Tuesday, March 12, 2019
Lakshminarayan case (partnership act) Essay
arena NoteDirect imposeation assessment of in tally Section 4 of league Act plaintiff in error a registered telephoner cyphered into an agreement with Mill comp both appointing its doer for thirty historic period hail prevailard by appellant from Mill comp alone(prenominal) were assessed nether income revenue appellant cont closinged pay received from the mill union was non evaluateable as it was not benefit or brightens from argument following incredulity referred to graduate(prenominal) motor hotel whether on a lower floor the footing of the agreement the petitioner is an exerciseee of the Mills phoner oris protracting on affair whether the recompense received from the Mills is on account of portion or is the allowance for military control matter decided against appellant appellant moved to the Supreme Court Court observed the objects of the appellants in this sequel inter alia were to act as cistrons for G everywherenment appellants we re therefore rightly assessed for extra net tax. JUDGMENTBhagwati, J.1. These are devil appeals from the judgment and decision of the High Court of Judicature at Hyderabad answering certain questions referred at the pillow slip of the appellants by the Commissioner of surplus Profits Tax, Hyderabad, and adjudging the liability of the appellants for excess profits tax in regard to the amounts received by them as remuneration from the Dewan Bahadur Ramgopal Mills fellowship Ltd. as its Agents.2. The Mills connection was registered on the 14th February, 1920, at Hyderabad in the then territories of His Exalted Highness the Nizam. The appellants were registered as a face-to-face particular(a) company at Bombay on the 1st March, 1920. On the twentieth April, 1920, an mental representation agreement was entered into in the midst of the Mills high society and the appellants appointing the appellants its Agents for a plosive consonant of 30 years on certain terms and condition s therein recorded.The appellants passim takeed only as the Agents of the Mills bon ton and for the Fasli years 1351 and 1352 they received their remuneration under the terms of the potency agreement. A notice was issued under voice 13 of the Hyderabad Excess Profits Tax Regulation by the Excess Profits Tax Officer c onlying upon the appellants to pay the amount of tax appertaining to these chargeable accounting periods. The appellants submitted their accounts and contended that the remuneration received by them from the Mills partnership was not taxable on the ground that it is was not income, profits or gains from line of work and was appearside the pale of the Excess Profits Tax Regulation.This public debate of the appellants was negatived and on the 24th April, 1944, the Excess Profits Tax Officer make an golf club assessing the income of the appellants for the accounting periods 1351 and 1352 Fasli at Rs. 8,957 and Rs. 83,768 respectively and assessed the tax accordi ngly. An appeal was taken by the appellants to the Deputy Commissioner of Excess Profits Tax who dis on the wholeowed the same. An application make by the appellants under fraction48(2) for tellment of the case to the High Court was rejected by the Commissioner and the appellants filed a petition to the High Court under soula 48(3) to compel the Commissioner to state the case to the High Court.An order was do by the High Court on this petition estimateing the Commissioner to state the case and the statement of the case was submitted by the Commissioner on the 26th February, 1946. quad questions were referred by the Commissioner to the High Courts as under - (1) Whether the Petitioner companionship is a federation firm or a registered firm ? (2) Whether under the terms of the agreement the petitioner is an employee of the Mills phoner or is carrying on line ?(3) Whether the remuneration received from the Mills is on account of service or is the remuneration for agate lin e ? (4) Whether the principle of personal qualification referred to in fraction 2, clause (4), of the Excess Profits Regulation is applicable to the Petitioner gild ?3. These questions were of considerable importance and were referred for decision to the wide of the mark Bench of the High Court. The Full Bench of the High Court delivered their judgment the majority deciding the questions (2) and (3) which were the only questions considered determinative of the reference against the appellants. The appellants appealed to the Judicial committee. But forward the Judicial Committee heard the appeals there was a merger of the territories of Hyderabad with India. The appeals concludingly came for hearing in the first place the Supreme Court Bench at Hyderabad on the 12th December, 1950, when an order was passed transferring the appeals to this Court at Delhi.These appeals be pretend now come for hearing and final disposal forward us. 4. The questions (1) and (4) which were referr ed by the Commissioner to the High Court at Hyderabad pee not been seriously pressed before us. Whether the appellants are a partnership firm or a registered company the principle of exclusion of the income from the category of pipeline income by reason of its depending wholly or mainly on the personal qualifications of the assessee would not apply because the income could not be said to be income from duty and n all a partnership firm not a registered company as much(prenominal) could be said to be possess of any personal qualification in the matter of the acquisition of that income.5. The jumper lead questions which were therefore argued