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Dwijendra Chandra Chowdhury Vs. Commissioner of Income-tax, Assam. Subodh Chandra Dutta V. Commissioner of Income-tax, Assam. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberIncome-tax Reference No. 6 of 1964. Income-tax Reference No. 7 of 1964
Reported in[1966]61ITR97(AP)
AppellantDwijendra Chandra Chowdhury
RespondentCommissioner of Income-tax, Assam. Subodh Chandra Dutta V. Commissioner of Income-tax, Assam.
Excerpt:
- - commission which had not, in fact been received by them, could not have been included in the returns as it did not represent moneys that had been received, and the returns submitted by them originally were correct and proper, and that there was no omission or failure on the part of the assessees to disclose any of the material facts necessary for enabling the income-tax officer to make a correct assessment, and that, therefore, no action could have been taken under section 34 of the act and that the notices issued under section 34 are not valid and thus the assessees are not liable for any reassessment under that section. the appeals to the appellate assistant commissioner and the income-tax appellate tribunal having failed, the questions indicate by us at the outset have been.....the judgment of the court was delivered bynayudu j. - the following questions have been referred to us in each of these cases, for our opinion, by the income-tax appellate tribunal, a bench, calcutta :(1) whether, on the facts and in the circumstances of the case, the remunerations received by the assessee from messrs. eastern tea estates (p.) ltd., in the relevant years of account, are assessable under section 10 of the indian income-tax act, 1922 ?(2) whether, on the facts and in the circumstances of the case, the initiation of the proceedings in reassessment under section 34(1)(a) for the assessment years 1955-56 and 1956-57 was legally valid ?as the questions referred to us are common to both cases and as the facts and circumstances to be considered are, more or less, similar, we have.....
Judgment:

The judgment of the court was delivered by

NAYUDU J. - The following questions have been referred to us in each of these cases, for our opinion, by the Income-tax Appellate Tribunal, A Bench, Calcutta :

(1) Whether, on the facts and in the circumstances of the case, the remunerations received by the assessee from Messrs. Eastern Tea Estates (P.) Ltd., in the relevant years of account, are assessable under section 10 of the Indian Income-tax Act, 1922 ?

(2) Whether, on the facts and in the circumstances of the case, the initiation of the proceedings in reassessment under section 34(1)(a) for the assessment years 1955-56 and 1956-57 was legally valid ?

As the questions referred to us are common to both cases and as the facts and circumstances to be considered are, more or less, similar, we have heard the references together and propose to dispose them of together by a common order.

Before we consider the questions referred to us, it would be necessary to set out the relevant facts of the cases which are beyond controversy. The assessees concerned in these two references are joint managing directors of Messrs. Eastern Tea Estates (P.) Ltd., a private limited company, incorporated under the Companies act, hereinafter referred to as the Company. Their powers and duties are set out in articles 46 to 54, 56, 59, 60, 61 and 68 of the articles of association of the company. It may be seen from article 46 of the above articles that the joint managing directors of the company are to hold office on a monthly remuneration of Rs. 1,000 each and 5 per cent commission on sales besides actual travelling expenses, etc., incurred inconnection with the business. It is also provided in this article that they would hold office till their death but would have the option to resign by giving notice in writing. The two assessees who are the joint managing directors of the company submitted their income-tax returns for the assessment years 1955-56, 1956-57 and 1957-58 covering respectively the calendar years 1954, 1955 and 1956, respectively. During the calendar year 1953 and assessment year 1954-55, the assesses in addition to their remuneration of Rs. 1,000 per month in each case had also received some amount towards commission and in the return for that year they showed the receipt of both these items. The assessees were assessed on the basis of their return, that is on the basis of what was actually received by way of commission in addition to the monthly remuneration of Rs. 1,000 in each case. Hence the assessment, it is claimed, was done on the basis of business income. Similarly, the assessments for the assessment years 1955-56 and 1956-57 were also completed, on the basis of the returns filed by the assessees, on March 28, 1957. But in the returns for these two assessments years only the remuneration of Rs. 1,000 per month was included and no amount was shown as commission receipts, in view of the fact that the assessees did not actually receive any amount towards the commission. it is also the case of the assessees, in this connection, that while the company followed the mercantile system of accounting, the assessees followed the cash system, reckoning as income only amounts that had been actually received into their hands, and since no amount towards commission had been received during the assessment years in question, namely, 1955-56 and 1956-57, that is the calendar years 1954 and 1955, respectively, the returns did not show any commission, the same having not been actually received. The assessment for all the three assessment years, as indicated above, was completed on March 28, 1957, and the assessees were assessed on the basis of their returns for all these years.

