STONE, C.J. - This is a reference under Section 66 of the Indian Income-tax Act, 1922. The assessee is a firm, and we are concerned with the assessment year 1939-40 and with the accounting year 1938-39. The firm carries on business in South Africa as general merchants, and its history is as follows :
Before 1912, Rao Bahadur B. R. Naik carried on this business on his own account. He returned to Bombay in that year, leaving his business in the hands of three managers. On May 26, 1937, a document was executed, which is aid to be a partnership deed. Since the year 1937 Rao Bahadur Naik has not returned to South Africa. Bearing in mind that the business is conducted in South Africa, and that Rao Bahadur Naik has resided continuously in Bombay since 1937, it is necessary to examine the document of partnership somewhat carefully before the problem which arises can be dealt with.
First of all, there is a rectal, which says :
'Whereas the said B. R. Naik has for many years past carried on business of a general merchant in Salisbury and elsewhere in South Rhodesia, and whereas he has agreed to admit the managers as partners in his said business upon the terms and conditions hereinafter set forth.'
Then clause 1 is the operative clause, which says that Rao Bahadur Naik hereby admits, as from May 22, 1937, the managers as partners in his general merchants business.
Clause 2, which is a somewhat unusual clause provides :
'The managers shall not be disclosed as partners in the said business, and as far as the public is concerned they shall be held out as managers of the said business.'
Then clause 3 provides that the partnership shall take over the said business as a going concern including stock-in-trade, furniture and the assets therein described; and that clause also provides for a capital account and other matters.
Clause 4 provides that the profits of the business shall belong as to fifty per cent. thereof to Rao Bahadur Naik and as to the remaining fifty per cent. thereof to the managers in equal shares, and that the losses, if any, shall be borne by the parties in like proportion.
Clause 5 provides for a basic salary for the managers, and it also provides that they are to draw nothing else other than their salary and their shares in profits.
Clause 6 is with regard to the occupation by the managers of certain premises.
Clause 7 is as regards the partnership business paying rent, for the premises on which it is carried on, to Rao Bahadur Naik.
Clauses 8, 9 and 10 provide for other matters regarding premises, insurance premiums and rates and taxes.
Clause 11 is as follows :
'The said B. R. Naik shall have the right to dismiss from the partnership any manager for misconduct whom he would be entitled to summarily dismiss for misconduct if he were such managers employer and the decision of the said B. R. Naik in that behalf shall be final and conclusive.'
Clause 12 provides that the managers shall devote their whole time and attention to the business and shall not carry on or be interested in any other business directly or indirectly.
Clause 13 provides that the partners shall not draw their shares of profits during the first three years, and provides for the credit of their shares of profits to their respective capital accounts.
Clause 14, which is of importance, is :
'The said B. R. Naik retains full control of the business and the managers shall carry out all instructions given to them from time to time by the said B. R. Naik.'
Then it contains a power that B. R. Naik can in effect put an end to the partnership, if the business is carried on unprofitably or in a speculative manner.
By clause 17 the partnership, unless terminated at an earlier date, shall continue for five years, and may thereafter be continued by mutual consent.
Clause 18 provides for B. R. Naik granting to the managers or any of them jointly or severally a power of attorney such as he may consider necessary to enable them to carry on the business.
This deed, though it gives Rao Bahadur B. R. Naik wider powers than are usually found in a partnership deed as being conferred on a senior partner, nevertheless creates the relationship of partners and not that of employer and employees. Profits and losses are to be borne by all in the proportion stated.
Mr. Setalvad for the Commissioner has urged that the position is not materially different from that of a man owning a business and having employees. But that argument is destructive of the whole reference, which proceeds on the basis that we are dealing with a partnership firm, as indeed is the case when the partnership deed is considered.
The point referred to us arises in this way : Section 4-A of the Indian Income-tax Act sets out the circumstances in which individuals, Hindu undivided families, firms or other associations of persons, and companies are to be considered 'resident' in British India for the purposes of the Act, such residence having a most material bearing on the incidence of taxation. The governing words of Section 4-A are : 'For the purposes of this Act -.' The section is then divided up into three sub-sections or clauses. Clause (a) deals with the case of individuals. Clauses (b), which is the one with which we are concerned provides :
'a Hindu undivided family, firm or other association of persons is resident in British India unless the control and management of its affairs is situated wholly without British India.'