before the High Court at Hyderabad and before us were the questions (2) and (3) which involved the aim of the position of the appellants whether they were retainersvor agents of the Mills companion and the determination of the character of their remuneration whether it was payment or salary or income, profits or gains from business.6. Th e appellants were registered as a private limited company having their registered military post in Bombay and the objects for which they were integrated were the following (1) To act as agents for Governments or governing or for any bankers, constructs, merchants, shippers, give voice Stock Companies and another(prenominal)s and carry on totally kinds of agency business. (2) To carry on in India and elsewhere the trade or business of merchants, importers exporters in all their branches etc. etc. 7. Under hold cxv of the Articles of Association of the Mills party the appellants and their tack aparts were appointed the agents of the fellowship upon the terms, provisions and conditions compensate out in the Agreement referred to in clause 6 of the Companys Memorandum of Association.Article 116 provided that the common focal point of the business of the Company relegate matter to the realise and supervision of the Directors, was to be in the hands of the Agents of th e Company, who were to check the power and ascendancy on behalf of the Company, subject to much(prenominal) control and supervision, to enter into all contracts and to do all other things usual, undeniable and desirable in the anxiety of the affairs of the Company or in carrying out its objects and were to have power to appoint and employ in or for the theatrical roles of the transaction and management of the affairs and business of the Company, or differently for the purposes thereof, and from quantify to sequence to bear away or suspend such managers, agents, clerks and other employees as they though decent with such powers and duties and upon such terms as to duration of employment, remuneration or other as they thought fit and were in like manner to have powers to motion all rights and liberties taciturn and granted to them by the said agreement referred to in clause 6 of the Companys Memorandum of Association including the rights and liberties contained in claus e 4 of the agreement.Article 118 authorised the agents to sub-delegate all or any of the powers, authorities and discretions for the sequence being vested in them, and in particular from time to time to provide by the appointment of an attorney or attorneys, for the management and transaction of the affairs of the Company in any specified locality, in such personal manner as they thought fit.8. The Agency agreement which was punish in pursuance of the appointment under Article 115 provided that the appellants and theirassign were to be the Agents of the Company for a period of 30 years from the encounter of registration of the Company and they were to continue to act as such agents until they of their proclaim will resigned. The remuneration of the appellants as such Agents was to be a commitment of 2 1/2 per cent. on the amount of sale issuing of all yarn cloth and other produce of the Company (including like gr sustain) which flush was to be exclusive of any remuneration or wages payable to the bankers, solicitors, engineers, etc., who may be employed by the appellants for or on behalf of the Company or for carrying on and conducting the business of the Company.The appellants were to be paying in addition all expenses and charges actually incurred by them in connection with the business of the Company and supervision and management thereof and the appellants were entitle to appoint any person or persons in Bombay to act as their Agents in Bombay and any other places in connection with the business of the Company. 9. article 3 and 4 of the agency agreement are important and may be set out in extenso -3. Subject to the control and supervision of the Directors, the said Lachminarayan Ramgopal and countersign hold in shall have the ecumenical conduct and management of the business and affairs of the company and shall have on behalf of the company to acquire by obtain lease or otherwise lands tenements and other buildings and to erect maintain quali fy and extend factories, ware-houses, engine house and other buildings inHyderabad and elsewhere in the territories of His Exalted Highness the Nizam and in India and to purchase, pay for, grass, resell and repurchase machinery, engines, plant, lancinating cotton wool, waste, jute, wool and other fibres and produce, stores and other materials and to manufacture yarn cloth and other fabrics and to sell the same either in the said territories as sanitary as elsewhere in India and either on credit or for cash, or for present or future delivery, and to execute become parties to and where necessary to cause to be registered all deeds, agreements, contracts, receipts and other documents and to insure the proportion of the Company for such purposes and to such extent and in such manner as they may think proper and to institute, conduct, defend, compromise, refer to arbitration and forsake legal and other proceedings, claims and disputes in which theCompany is concerned and to appoin t and employ discharge, re-employ or replace engineers, managers, retain commission dealers, muccadums, brokers, clerks, mechanics, workmen and other officers and handmaids with such powersand duties and upon such terms as to duration of office remuneration or otherwise as they may think fit and to nominate, accept endorse, negotiate and sell