KANIA, J. - This is a reference made under Section 66 (1) of the Indian Income-tax Act by the Tribunal of Appeal. The question submitted for the Courts opinion is in these terms :-
'Whether in the circumstances of this case, that portion of the income received by the assessee from the principal company of Marsland Price & Co., Ltd., which is proportionate to the agricultural income earned by the principal company is agricultural income within the meaning of Section 2 (1) of the Indian Income-tax Act, 1922, and exempt from assessment under the provisions of Section 4 (3) (viii) of the Act ?'
The relevant material facts are these : The assessees, a limited company, are the managing agents of Messrs. Marsland Price & Co., Ltd. (referred as to the principal company in the reference). The assessees were appointed managing agents under a contract. Clause 2 of that contract is as follows :-
'A commission at the rate of ten per cent. per annum on the annual net profits of the said company after making all proper allowance and deductions from revenue for working expenses chargeable against profits but without making any deduction for depreciation or in respect of any amount carried to reserve or sinking fund or any payment on account of super-tax or any deduction for expenditure on capital account, provided that such commission shall not in any year amount to a less sum than rupees ten thousand.'
The original agreement was between the principal company and The Tata Construction Co., Ltd., which was the trade name of the assessees, before the one now adopted by them. The principal company derives its income from several sources, one of which is the manufacture of sugar. The cane that is used in manufacture is partly grown on the companys own farms and partly bought from outside. In the statement of case it is noted that a part of the principal companys income from this source, i.e., the part that is attributable to the manufacture from the cane grown on the companys farms is exempted from income-tax under Section 4 (3) (viii) of the Act as agricultural income within the meaning of Section 2 (1).
The assessees contend that as under their managing agency agreement they are entitled to a percentage of the net profits of the principal company, the remuneration received by them, so far as the same can be apportioned for work done in respect of agricultural business of the principal company, is agricultural income. It is contended that an agreement containing a clause for remuneration similar to the one before us has been held to be an agreement for participation in profits between the shareholders and the managing agents. It was therefore argued that when their share of profits was received by the assessees, the character of the receipt was not changed and it continued to be the character of the receipt was not changed and it continued to be agricultural income. In support of this contention it was argued that in the assessment of the principal company an apportionment of the expenses between its agricultural business and other business was made by the taxing authorities. Therefore, as the expenses of the agricultural business would include a proportionate payment to the managing agents, that payment in the hands of the managing agents should be considered agricultural income and exempt from tax. In support of the first contention that an agreement of this kind is an agreement for participation in profits our attention has been drawn to Walchand & Co., Ltd. v. Hindustan Construction Co., Ltd. That was a reference made to the Court for deciding whether the remuneration payable to the managing agents was to be ascertained before or after deduction of the excess profits tax payable by the principal company. That case did not deal with the nature of the receipt of the remuneration by the managing agents. The clause about the remuneration was substantially the same as in the present case. On the construction of the agreement the Court held that it was a profit-sharing agreement and the intention of the parties was that remuneration of the agents was to be calculated after the excess profits tax payable by the principal company was deducted out of the profits. The Court considered three English decisions on the question whether the excess profits tax should be deducted before ascertaining the profits divisible between the company and the managing agents. I do not think that that case is helpful to the present discussion as the point before the Court was quite different. The Court pointed out that the decision must rest on the true meaning to be given to the agreement between the parties as to the stage at which the division of profits was to be made.
In Patent Castings Syndicate, Ltd. v. Etherington, there was an agreement under which the defendant was appointed the works manager of the business of the plaintiff company at a salary. The company agreed also to pay him at the end of each business year of the company and within seven days of the holding of the annual general meeting a further sum by way of commission being a percentage upon the net profits for the year. There was a proviso that the certificate of the companys auditors should be conclusive as to what constituted the net profits at the end of any such business year. The Court had to construe the meaning of the words 'net profits.' The question before the Court was whether in arriving at the net profits the excess profits duty which was debt of the company to the Crown should be deducted first. The Court came to the conclusion that the excess profits duty should be deducted before the net profits, a percentage of which was to be paid to the works manager, came to be determined. The Court emphasized that the facts, that payment was to be made within seven days of the holding of the meeting and that certificate of the auditors was to be conclusive, showed that the net profits intended to be divided on a stated percentage basis were the net profits arrived at after deducting the excess profits duty. It was observed that excess profits duty was, for the purposes of ascertaining what was payable to the shareholders of the company, an outgoing, and had to be paid before it could be ascertained what were the profits distributable amongst the shareholders of the company by way of dividend. This case is also on the question of determining the amount of profits out of which remuneration agreed to be paid on a percentage basis was to be calculated. It has no bearing on the construction of the clause here.
