1. The two questions referred to this Court under Section 66 (1) of the Income-tax Act are as follows:
'1. Whether on the facts and in the circumstances of the case, the sums of Rs. 1,39, 439 and Rs. 1, 57, 453 were assessable as the income of the applicant company for the assessment years 1956-57 and 1957-58 respectively?
2. Whether on the facts and in the circumstances of the case, the applicant company was rightly denied the full rebate in super tax on account of dividends distributed during the relevant previous years?'
2. The facts are as follows: The assessee is a private company limited by guarantee not having a share capital incorporated in April 1941. Originally it had only five members all of whom were engaged in manufacturing gramophone records, perforated rolls and other contrivances for production of sound mechanically. In the relevant accounting years there were eight more members. The main objects of the company, according to clause 3 of its memorandum of association, are as follows;
'To exercise and enforce on behalf of members of the company ...... all rights and remedies of the proprietors in respect of the public performance of records. In the exercise or enforcement of such rights and remedies to grant licences and to make arrangements or agreements with respect to the public performance of such records and to collect and receive all royalties, fees and other monies under any such licences agreements or arrangements.
To distribute the net moneys received by the company in the exercise of the foregoing powers, after making provision thereof for the expenses and liabilities of the company, amongst the members of the company.
To carry on any business which may seem to the company capable of being conveniently carried on in connection with the above objects or calculated, directly or indirectly to enhance the value of or render profitable any of the property or rights of the company or the proprietors.'
3. The relevant clauses in the articles of association are as follows:
Clause 6: Any owner of performing right, whether a manufacturer or otherwise, and any person entitled to the benefit of or having an interest in such performing right or otherwise in the public performance of records. ....... .shall be eligible as a member of the company, and may on application be admitted a member thereof by the directors at their discretion, but the Directors shall have full and unrestricted power to refuse any application for membership. Clause 7: Every member who is the proprietor of the whole or any part of the performing rights in any record may, on or at any time after his election, and shall, if and when requested by the Directors in writing so to do, assign to the company in the form prescribed by the company his interest, whether present or future, in such performing rights, and until such assignment and so far as such assignment may not extend, every member, by virtue of his application for membership, and his election as a member by the Directors, grants to the company for and during the period of his membership, the sole power and authority.
(a) To authorise or permit or forbid the public performance of all or any records the performing right in which is or shall during his membership be or become vested in him;
(b) To grant licences on his behalf for the public performance of all or any of such records.
Clause 8: Every member, by virtue of his application for membership and his election as a member by the Directors, authorises the company for and during the period of his membership in their or his name, out at their sole charge and expense. (a) To collect fees and subscriptions and all moneys whether for the performance of any of the records the performing rights in which are vested in or controlled by the company or by way of damages or compensation for unauthorised performances thereof;
Clause 29: Subject as provided, every member shall have one vote.
Clause 36: Until otherwise determined by a general meeting, the number of the members of the Board shall not be less than three nor more than seven.
Clause 47: The company in general meeting may declare dividends, but no dividends shall exceed the amount recommended by the Directors.
Clause 48. The Directors may before recommending any distribution amongst the members of the company set aside out of the receipts such sums as they think proper as a reserve fund to meet contingencies ...... and to divide the reserve fund into such special funds as they think fit, and to employ the reserve fund or any part thereof for the general purposes of the company.
Clause 49: No dividends shall be paid otherwise than out of the profits of the year or any other undistributed profits.
Clause 65: The Directors shall as required by Sections 131 and 131-A of the Indian Companies Act 1913 cause to be prepared and to be laid before the company in general meeting such profit and loss accounts, income and expenditure accounts, balance sheets and reports as are referred to in those sections. Clause 69: The profit and loss account shall in addition to the matters referred to in Sub-sections (3) of Section 132 of the Indian Companies Act, 1913, show arranged under the most convenient heads the amount of gross income distinguishing the several sources from which it has been derived and the amount of gross expenditure distinguishing the expenses of the establishment, salaries and other like matter.
Clause 70-A. A balance sheet shall be made out in every year and laid before the company in general meeting made up to a date not more than six months before such meeting. The balance sheet shall be accompanied by a report of the Directors as to the state of the company's affairs and the amount which they recommend to be paid by way of dividend, and the amount, if any, which they propose to carry to a reserve fund.