Subsequently, the assessment of the company was completed on February 25, 1959. The scrutiny of the accounts of the company revealed that the two sums of Rs. 73,996 and Rs. 91,589 had been debited in the books of the company and the two sums of Rs. 36,998 and Rs. 45,695 were in each case credited in the personal accounts of the assesses as commission calculated at 5 per cent, on the sales, during the respective calendar years, namely, 1954 and 1955. From a note, appearing at page 51 of the printed paper-book, in the assessment order made by the Income-tax Officer against the company for the year of assessment 1955-56, it appears that the joint managing directors, that is, the assessees herein, had not shown receipt of any income by way of commission in the returns filed by them for the calendar years 1954 and 1955. Subsequent to the completion of the assessment of the companys income on February 25, 1959, notices were served on the assessees on March 19, 1959, under section 34(1) of the Indian Income-tax Act 1922, hereinafter referred to as the Act, in regard to the assessment years 1955-56 and 1956-57 and on the basis of those notices the 5 per cent. commission that was debited in the companys accounts as payable to the joint managing directors was respectively added to their remuneration of Rs. 1,000 per month, in respect of which the assessees had already submitted their returns, and acting under section 34 of the Act, the Income-tax Office made the impugned reassessments. The assessees contended that their income of Rs. 1,000 per month was only a remuneration and represented a business income and not a salary, that, therefore, they could only be assessed under section 10 of the act and not under section 7; that the 5 per cent. commission which had not, in fact been received by them, could not have been included in the returns as it did not represent moneys that had been received, and the returns submitted by them originally were correct and proper, and that there was no omission or failure on the part of the assessees to disclose any of the material facts necessary for enabling the Income-tax Officer to make a correct assessment, and that, therefore, no action could have been taken under section 34 of the Act and that the notices issued under section 34 are not valid and thus the assessees are not liable for any reassessment under that section. The appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal having failed, the questions indicate by us at the outset have been referred to us at the instance of the assessees.

Two points have been urged by Mr. Ray, the learned counsel or the assessees in these references. Firstly, that the department was wrong in assuming that the joint managing directors of the company, namely, the assessees, were the employees or servants of the company and that the income that was assessed was salary paid to them as such, while on the contrary the joint managing directors were only the agents of the company and not its employees and the amount of Rs. 1,000 received by them per month as well as the 5 per cent. commission payable to them on the sales as remuneration, represented their business income and could only be taxed as profits or gains under section 10 of the Act and not as salary under section 7. Secondly, in regard to the assessment years 1955-56 and 1956-57, section 34(1)(a) could not at all have been invoked as there was no omission or wilful default on their part in disclosing all the material facts fully and truly, necessary for making the assessment, inasmuch as all the primary facts were in the knowledge of the Income-tax Officer and were before him, and that, therefore, no action could validly have been taken under section 34(1)(a) of the Act.

Before we consider in detail the arguments advanced by Mr. Ray and the learned Senior Government Advocate for the department, it would be useful to refer to the relevant provisions of the Indian Income-tax Act, 1922 (Act XI 1922). The relevant portions of section 7 of the Act are as follows :

'7. Salaries :- (1) The tax shall be payable by an assessee under the head Salaries in respect of any salary or wages, any annuity, pension or gratuity and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are due to him from, whether paid or not, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer; and for the purposes of this sub-section advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received : .....'

The portion of section 10 of the Act, relevant to the case under enquiry, is extracted below :

'10. Business :- (1) The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.'

Section 34(1)(a) of the Act reads as follows :

'34. Income escaping assessment :- (1) if -

(a) The Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his Income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at to low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or.....'

We shall deal with the second point, relied on by Mr. Ray in the first instance. This relates to the assessment made for the assessment years 1955-56 and 1956-57 and the corresponding calendar years 1954 and 1955. The Income-tax Officer had served a notice, under section 34(1)(a) of the Act in regard to these two years, on the assessees as already indicated, apparently, on the ground that there has been a failure on the part of the assessees to disclose fully and truly all material facts necessary for making an assessment for those years, thereby resulting in the income, profits or gains chargeable to income-tax having escaped assessment for those years.

The following facts would appear to be beyond dispute :

1. That the assessees were joint managing directors of the tea company.

2. That they were entitled to the remuneration for performing the functions of joint managing directors each to a payment of Rs. 1,000 per mensem and to a commission of 5 per cent. on the sales made by the company under article 46 of the articles of association of the company.

3. That the assessees were in actual receipt of only the remuneration of Rs. 1,000 a month during the assessment years covering the calendar years 1954 and 1955.

4. That the assessees had not in fact been in receipt of any part of the commission that is payable to them under article 46 of the articles of association of the company, although in the companys accounts, debits had been made of these amounts and corresponding credits to the personal accounts of the assessees with the company.

5. That for the assessment year 1954-55, that is the calendar year 1953, the assessees had shown in their return the amount actually received by them as commission, of which fact the Income-tax Officer was aware, he having made the assessment for that year taking into account the amount shown as commission received in the return.

6. That no part of the commission was shown in the returns for the assessment years 1955-56 and 1956-57, as the assessees had not actually drawn their commission and had not, therefore, been in actual receipt of the same.

