Sayasachi Mukharji, J.
1. We are concerned with the assessment years 1960-61, 1961-62 and 1962-63, in this reference under Section 256(1) of the Income-tax Act, 1961. The assessee is a private limited company. One of the businesses of the assessee-company is that of managing several other companies situate both in India and Pakistan and thereby to earn managing agency commission. One of such managed companies is Sutlej Cotton Mills Ltd. situate in Okara (Pakistan). The assessee-company was appointed as their managing agents by an agreement dated May 16, 1936. The managed company though registered in India has its factory in Pakistan. The assessee-company has its head office in India. The Income-tax Officer, in view of the 'Two-man Committee Report' and ' Avoidance of Double Taxation Agreement ' with Pakistan, taxed 50% of the managing agency commission from Sutlej Cotton Mills Ltd. in the hands of the assessee-company. The other half of the managing agency commission was brought to tax by the Income-tax Officer, Companies Ward III, Lahore (Pakistan). Later on, the Income-tax Officer, Lahore, reopened the assessment of Birla Brothers Private Ltd., Okara, Pakistan, for the purpose of assessing 100% of the total managing agency commission in Pakistan in view of the decision of the Pakistan Supreme Court in the case of Octavious Steel & Co. Ltd. v. Commissioner of Income-tax, Dacca, Civil Appeals Nos. 5D and 6D of 1960 decided on May 31st, 1960. By the aforesaid judgment, the Supreme Court of Pakistan had held in more or less similar circumstances that the entire managing agency remuneration, that is to say, 100%, accrued or arose in Pakistan and was taxable in Pakistan. In the instant case, the assessee-company did not disclose inIndia for the relevant years the managing agency commission from Sutlej Cotton Mills Ltd., situated in Pakistan in its books of account on the ground that the Pakistan authorities intended to tax the entire commission from the said total instead of 50% as was being done so far. We were told from the Bar that subsequently, the Pakistan tax authorities have taxed the entire remuneration in their hands in Pakistan. The Income-tax Officer here for the relevant years did not agree or accept the submissions of the assessee in this regard and brought to tax in the assessment years 1961-62 and 1962-63, 50% of the managing agency commission received from Sutlej Cotton Mills Ltd. by including the same in the total income of the assessee. In the assessment year 1960-61, since the assessment had been completed by inclusion of minimum remuneration in the original assessment, the Income-tax Officer keeping in line with the decision taken by him in the assessment years 1961-62 and 1962-63 made an order under Section 154 of the Income-tax Act, 1961, and included 50% of the managing agency commission from the aforesaid mills in the assessee's income.
2. The assessee appealed to the Appellate Assistant Commissioner against the orders of the Income-tax Officer. The Appellate Assistant Commissioner held that since all the directors of the assessee-company were in India and rendered services in India for the purpose of the managed company in Pakistan, the services for earning managing agency commission were performed in India. He, accordingly, confirmed the assessments made by the Income-tax Officer and dismissed the appeals. The assessee preferred appeals to the Tribunal. The Tribunal referred to the managing agency agreement and found that the factory of the managed company was situated in Pakistan, the entire manufacturing operations were done in Pakistan and the sales were also made in Pakistan. The Tribunal was of the opinion that the mere fact that the head office of the assessee-company which earned managing agency commission by way of remuneration was situated in India, did not necessarily lead to the conclusion that the income accrued or arose in India, The Tribunal held that there was not much difference between the facts of the case of Octavious Steel & Co. Ltd. and the facts of the instant case. In the premises, applying Article 9 of the Schedule to the agreement for ' Avoidance of Double Taxation ' between India and Pakistan, the Tribunal held that the authorities below were not justified in including 50% of the managing agency commission in the assessee's hands. The Tribunal then deleted this amount added in all the assessment years in question.
3. In the aforesaid circumstances, under Section 256(1) of the Income-tax Act, 1961, the following question has been referred to this court:
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not justifiedin including 50% of the managing agency commission in the assessment of the assessee ?'
