions. An agent receives his principal's instructions but is generally free to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and acts on behalf of the company, as might be necessary or expedient and as were not specifically reserved to be done by the directors. These powers did not spell a direct control and supervision of the directors as of a master over his servant but constituted the appellants, the agents of the company, who were to exercise their authority subject to the control and supervision of the directors but were not subject in such exercise to the direct control or supervision of the principals. The liberty given to the appellants under clause 4 of the agency agreement to deal with the company by way of sale and purchase of commodities therein mentioned also did not spell a relation as between master and servant but empowered the appellants to deal with the company as principals in spite of the fact that under clause 8 of the agreement two of their members for the time being were to be the ex-officio directors of the company. The power to assign the agreement and the rights of the appellants thereunder reserved to them under clause 9 of the agency agreement though subject to the approval and sanction of the board was hardly a power which could be vested in a servant. There was further the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. " Applying the principles enunciated in the above quoted authorities to the facts of the instant case, we are satisfied that the assessees are not employees or servants of the company, but are managing agents inasmuch, as their duties and powers correspond to those of an agent as distinct from a mere servant of the company. In this connection, the following features, as gathered from the articles of association of the company may be noticed : 1. The object of appointing the joint managing directors is to secure better management and direct control and supervision of the affairs of the company. 2. The joint managing directors hold office till their death, although they are given the option to resign by giving a notice in writing. 3. The joint managing directors have the right to nominate any other person as managing director in case of early retirement or permanent disability or incapacity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable under section 10 of the Act. Such income, therefore, does not partake of the nature of the salary paid to a servant or employee which is to be assessed under section 7 of the Act. It is contended by Mr. Pathak, the learned Senior Government Advocate for the department, that as the articles of association indicate also a control and supervision by the board of directors, the assessees must be regarded not as agents but as servants. This argument is hardly understood. In the two Supreme Court cases, which we have quoted above, in many of the articles of association, dealing with the powers and duties of the managing directors, there is provision for supervision by the board of directors and also for certain acts being done by the managing directors with the approval of the board of directors. Notwithstanding these provisions, their Lordships of the Supreme Court held that that made no difference, as, obviously, such supervision and control is not repugnant to the status of the joint managing directors as the managing agents of the company. The real test is as propounded by their Lordships of the Supreme Court and as enunciated by the various authorities referred to above b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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