British Sugar . v. Harris is material for the proper approach to the question of profits. In that case a company carrying on a manufacturing business agreed with two other companies to pay them a stated percentage of its net profits, in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience. The net profits were to be ascertained after payment of all expenses of the company and after providing for interest on debentures but before making any provisions for depreciation and in case of dispute as to these amounts, the certificate of the auditors was to be final and binding. It was held that in computing its profits for the purposes of income-tax the company was entitled to deduct the sums so paid as being money wholly and exclusively laid out or expended for the purpose of trade. In other words the decision was that although it was an agreement to pay a stated percentage of the net profits, having regard to the particular clause it was not a profit-sharing agreement and the amounts paid to the two companies were to be treated as expenses of the principal company. Greene, M. R., at p. 104 considered the distinction between a case of service and a case of payment by participation in profits. It was pointed out that in order to be real participant in the profits funds, to be ascertained for different purposes. There would be one profit fund, and nobody would have any interest in anything until that profit fund was ascertained and fell to be divided. It was pointed out that that was not the position in the case before the Court. By the terms of the agreement two funds of the so-called profits came into picture. The first was a fund which was to be ascertained for the purposes of calculating twenty per cent. payable to the companies who rendered services. In that fund, as such, the shareholders had no concern. It was used for the purpose and only for the purpose of ascertaining what would be paid to the service rendering companies. When that amount was ascertained the fund ceased to have any usefulness at all, and it next became necessary to ascertain what were the dividable profits and for that purpose to take another account, which not only would bring in depreciation but would also take into account the sum that had been paid to the service rendering companies.
Strong reliance was placed on this case to show that it was not a profit-sharing agreement, as contended by the principal company. In the present case the clause about remuneration is distinctly framed so as to create an artificial account, the resultant profits of ten per cent. of which have to be paid to the assessee by the principal company for their remuneration. Once that is paid the account so prepared had no further utility for the shareholders. A totally different account, which would include items of depreciation, the amount carried to reserve fund, sinking fund, and deductions for expenditure on capital account, in particular, will have to be prepared and after making all these deductions the net profits divisible amongst the shareholders will be ascertained.
British Sugar . v. Harris is again useful to explain certain observations of Lord Macmillan in Pondicherry Railway Co. v. Income-tax Commissioner. In that case Lord Macmillan had observed that a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at the point, and the revenue is not concerned with the subsequent application of profits. Green, M. R., explained those observations as referable to profits ascertained at two different stages and the misunderstanding caused by reading the word 'profits' as meaning the same thing in all the circumstances. He observed as follows :-
'It is to be observed that Lord Macmillan in that paragraph was clearly using the word profits in one sense and one sense only, he was using it in the sense of the real net profit to which Lord Maugham referred. That he was doing that is, I think, abundantly clear when the nature of the contract there is question is considered, which was merely a contract under which a percentage of profits was payable by the railway company to the French Government. There was no question of services or anything of that kind in the case, it was merely a sum payable out of profits.'
Having regard to these observations it is next necessary to consider the exact import of the clause about remuneration between the assessees and the principal company. The question is whether the remuneration is agricultural income, which is defined in Section 2 (1) as 'any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in British India or subject to a local rate assessed and collected by officers of the Crown as such.' Under the agreement the managing agents could be participators in profits, as ordinarily understood, perhaps, if they divided in a stated percentage an agreed fund. They could not be participators if the profits divisible amongst the shareholders constituted one fund and they got a percentage of a fund which was differently calculated and therefore in fact a different fund. It must first he noticed that the ten per cent. are not necessarily payable out of the profits. It is a calculation to be made on the annual net profits. The net profits are, again, not what one ordinarily finds in the companys balance sheets. They are net profits only for the purpose of calculation, to be worked out strictly on the lines specifically mentioned in that clause. It is obvious that several deductions which are not permitted under the clause would be made in preparing the balance sheet and ascertaining the net profits of a commercial corporation. Moreover, the commission was not in any year to amount to a sum less than Rs. 10,000. Therefore, if in any year the company made no profits, this sum had to be paid by the principal company, even out of its capital. If in any given year there was no agricultural income, the remuneration, with a minimum of Rs. 10,000, will still have to be paid out of the profits earned through the other activities of the principal company. It is therefore clear that, on the face of this clause itself, there is nothing to connect it necessarily with the agricultural income of the principal company.