In deciding this controversy, we will have to refer to the agreement between the Sutlej Cotton Mills Ltd. and Birla Brothers Private Ltd. by which the assessee-company was appointed as the managing agents. The agreement as mentioned before was entered into originally on May 16, 1936, and was subsequently modified. The relevant clauses of the agreement as it stood were as follows :
'1. The business of the company shall be carried on by managing agents subject to the control and supervision of the Board of Directors. The first managing agents shall be Birla Bros. Ltd., or their assigns or successors in business whether under the same or any other style or firm, and they shall be entitled to remain and continue in the said office (unless it be resigned by them) for 25 years from the incorporation of the company with a further option to them for 25 years and thereafter until they be removed therefrom by an extraordinary resolution of the shareholders of the company passed at an extraordinary general meeting to be convened for the express purpose and of which meeting six months' notice shall be given to each shareholder at his address on the register and not by advertisement and at which meeting not less than seven-eighths in number of the holders of ordinary shares of the company for the time being issued shall be present in person and not less than seven-eighths of the paid-up ordinary share capital of the company for the time being shall be represented, it being expressly provided that no question of such removal from office of the managing agents may arise before the termination of the said period of 25 years. The managing agents shall be remunerated by an allowance of Rs. 500 per mensem so long as the number of spindles and looms in the mills shall be not more than 10,000 and 250, respectively, and when the spindles or looms shall exceed those figures, the allowance shall be Rs. 1,000 per mensem till the number of spindles and looms shall not exceed 25,000 and 600, respectively, and when the spindles and looms in the mills shall exceed the ,last named figures, the allowance shall be Rs. 2,000 per mensem.
2. The managing agents shall further be entitled to a commission of 2 per cent. on the gross proceeds of all sales made by the company.'
Clause 3 of the said agreement deals with the general powers and mentions the various functions that the managing agents shall have to perform. Clause 4 stipulates that during their continuance in the office of the managing agents, they shall have the right to delegate their powers and retain and employ any such staff as might be necessary for carrying on the business of the assessee and the salary of such staff shall be defrayedby the company. Other clauses are not very relevant for our present purpose. The said agreement was modified by a subsequent agreement dated April 22, 1957. So far as the modifications are concerned, it pro-vided as follows:
' 1. That the last sentence being about last eight lines in clause 1 of the said managing agency agreement dated the 16th day of May, 1936, made between the company and managing agent beginning with the words 'The managing agents shall be remunerated...... Rs. 2,000 per mensem'be and the same is hereby deleted.
2. That clause 2 of the said managing agency agreement be and the same is hereby deleted and in place thereof, the following clause be and the same is hereby substituted : '2. As from 1st April, 1956, the managing agency shall be paid by way of remuneration 10 per cent. of the net profits of the company to be computed in the manner provided in Sections 349 and 350 of the Companies Act 1 of 1956'. '
Incidentally, we may mention that reference was made to the Two-man Committee Report dated April 22, 1957, but we do not find the said report to be very relevant in deciding the present controversy in accordance with law. The Tribunal has also referred to the Two-man Committee Report meetings on July 14, 15, 16, 1953, the minutes of which provided, as follows : ' The gist of the basis is that 50% of the managing agency should be allocated to the dominion in which the head office of the managing agents is situated and the other 50% shall be allocated between the two dominions according to the income of the managed agency arising in each dominion.' The Tribunal was not sure as to what was the value of the arrangement recorded in the said agreement. Incidentally, we may mention that the head office of the assessee was situate in India. We were not shown any provision of law which gave any legal sanction to the said agreement. The Pakistan Supreme Court has given a go-by to the said agreement recorded in the minutes aforesaid. Under the provisions of Section 49AA of the Indian Income-tax Act, 1922, there is the Agreement for Avoidance of Double Taxation between India and Pakistan. By virtue of articles IV and IX of the said agreement read with Schedule 9 to the agreement, the remuneration of the managing agents not being mentioned in the other Schedules, 100% of the income was liable to be taxed by the country in which the income actually arose or accrued. Article VII of the said agreement, however, provided that the schedule to the agreement may be modified from time to time by agreement between the Central Board of Revenue of the two dominions and references to the schedules shall be read as references to the schedule as modified. We have not beenshown anything to indicate that the Two-man Committee Report had that effect or was an agreement between the Central Board of Revenue of the two countries to that effect. We have referred also to the facts as found by the Tribunal, namely, that the factory was situated in Pakistan and sales were all made in Pakistan. Apart from the two agreements mentioned before, there are no other facts found in this case.
