Shoorji Vallabhdas & Co., Bombay v. The Commissioner of Income-Tax/Excessprofits Tax, Bombay.

This is an appeal with special leave from

the judgment and orders dated March 31, 1952, and March 2,

1953, of the High Court of Bombay in an Income-tax Reference

No. 48 of 1951 made by the Income-tax Appellate Tribunal,

Bombay, under s. 66(1) of the Indian Income-tax Act, 1922,

and s. 21 of the Excess Profits Tax Act, 1940.

We may shortly state the relevant facts first. The

assessee, Messrs. Shoorji Vallabhdas and Company, Bombay,

appellant herein, is a firm registered under the Indian

Income-tax Act. It held the managing agency of three

companies, namely-(1) the Malabar Steamship Company Ltd.,

(2) the New Dholera Steamships Ltd., and (3) the New Dholera

Shipping and Trading Company Ltd., for the periods material

in this case. The appellant as also the aforesaid three

managed companies were resident in the taxable territories

within the meaning of the Indian Income-tax Act. The

business of the Malabar Steamship Company Ltd. and of the

New Dholera Steamships Ltd. was to carry cargo in cargo

boats which touched ports in British India, Cochin State,

Travancore State and ,Saurashtra, as they were then known.

The appellant became the managing agent of the Malabar

Steamship Company Ltd. with effect from April 1, 1943, and

the firm consisted of Shoorji Vallabhdas and his two sons.

Formerly, Shoorji Vallabhdas alone was the managing agent of

the Malabar Steamship Company Ltd. and a managing agency

agreement dated September 16,

1938, was executed between the managing agent and the

managed company, and that agreement as varied by two

subsequent deeds dated June 26, 1942, and December 7, 1943,

constituted the contract of managing agency between the

appellant and the managed company. Under the managing

agency contract the remuneration payable to the appellant

after September 1, 1943, was expressed in the following

terms:

" That the remuneration of the Managing Agents as and from

1^st September one thousand nine hundred and forty-three

shall be ten per cent. (10%) on the freight charged to the

shippers instead of annas fourteen per ton as mentioned in

clause (1) of the said first supplemental agreement dated

the 26^th day of June, 1942."

The managing agency agreement dated June 8, 1946, between

the appellant and the second managed company, New Dholera

Steamships, Ltd., provided inter alia as follows:

" That the Managing Agents shall as and by way of

remuneration for their services in relation to the shipping

business of the Company receive a commission of ten per

cent. (10%) of the gross freight charged to the shippers

and/or passage money charged to the passengers. Such

remuneration shall be payable to the Managing Agents at the

place where the same is earned by the Company unless

otherwise requested by the Managing Agents. The

remuneration of the Managing Agents in relation to the

business of the Company other than the shipping business

shall be (10%) ten per cent. on the gross profits that may

be earned in such business."

It may be stated here, however, that no question arose as to

the remuneration of the Managing Agent in relation to

business other than shipping business, because no business

other than shipping business was carried on by the managed

company during the relevant period.

The third managed Company, viz., the New Dholera Shipping

and Trading Company Ltd., confined its business during the

relevant accounting period to stevedoring and trading only.

The managing agency agreement also dated June 8, 1946, with

the, third

managed company provided inter alia for the payment of

remuneration in the following terms:

" That the Managing Agents shall as and by way of

remuneration for their services receive a commission at the

rate of 25 per cent. of the net profits of the company.

Such remuneration shall be payable to the Managing Agents at

the place where the same is earned by the Managing Agents

unless otherwise requested by the Managing Agents."