4. For the two assessment years 1956-57 and 1957-58 the company was assessed at a total income of Rs. 1,39,439 and Rs. 1, 57,453. The assessability of these amounts was the subject-matter of dispute before the Appellate Assistant Commissioner. It was contended on behalf of the company that it was not carrying on any business on its own but was acting merely as an agent on behalf of its members and it was merely distributing the surplus left after meeting the necessary expenses, to the members in accordance with the number of records belonging to each member paid for by the All India Radio. The same contentions were urged before the Tribunal where reliance was placed entirely on a decision of the House of Lords in the case or the Commissioners of Inland Revenue v. Electric and Musical Industries Ltd. (1950) 2 All ER 261.
5. According to the Tribunal the question whether the assessee was acting as an agent of its members for the purposes mentioned in the memorandum of association was not decisive of the matter in issue. The crucial test was whether the applicant company was carrying on business and whether the amounts received by it: constituted its income. On the first aspect the Tribunal came to the conclusion after considering the authorities cited and the clauses in the Memorandum referred to that the company was carrying on a business although it might not have been formed for the purposes of profit making. On the second aspect the Tribunal on a consideration of Article 10 of the Articles of Association and other relevant factors held that the moneys received by the company as a separate legal entity, in course of its activities, were its own income and the subsequent distribution of such moneys between the constituent members amounted to application of the income which did not preclude its taxation.
6. On the second question the Tribunal held that under the Finance Acts in force during the two assessment years super tax was chargeable on the total income of the company at a fixed rate but those companies which had made the prescribed arrangement for the declaration of dividends and payment of the same within the territory of India, and for the deduction of super tax from dividends in accordance with the provisions of the Act, were entitled to a rebate at prescribed rates on their total income. This rebate was liable to be reduced if the company had distributed to its share-holders during the previous year, dividends in excess of 6 per cent of its paid up capital. The Tribunal agreed with the Appellate Assistant Commissioner that the amount distributed by the company to its members was dividend as defined under the Act and the rebate was liable to be reduced, at the prescribed rates, on the entire amount of the dividends distributed amongst the members in the relevant previous year, the paid up capital of the company being nil.
7. It appears to us that the Tribunal came to a correct conclusion on both the questions. As regards the first question what has to be considered is whether the assessee was carrying on a business and was deriving income which was assessable to tax under the Act. The fact that the assessee's business was that of an agent and that it had agreed to pay over the bulk of its income at the direction of the members is not a matter which makes any difference so far as its assessability is concerned. The objects clause of the Memorandum of Association shows the nature of its activities. The assessee was to exercise and enforce on behalf of its members all their rights and remedies by virtue of the Indian Copyright Act, 1914, in respect of the public performance of records manufactured by them. They were to collect and receive and give effectual discharge for all royalties, fees and other moneys payable under the licences in respect of public performances. Under Sub-clause (g) of Clause 3 the assessee was empowered to carry on any business which might conveniently be carried on with its other objects which would enhance the value of or render profitable any of the property or rights of the company or the proprietors. Under Article 10 of the Articles of Association all moneys received by it in respect of the exercise of the rights, licence or authority granted by its members were to be the property of the company and were to be dealt with in accordance with the rules in force. Article 47 empowered the company in general meeting to declare dividends not exceeding the amounts recommended by the Directors. Under Article 48 the Directors had the right to set apart such sums as they thought fit as a reserve fund to meet contingencies or for future distribution or for repairing, improving the property or premises' of the company. Article 65 required the Directors to lay before the company in general meeting such profit and loss accounts, income and expenditure accounts, balance sheets and reports as are referred to in Sections 131 and 131A of the Indian Companies Act, 1913. The profit and loss account was to be prepared in terms of Article 69 and the balance sheet was to be made out in terms of Article 70. The Tribunal considered the question as to whether the assessee was carrying on a business. Referring to the case of Laksninarayan Ram Gopal and Son Ltd. v. Government of Hyderabad : 25ITR449(SC) and Narain Swadeshi Weaving Mills v. Commissioner of Excess Profit Tax : 26ITR765(SC) the Tribunal, in my opinion, rightly came to the conclusion that the assessee was carrying on a business even if it was nothing more than acting as an agent for its members. In the first of the two cases mentioned above it was observed by the Supreme Court that the rendering of services as managing agents to a company would amount to carrying on a business while in the second case it was said that the word 'business' connoted some real, substantial and systematic or organised course of activity or a conduct with a set purpose. There can be no doubt that there was a systematic or organised course of activity of the assessee and it was only for the purpose of taking advantage thereof that various companies manufacturing gramophone records etc. became its members. Again I can see no valid ground for holding that the fees, royalties etc. collected by the assessee were not its income. Article 10 of the Articles of Association expressly provides that all moneys received by the assessee in respect of the exercise of the rights, licence or authority granted by its members were to be the property of the company. The Tribunal rightly held that the:
'company is a separate legal entity and the moneys which it receives in course of its activities are its own income. The subsequent distribution of such money between the constituent members amount to application of the income which does not preclude its taxation'.