4. The question is, where did the income of the assessee-company so far as its managing agency commission is concerned, arise or accrue. In determining such a question two aspects will have to be borne in mind, that is to say, where the income accrued and when the income accrued. Bearing the above two factors in mind, we may consider the principles laid down by the Supreme Court in this matter. The Supreme Court in its decision in the case of Shoorji Vallabhdas & Co. v. CIT : 39ITR775(SC) dealt with this question. In that case, the assessee-firm which was a resident in British India was the managing agent of two shipping companies which were also resident in British India. The business of the two companies was to carry cargo in cargo boats which touched the ports in British India and native States of Cochin, Travancore and Saurashtra. The remuneration of the assessee was expressed to be a percentage on the freight charged to shippers and passage money charged to the passengers payable at the place where it was earned. The assessee also had acted as managing agent of a third company which during the relevant accounting periods confined its business to stevedoring and trading only on a remuneration of 25% of the net profits of the company. The Department sought to assess the entire managing agency commission from the three companies as having accrued or arisen in British India whereas the assessee contended that that part of the commission that accrued in Cochin and Travancore States was exempted from tax. The Appellate Tribunal found that apart from booking and collecting freight at Cochin, all other important responsible work of managing the companies was done from the head office in British India. It was held that normally commission payable to the managing agents accrued at the place where the business was actually done, that is to say, where the services of the managing agents were performed. In this case, the Supreme Court found that as the assessee performed practically all the services in British India, the commission in respect of the two shipping companies though computed on the percentage freight or passage money, accrued or arose in British India. The remuneration for managing the third company whose business was stevedoring and trading also accrued in British India.
5. Counsel for the Revenue drew our attention to the agreement with the third managed company, the new Dholera Shipping and Trading Company, which contained, inter alia, the following clause-
' The managing agent shall as and by way of remuneration for their services receive a commission at the rate of 25% of the net profits of the company. Such remuneration shall be payable to the managing agent at the place where the same is earned by the managing agents unless otherwise requested by the managing agent.'
Counsel for the Revenue contended that the said clause was more or less similar to the clause in the instant case before us as we have noticed before, that is to say, that from April 1, 1956, the managing agent shall have by way of remuneration 10% of the net profit of the company to be paid in the manner provided under Sections 349 and 350 of the Companies Act, 1956. The Supreme Court, in our opinion, clearly laid down the proposition that unless the facts of a particular case indicated otherwise, normally commission payable to the managing agent accrued at the place where the business was actually done, viz., the business of managing the affairs of the managed company. Therefore, in each case, we have to find out where the business of managing the affairs of the managed company was performed by the managing agent and if there were any particular clause or factor which stipulated payment at any place other than the place where the business of the work of the managing agent had been performed. It is in this light, that the Supreme Court decided the case after reviewing all the other relevant cases on this point and after considering the effect of the decision of the Bombay High Court in the case of Salt & Industries Agencies Ltd, v. CIT : 18ITR58(Bom) , a decision upon which counsel for the Revenue in the instant case before us placed much reliance. Therefore, the Supreme Court, after analysing the facts, found that all the activities of the managed companies were performed by managing agents in British India. The Supreme Court noted that freight was secured and paid at Cochin. The Supreme Court observed that freight was merely the resultant profit which accrued to the shipping company. In order to have the resultant profit, the principal had to get ships, it had to have sea-worthy ships and it had to have officers and men to look after the repairs of the ships, renovation of the ship and replacement of the ships. Similarly, in this case, the factory had to be run ; the managing agents must perform that function. The manner of computation of the resultant profit and the right to claim payment after computation do not, in the absence of other indications, conclude the point that profit accrued at the place or income accrued at the place where computation was made. In this case, the assessee pointed out that as profit had accrued or income had accrued in Pakistan, it had not disclosed this part of the income. That the entire manufacturing process was done in Pakistan and sales were made in Pakistan go to indicate that the work of managing its affairs which brought in income out of which commission wasearned was done in Pakistan. No other fact was established to indicate that any activity of managing the affairs of the managed company was performed in India. In the aforesaid view of the matter and in view of the principles laid down by the Supreme Court, we are of the opinion that the Tribunal came to the correct conclusion in the instant case.
6. In the premises, the question referred to this court is answered in the affirmative and in favour of the assessee.
7. Each party will bear and pay its own costs.
R.N. Pyne, J.
8. I agree.