On the basis of these facts the Income-tax Officer served a notice under section 34(1)(a) on the ground that the commission, to which the assessees had been entitled, should also have been shown as income and their failure to do so amounted to a non-disclosure fully and truly of all material facts necessary for their assessment and accordingly added back the commission which had become due and payable to the assessees salary of Rs. 12,000 received during each calendar year and made up the total amount as representing the income, and on that basis levied income-tax under section 7 of the Act, treating the assessees as the paid-servants and employees of the tea company and their income as salary received in that capacity.

The main contention of Mr. Ray in this regard is that in the instant case there can be no question of any failure on the part of the assessees to disclose all material facts necessary to make the assessment. He contended that the Income-tax Officer was aware of the articles of association of the company and that the assessees were entitled to commission at 5 per cent. on sales; more so, in view of the fact that in the year immediately preceding the year under assessment, the return showed the actual amount of commission received by the assessees who were assessed on that basis. On these premises, Mr. Ray contended that the Income-tax Officer was fully aware of the relevant facts and circumstances and that in any case all the primary facts were before the Income-tax Officer and were known to him when he finalised the assessment of the assessees for the years in question on March 28, 1957. He, therefore, contended that there was no scope in the instant case for any failure on the part of the assessees to disclose facts necessary for making the assessment of income-tax. He further submitted that the Tribunal erred in assuming that there was an omission to disclose all the necessary facts in the return. He pointed out that the words 'in his return' are not in the section and that, therefore, even if the return did not contain the particulars, it is enough if the Income-tax Officer was informed of all relevant matters, and all material facts necessary for assessment are disclosed to him fully and truly, whether in the return or otherwise. Mr. Rays main contention is that once the primary facts have been disclosed to the Income-tax Officer and he was aware of those facts, the obligation to make any further disclosure is no longer there and section 34(1)(a) of the Act could not, in such a case, be invoked.

In support of this, he placed reliance on a decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer. In that case, the only point that was raised before the Supreme Court was that the courts below were wrong in holding that the first ground that the notices were issued without the existence of the necessary conditions precedent which confers jurisdiction under section 34 had not been made out. In that connection, their Lordships of the Supreme Court observed as follows :

'To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year, two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under-assessed. The second is that he must have also reason to believe that such under-assessment has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedents to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years, but within the period of eight years, from the end of the year in question.'

Their Lordships proceeded further to examine the precise scope of the disclosure which the section demanded and observed as follows :

'The words used are omission or failure to disclose fully and truly all material facts necessary for his assessment for that year.' It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable......

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee...........

Does the duty, however, extend beyond the full and truthful disclosure of all the primary facts In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he required no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts.................

We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.'

It is contended in the instant case, as already pointed out, that all the primary facts were before the Income-tax Officer, a contention which receives strong support from the observations of the Tribunal in their judgment at page 29, which is extracted hereunder :

'10. The appellants representative referred to the following facts to show that the Income-tax Officer who completed the original assessment had knowledge of the fact that the commission had become due to the assessee during the years 1954 and 1955 and the Income-tax Officer also knew that the assessee used to return such commission on receipt basis : (1) in the return for 1954-55 the commission on sales had been shown on receipt basis and was assessed accordingly without objection. The assessment was completed on March 28, 1957, and, on the same day, the assessments for the years 1955-56 and 1956-57 were also competed by the same Income-tax Officer.

(2) The same Income-tax Officer made assessments on the tea company and the articles of association of that company, which was before the Income-tax Officer, showed that commission at 5% on sales of tea was payable to the assessee at the end of each calendar year.

(3) The Income-tax Officers remarks in the tea company assessment for 1955-56 show that the assessee had explained before the Income-tax Officer at the time of his original assessment that nothing was actually drawn by them during 1954-55.'

'The above facts to which our attention has been drawn are borne out by the records and admit of no controversy. It must, therefore, follow that the Income-tax Officer knew, when he completed the original assessments, that the commission on sales of tea had accrued due to the assessee. The Income-tax Officer had been assessing the commission in the hands of the appellant on receipt basis in the past up to the assessment year 1954-55 and it is manifest that in the original assessments for 1955-56 and 1956-57 the Income-tax Officer adopted the same basis.'

Having thus found that the Income-tax Officer knew when the competed the original assessment that the commission of sales had accrued due to the assessees and that nothing was actually drawn by them during the calendar years 1954 and 1955 and in view of the fact that the Income-tax Officer had been assessing the commission in the hands of the assessees only on receipt basis in the past right up to the assessment year 1954-55, and the having adopted the same basis in the original assessment for the years 1955-56 and 1956-57, the conclusion is irresistible that the Income-tax Officer not only knew all the primary facts relevant and necessary for the purpose of making an assessment in the case, but also he had in fact applied his mind to those facts and made the assessment on a full consideration of these primary facts and the inferences to be drawn from them. In the circumstances, the Tribunal was not justified in assuming that there was a statutory obligation on the part of the assessees to include in the returns the amount of commission, whether the same had been paid or not.