Bills of Exchange and Hundies with or without security and to receive and enforce receipts for all moneys payable to or to be received by the company and to draw cheques against the moneys of the company and superior generally to make all such arrangements and do all such acts and things on behalf of the Company, its successors and assigns as may be necessary or expedient and as are not specially reserved to be done by the Directors.4. The said Lachminarayan Ramgopal & intelligence Ltd., shall be at shore leave to deal with the Company by way of sale of the Company of cotton all raw materials and articles required for the purpose of the C ompany and the purchase from the Company of yarn cloth and all other articles manufactured by the Company and otherwise, and to deal with any firm in which any of the shareholders of the said Lachminarayan Ramgopal & Son Ltd., may be reckonly or indirectly concerned provided unceasingly such dealings are sanctioned passed or ratified by the Board of Directors either before or after such dealings.Clause 8 provided that two of the members for the time being of the appellants were at the option of the appellants to be the ex-officio Directors of the Company and clause 9 empowered the appellants to assign the agreement and the rights of the appellants under it subject to the approval and sanction of the Board to any person, firm or Company having authority by its constitution to become bound by the obligations undertaken by the appellants. 10. No materials other than these were placed by the appellants either before the Income-tax governance or the High Court and the question that a rise before us have to be determined only on these materials.If on the construction of these documents we arrive at the conclusions that the position of the appellants was not that of retainers barely the agents of the Company the further question would have to be determined whether the activities of the appellants amounted to the carrying on of business. If they were not the handmaids of the Company, the remuneration which they received would certainly not be wages or salary precisely if they were agents of the Company the question would still survive whether their activities amounted to the carrying on of business in which case only the remuneration which they received from the Company would be income, profits or gains from business.11. The distinction between a servant and an agent is thusindicated in Powells Law of Agency, at page 16 - (a) Generally a master can tell his servant what to do and how to do it. (b) Generally a pass cannot tell his agent how to carry out his in structions. (c) A servant is under more come control than an agent,and also at page 20 -(a) Generally, a servant is a person who not only receives instructions from his master only if is subject to his masters right to control the manner in which he carries out those instructions. An agent receives his dealers instructions but is generally free to carry out those instructions according to his own discretion, (b) Generally, a servant, qua servant, has no authority to make contracts on behalf of his master. Generally, the purpose of employing an agent is to authorise him to make contracts on behalf of his principal. (c) Generally, an agent is paid by commission upon effecting the result which he has been instructed by his principal to achieve. Generally, a servant is paid by wages or salary.12. The statement of the law contained in Halsburys Laws of England Hailsham Edition people 22, page 113, paragraph 192 may be referred to in this connection - The difference between the rela tions of master and servant and of principal and agent may be said to be this a principal has the right to direct what work the agent agent has to do but a master has the further right to direct how the work is to be done. 13. The position is further clarified in Halsburys Laws of England Hailsham Edition Volume 1, at page 193, article 345 where the positions of an agent, a servant and self-supporting contractor are thus distinguished - An agent is 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 correct to all reasonable orders granted him in the course of his work an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result, employing his own manner to produce that result. An agent, though bound to exercise his authority in compliance with all logical instructions which may be precondition 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 hismasters implied agent, the extent of the agency depending upon the duties or position of the servant.14. Considering the position of the appellants in the flicker of the above principles it is no doubt true that the appellants were to act as the agents of the Company and carry on the general management of the business of the Company subject to the control and supervision of the Directors. That does not however mean that they acted under the direct control and supervision of the Directors in regard to the manner or mode of their work. The Directors were entitled to lay down the general policy and also to give such directions in regard to the management as may be considered necessary.But the day to day management of the busine ss of the Company as detailed in Article 116 of the Articles of Association and clause 3 of the Agency Agreement above set out was inwardly the discretion of the appellants and apart from directing what work the appellants had to do as the agents of the Company the Directors had not conferred upon them the further right to direct how that work of the general management was to be done. The