Clause (c) is the clause, which deals with companies.
Do the words 'the control and management of its affairs' in clause (b) mean the de jure control and management, or the de facto control and management For example, a man may be described as controlling a company, if he owns so many of its shares that he can at any time by exercising his rights pass any resolution he likes, and indeed alter the whole of its articles of association; but he may in fact never exercise his voting rights at all. In the reference before us, if it is the legal right to control and manage the affairs of the firm, which is the only criterion, then, having regard to the partnership deed of May 26, 1937, it could hardly be contended that Rao Bahadur Naik, who admittedly resides in British India, has not the right to control and manage the affairs of the firm, and, therefore, for the purposes of the Act the firm would be treated as resident in British India. That is in effect the view taken by the Appellate Tribunal. In taking that view, the Tribunal has not found any sufficient facts on which the case could be dealt with on the other basis, namely, any finding as to where the control and management of the affairs of the firm is in fact actually situated. This would depend on whether Rao Bahadur Naik actually exercised any control and management from British India. All that the Tribunal says about this in the statement of the case is as follows :
'The assessee-firm of Messrs. Bhimji R. Naik consists of four partners including Rao Bahadur B. R. Naik. The firm carries on business in Salisbury in South Africa. With the exception of Rao Bahadur B. R. Naik, all other partners reside at the place of the business'.
Then in paragraph 3 of the statement the Tribunal says :
'On the facts produced before us we held that it was not proved that Rao Bahadur B. R. Naik had not been exercising any control. We went further and held that according to the partnership agreement he was competent to exercise the control if he so desired; and, therefore, the assessment has been rightly made on the status of a resident firm.'
Be it observed that nothing is said about 'management,' though the words of clause (b) of Section 4-A are : '...... control and management of its affairs......', that is the firms affairs.
We have been referred to a number of English cases on the English Income Tax Act, the relevant words there being : 'whether the trade or business is carried on wholly or in part in the United Kingdom.' I must confess that I do not find these cases helpful. By construing another Act, which contains totally different words, and in which the whole scheme and frame-work of the Act is very different with the statute under consideration, there is grave risk of introducing irrelevancy, which destroys the whole basis of comparison.
Mr. Setalvad has referred us to a passage in the judgment of the Judicial Committee delivered by Sir George Lowndes in the case of Shaw Wallace & Co. v. Commissioner of Income-tax, Bengal. The passage, which appears at p. 180, is as follows :
'Again their Lordships would disregard altogether the case law which has been so painfully evolved in the construction of the English Income Tax Statutes - both the cases upon which High Court relied and the flood of other decisions which has been let loose in this Board. The Indian Act is not in pari materia; it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the Courts in this country have had to deal. Under such conditions their Lordships think that little can be gained by attempting to reason from one to the other, at all events in the present case in which they think that the solution of the problem lies very near the surface of the Act, and depends mainly on general considerations.'
In my judgment, looking at Section 4-A as a whole, and bearing in mind that it is providing a sort of statutory definition of 'residence,' which renders individuals, Hindu undivided families, firms or other associations of persons, and companies liable to the incidence of taxation, it must be construed as dealing with actual events : for it is fundamentally actual residence which attracts the incidence of taxation on those who reside within a country. Unless, therefore, I find some words which impose taxation because there is power to exercise control and manage as opposed to the actual control and management, I should not be prepared to construe this section adversely to the prospective tax-payers. The subject, as it has been said, is always entitled to the benefit of the doubt in construing taxation statutes. There is nothing in the section which compels its interpretation as including the power or capacity to control and manage as well as the actual control and management, and the two are not mutually exclusive. If power and capacity to control and manage was to be the test, then every firm would be liable to tax if any of its partners was in British India, although he exercised no control and management over the foreign business, since the partner is the agent of the firm for the purposes of the business of the firm : (see Section 18 of the Indian Partnership Act).
In my opinion, the view of the Tribunal is incorrect. No doubt, the existence of an overriding power of control and management is a very relevant consideration; but who, or what, in fact actually controls and manages the affairs of the firm is, in my judgment, the relevant consideration. Only then can it be considered where such control and management is situated.