In this connection, Mr. Ray submitted that the Tribunal had assumed that the disclosure of the primary facts should be in the return and not independently of the return. He contended that all that is required is that the Income-tax officer should be in the knowledge and possession of the primary facts, irrespective of whether that knowledge is derived from the return or from the connected or incidental correspondence or the accounts and other documents produced in support of and in connection with the making of the return. He placed reliance on a decision in Commissioner of Income-tax v. Lakhiram Ramdas. In that case, at the time of the original assessment for the year 1945-46 the assessee had produced account books and balance-sheets of all his branch offices. The Income-tax Officer had these account books examined by his subordinate, the examiner of accounts, who had submitted his report; in which he had also stated that the assessee had accounts with the Exchanges Bank of India and Africa, and other banks. The assessment was made on September 13, 1946. the Income-tax Officer came to know later that the assessee had taken a draft for Rs. 1,10,000 from the Bombay branch of the aforesaid bank and deposited it on July 17, 1944, in the Ahmedabad branch of the said bank. Thereupon, the Income-tax Officer issued a notice for reassessment under section 34(1)(a) on the 24th March, 1954, and by a revised assessment order, added the sum of Rs. 1,10,000 on the 15th October, 1954, on the ground that the assessee had omitted or failed to disclose fully and truly all the material facts necessary for his assessment for that year and that consequently the income, profits or gains chargeable to income-tax had escaped assessment. This order of the Income-tax Officer was upheld by the Appellate Assistant Commissioner. But the Tribunal, after considering the account books and the examiners report, reversed this order on the ground that it could not be said on the facts and circumstances of the case that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the year 1945-46. So holding, the Tribunal refused to make a reference to the High Court. On these facts, the Supreme Court held, following the decision in Calcultta Discount Co. Ltd. v. Income-tax Officer, that the one condition that must be fulfilled before the Income-tax Officer could take action under section 34(1)(a) was that the Income-tax Officer must have had reason to believe that by reason of the omission or the failure on the part of the assessee to disclose fully and truly all the material facts necessary for this assessment that year, the income, profits or gains chargeable to income-tax had escaped assessment, etc. It follows from this decision that the disclosure by the assessee need not be only by or in the return of the income, but it could be done, as was done in this case, by other means such as the accounts and other documents produced before the Income-tax Officer at the time of the original assessment. This conclusion receives further support from the majority judgment in Prashar v. Vasantsen Dwarkadas, wherein S. K. Das J., who wrote the leading judgment embodying the majority view, observed as follows at page 18 :

'I have said earlier that clause (a) of sub-section (1) of section 34 related to those cases in which there was an omission or failure on the part of the assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year. When the Calcutta Discount Companys case came to us, we had explained what was meant by non-disclosure of material facts and point out the distinction between primary facts and inferences therefrom. There is nothing in the record to show that in the present case there was an omission or failure on the part of the assessee to make a return of his income under section 22 for the year 1942-43; nor is there any averment on behalf of the appellants that the assessee failed to disclose fully and truly all material facts necessary for his assessment for that year in the sense explained above.'

It is contended by the learned Senior Government Advocate for the department that the returns furnished by the assessees in this as cannot be regarded as valid returns as they are incomplete and did not make any reference to the income earned by the assessees by way of commission, and that, therefore, section 34(1) of the Act is attracted, and, the action taken by the Income-tax Officer under that provision cannot be questioned. In the instant case, there is no question of any return filed, not being valid. The only question is whether there has been an omission or failure on the part of the assessees to fully disclose all relevant circumstances enabling the Income-tax Officer to make a proper assessment of the income, etc., for the purpose of income-tax. As we have already pointed out, the Income-tax Officer was fully aware of all the facts, and as all the primary facts were before him and within his knowledge, the mere fact that the return did not contain a reference to a particular income earned, although not received, would not make any difference.

On a consideration of the above decision of the Supreme Court, bearing on the subject, we are clearly of opinion that before the action could be taken by the Income-tax Officer under 34(1)(a) of the Act, the Income-tax Officer must have been satisfied that there was failure on the part of the assessee either :

(a) to make a return of his income under section 22 for any year; or

(b) to disclose fully and truly all material facts necessary for his assessment for that year; and

this failure or omission must have resulted in the income, profits or gains chargeable to income-tax having escaped assessment for the year in question or having been under-assessed, etc., as indicated in the aforesaid provision.

Having regard to the facts and circumstances set out above, we are satisfied that there was no failure on the part of the assessees in each of these cases either to make a return of their income under section 22 for the years in question, or any failure on their part to disclose fully and truly all the material facts necessary for the assessment being made for the years in question, namely, the assessment years 1955-56 and 1956-57. Hence, as the conditions precedent to the taking of the action under section 34(1)(a) of the Act have not been shown to have existed in this case, our answer to the second of the questions referred to us by the Tribunal would have to be in the negative.

The first of the questions referred to us for our opinion by the Tribunal involves the question whether the remunerations received by the assessees from the tea company in the relevant years of accounts, namely, 1955-56 and 1956-57 are assessable to income-tax under section 10 of the Act.