The contention that the assessment of the principal company a portion is allocated towards the agricultural expenses is not relevant for the present discussion. What may be deducted in the assessment of the principal company does not necessarily bear the same character when the payment is received by an employee. This view is supported by the decision in Habibulla v. Commissioner of Income-tax. In that case one of the ancestors of the assessee had constituted a wakf of agricultural properties, but no remuneration was provided by the wakf deed for the post of mutawali. A suit was filed by some relators for the removal of the assessee from his office and for accounts. On a compromise, a scheme for the administration of the wakf was framed and it provided inter alia as follows :-
'The remuneration of the mutawali payable from the wakf shall be rupees two thousand five hundred monthly, together with a fixed allowance of rupees five hundred monthly for his conveyance... and personal charges incidental to his position.'
It was found as a fact that all the income of the wakf was agricultural income within the meaning of Section 2 (1). When the reference came before the Calcutta High Court it was contended by the mutawali that the remuneration received by him was also agricultural income, and therefore exempt from tax. The Court rejected that contention. On appeal, the same contention urged before the Judicial Committee of the Privy Council was also rejected. It was argued before the Court that Commissioner of Income-tax v. Sir Kameshwar Singh supported the contention that the amount received by the mutawali was agricultural income. In that case (which is known as the Darbhanga case) a loan was advanced on the usufructuary mortgage of certain agricultural properties for a period of fifteen years. The mortgagee was put in possession and after allowing a certain amount as tika rent to the mortgagor, he was allowed to take the balance of the profits which the mortgagee appropriated towards interest and the excess for principal. It was contended on behalf of the taxing authorities that the receipt by the mortgagee lost the character of agricultural income, because the mortgagee was doing money-lending business and the receipts should be considered as falling under the head 'Business' under Section 6. This contention was rejected because of the peculiar position the mortgagee held under the mortgage deed. The following passage, taken from the judgment of the Chief Justice, was emphasized in the judgment of Lord Macmillan, who decided the issue against the taxing authorities. The learned Chief Justice observed as follows (p. 307) :-
'The mortgagee lessee was to be in possession of both properties, and, in his relation to the cultivators of the soil he stood in the position of landlord dealing directly with them and collecting the rents. He had, moreover, to pay the Government revenue, cesses and taxes and his name was registered in the land registration department. He alone was able to sue for rent whether current or arrears; to sue for enhancement or for ejectment and was able to settle lands with raiyats and tenants in all the properties; in fact he was in a position to take all proceedings which the mortgagor would have been able to take in the ordinary course if the lands leased and mortgaged had remained in her khas possession.'
Those observations were repeated by Lord Thankerton in Habibullas case, as distinguishing the position of a manager, who was paid remuneration for services rendered. Lord Thankerton observed (p. 298) :-
'The position of the appellant is very different : the recovery of the rents depends on the rights of the wakf estate, and on the appellantss performance of his duties of management as mutawali, and the amount of his remuneration does not depend either on the nature of the properties or assets which constitute the wakf estate, nor on the amount of the income derived therefrom by the wakf estate. If, as might possibly happen, the whole or a portion of the wakf property ceased to be represented by agricultural lands, it is clear that the remuneration fixed by the article 15 of the scheme would not be affected.'
Those observations are particularly applicable to the facts here. In the present case the managing agents would receive the remuneration irrespective of the nature of the business of the principal company. They are paid for their work as managing agent. The assets of the principal company are not vested in them. They are not the persons who could sue for amounts due to the principal company in their own name. They are only agents for management. It seems therefore clear that, under the terms of the managing agency agreement, the balance of the agricultural income in the hands of the principal company is not to be divided between the principal company and the managing agents in a stated proportion.