The facts stated as found by the Tribunal are wholly insufficient to deal with the reference on this basis. The reference will have to go back, in my opinion, to the Tribunal to find the relevant facts.
KANIA, J. - The question submitted by the Tribunal for the Courts opinion is in these words :
'Whether in the circumstances of the case and on a true construction of the deed of partnership the assessee-firm was rightly held to be resident in British India within the meaning of Section 4-A (b) of the Indian Income-tax Act ?'
The conclusion of residence thus rests on two factors : (1) 'Whether in the circumstances,' and (2) 'on a true construction of the deed of partnership.' I shall deal with the second factor of the question first.
The relevant clauses of the partnership deed are quoted in the judgment of the learned Chief Justice. The history of the firm, as found in the record, shows that Rao Bahadur Naik was the owner of the firm, and in 1934, by the partnership deed, he admitted the three persons, who were working as his managers till then in Salisbury, Rhodesia, as partners. The principal facts to be borne in mind in connection with this partnership deed are that the assets and inabilities of the old firm, which was owned by Rao Bahadur Naik, were taken over by the new firm, and Rao Bahadur Naik became the creditor of the firm for the amount. The partnership assets thereafter became the property of the partners. In the profits and losses of the business Rao Bahadur Naik retained an eight annas share, whilst the others were the owners of the balance. It is further provided in the partnership deed that, so far as the public were concerned, the three persons admitted as partners in the firm were to continue to be held out at managers, and if necessary, and to the extent required, Rao Bahadur Naik, under clause 18, was to give them, jointly or severally, a power of attorney. Under clause 11 Rao Bahadur Naik had the right to dismiss from the partnership any of the other partners, who are described as managers, for misconduct and Rao Bahadur Naik was the sole judge of whether misconduct was established. The opening words of clause 14 are material. They are :-
'The said B. R. Nail retains full control of the business and the managers shall carry out all instructions given to them from time to time by the said B. R. Naik......'
The question whether the assessee is resident within the meaning of Section 4-A is a question of fact. As it is difficult to apply the test of physical residence to an association of persons or a firm, the test is held to be : 'Where the central control and management actually abides.' In the present case, the question will have to be considered from two aspects, as in fact was considered by the Tribunal in its judgment. The one is the effect of the partnership deed. Having regard to the words used in Section 4-A (b), the assessee firm is resident in British India, unless the control and management of its affairs is situated wholly without British India. The Court has, therefore, to determine where the control and management of its affairs is situated, and next, whether it is situated wholly without British India. I doubt, if the significance of the word 'management' in the clause was appreciated before the Tribunal. The discussion appears to have proceeded only on the word 'control.' The important point for consideration in construing this sub-section is : Whether the control and management of the firms affairs is actually to be situated in a particular place, or whether it is sufficient that a person, who has a right to control and manage its affairs, is residing in a particular place. In the judgment of the Tribunal, on a true construction of Section 4-A (b), if a partner, having the right to control, resides in British India, the firm is resident in British India, because the control and management of its affairs is not situated wholly without British India. Approaching the partnership agreement from that angle, the Tribunal held that, having regard to the words used in clause 14, as Rai Bahadur Naik who resided in India was in a position and has a right to control the business, the firm was not one control and management of whose affairs was situated wholly outside British India.