In considering this question, it has to be noticed that the department treated the assessees in both the cases as the employees of the tea company and on that footing treated their income, namely, the monthly remuneration of Rs. 1,000 per mensem and the entitlement of 5 per cent. Commission on sales, as constituting their remuneration for the services rendered to the tea company in their capacity as the companys employees or servants. This basis for the assessment by the Income-tax Officer found favour with the Assistant Commissioner of Income-tax on appeal, as well as with the Tribunal. The case of the assessees is that they are the joint managing directors of the tea company and that as such they were only the managing agents of the said company and that, therefore, whatever remuneration was paid to them was assessable under section 10 and not under section 7 of the Act.

Hence, the main and the important point that requires to be considered in regard to the first of the questions referred to us for our opinion is whether the assessees were employees or servants of the tea company or whether they were the managing agents of the said company and the remuneration received by them was received in that capacity and therefore amounted to business income and as such assessable under section 10 of the Act.

In order to determine this important question whether the assessees were mere employees of the tea company or whether they were the joint managing agents thereof, we have go to look into the articles of association of the company, which deal with the nature of the duties of the assessees, their rights and privileges, the terms and conditions governing them and the nature of the powers and the control of management exercisable in regard to the affairs and business of the company. As already pointed out, the relevant articles in the articles of association that require to be looked into are articles 46, 47, 49 to 54 and 59 and 61 and 68. These articles occur under the heading managing directors. Article 46 provides for the appointment of the joint managing directors by the board of directors for the better management and direct control and supervision of the affairs of the company. The assessee have been shown In the articles as having been appointed as the first managing directors of the company, on a remuneration of Rs. 1,000 each per month and 5 per cent. commission on sales besides actual travelling and other allowances, etc. They are to hold office as the joint managing directors till their death, although they are given the option to resign by giving notice in writing.

Article 47 confers a right on the joint managing directors to nominate with the consent of the board of directors any other person, holding a qualification share of a director, as the managing director in the place of any one of them, in the event of early retirement or of his becoming permanently disabled or incapacitated to attend to the business of the company.

Article 49 provides that the joint managing directors shall be the chief executive officers of the company and shall discharge all executive functions of the board of directors under the latters supervision, and shall have vested in them all powers and duties of the board of directors mentioned in the articles of association, except those which are required to be performed by the board of directors themselves.

Article 50 gives power to the managing directors to engage or dismiss managers, engineers, assistants, clerks and labourers together with the power of general direction and management of the business of the company and to do all acts, matters and things deemed necessary, proper or expedient for carrying on the business and concerns of the company, including the power to make such investments of the companys fund as they shall think fit, and to make and sign all a contracts and to draw, sign, accept, endorse and negotiate, bills of exchange, promissory notes, hundies, cheques, drafts and other instruments on behalf of the company. The managing directors are also given the powers to delegate all or any of the powers to such other directors, managers, agents or other persons as they may think fit and to grant them power-of-attorney and they any deem expedient, with power of revocation at their pleasure. These powers are, however, subject to the supervision of the board of directors.

Article 51 gives power to the joint managing directors to raise or borrow monies for and on behalf of the company and to advance monies to the company on such interest as may be approved by the directors.

Article 52 enables the managing directors to create securities on charges in regard to amounts due from the company by the issue of debenture or bonds or by mortgaging or creating charge on any or part of the property of the company, including its uncalled capital for the time being.

Article 54 provides for the removal of the joint managing directors, only if they had been declared insolvent by a court or if they were found guilty of misappropriation of the funds of the company by a competent court.

Article 54 provides for the removal of the joint managing directors, only if they had been declared insolvent by a court or if they were found guilty of misappropriation of the funds of the company by a competent court.

Articles 59 and 60 provide for the maintenance of proper books of accounts and of true accounts of the sums, monies received and expended, as well as of the assets and liabilities of the company.

From the above articles of association dealing with the powers and duties of the joint managing directors, Mr. Ray contended that the provisions in these articles clearly disclosed that the joint managing directors were to be the agents of the company and not mere employees or servants. In support of this contention, he relied on the following distinctive features, governing the relations between the company and the assessees, which according to him, would clear the position and leave the matter in no doubt :

(1) The manner of doing the work is left to the joint managing directors.

(2) There is no provision for any direct and close supervision of their work by the board of directors or other authority.

(3) The joint managing directors are given the right to delegate their powers to other persons indicated.

(4) They are appointed for life.

(5) They cannot be dismissed by notice.

(6) They could only be removed for either proved insolvency or proved misappropriation of companys funds.

(7) Provision in article 17 of the articles of association enabling the joint managing directors to declare any monies due from any member to the company to be wholly or in part exempt from being made the subject of the first and the paramount lien upon the registered shares of that member.

From the above, it is contended that the joint managing directors, the assessee herein, are only the managing agents of the company within the meaning of section 2(9A) of the Indian Companies Act, 1913, and not its employees or servants. Section 2(9A) of the Act is as follows :

'managing agent' means a person, firm or company entitled to the management of the whole affairs of a company by virtue of an agreement with the company, and under the control and direction of the directors, except to the extent, if any, otherwise provided for in the agreement and includes any person, firm or company occupying such position by whatever name called :

Explanation :- If a person occupying the position of a managing agent calls himself a manager he shall nevertheless be regarded as managing agent and not as manager for the purposes of this Act.'