8. The sheet anchor of the assessee's case before the Tribunal and before this court was the decision of the House of Lords in (1950) 2 All ER 261. The facts of that case as summarised in the judgment of Singleton J, in Inland Revenue Commissioners v. Electric and Musical Industries Ltd. (1948) 2 All. ER 514 may be stated as follows: The Gramophone company limited was a subsidiary company of Electric and Musical Industries Limited throughout the accounting period. It used to manufacture gramophone records and had the exclusive right of performance in public of records made by them. Two groups of manufacturers of gramophone records, namely, Electric and Musical Industries group and the Decca group formed a committee to coordinate the arrangements for granting licences for public performances of their records. The business increased and became very remunerative. It was then decided that other means be taken to look after the copyright interests of the gramophone record makers and to provide for the collection of fees for the granting of licences. Accordingly Phonographic Performance Limited was incorporated as a company limited by guarantee in the year 1934 without a share capital. Since then matters like collection of fees and royalties, granting licences were placed in the hands of this company. In the accounting period July 1, 1943 to June 30, 1941 the Phonographic Company paid over 17265-17-1 to the Gramophone Company in respect of their share of the balance remaining due after expenses of the Phonographic Company had been paid. The question which the court had to decide was whether the above sum received by the Gramophone company constituted income from an investment in the hands of the Gramophone Company and so to be excluded from its profits for the purpose of determination of excess profits tax. Under the Finance (No. 2) Act, 1939 Section 12(1) tax had to be paid on the excess of profits over the standard profits in respect of the chargeable accounting period. Schedule VII to the Act provided for computation of profits and capital for purposes of excess profits tax and in part I containing rules for adaptations of income-tax principles as to computation of profits provided that income received from investments was to be included in the profits in the cases and to the extent provided in Sub-clause (2) of paragraph 6(1) and not otherwise. Sub-paragraph (2) laid down that:
'in the case of the business oi: a building society or of a banking business, assurance business or business consisting wholly or mainly in the dealing in or holding of investments, the profits shall include all income received from investments, being income to which persons carrying on the business are beneficially entitled'.
Singleton J. held that to determine the question one had to look at the Memorandum and Articles of Association of the phonographic company and to sec what had been done in order to get a general view of the business. Reference was made to clause 3 of the objects clause which are in pan materia as Clause 3 of the memorandum and also Articles 6,7,8 and 9 of the Articles of Association. These articles correspond to Articles 7, 8, 9 and 10 of the Articles of Association of the assessee before us. The language used in the objects clause and the Articles of Association of the assessee is practically the same as that used in the phonographic company's case and it would not be wrong to say that they are copied from the documents of the English Company. If must be noted at the outset that the Courts in England were not concerned to find out whether Electric and Musical Industries Ltd., or phonographic Co. Ltd., were carrying on a business or not and whether these companies were assessable to tax or not. The question before them was whether the sum of money received by Gramophone company constituted an income from investment which merited exclusion from its profits for the purpose of excess profits tax. It was held by Singleton J. and the Court of Appeal that there was no equitable assignment of any property and this argument was not canvassed before the House of Lords. Lord Simonds adopted the reasoning and conclusion of Cohen L. J. in the Court of Appeal. According to him nothing could be clearer than that Phonographic company was formed for the purpose of acting as an agent for its several members for the exercise or its rights and agreed with the summing up of Cohen L.J. in Inland Revenue Commrs. v. Electric and Musical Industries Ltd., (1949) 1 All. ER 120(126) that:
'the articles coupled with the contract of membership arising from the application for membership and the acceptance thereof constitute an arrangement between each member and the Phonographic Company and also between the members inter se, under which the members agreed to pool the proceeds of exploitation of the copyright on the terms recorded in the articles and article 9 is mere machinery to enable the Phonographic company to give effect to the pooling agreement'.