The appellant was assessed to income-tax for three

assessment years, namely, 1945-1946, 1946-1947 and 1947-

1948, the previous years being the financial years 1944-

1945, 1945-1946 and 1946-1947 respectively. The appellant

was likewise assessed to excess profits tax under the Excess

Profits Tax Act, 1940, for the respective chargeable

accounting periods which were also three in number, namely,

April 1, 1943, to March 31, 1944, April 1, 1944, to March

31, 1945, and April 1, 1945, to March 31, 1946. The Income-

tax Officer and the Excess Profits Tax Officer assessed the

appellant to tax in respect of the whole of the managing

agency commission received from the three managed companies

on the footing that the entire managing agency commission

accrued or arose in British India. The appellant went up in

appeal to the Appellate Assistant Commissioner from the

assessment orders on the ground inter alia that a part of

the managing agency commission received from the three

managed companies accrued in the Cochin and Travancore

States and not in British India and was therefore exempt

from tax under the relevant provisions (as they stood at the

material time) of the Indian Income-tax Act, 1922, and the

Excess Profits Tax Act, 1940. Thus, the dispute was about

the place of accrual of the in. come in question. As to the

managed companies, the Income-tax authorities accepted the

position that the profits of the three managed companies

partly accrued in British India and partly in the Indian

States; but they did not accept the claim of the appellant

that part of its managing agency commission from the three

managed companies accrued or arose in the Cochin and

Travancore States. The Appellate Assistant Commissioner by

different orders all dated

May 4,1950, dismissed all the appeals. The Appellant went

in appeal to the Income-tax Appellate Tribunal. By its

order dated December 11, 1950, the Tribunal also dismissed

the appeals.

The appellant then made an application to the Tribunal to

refer certain questions of law which arose out of its order,

to the High Court of Bombay. The Tribunal referred two such

questions:

" (1) Did a part of the managing agency commission earned by

the assessee accrue or arise in the Cochin State inasmuch as

the managing agency commission is computed on the basis of

the freight earned by the managed company in the Cochin

State or otherwise?

(2)Did the whole or part of the dividend income accrue or

arise in the Cochin State ? "

The expression Cochin State in the questions obviously

referred to both Cochin and Travancore States. On March 31,

1952, the reference came up for consideration before the

High Court, and after hearing Counsel, the High Court

reformulated the first question as follows:

" Where the actual business of managing agency was done

which yielded the commission which is sought to be taxed? "

The High Court directed the Tribunal to submit a

supplemental statement of the case on the first question as

reformulated. The second question was not pressed by

learned counsel for the appellant and does

not now survive.

The Tribunal submitted a supplemental statement of the case

on August 29, 1952. The reference was finally heard on

March 2, 1953, and the High Court answered the question by

saying that the actual business of the managing agency which

yielded the commission was done at Bombay and not at Cochin.

In arriving at the conclusion the High Court proceeded on

the footing that the finding of the Tribunal in effect was

that barring freight and collecting it at Cochin, all other

important and responsible work of managing the managed

companies was done from the

head office at Bombay.

It has been argued on behalf of the appellant that the High

Court erroneously reformulated the question,

and that the real question of law is whether on the facts

and circumstances of the case, any part of the managing

agency commission accrued outside British India so that the

appellant would be entitled to an apportionment of the

managing agency commission and to claim exemption from tax

in respect of the commission which accrued outside British

India under s. 14(2)(c) of the Indian Income-tax Act, 1922

(as it then stood) and the third proviso to s. 5 of the

Excess Profits Tax Act, 1940. It has been further

contended, that in view of the findings of the Tribunal that

(a,) the commission earned was a percentage of the freight

and passage money received by two of the managed companies

in Cochin and Travancore States, (b) a part of the

commission was payable there and (c) a part of the services

was also rendered by the appellant as managing agent in

those States, the High Court was in error in coming to its

conclusion that the whole of the managing agency commission

accrued or arose in Bombay. While we agree with learned

counsel for the appellant that the real question in this

case is whether any part of the managing agency commission

accrued outside British India, we do not agree with him that

the High Court was wrong in reformulating the question. The

Tribunal formulated the, question as though the computation

of the appellants remuneration on the basis of freight

determined the place of accrual; in this the Tribunal was in

error, and the High Court rightly pointed out that the test

to be applied was not how the remuneration was to be

computed or quantified, but where the services were

performed by the appellant, which yielded the profits sought

to be taxed. The High Court rightly reformulated the

question on that basis, and asked the Tribunal to submit a

supplemental statement of the case on the materials

available and placed before it by the appellant bearing on

the question as reformulated by the High Court.