Reliance has been placed on paragraph 350 of Halsburys Laws of England, Lord Simonds Third Edition, volume 1, page 144 and paragraph 874 of volume 25 at page 450, for illustrating the distinction between an agent and a servant. The passage in volume 1 at page 144 is as follows :

'350. AGENT DISTINCT FROM SERVANT AND INDEPENDENT CONTRACTOR. The relation of agency arises whenever one person, called the agent has authority, express or implies, to act on behalf of another, called the principal and consents so to act.

An agent is to be distinguished on the one hands from a servant, and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders given him in the course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference, and merely undertakes to produce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent, as such, is not a servant, but a servant is generally for some purposes his masters agent, the extent of the agency depending upon the duties or position of the servant, and in some cases an independent contractor may also be an agent.'

In volume 25 of Simonds Edition of Halsburys laws of England, the following statement of the distinction between an agent and a servant occurs, which may be quoted with advantage :

'Para. 874. PRINCIPAL AND AGENT. The difference between the relations master and servant and of principal and agent is, in general, that a principal has the right to direct what work the agent has to do, but as master has the further right to direct how the work is to be done.

A person who is subject to no directions as to the time he is to devote to the work of another is an agent and not a servant; but a person who is required to give a definite amount of his time thereto, although allowed to exercise his discretion as to the place and manner of this work, is a servant and not an agent.

The circumstance that a person is remunerated by commission only is not conclusive as showing him to be an agent and not a servant; and an agent may, in part, be remunerated by salary.'

Dealing with the distinction between a clerk or servant and managing director, it is observed at page 666 of volume 6 of Halsburys Laws of England, Simonds Edition, as follows :

'Whether a person is a clerk or servant is a question of fact in each case. Some of the determining factors are whether or not the person in question works at the companys officer, or is exclusively employed by the company, or is bound to render services generally and in a manner prescribed by the company; and in general a person must have a contract of service with company in order to constitute him a clerk or servant. A managing director is not as such a clerk or servant,.........'

Reliance has been placed in support of these observations on the decision reported in In re newspaper Proprietary Syndicate Ltd. : Hopkinson v. Newspaper Proprietary Syndicate Ltd.

In Bowstead on Agency, 12th edition (1959), at page 2, it is stated that a servant is a 'person employed by another to do work for him on the terms that he, the servant, is to be subject to the control and directions of his employer in respect of the manner in which his work is to be done.

A general agent is an agent who has authority -

(a) To act for his principal in all matters, or in all matters concerning a particular trade or business, or of a particular nature; or

(b) To do some act in the ordinary course of his trade, profession or business as an agent, on behalf of his principal; e.g., where a solicitor, factor or broker is employed as such.'

In article 2 of the same publication, agency has been defined as 'the relationship that exists between two person one of whom, the principal, expressly or impliedly consents that the other, the agent, similarly consenting, should represent him or act on his behalf. The relationship of principal and agent exists, and can only exist, by virtue of the express or implied assent of both principal and agent, except in certain cases of necessity in which the relationship is imposed by operation of law.

'The agents privilege or right to act for the principal so as to affect his legal relations with third parties is known as his authority which may be express or implied.'

In Buckley on the Companies Acts, 13th edition(1957), at page 643, the position of a managing director has been contra-distinguished from a clerk or a servant. It is observed that, although the expression 'Clerk or servant' has been given a wide interpretation, that expression could not be held to cover a managing director. Reliance was placed by Buckley also on the same decision reported in In re Newspaper Proprietary Syndicate Ltd. : Hopkinson v. Newspaper Proprietary Syndicate. In that case, it was contended that a 'clerk or servant' of a company is entitled to payment, in priority to other creditors, in respect of wages or salary in the winding-up of his company, and it was claimed that the managing director was also entitled to the same benefit. In that connection, the question came to be considered whether a managing director could be held to be a 'clerk or servant'. The following observation are material and may be quoted :

'I think the claim cannot be supported. A managing director is certainly not a clerk of the company. Is he a servant of the company this proposition was negatived by the Court of Kings Bench in Dunston v. Imperial Gas Light and Coke Co., where it was pointed out that a director is not a servant, but a manger; and in Hutton v. West Cork Railway Co., Bowen L. J. dealing with a case of a managing director says :

'A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms.'

'A managing director is only an ordinary director entrusted with some special powers. It is not relevant to say that he is entitled to remuneration by virtue of a special bargain or that his remuneration is described as a salary. It is sufficient for me to say that he is not, within the meaning of the statue, a servant of the company. So far as I am aware, no such claim has ever been brought forward by a director.'

In Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, whether the appellants therein were agents of the company and not merely the servants, came up for consideration. Referring to the various articles of association of the company in that case, their Lordships for that as these articles provided for vesting the power and authority in the hands of the agents for the general management of the business of the company subject to the control and supervision of the directors, and who were to have power and authority on behalf of the company, to enter into all contracts and to do all other things usual, necessary and desirable in the management of the affairs of the company or in carrying out its objects, and were to have the power to appoint and employ in or for the purposes of the transaction and management of the affairs and business of the company, or otherwise for the purposes thereof, and from time to time to remove or suspend such managers, agents, clerks and other employees as they thought proper and with such powers and duties and upon such terms as to duration of employment, remuneration or otherwise as they thought fit, and were also to have power to exercise all rights and liberties reversed and granted to them under the agreement referred to in clause 6 of the companys memorandum of association, and as they also authorised the agents to sub-delegate all or any of the powers, authorities and discretions for the time being vested in them, and taking into account the other articles bearing on the duties and the responsibilities of the agents, including the appointment of attorneys for the management of the companys affairs, and particularly as the agency was to continue for a period of thirty years and as they were to continue to act as such agents until they of their own will resigned, their Lordships held that these provisions made the appellants agents of the company and not merely servants. In that case, the remuneration of the appellants as such agents was to be a commissioner of 2 1/2% on the sale proceeds of the produce of the company. In that connection, their Lordships relied on the distinction between an agents and a servant indicated in Powells Law of Agency, at pages 16 and 20, extracted below :

'The distinction between a servant and an agent is thus indicated in Powells Law of Agency, at page 16 :

'(a) Generally a master can tell his servant what to do and how to do it.

(b) Generally a principal cannot tell his agent how to carry out his instructions.

(c) A servant is under more complete control that an agent.'

and also at page 20 :

'(a) Generally, a servant is a person who not only receives instructions from his master but is subject to his masters right to control the manner in which he carries out those instructions. An agent receives his principals instructions but is generally free to carry out those instruction according to his own discretion.

(b) Generally, a servant, qua servant, has no authority to make contracts on behalf of his master. Generally, the purpose of employing an agent is to authorise him to make contract on behalf of his principal.

(c) Generally, an agent is paid by commission upon effecting the result which he has been instructed by his principal to achieve. Generally, a servant is paid by wages or salary.'

After considering the contentions in the light of the articles of association of the company, their Lordships observed as follows :

'Considering the position of the appellants in the light of the above principles it is no doubt true that the appellants were to act as the agents of the company and carry on the general management of the business of the company subject to the control and supervision of the directors. That does not however mean that they acted under the direct control and supervision of the directors in regard to the manner or method of their work. The directors were entitled to lay down the general policy and also to give such directors in regard to the management as may be considered necessary. But the day-to-day management of the business of the company as detailed in article 116 of the article of association and clause 3 of the agency agreement above set out was within the discretion of the appellants and apart from directing what work the appellants had to do as the agents of the company the directors had not conferred upon them the further right to direct how the work of the general management was to be done. The control and supervision of the directors was a general control and supervision and within the limits of their authority the appellants as the agents of the company had perfect discretion as to how that work of general management was to be done both in regard to the method and the manner of such work. The appellants for instance had perfect latitude to enter into agreements and contracts for such purpose and to in such manner as they thought proper. They had the power to appoint, employ, discharge, re-employ or replace the officers and servants of the company, with such powers and duties and upon such terms as to duration of office remuneration or otherwise as they thought fit. They had also the power generally to make all such arrangements and to do all such things and acts on behalf of the company, as might be necessary or expedient and as were not specifically reserved to be done by the directions. These powers did not spell a direct control and supervision of the directors as of a master over his servant but constituted the appellants, the agents of the company, who were to exercise their authority subject to the control and supervision of the directors but were not subject in such exercise to the direct control or supervision of the principals. The liberty given to the appellants under clause 4 of the agency agreement to deal with the company by way of sale and purchase of commodities therein mentioned also did not spell a relation as between master and servant but empowered the appellants to deal with the company as principals in spite of the fact that under clause 8 of the agreement two of their members for the time being were to be the ex-officio directors of the company. The power to assign the agreement and the rights of the appellants thereunder served to them under clause 9 of the agency agreement though subject to the approval and sanction of the board was hardly a power which could be vested in a servant. There was further the right to continue in employment as the agents of the company for period of 30 years from the date of the registration thereof and thereafter until the appellants of their own will resigned, which also would be hardly consistent with the employment of the appellants as mere servants of the company. The remuneration by way of commission of 2 1/2 per cent. of the amount of sale proceeds of the produce of the company savoured more of the remuneration given by a principal to his agent in the carrying out of the general management of the business of the principals and of wages or salary which would not normally be on such a basis. All these circumstances together with the power of sub-delegation reserved under article 118 in our opinion go to establish that the appellants were the agents of the company and not merely the servants of the company remunerated by the wages or salary.'

It is clear from the above observations that the instant case is more or less similar to and on a part with the case that was examined by their Lordships of the Supreme Court in the case above referred to and this decision lends strong support to the contention of Mr. Ray that having regard to the various articles of association governing the duties of the assessees in the instant case, judged in the light of the above observations quoted above, the assessee must be regarded as the agents of the company and not as mere servants or employees.