control and supervision of the directors was a general control and supervision and within the limits of their authority the appellants as the agents of the Company had perfect discretion as to how that work of general management was to be done both in regard to the regularity and the manner of such work.The appellants for instance had perfect latitude to enter into agreements and contracts for such purpose and to such extent and in such manner as they thought proper. They had the power to appoint, employ, discharge, re-employ or replace the officers and servants of the Company with such powers an d duties and upon such terms as to duration of office remuneration or otherwise as they thought fit. They had also the power generally to make all such arrangements and to do all such things and acts on behalf of the Company, as competency 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 asbetween master and servant but empowered the appellants to deal with the Company as Principals in rancor of the fact t hat 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 right to continue in employment as the agents of the Company for a period of 30 years from the date of the registration thereof and thereafter until the appellants of their own will resigned, which also would be hardly consistent with the employment of the appellants as mere servants of the Company. The remuneration by way of commission of 2 1/2 per cent. of the amount of sale proceeds of the produce of the Company savoured more of the remuneration given by a principal to his agent in the carrying out of the general management of the business of the principals than of wages or salary which would not usually be on such a basis.All these circumstances unitedly with the power of sub-delegation reserved under Article 118 in our opinion go to establish that the appellants were the agents of the Company and not merely the servants of the Company remunerated by wages or salary. 15. Even though the position of the appellants qua the Company was that of agents and not servants as stated above it remains to be determined whether the work which they did under the Agency Agreement amounted to carrying on business so as to constitute the remuneration which they received thereunder income, profits or gains from business.The affray which was urged before us that the appellants only worked as the agents of the Mills Company and no others and therefore what they did did not constitute a business does not aid the appellants. The activities in order to constitute a business lease not necessarily be concerned with several somebodys or concerns. They would constitute business in spite of their being curb to only one item-by-item or concern. What is relevant to consider is what is the temper and scope of these activities though either by chance or design these might be restricted to only one individual or concern. It is the personality and scope of these activities and not the extent of the operations which are relevant for this purpose. 16.The activities of the appellants certainly did not come within the inclusive definition of business which is given in section 2clause 4 of the Excess Profits Tax Regulation, Hyderabad. stage business is there defined to include any trade, job or manufacture or any adventure in the nature of a trade, commerce or manufacture or any profession or traffic but not to include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the do of contracts on behalf of o ther persons or giving to other persons of advice of commercial nature in connection with the making of contracts.The work which the appellants did under the terms of the Agency Agreement constituted neither trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture nor was it a profession or vocation. 17. The activities which constitute carrying on business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering function to other which services may be of a variegated character.The consideration which apply in the case of individuals in the matter of determining whether the activities constitute a business within the meaning of the inclusive definition thereof set out above may not apply in the case of embodied companies. Even though the activities if carried on by individuals might constitute business in that sense they mig ht not constitute such business when carried on by compound companies and resort must be had to the general position in law in order to determine whether the incorporated company was carrying on business so as to constitute the income realise by it income, profits or gains from business.Reference may be do in this context to William Esplen, Son and Swainston, Limited v. Commissioners of Inland Revenue 1919 2 K.B. 731. In that case a private limited company was incorporated for carrying on business as naval clothes designers and consulting engineers. Before the formation of the company, a partnership had existed for many years between three persons who, on incorporation, became the touch on shareholders and directors of the company. The partnership had carried on the profession of naval architects and consulting engineers and the work done by the company was identical in character with that formerly done by the partnership which is succeeded.The work done by the company was iden tical in all respects with the work of a professional naval architectand consulting engineer, and was performed by the said three shareholders and directors of the company personally. A question arose whether the company was carrying on a profession within the meaning of section 39 paragraphs