According to Lord Simonds the true construction of the documents (the Memorandum and the Articles of Association) pointed to an agency relation. His Lordship also said that the fact that the phonographic company was one limited by guarantee and not by snares made no difference although his Lordship added that the same consideration might not in all respects apply to a company limited by shares as to one limited by guarantee. Lord Macdermott thus summarised the contentions of the parties:
'For the appellant company it was said that the income in question was a dividend paid by the phonographic company out of its divisible profits to a member as such. For the respondents, on the other hand, it was submitted that this payment was of quite a different order in that it was made by the phonographic company, not out of its profits but as the Gramophone Company's share of the net amount of the proceeds received by the phonographic company, as agent for its members, from the issue of licences on their behalf.'
According to the learned Law Lord the memorandum conferred no power on the Phonographic company to turn to its own account the net amount of the moneys it obtained by dealing in the rights and remedies granted to its members, in respect of the public performance of their records, by the law of copyright. According to Lord Reid:
'the substance of the matter was that the seven manufacturing companies which became members of the Phonographic Company, trusting each other, empowered a body controlled by the majority of their number not only to collect the revenue which each could have collected for itself, but also (and this is the peculiar feature of this case) empowered that body to determine whether or not the whole of the revenue was to be distributed, and in what proportions the revenue to be distributed was to be divided among them. No doubt there were good practical reasons against providing that each member should receive each year precisely what had been collected in respect of that member's records, less expenses of collection, and the expectation was that the sum paid to each member would roughly represent what that member's records had earned. In fact, this expectation appears to have been realised, but it need not have been. If a majority of the members had chosen to use their voting power to cause the Phonographic Company to distribute on some other basis, there does not appear to be anything in the memorandum or articles which would have prevented that. The decision how much any member should get was the decision of the Phonographic Company, an independent person in law. It is this feature which makes me doubt whether this case can properly be brought within the category of agency, but I do not think it necessary to determine that question. The question under the statute is whether there was an investment. It may well be that where there is agency there is no investment, but it does not at all follow that if the case is not one of agency it must, therefore, be one of investment.'
9. The single question before the English Courts including the House of Lords was whether the money received by the Gramophone Company from the Phonographic Company was an Income from investment. In ascertaining this the Courts went into the nature of the receipt of the money and held against the Gramophone Company. The Court of Appeal and most of the Law Lords were disposed to hold that the phonographic Company was acting as an agent of the Gramophone Company. From this, however, it does not follow that the money collected by the Phonographic Company were hot its income from a business. The articles of association of the Phonographic Company in the English case and of the assessee before us are specific on this point, namely, that the money collected were the moneys of the Phonographic Company in England ana are the moneys of the assessee before us. The provisions in the Articles of Association that after meeting the expenses and creation of a reserve fund the balance could be divided among the members is a matter of no moment so far as the question before us is concerned. Like any other company the assessee before us is under an obligation to prepare profit and loss account, income and expenditure account etc. In my view, it is idle to contend that the assessee was not carrying on a business the income, profits and gains of which were not assessable to tax.
10. The second question can be disposed of very shortly. Under the Finance Act of 1956, the rate ot super tax prescribed in respect of every company was 6 annas 9 pies in the rupee but certain rebates were to be allowed as laid down in the proviso to clause D of Part II of the rates of super-tax prescribed under the said Act. Under the proviso the rate was liable to be reduced on the entire amount of dividends distributed amongst the members in the relevant previous year. As the company in this case does not have a share capital it was not entitled to the benefit of the rebate granted by the Finance Act.
11. The answer to both the questions must, therefore, be in the affirmative and against the assessee who will pay the costs of this Reference.
12. I agree.