To a similar effect is the decision in Qamar Shaffi Tyabji v. Commissioner Excess Profits Tax, which placed reliance on the decision reported in Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, wherein it was observed as follows :

'We have examined the original agreement between the mills and the trustees dated April 12, 1934. Clause 9 of that agreement said 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 powders, authorities and discretions as escritoires, treasures and agents of the company to such person of persons and on such terms and conditions as they may think fit, subject to the approval of the board of directions of the company. The deligation in favour of the appellant was made under this clause. The position was therefore this : the trustees as agents had express authority to name another person to act for the principal in the business of the agency, and they named the appellant with the approval of the board of directors. Therefore, the appellant was either a servant nor a mere sub-agent. He was an agent of the principal for such part of the business of the agency as was entrusted to him.'

Applying the principles enuncicated in the above quoted authorities to the facts of the instant case, we are satisfied that the assessees are not employees or servants of the company, but are managing agents inasmuch as their duties and powers correspond to those of an agent as distinct from a mere servant of the company. In this connection, the following features, as gathered from the article of association of the company may be noticed :

1. The object of appointing to joint managing directors is to secure better management and direct control and supervision of the affairs of the company.

2. The joint managing directors hold office till their death, although they are given the option to resign by giving a notice in writing.

3. The joint managing directors have the right to nominate any other persons as managing director in case of early retirement or permanent disabililty or incapacity of any one of them.

4. All the executive functions and all powers and duties of the board of directions under the articles of association vest in the joint managing directors, excepting those which have to be performed by the board of directors themselves.

5. The joint managing directors have the powers of appointing and dismissing the managers, engineers, assistants, clerks and labourers, and to do all acts, matters and things deemed necessary, proper or expedient for carrying on the business the concerns of the company.

6. The joint managing directors have the power to make such investments of the companys funds, as they shall think fit.

7. The joint managing directors have the power to make and sign all contracts and to draw, sign, accept, endorse and negotiate bills of exchange, promissory notes, hundies, cheques, draft, government promissory notes and other government securities and other instruments, on behalf of the company.

8. The joint managing directors may delegate any or all of the powers vesting in them to such others directors, managers, agents or other persons as they may think fit and may grant such persons such power-of-attorney as they may deem expedient and may revoke those powers at their pleasure.

9. The joint managing directors may, with the approval of the directors, from item to time raise or borrow any sums of money for and on behalf of the company or themselves advance money to the company and secure the payment of such money in such manner and upon such terms and conditions in all respects as they think fit, particularly by the issue of debentures or bounds of the company or by mortgaging or charging all or any part of the properties of the company.

10. The joint managing directors could only be removed if he is declared insolvent by a competent court or is found guilty of misappropriation of the funds of the company by a competent court.

The above features, in our opinion, clearly and beyond any doubt make the joint managing directors, the agents of the company and they filled the capacity of the managing agents within the meaning of the Companies Act. This being the position, we experience no difficulty in coming to the conclusion that the income derived by the assessees from the company is remuneration paid to them in their capacity as managing agents, and, therefore, partakes of the character of business income assessable under section 10 of the Act. Such income, therefore, does not partake of the nature of the salary paid to a servant or employee which is to be assessed under section 7 of the Act.

It is contended by Mr. Pathak, the learned Senior Government Advocate for the department, that as the article of association indicate also a control and supervision by the board of directors, the assessee must be regarded not as agents but as servants. This argument is hardly understood. In the two Supreme Court cases, which we have quoted above, in many of the articles of association, dealing with the powers and duties of the managing directors, there is provision for supervision by the board of directors and also for certain acts being done by the managing directors with the approval of the board of directors. Notwithstanding these provisions, their Lordships of the Supreme Court held that that made no difference, as, obviously, such supervision and control is not repugnant to the status of the joint managing directors as the managing agents of the company. The real trust is as propounded by their Lordships of the Supreme Court and as enunciated by the various authorities referred to above by us in our judgment.

Another argument is sought to be based on article 49 of the article of association in this case, which declared that the managing directors shall be the chief executive officers of the company. The functions of the joint managing director involve the performance of executive functions on behalf of the company and it is only right and proper that by virtue of part of their duties, they should be related as exercising the powers of chief executive officers of a company. The duties of agents and managing agents of a company essentially partake of the character of management of the affairs of the company which necessarily involves the exercise and performance of executive functions, and this being the case, nothing, in our opinion, turns on the employ of the expression chief executive officers in a connection with the joint managing directors duties.

On a careful consideration of the above facts and circumstances of the case, and the decisions bearing on the subject, we are clearly of the opinion, that the answer to question No. 1 has to be in the affirmative.

We, accordingly, answer the question referred to us for our opinion as follows :

First question - affirmative

Second question - negative.

The references are accordingly allowed with costs. There shall, however, be one set only of advocates fee which is fixed at Rs. 500.


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