C of the Finance (No. 2) Act, 1915. It was contended that it carried on a profession of naval architects and consulting engineers because the members penning it were three naval architects.That contention was however negatived and it was held that even though what was to be looked at was the character of the work done by the company, it was not carrying on the profession of the naval architects within the meaning of the section, because for that purpose it was of the essence of a profession that the profits should be dependent mainly upon the personal qualifications of the person by whom it was carried on and that could only be an individual.A company such as that could only do a naval archite cts work by sending a naval architect to its customers to do what they wanted to be done and it was held that the company was not carrying on a profession but was carrying on a trade or business in the ordinary sense of the term.18. When a partnership firm comes into innovation it can be predicated of it that it carries on a business, because partnership according to section 4 of the Indian Partnership Act is the relation between persons who have agree to share the profits of a business carried only by all or any of them acting for all. (See Inderchand Hari Ram v. Commissioner of Income-tax U.P. & C.P. 1952 I.T.R. 108)But when a company is incorporated it may not necessarily come into instauration for the purpose of carrying on a business.According to section 5 of the Indian Companies Act any seven or more persons (or, where the company to be formed will be a private company, any two or more persons) associated for any lawful purpose may by subscribing their names to a memorandum of association . form an incorporated company, and the lawful purpose for which the persons become associated might not necessarily be the carrying on of business. When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated.As was observed by professional Sterndale. M.R., in Commissioners of Inland Revenue v. The Korean Syndicate Limited (1921) 12 Tax Cas. 181 If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limitedcompany comes into existence in a different way is a matter to be considered.An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and tw ist 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. 19. Justice Rowlatt followed the above view of Lord Sterndale, M.R., in Commissioner of Inland Revenue v. Birmingham Theatre Royal Estate Co., Limited (1923) 12 Tax Cas. 580 , and held that when you are considering whether a certain form of opening move is carrying on business or not, it is material to look and see whether it is a company that is doing it.The objects of an incorporated company as laid down in the Memorandum of Association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business (See Indian Law Reports 55 Calcutta 1059 andMANU/WB/0002/1952 195119ITR571(Cal) ). But they are relevant for the purpose of determining the nature and scope of such activities. 20. The objects of the appellants in this case inter alia were to act as agents for Governments or Authorities or for any bankers, manufacturers, merchants, shippers, Joint Stock Companies and others and carry on all kinds of agency business.This object standing by itself would carry within its ambit the activities of the appellants as the agents of the Company and constitute the work which they did by way of general management of the business of the company an agency business. The actors line carry on all kinds of agency business occurring at the end of the object as therein set out were capable of including within their general description the work which the appellants would do as agents for Governments or Authorities or for any bankers, manufacturers, merchants, shippers and others when they acted as agents of the Company which were manufacturers inter alia of cotton chip goods they would be carrying on agency business within the meaning of this object. apart however from this there is the further fact that there was a tenacity of operations which constituted the activities of the appellants in the general management of the Company a business. The whole work of management which the appellants did for the Company within the powers conferred upon them under Article 116 of theArticles of Association and clause 3 of the Agency Agreement consisted of numerous and invariable operations and comprised of various services which were rendered by the appellants as the agents of the Company.The appellants were also entitled though with the sanction or ratification by the Board of Directors either before or after the dealings to enter into dealings with the Company by way of sales and purchases of various commodities. There was nothing in the Agency Agreement to prevent the appellants from acting as the agents of other manufacturers, Joint Stock Companies etc., and the appellants could have as well acted as the agents of other concerns in like manner the Company.All these factors taken into consideration along with the fixity of tenure, the nature of remuneration and the assignabili ty of their rights, are sufficient to enable us to come to the conclusion that the activities of the appellants as the agents of the Company constituted a business and the remuneration which the appellants received from the Company under the terms of the Agency Agreement was income, profits or gain from business. 21. The appellants were therefore rightly assessed for excess profits tax and these appeals must stand dismissed with costs. 22. Appeal dismissed. Manupatra Information Solutions Pvt. Ltd.