What did the Tribunal find in this case as to the place

where the actual business was done, i.e., the services were

performed by the appellant as managing agent, which yielded

the commission ? After referring to the agreements relating

to the computation of remuneration, the Tribunal said in its

order dated

December 11, 1950, that (a) from time to time one of the

partners of the appellant firm went to Cochin to, attend to

the business, (b) the managed companies had an officer in

Cochin, and (c) the payments said to have been made to

certain employees at Cochin were fictitious. In the

supplementary statement, the Tribunal pointed out that it

was not known whether the' partner who went to Cochin went

in his capacity as partner of the appellant firm or as a

director of one of the managed companies; the appellant firm

had rented a flat at Cochin on Rs. 20 per month and

maintained some employees at Cochin for securing freight;

and the local office of the appellant firm at Cochin rented

at Rs. 10 per month maintained only one book containing

cash, journal and ledger. The Tribunal concluded its

supplementary statement thus:

"As for the staff maintained at Cochin, it was alleged that

K. P. Joshi and subsequently G. H. Narechania were paid Rs.

18,000 each year. The so-called payment was disallowed by

the Appellate Tribunal. It observed that debit entries in

regard to the salaries paid by the asessee firm were

collusive and fictitious. As for the presence of the

partners of the assessee firm at Cochin, it appears from the

Appellate Assistant Commissioner's order that it was

admitted before him that none of the partners of the firm

ever attended to the company's business at Cochin or

Alleppey.

"There is no clear evidence on the record as to what the

assessee firm did as the managing agents of the three

managed companies; in other words, how the assessee firm was

carrying on the managing agency business. The partners of

the assessee firm (not necessarily all) were on the Board of

Directors of the managed companies. They held a large

number of shares in the managed companies. The Malabar

Steamship Co. Ltd. had an office of its own "to secure

freight ". The Cochin office of the assessee firm, as far as

one could make out, did practically nothing, except receive

10% of the gross freight at Cochin and retain the net,

income therefrom ",

fact reached by the Tribunal-where did the commission

payable to the managing agent accrue ? It is well to

remember that the problem in this case is not so much when

the commission accrued as where it accrued, though the

question as to where and when may be interlinked. We think

that normally, the commission -payable to the managing

agents of a company accrues at the place where the services

are performed by the managing agents. It was so held by

this Court in K. R. M. T. T. Thiagaraja Chetty and Company

v. Commissioner of Income-tax, Madras, No. 2(1). The

assessee in that case, Thiagaraja Chettiar, claimed that a

portion of the commission or-edited to it in the company's

accounts accrued to it in the Indian States where the

company had opened branches for selling yarn and as the

commission was not remitted to British India, it was not

assessable to tax. This Court observed:

"The short answer to this argument is that the business of

the company was carried on in British India, that the

commission earned by the firm on the profits made by the

company in the States arose out of one indivisible agreement

to charge the reduced commission of 5 per cent. on the

profits of the company and that the managing agents had been

doing the business of the agency in British India and not in

the States. It is not suggested that the managing agents

performed any functions in the States."

The same question of the place of accrual arose in a

somewhat different context in Commissioner of Income-tax,

Bombay Presidency and Aden v. Chunilal B. Mehta (2) where a

person resident in British India and carrying on business

there controlled transactions abroad, and the question was

it he was liable to pay tax upon profits derived by him from

contracts made for the purchase and sale of commodities in

various markets-Liverpool, London, New York, etc. The

assessee disputed his liability in respect of such profits

on the ground that they were not profits " accruing or

arising in British India ". It was held that the mere fact

that the profits made depended on the exercise in

(1) (1953) 24 I.T.R 535.

(2) [1938] 6 I.T.R. 521.

British India of knowledge, skill and judgment on the part

of the assessee did not mean that the profits arose or

accrued in British India, and there was no necessity &rising

out of the general conception of a business as an

Organisation that the profits of the business must arise

only at one place, namely, the place of central control of

the business. Delivering the judgment of the Privy Council

in that case, Sir George Rankin observed:

" The words "accruing or arising the British India" may be

taken, provisionally and in the first place, as an ordinary

English phrase which derives no special meaning from the

Act. The alternative " accruing or arising in" and the

antithesis between these words and the words " received in "

or " brought into " afford no safe inference of any special

meaning. " Profit accruing or arising in British India "

are words which in their ordinary meaning seem to require a

place to be assigned as that at 'which the result of trading

operation comes, whether gradually or suddenly, into

existence"…………………………………..