In my opinion, that is not the correct construction of the section. The Legislature has deliberately used the present tense in describing where the control and management should be in the relevant year. While the word 'situated' involves an idea of some sort of permanency, it also involves an idea of the present existence, that is, effective existence of such control in the relevant year. It does not contemplate merely the right to control and manage. In dealing with the construction of this clause, it must be remembered that the object is to assess the whole firm. The object is not to assess the individual income of the partner who is resident within British India. His case will be covered by Section 4-A (a). If the argument urged on behalf of the Commissioner is accepted in respect of a partnership of eleven person whose whole business is outside British India and whose ten partners are in England but one partner is in India, the income of the whole firm will be liable to Indian Income-tax, unless under the partnership agreement that one partners right to control and manage the firms affairs is completely and for ever taken away. Every partner in law has a right to put forth his view in the control and management of the business of the firm, and unless the right, under the partnership deed, is completely taken away the control and management cannot be stated to be wholly without British India. Therefore the mere fact such partner lives in British India, according to the argument of the Commissioner, would be sufficient to assessee the whole income of such firm. In my opinion, such a construction would be violation of international law and would be opposed to international comity. On that construction the ten partners in the firm, who are all living in England, whose business is in England, and who have nothing to do with the Indian taxing authorities, are liable to pay tax on their share of the firms income simply because they have chosen to admit one partner in India with a share, however nominal, in the partnership. I emphasize again that the question is not in respect of the income of the resident partner in India, but the income of the whole firm. In the circumstances, therefore, the argument advanced on behalf of the Commissioner should be rejected. I do not think the words used in the clause necessarily lead to such conclusion. As I have pointed out, in respect of a firm it is recognised that the test of residence is where the central control and management actually abides. That is clear from De Beers case, San Paulo (Brazilian) Railway Companys case, and American Thread Co. v. Joyce.
The test is not where the control and management could be assumed by a partner by the exercise of power remaining in him under the partnership deed. In my opinion, the section must be construed to ascertain where the actual control and management is situated and not merely where the right to manage can come into existence. The contention of the Commissioner on the construction of the partnership agreement is therefore rejected.
It was argued on behalf of the Commissioner that it was not necessary for a partner of a firm to issue instructions from year to year or from day to day in order to show that he had the control and management of the affairs of the firm. It was urged that, in the case of an individual owner, whose agents are running business in different places, the control and management of the affairs of the business is always situated in the owner. It was argued that in the case of a partnership like the present, there was no difference. I am unable to accept this contention because of the fundamental distinction between the position of a partner and that of the owner of a business. Persons conducting business on behalf of the owner in different places are doing so by virtue of the authority given to them by the owner. As between the owner and the agents, the extent of the authority is controlled and limited by their individual agreement and which authority (apart from cases where interest is created by the agreements in the agents), is liable to be terminated at the will of the principal. In the case of a partnership, while each partner is the agent of the firm in respect of its business, he occupies a dual capacity. He is an owner himself, and to the extent he is acting for his partners he is their agent. His authority is not liable to be terminated at the will of another individual, because he is also the owner. Under the circumstances, this analogy is not useful.
That leaves the consideration of the first factor, viz., whether, 'in the circumstances of the case,' the firm is resident in British India I find this expression repeatedly used in the references made to this Court, but I must say that it is not helpful in determining matter. On looking at the judgment of the Tribunal, in the first instance, I find the same expression used in paragraph 6 at the commencement. The Tribunal has there stated as follows :
'In these circumstances we are of the opinion that, firstly, there is no proof that B. R. Naik has in fact not exercised any control, as ordinarily it should be reasonably expected that some sort of report of the business received by him and on, if not regularly.'
On a perusal of the preceding paragraphs of the judgment, I am unable to find a single statement of fact on which this conclusion could be based. Paragraph 1 recites the history. Paragraph 2 summarizes the contentions urged on behalf of the two sides. Paragraph 3 deals with the partnership agreement. Paragraphs 4 and 5 contain the effect of two decisions of English Courts. The result is that, while the Tribunal has made this statement in paragraph 6 of its judgment, there is no material on which it is based. The second part of that paragraph deals with the construction of the partnership agreement. I have already dealt with that part of the judgment.
Turning to the statement of case, which is based on the judgment, I do not find further materials usefully added there. In the statement of case the Tribunal has stated :
'On the facts produced before us we held that it was not proved that Rao Bahadur B. R. Naik had not been exercising any control.'
This obviously refers to the judgment, and as I pointed out, the judgment makes no references to anything produced before the Tribunal at all. The result, therefore, is that by using the words : 'In the circumstances of the case,' the Tribunal has not informed the Court what materials, if any, were put before it for arriving at that conclusion, independently of the partnership deed. On the record as printed, we find affidavits of the partners of the assessee-firm and of merchants with who they had dealings. They have not been dealt with. For the statements in the judgment that some sort of report of the business must have been received from time to time, there appears no foundation whatsoever in the judgment or in the statement of case.
