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 section 48(3) of the Hyderabad Excess Profits Tax Act.
The question which the High Court answered against the assessee in the said
references was :
"Whether in the circumstances of the case, the
officers of the excess profit 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 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 21, 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 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 Tyabji 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 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, subject to the condition
that Osmanshahi Mills made an annual profits of Rs. 1,50,000 and the Azamjahi
Mills made an annual profits 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 7 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 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 11 related to the eventuality of winding up
of the mills and its effect on the appellant's rights 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 two chargeable accounting periods 1351 F. and 1352 F.
corresponding to October 1, 1941, to September 30, 1942, and October 1, 1942, to
September 30, 1943, respectively. The total income assessed for 1351 F. 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 1352 F. was Rs.
4,90,027 which included Rs. 4,45,775 being the managing agency commission and
allowance of the appellant.
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.
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.
We are unable to accept this line of argument as correct.
In Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, 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 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 appellant 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 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. 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 section
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. Government of
Hyderabad and J. K. Trust v. Commissioner of Income-tax). 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 clause 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, clause 4 relating to remuneration, clause 7
relating to termination of business and the 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 clause 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 clause 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 clause
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, 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.