" Their Lordships are not laying down any rule of general

application to all classes of foreign transactions, or even

with respect to the sale of goods. To do so would be nearly

impossible and wholly unwise. They are not saying that the

place of formation of the contract prevails against

everything else. In some circumstances it may be so, but

other matters-acts done under the contract, for example-

cannot be ruled out a priori. In the case before the Board

the contracts were neither framed nor carried out in British

India; the High Court's conclusion that the profits accrued

or arose outside British India is well-founded."

A similar view was expressed in two earlier decisions: (1)

In Re: The Aurangabad, Mills Ltd.(") where a reference was

made to Commissioner of Taxation v. Kirk, (1900) Appeal

Cases, page 588 and it was pointed out that the circumstance

that the affairs of the company were directed from Bombay

was not the determining test was the test was where the

processes

(1) [1921] I.L.R. 45 Bom. 1286,

which yielded the income were carried out and that was

outside British India; (2) The Commissioner of Income-tax,

Bombay Presidency v. Messrs. Sarupchand Hukamchand of

Bombay, a firm (1) where the assessees acted as the

secretaries, treasurers and agents of a mill company

registered at Indore, outside British India, and under the

terms of agreement, the assessees were entitled to charge

and receive as selling agents commission on the gross sale

proceeds of all cloth produced by the mill and the company

opened a shop in Bombay for the sale of cloth produced by

the mill which was managed by the assessees. The sale

proceeds were sent to Indore and the assessees were paid the

commission at Indore. The question arose whether the com-

mission was liable to be assessed to income-tax in Bombay,

and it was held that the income accrued in British India.

In Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai

and Co, Bombay (2) this Court dealt with a case where a firm

resident in British India carried on the business of

manufacturing and selling groundnut oil; it owned some oil

mills within British India and a mill in Raichur in the

Hyderabad State where oil was manufactured. One of the

questions for decision was whether the profits of that part

of the business, viz., the manufacture of oil at the mill in

Raichur accrued or arose in Raichur within the meaning of

the third proviso to s. 5 of the Excess Profits Tax Act,

1940. A majority of Judges held that the profits arose in

Raichur, and in a composite business, the profits need not

arise at one place only but may arise at more than one place

and an apportionment may be necessary. This was not,

however, a case of managing agency.

We now come to the decision in Salt and Industries Agencies

Ltd., Bombay v. Commissioner of Income-tax, Bombay City(3) a

decision of the same learned Chief Justice, in respect of

which learned counsel for the appellant has made some very

serious comments. The facts of that case were these : the

assessees, a company incorporated in Bombay were the

managing agents of another company incorporated in Bombay

and having its salt works at Aden and at Kandla in the Kutch

(1) [1930] I.L.R. 55 Bom. 231 (2) [1950] S.C.R. 335.

(3) [1950) 18 I.T.R. 58.

where the board of directors met, the books of account were

maintained and various types of work connected with the

company were done. Under the managing agency agreement the

assessees were entitled to a commission at the rate of 12

1/2 per cent. per annum on the annual net profits of the

company and in any event a minimum of Rs. 30,000 per annum.

The agreement also provided that such portion of the

commission as was attributable to the net profits of the

company arising or accruing in the Indian State was to be

paid to the managing agents in such State and that with

regard to the minimum commission half of it was to be. paid

in the State. In pursuance of the assessees' articles of

association the board of directors passed a resolution

delegating a particular director to guide the company's

operation in the State of Kutch and during the year of

account that director supervised the salt works at Kandla.

The question was whether the sum of Rs. 88,O65 representing

assessee's commission attributable to the salt works at

Kandla accrued or arose at Kandla or in British India.