In this connection, I should like to draw the attention of the Tribunal to Bomford v. Osborne. Viscount Simon, Lord Chancellor, in delivering judgment, pointed out the necessity for reciting facts in matters of this king. It was pointed out that the Commissioners had set out in a series of paragraphs lettered from (A) to (R) the facts which were proved or admitted before them. Having recited those in the judgment, the Commissioners then expressed their conclusions, in paragraph 5 of the case, in the terms their quoted. It should be noted that they were also numbered seriatim as (1) (2) (3)...... The learned Lord Chancellor then observed as follows (p. 33) :
'The High Court can only discharge its proper function in dealing with a case stated if the contents of the case shows with reasonable clearness what is the question of law, if any, which arises. In the present instance (and the practice is not uncommon) the Commissioners, after carefully setting out exhaustively the facts proved or admitted, proceed in a subsequent paragraph to state their own conclusions as a finding of fact. Presumably, the Commissioners mean to say that they deduce from the facts which were proved or admitted the three conditions stated in paragraph 5, and that they regard these conclusions as matters of fact. No doubt there are many cases in which Commissioners, having had proved or admitted before them a series of facts, may deduce therefrom further conclusions which are themselves conclusions of pure fact. But in such case the determination in point of law is that the facts proved or admitted provide evidence to support the Commissioners conclusions. I think it would tend to clearness, and be in closer correspondence with the intentions of section........., if Commissioners is such a case as this would state that the question of law is whether the facts found or admitted can support their further conclusions of fact.'
The question, whether the assessee-firm is a resident depends on findings of fact. It is the duty of the Tribunal, therefore, to state all the facts they consider proved or admitted, and, thereafter, to state what conclusion they have deducted. On that the question as formulated in the judgment of the Lord Chancellor could arise. I have already pointed out that in the present case neither in the judgment nor in the statement of case, apart from the partnership deed, any facts are stated as proved or admitted, on which the conclusion of the assessee firm being a resident is founded. Under Section 66 (4) of the Indian Income-tax Act, therefore, it is the duty of this Court to send back the matter to the Tribunal to complete the statement of facts and send it for the opinion of the Court.
It was argued on behalf of the Commissioner that the statement of case contains the following :- 'On the facts produced before us we held that it was not proved that Rao Bahadur B. R. Naik had not been exercising any control.' That is a finding of fact by the Tribunal. On turning to the judgment and the statement of case, however, we are unable to find any facts on which the conclusion is based; and in the absence of any statement of facts we are unable to accept the one line in the judgment and in the statement of case as a finding of fact. It must be noted that when the application for a reference was sent to the Commissioner, he did not protest and contend that the question sought to be submitted was a question of fact, and, therefore, no reference should be made. The records of the Income-tax authorities show that such contention has been frequently raised, and very often upheld. The absence of such contention strongly supports the view urged on behalf of the assessee that the argument before the Tribunal centred round the construction of the partnership agreement, and other matters were not gone into at all. On the record it is difficult to say what was the exact course of events before the Tribunal, but we are not satisfied that the Tribunal had arrived at this conclusion as a fact.
Under the circumstances, the reference is sent back to the Tribunal. In dealing with the matter, it is open to the Tribunal to consider the effect of the partnership agreement and the words used in it. It is a piece of evidence which they can use for arriving at their conclusion. The effect of the partnership agreement is a matter to be decided and considered along with other evidence because the true question to be decided is : what is the residence of this partnership firm ?
Per Curiam. - Counsel for the assessee asked for an order for costs to be made at this stage. As the reference has not been disposed of, we are not inclined to make the order now. It is, however, clear that the assessee has succeeded in defeating the contention urged on behalf of the Commissioner that even if no control has been exercised by Rao Bahadur Naik in any particular year the status of the firm is that of a resident firm, because he is competent to control the business under the partnership agreement. When the reference is brought again for hearing, the question depending on the facts found by the Tribunal will have to be determined. There is, however, no doubt that in respect of the costs which are thrown away by this contention of the Commissioner, the Commissioner will have to pay the same. In working out the question of costs ultimately this aspect of the reference will have to be borne in mind. Costs reserved.
Reference sent back to the Tribunal.