Qamar Shaffi Tyabji vs The Commissioner, Excess Profits Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 324 and 325 of 1957

Decision Date: 18 April 1960

Coram: S.K. Das, J.L. Kapur, M. Hidayatullah

In this case the Court explained that, by an order of the ruler of the former State of Hyderabad, an institution called the Industrial Trust Fund was created to develop industries on behalf of the Government. The Fund was to be managed by a committee known as the Trustees. In the year 1934 the Trustees entered into agreements with two cotton mills that were located in the State. Under those agreements the Trustees were appointed as secretaries, treasurers and agents of the mills. They were also given the general management of the mills, which included the power to appoint employees, and they were designated as the selling agents of the mills. Separate agreements gave the Trustees the authority to delegate any or all of the powers granted to them under the 1934 agreements to other persons, provided that such delegation received the approval of the Board of Directors of each mill. On 6 December 1938 the Trustees executed an agreement with the appellant in which they delegated to him their powers and appointed him as the managing agent of their business. The agreement named the appellant as secretary, treasurer, agent and also as selling agent of the two mills, subject to the general control retained by the Trustees. The appellant was to hold the office of managing agent and selling agent for the remainder of the original managing‑agency and selling‑agency agreements. The remuneration fixed for the appellant’s managing‑agency duties was two thousand rupees per month, together with a commission of two and a half percent taken from the commission of twelve and a half percent per annum on the annual profits that were payable to the Trustees. For the selling‑agency function a separate commission was payable on the sale of different kinds of goods. Clause nine of the agreement expressly stated that the managing agent could not assign the benefit of the agreement because the benefit was personal to him.

For the accounting years 1941‑42 and 1942‑43 the appellant was assessed for excess profits tax. He contested the assessment by arguing that the Trustees of the Industrial Trust Fund were the true managing agents and selling agents of the two mills, and that they had employed him on certain terms and granted him certain powers. He maintained that he was not carrying on an independent business of his own, but was merely performing the duties of an employee of the Trustees. Accordingly, he claimed that the remuneration he received under the 6 December 1938 agreement was simply a salary, not income derived from a business, and therefore should not be subject to excess profits tax. The Court recorded these facts and the appellant’s contention before proceeding to consider the legal issues involved.

The appellant contended that his income was derived from business and therefore not liable to excess profits tax. The Court held, however, that first, under the agreements executed in 1934 the Trustees, acting as agents, possessed explicit authority to appoint the appellant to act on behalf of the principal in the agency business; consequently the appellant could not be characterized as a servant or merely a sub‑agent but was an agent of the principal for the portion of the agency business that had been assigned to him, as defined by section 194 of the Indian Contract Act, 1872. Second, the Court ruled that a proper construction of the agreement dated 6 December 1938 showed that the appellant was carrying on his own business by accepting the duties and responsibilities of managing agent for the two mills while remaining under the general control of the Trustees, and therefore the remuneration and commission he received constituted income liable to excess profits tax. The Court referred to the authorities Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad, [1955] 1 S.C.R. 393 and K. Trust, Bombay v. The Commissioner of Income‑Tax (Excess Profits Tax), Bombay, [1958] S.C.R. 65. The judgment arose in civil appellate jurisdiction concerning Civil Appeals No. 324 and No. 325 of 1957, which were filed by special leave against the judgment and order dated 10 April 1953 of the former Hyderabad High Court in the Excess Profits Tax references. The references were numbered 45215 and 453/5 of 1358 F. Counsel for the appellant and counsel for the respondent appeared before the Court, which delivered its decision on 18 April 1960, with S.K. Das, J. delivering the judgment. The matters before the Court were two appeals taken on special leave from the High Court of Hyderabad decision, which had considered two references made under section 48(3) of the Hyderabad Excess Profits Tax Act. The High Court had answered the question whether, given the facts, the officers of the Excess‑Profits Tax Department were correct in treating the income of the assessee or that of the Industrial Trust Fund as income derived from business, and had answered affirmatively. The principal issue for determination by this Court was whether the High Court’s answer was correct. The factual background leading to the question involved two cotton mills in the State of Hyderabad, then known as Azamjahi Mills and Osmanshahi Mills, both organized as public joint‑stock companies. In 1929 a Firman‑e‑Mubarak issued by the then Ruler of the State established the Industrial Trust Fund, an institution intended to assist large and small industries on behalf of the State Government. Management of the Trust was vested in a Committee comprising three government members designated as Trustees. By agreements dated 12 April 1934 and 27 July 1934, entered into between the Trustees and the two mills, the Trustees were appointed as secretaries, treasurers and agents of the mills, thereby receiving general authority for the conduct and management of the mills’ affairs, the power to appoint employees, and the authority to delegate any of their powers subject to the approval of the respective Boards of Directors.