First, the learned Chief Justice referred to the test to be

applied in order to determine where the profits of the

assessee company accrued or arose, and he said that the test

was to find out where the actual business of the company was

done which yielded the profits sought to be taxed. In that

connexion he said:

" The work of the managing agents must be looked upon as a

unit and not as divided up into so many different

categories, to each one of which a certain portion of the

commission earned by the managing agents can be attributed

or allocated.".

He then went on to consider when the right to managing

agency commission arose in that case and came to the

conclusion, which was decisive in his opinion, that it arose

when all the accounts of the working of the company were

submitted to the head office in Bombay and the profits were

determined therefore, the sum of Rs. 88,065 accrued or arose

to the assessees in Bombay and not in the Indian State both

for purposes of income-tax and excess profits tax.

Now, learned counsel for the appellant has no quarrel with

the decision in so far as it laid down that (a) the test is

to find out where the business is actually done, i. e.,

where the services are performed, and (b) the right to

managing agency commission arose in that case when all the

accounts of the working of the company were submitted to the

head office in Bombay and the profits were determined.

Learned counsel has contended that in the case under our

consideration the services were performed partly in British

India and partly in Cochin and the right to managing agency

commission arose as soon as the freight was paid at least in

respect of two of the managed companies. He has submitted,

however, that the learned Chief Justice was in error if he

intended to lay down a rule of universal application that

the work of the managing agents must always be looked upon

as a unit and can never to be divided into categories. It

is contended that the services of a managing agent can be

performed at more than one place, and legally it is possible

to apportion the commission and attribute a part of it to

services rendered outside the taxable territories.

We consider it unnecessary in the present case to decide the

question of performance of services and resultant

apportionment, if any, on a theoretical or hypothetical

basis, because the case can be disposed of 'on the short

ground that on the findings of the Tribunal, the

remuneration of the managing agents accrued at Bombay. We

had referred earlier to the findings reached by the

Tribunal. These findings show that except for an attempt at

make-believe, no services were really performed by the

appellant at Cochin. No doubt, some freight was secured and

paid for at Cochin. But the managed company also had an

office at Cochin to secure freight. It has been argued that

under the terms of the managing agency agreements, the

managing agents employed the staff, etc., and for two of the

companies which carried on the cargo business, securing

freight was the principal part of the managing agency

business. The High Court, however, rightly. pointed out:

" In our opinion, it is not possible to read the managing

agency agreement in that light. All that clause 2 of the

agreement does is to lay down the standard by which the

commission is to be computed and determined, and it lays

down two different standards, one with regard to the

shipping business and the other with regard to the other

businesses, but as far as the business of the managing

agency is concerned their responsibilities and their duties

are integrated duties and responsibilities which are set out

in the different clauses of the agreement. It is impossible

to contend that they had not to supervise, control and

manage the shipping business and, as we have already said

the business of a shipping company is vastly more detailed

and responsible than the mere task of finding people to go

by ship or send their goods by ship and for that purpose

paying freight. Freight is merely the resultant profit

which accrues to a shipping company. In order that that

profit should result the company has got to have ships, it

has got to have seaworthy ships, it has got to have sailors

and officers, it has got to look to the repairs of the

ships, the renovation of the ships and the replacements of

the ships. All this is part of the shipping company's

business and all this business had to be attended to by the

managing agents and the question is, where did they attend

to this business. The finding on this question is clear.

The finding, in effect, is that barring booking freight, and

collecting freight at Cochin, all other important and

responsible work of managing the managed companies was done

from the head office at Bombay and not from Cochin."

On the findings reached, the position in law is quite clear.

The decisions to which we have referred clearly establish

that normally, the commission payable to the managing agents

accrues at the place where the business is actually done,

that is, where the services of the managing agents are

performed. In this case the appellant practically performed

all the services at Bombay, and therefore the commission

which it earned though computed on the percentage of freight

and/or passage money in respect of two of the managed

companies, accrued or arose in British

India. As to the third managed company whose business was

stevedoring and trading and the remuneration was payable at

25 per cent. of the net profits, there can be no doubt that

the remuneration accrued at Bombay. Therefore, the High

Court of Bombay correctly answered the question against the

appellant.

The appeal accordingly fails and is dismissed With costs.

Appeal dismissed.