In Habibullas case their Lordships kept open the question whether the receipts in the hands of the manager would be agricultural income, if the agreement was to pay on a percentage basis. This was due to certain observations of Panckridge, J., in the same case in In re K. Habibulla from which the appeal was preferred to the Privy Council. In the present case it is clear that the total income of the principal company is not wholly agricultural. The percentage is not necessarily payable out of the agricultural income. In fact, as I have pointed out, whether there were profits or no profits to the principal company, the managing agents were entitled to their remuneration. Therefore, I do not propose to consider the question of a remuneration payable on a percentage basis when the total income of the principal company is wholly agricultural. Sufficient to say that that is not the case here and it is not necessary to decide it for the present reference.
Syed Mohammad Isa v. Commissioner of Income-tax was relied upon to support the contention that if agricultural income, earned by a principal company, is passed on to the next party, it does not alter the character of the receipt. It was argued that if there was a farm and an employee was promised remuneration for working on the farm at the rate of ten per cent. of the net earnings, the amount received by the workman would be agricultural income. In the case in question the assessee, a mutawali, was authorised under a wakf deed to appropriate the balance, remaining after the purposes of the trust, for his personal expenses, and under another deed to appropriate the balance in lieu of his services. The income from the wakf properties consisted both of agricultural and non-agricultural income. The question was whether the sums thus received by the mutawali out of the income of the truss, either as remuneration for services rendered as one of the trustees or in his capacity as a beneficiary, can be regarded as agricultural income in his hands. It was held that in the circumstances of the case so much of the sum received by the assessee which represented his share of the surplus income in the year of assessment as bore the same proportion to the whole of such sums received by him, as the agricultural income bore to the non-agricultural income of the wakf properties in the year of assessment, must be regarded in his hands as agricultural income within the meaning of Section 2 (1). That decision is clearly explicable. The Court carefully noted the fact that the balance was paid to the mutawali as a beneficiary. The simple position before the Court therefore was of a trust, the income whereof was partly agricultural and payment was made to the beneficiary, as provided by the trust deed. The payment did not lose the character of being agricultural income because it passed through the hands of the trustees or mutawali. Except that proposition the Court decided nothing more, as it was not necessary for it to decide. This aspect of the case is emphasized clearly in the judgment of Braund, J., at p. 280 where he observed :-
'I think, therefore, that in both cases the assessee is entitled to be treated as a beneficiary and not as a servant of trust by contract. The position would, I think, have been quite different, had the assessee been a mere employee of the wakf by contract deriving a salary which was payable (ordinarily, at least) out of the income of the wakf properties.'
It seems therefore clear that none of the authorities relied on by the assessees supports the contention that in respect of an agreement, containing a clause like the one before us, it was held that the remuneration received by the managing agents was agricultural income. In my view, the conclusion of the Tribunal is correct. On the true construction of the clause in question it cannot be stated that the managing agents received by portion of the agricultural income, when they received remuneration for services rendered for managing the affairs of the principal company, only one part of whose business is held to be agricultural. The answer to the question will therefore be in the negative. The assessee to pay the costs of the reference.