The Trustees of the Industrial Trust Fund were appointed as secretaries, treasurers and agents of the two cotton mills, Azamjahi Mills and Osmanshahi Mills, by the agreements dated 12 April 1934 and 27 July 1934. Under those agreements the Trustees received the general conduct and management of the business and affairs of each mill, and they were authorized to employ staff. The agreements also permitted the Trustees to delegate any or all of their powers, authorities, discretions and related functions to other persons, provided that such delegation obtained the approval of the Board of Directors of the respective mill. In addition, two further agreements dated the same days, 12 April 1934 and 27 July 1934, named the Trustees as the selling agents of the mills. Subsequent supplemental agreements, both dated 16 October 1938, expanded the delegation power, allowing the Trustees to delegate any or all of their powers and authorities to other persons, again subject to the Board of Directors’ approval. Until October 1938 the Trustees exercised the powers granted by the foregoing agreements through an Advisory Board. The Advisory Board was chaired by Quamar Shaffi Tyabji, who received a monthly remuneration of Rs 1,500 together with a commission of an unspecified rate.

In 1938 the Advisory Board was dissolved and, on 6 December 1938, a new agreement was executed between the Trustees and the appellant, Quamar Shaffi Tyabji. The preamble of that agreement, in Clause 11, declared the Trustees’ intention to delegate “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” and to appoint the appellant as the managing agent of the Trustees’ business, acting also as secretaries, treasurers, agents and selling agents of the two mills for the matters and purposes described thereafter. The agreement further stated that, having obtained the approval of the Boards of Directors of both mills, the appellant was appointed as managing agent of the Trustees’ business in the capacities of secretaries, treasurers, agents and selling agents. Clause 2 set out the appellant’s powers, which were identical to those of the Trustees for conducting and managing the business of the two mills, although the appellant remained subject to the overall control of the Trustees. In effect, the entire management and selling‑agency authority over both mills was delegated to the appellant. Clause 3 provided that the appellant would hold the offices of managing agent and selling agent for the remainder of the original managing‑agency and selling‑agency agreements. The remuneration for the managing‑agency role was fixed at Rs 2 000 per month, together with a commission of twenty‑one per cent out of a total commission of one hundred‑twenty‑one per cent per annum on the annual profits payable to the Trustees, on the condition that Osmanshahi Mills earned an annual profit of Rs 1,50,000. The agreement also stipulated that the remuneration for the selling‑agency function would be a separate commission on the sale of various goods, again contingent upon the two mills achieving specified minimum annual profit levels.

In the agreement, it was stated that the Azamjahi mills earned an annual profit of Rs 2,00,000. For the selling agency, a separate commission was payable on the sale of various kinds of goods, but this commission was also subject to the condition that the combined annual profits of the two mills would not fall below a specified amount. Clause 6 of the agreement dealt with the appointment and duties of a mill expert. Clause 7 provided for the termination of the agreement and specified that the agreement would cease when the Trustees terminated the earlier agreements in their favour; however, if the Trustees decided to transfer those agreements and the rights under them to any other party, they were required first to offer the same terms and conditions to the managing agent. The managing agent then had to make arrangements, satisfactory to the Trustees, for the payment in cash or otherwise of the monies the Trustees had spent in purchasing the managing‑agency rights of the two mills, as well as the balance then due of any unsecured loans (that is, loans other than the first debenture) that the Trustees had advanced to the mills. The managing agent was given a six‑week period to indicate acceptance of this offer, and failure to respond within that period would be deemed a refusal. Clause 9 was also important; it read: “The managing agent shall not assign the benefit of this agreement, the same being personal to himself.” Clauses 10 and II concerned the eventual winding up of the mills and the effect of such winding up on the appellant’s rights under the agreement. Under the terms of the agreement dated 6 December 1938, the appellant conducted the business of the mills, both in terms of management and selling. He was assessed for excess profits tax for two chargeable accounting periods, namely 1351 F (covering 1 October 1941 to 30 September 1942) and 1352 F (covering 1 October 1942 to 30 September 1943). The total income assessed for the first period, 1351 F, was Rs 2,37,451, which included Rs 2,11,230 representing the appellant’s managing‑agency allowance and commission. For the second period, 1352 F, the total income assessed was Rs 4,90,027, of which Rs 4,45,775 represented the appellant’s managing‑agency commission and allowance. Before the excess profits tax authorities, the appellant argued that he was merely an employee of the Industrial Trust Fund and that his remuneration under the 6 December 1938 agreement was solely salary, not income derived from a business, and therefore should not be liable to excess profits tax. The tax authorities rejected this argument, and, as required by the High Court, the Commissioner of Income‑tax, Hyderabad, referred the question of law to the High Court for decision.

The Commissioner of Income‑tax, Hyderabad, referred to the High Court for decision the question of law that had been set out at the beginning of this judgment. On behalf of the appellant it was submitted that a proper construction of the relevant agreements showed that the Industrial Trust Fund acted as both managing agent and selling agent of the two mills; that the Trustees had employed the appellant under certain terms and had conferred upon him certain powers; and that, because the appellant was an individual and not a firm, he was not carrying on an independent business of his own but was merely performing the duties of an employee of the Trustees despite being described as “managing agent” in the agreement dated 6 December 1938. Accordingly, the appellant contended that his remuneration was not income derived from a business and therefore should not be subject to excess‑profits tax. The Court was unable to accept that line of argument.

In Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad (1) this Court earlier explained the distinction between an agent, a servant and an independent contractor. The Court pointed out that the difference between the relations of master and servant and of principal and agent lies in the extent of control: a principal may direct what work the agent is to do, whereas a master may also direct how the work is to be done. A servant acts under the direct control and supervision of his master and must obey all reasonable orders given in the course of his work. In contrast, an agent, while bound to exercise his authority in accordance with lawful instructions from his principal, is not subject to the direct control or supervision of the principal in the performance of his duties. Learned counsel for the appellant accepted the correctness of this distinction and also accepted that the true relationship between the Mills and the Trustees was that of principal and agent. However, counsel argued that the relationship between the Trustees and the appellant was one of master and servant. The Court considered this contention wholly unsound.

The Court examined the original agreement between the Mills and the Trustees dated 12 April 1934. Clause 9 of that agreement provided 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. Consequently, the Trustees, acting as agents, possessed express authority to appoint another person to act for the principal in the business of the agency, and they appointed the appellant with the approval of the Board of Directors. Accordingly, the appellant was neither a servant nor a mere sub‑agent; he was an agent of the principal for that part of the agency business which had been entrusted to him. The legal position corresponded with the provision laid down in section 194 of the Indian Contract Act. Similar circumstances have been treated by this Court as managing agency being a business (see Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad (1) and J. K. Trust, Bombay v. The Commissioner of Income‑tax (Excess Profits Tax), Bombay (2)). The terms of the agreement dated 6 December 1938 leave no doubt that full powers of the Trustees as managing agents were delegated to the appellant under clause 2 of that agreement, subject only to the general control of the Trustees.

The Court observed that the Trustees, acting as agents of the principal, possessed explicit authority under the original agreement dated April 12 1934 to appoint another individual to act on behalf of the principal in the agency’s business. By exercising that authority, the Trustees named the appellant, and the appointment received the approval of the Board of Directors. Consequently, the appellant could not be characterised as a servant or a mere sub‑agent; rather, he functioned as an agent of the principal for the portion of the agency’s business that had been entrusted to him. The Court noted that this legal position corresponded with the provision set out in section 194 of the Indian Contract Act. In analogous situations, the Court has previously held that a managing agency constitutes a business, referring to the decisions in Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad (1) and J. K. Trust, Bombay v. The Commissioner of Income‑tax Excess Profits Tax, Bombay (2). The terms of the agreement dated 6 December 1938 further left no doubt that full powers of the Trustees, acting as managing agents, were delegated to the appellant under clause 2 of that agreement, subject only to the general control of the Trustees. Clause 2 expressly required the appellant to conduct and manage the business and affairs of the two mills. Clause 3 dealt with the tenure of the managing agency, clause 4 with remuneration, and clause 7 with termination of the business and the eventual winding up of the mills. All of these clauses were appropriate to a business undertaking and were inconsistent with a master‑servant relationship. The extent of the delegated authority was also reflected in clause 5, which required the managing agent – that is, the appellant – to observe and perform all the terms and conditions of the earlier managing‑agency and selling‑agency agreements on behalf of the Trustees, indicating that the entire managing‑agency business had been transferred to the appellant.

Counsel for the appellant emphasised clause 9, previously quoted, arguing that it demonstrated the appellant’s inability to assign any benefits under the agreement because such benefits were personal to him. The Court, however, held that clause 9 did not alter the nature of the relationship between the Trustees and the appellant. The managing‑agency agreement must be read as a whole, and when interpreted in its entirety, it clearly showed that the appellant was undertaking his own business by accepting the duties and responsibilities of a managing agent of the two mills, albeit under the general control of the Trustees. The appellant, who possessed prior business experience and held an agency with the Eastern Federal Union Insurance Co., derived a substantial income from that agency. Counsel further relied on the decision in Inderchand Hari Ram v. Commissioner of Income‑tax, U. P. & C. P. (1), which distinguished between the definitions of managing agent and manager under the Indian Companies Act, 1913. The Court concluded that the cited decision did not assist the appellant’s argument, reaffirming that the contractual terms established a business relationship of managing agency rather than a master‑servant relationship.

The Court addressed the question as it applied to the appellant. The real issue was the construction of the relevant agreements and whether the terms of those agreements manifested a master‑servant relationship or an agency business. After examining the language of the agreement dated December 6 1938, the Court was convinced that the terms plainly disclosed a managing‑agency business that the appellant had accepted and undertaken. Consequently, the Court held that the High Court had correctly answered the question in the affirmative. The appeals therefore failed and were dismissed with costs. Because the appeals were heard together, a single set of costs was ordered. The appeals were dismissed. (1) [1952] 22 I.T.R. 108.