CHAGLA, J. - I agree. The question which we have to decide is whether any portion of the remuneration received by the assessee as the managing agents of the principal company under the agreement between them and the principal company constitute agricultural income and is exempt from payment of tax. Under Section 4 (3) in the total income of an assessee agricultural income is not to be included. 'Agricultural income' is defined in Section 2 (1) as any rent or revenue derived from land which is used for agricultural purposes, and the question therefore which arises for determination is whether any portion of the remuneration received by the assessee is rent or revenue derived from land which is used for agricultural purposes. In my opinion it is clear that the remuneration received by the assessee is under a contract between it and the principal company remuneration for services to be rendered by the assessee as the managing agents of the principal company. That contract has nothing whatever to do with the income earned by the principal company from agricultural sources. It is also clear from the contract that what the principal company contracted with the managing agents was to pay them a sum of Rs. 10,000 or ten per cent. of the profits computed in a particular manner whichever sum was larger. Sir Jamshedjis contention throughout this reference has been that assessee was sharing the profits of the principal company and to the extent that it shared the profits derived from agricultural sources payments in the hands of the assessee became agricultural income and should be exempted from tax. The whole of Sir Jamshedjis argument was based upon the decision of this High Court in Walchand & Co., Ltd. v. Hindustan Construction Co., Ltd. The Court was construing a particular agreement which I admit was practically similar in terms to the agreement before us, and all that that case decided was that the amount of excess profits tax should be deducted in ascertaining the annual net profits of the company for the purposes of calculation of the managing agents commission. Now in the course of his judgment Beaumont, C.J., did use the expression that that agreement was a profit-sharing agreement. But the question is in what profits did the managing agents share It is clear that the profits in which the managing agents shared were not the same profits in which ultimately the shareholders had a right to share or the profits which ultimately became divisible amongst the shareholders. With respect to the learned Chief Justice a confusion is created by using the expression profits which has different connotations in different contexts. The possibility of such confusion is drawn attention to and pointed out in British Sugar . v. Harris. In the case before us it is perfectly evident that what the assessee was going to share in was an artificial fund which first came into existence. They received ten per cent. of that fund. After that had been ascertained the usefulness of that fund disappeared and a new fund came into existence by a different computation which was to be divisible amongst the shareholders as their own profits. If the assessee was sharing in the later fund which is divisible amongst the shareholders, then Sir Jamshedjis contention would be sound, because then what came to it was share of the net profits and to the extent that those net profits were derived from agricultural income the assessee was exempted from the payment of tax. As I have pointed out under the agreement the assessee has nothing whatever to do with whether the principal company made a profit or not; whether their business was agricultural or not; it was entitled to receive Rs. 10,000 even if the principal company worked at a loss. It was entitled to receive Rs. 10,000 even if the principal company stopped all its agricultural business. It was only if the ten per cent. of the artificial fund amounted to more than Rs. 10,000, then the managing agents became entitled to receive an amount larger than Rs. 10,000. Therefore in the language of Greene, M. R., in British Sugar . v. Harris, line is capable of being drawn between a contract for payment of a share of profits simpliciter and payment of remuneration which is deducted, no doubt, before profits which are divisible are ascertained. In this case what the assessee would receive in the event of the principal company making profits was not the payment of a share in profits simpliciter but it would receive a remuneration which was deductible before the profits divisible were ascertained. With regard to the decision in Patent Castings Syndicate, Ltd. v. Etherington, a striking difference between the case there and the case before us has to be noted. There the defendant was appointed the manager of the business of the plaintiffs on a salary and over and above the salary the company agreed also to pay to him at the end of each business year of the company a percentage of the net profits and it was only with regard to his latter remuneration that the Court held that he was sharing in the fund which was divisible amongst the shareholders. It must be noted that the net profits in which the manager was to share were arrived at after the remuneration payable to the manager had been deducted. In this case the fund in which the assessee has a share is a fund to be ascertained before the remuneration payable to the managing agents is ascertained. In the two cases relied upon by Sir Jamshedji, Commissioner of Income-tax v. Kameshwar Singh (the Darbhanga case) and Syed Mohammad Isa v. Commissioner of Income-tax, in the first case the mortgagee stood in the shoes of the mortgagor and exercised all the rights of the landlord and also of the mortgagor. In the other case the Court made it perfectly clear that the income which was exempt from tax was the income received by the assessee as the beneficiary and not as the mutawali. The Court pointed out that the assessee occupied two positions one of mutawali and the other of beneficiary and it was only in his capacity as the beneficiary that the income which he received from the agricultural source was exempted from tax. Therefore when we come to Habibulla v. Commissioner of Income-tax where we have a simple case of a mutawali receiving remuneration from the trust estate consisting entirely of agricultural land and the income of which was wholly agricultural income, the Privy Council held that the income of the mutawali was not agricultural income and therefore not exempt from tax. It is true, as Sir Jamshedji pointed out, that we have to consider the character of the income and not that of the assessee. If the income is agricultural income, it bears an indelible impression upon it and is exempt from tax. But in my opinion on the construction of the contract before us the remuneration of the assessee is for its services as the managing agents of the principal company; that is the character of its income. The character of its income is not that part of it is rent or revenue from land which is used for agricultural purposes. I therefore agree with my learned brother Kania that we should answer the question raised in the negative, and the assessee should pay the costs of the reference.
Reference answered in the negative.