DERBYSHIRE, C.J. - This is a Reference to this Court made by the Income Tax Officer, Burdwan-Birbhum, arising out of the assessment made in the year 1932-33 upon Nrisingha Chandra Nandy Chowdhury as an individual on income from money-lending business carried on by him at Baidyapur in the Burdwan District, a rice mill at Boinchee in the Hooghly District, a business in stevedoring and dubashing in Calcutta, money-lending business carried on by him at Deoghar in the Sonthal Parganahs and his income from other sources. It is the stevedoring and dubashing business in Calcutta which gives rise to the question which is asked by the Commissioner. This stevedoring and dubashing business was carried on under the name of Chatterji & Co., and the question asked of this court is- what is the income properly assessable to income-tax of the assessee in respect of the business of Chatterji & Co. ?
The assessee for some years previous to 1931 was the proprietor of this stevedoring and dubashing business of Chatterji and Co., and appears to have appointed Sarat Chandra Chatterji, Tulshi Charan Chatterji and Radha Charan Chatterji who are described as merchants and land-holders, as managers of this business and the Chatterjis appear to have acted as managers of that business under certain agreements made between them and the proprietor.
On the 16th of March, 1931, an agreement in writing was made between the assessee described as the proprietor of the business and the said three Chatterjis who were described as managers. In that agreement the previous agreements were referred to. Then the written agreement proceeds in its operative part-
'Now it is hereby Agreed and Declared as follows :-
'1. The proprietor shall employ the managers as managers of his said business for the said period of five years commencing from the said 1st day of Baisakh, 1338 B. S., and the said business shall continue to be carried on by the managers up to the end of the month of Chaitra 1337 B. S., by virtue of and under the said hereinbefore in part recited agreement dated the 13th day of April, 1930, and all the terms, conditions and stipulations therein contained including the clause about adjustment of accounts shall be deemed to apply thereto notwithstanding anything herein contained.
'2. The managers shall continue to carry on and conduct the business of the proprietor and secure all Stevedoring and Dubashing work for and on behalf of the proprietor in the name of his said firm of Chatterjee & Co., in respect of the following lines of Steamships and vessels;
Ellerman Bucknall Steamship Co., Ltd.
Holland Britain Indian Line.
Swedish East Asiatic Company.
Roosevelt I. S. Company.
River Pilot Service.
'3. The managers shall be at liberty to secure at any time during the continuance of this agreement contracts for Stevedoring and Dubashing work in respect of any other line of steamships and vessels for and on behalf of the proprietor and in the name of his said firm of Chatterjee & Co.
'4. The managers shall after collecting all bills and outstandings of the said firm of Chatterjee & Co., in respect of Stevedoring works in ships and vessels (excepting Tally Clerks, salt and extra gangs and winchmen) pay to the proprietor 5 per cent. on the gross realization and in respect of Dubashing works (with the exception of Captains and Gharry hire) 2 1/2 per cent. on the gross realisations without any deduction or abatement, whatsoever. The managers shall also pay to the proprietor a further sum of Rs. 1,000 per year on or before the expiry of the last day of the month of Chaitra each and every Bengali year during the aforesaid period of five years the first of such annual payments to be made on or before the expiry of the last day of the month of Chaitra, 1338 B. S. The managers shall after paying all expenses of and incidental to the carrying on of the business of the said firm of Chatterjee & Co., including salaries of clerks assistants, supervisors and other employees, establishment, contingent and other extra expenses, if any and the payments to be made to the proprietor as hereinbefore provided retain the balance to themselves as and for their remuneration.
'5. The proprietor shall have the option to appoint an assistant to supervise and check the collection of all bills and outstandings of the said firm of Chatterjee & Co., and the managers shall pay to the proprietor the salary of such assistant at the rate of Rs. 50 per month over and in addition to the said yearly sum of Rs. 1,000 and 5 per cent. and 2 1/2 per cent. hereinbefore mentioned.
'6. The assistant so to be appointed as aforesaid shall have free access at all times during office hours to all documents, papers, books of account, correspondence, vouchers, bills, etc., relating to the business of the said firm of Chatterjee & Co., and the managers shall forthwith give every facility in that behalf.
'7. If owing to any negligence or default on the part of the managers in carrying on the business of the firm of Chatterjee & Co., there be any loss, the same shall be borne and paid by the managers and the proprietor shall not be liable to bear or pay the same or any part or portion thereof and the managers shall at all times indemnify any keep indemnified the proprietor against all such losses'.
'8. During the continuance of this agreement the managers shall have full power and authority to sign, endorse and negotiate all bills, cheques, etc., in the name of the said firm of Chatterjee & Co.
'9. During the continuance of this agreement the managers shall not directly or indirectly secure any business of Stevedoring or Dubashing with any new line of Steamship and vessels in their own name or in the benami of any person or persons for their benefit. Should the managers act in any way contrary to the provision hereinbefore contained, then and in such case, such business should belong to the proprietor and should be deemed to have been secured for his benefit and he shall be at liberty to forthwith determine this agreement without any notices and also to recover from the managers the sum of Rs. 20,000 as and by way of liquidated damages besides forfeiting the security deposit hereinafter mentioned'.
'10. The sum of Rs. 6,000 deposited by the managers with the proprietor as and by way of securing in pursuance of clause 9 of the said hereinbefore in part recited agreement dated the 13th April 1930, shall continue to remain in deposit with the proprietor as and by way security for the due performance and observance of the covenants and conditions hereinbefore contained and on the part of the managers to be performed and observed and they shall not be entitled to claim refund of the said deposit or any part or portion thereof so long as any claim of the proprietor under and by virtue of this agreement shall remain outstanding and unsatisfied with liberty to the proprietor to appropriate the same or any part or portion thereof in satisfaction of such claim if the same be not paid on demand. The proprietor shall also be at liberty to recover from the managers the balance, if any, of such claim by suit or otherwise'.
'11. On the expiry of the month of Chaitra each and every year, the accounts of the business of the said firm of Chatterjee & Co., on the basis of the hereinbefore in part recited agreement of the 29th day of September, 1924, shall be adjusted and upon such adjustment, the managers shall be at liberty to withdraw their respective shares in the profits in terms of the said agreement and the proprietor shall likewise be at liberty to withdraw his capital and other moneys from the said business'.
'12. On the expiry of the agreement either by effluxion of time or by sooner determination thereof as hereinbefore provided, the manager shall be at liberty to retain any capital or other moneys that they might have brought into the said business after having paid the proprietor, any money or moneys for the time being due to him by the managers under and by virtue of this agreement provided always and it is hereby expressly agreed and declared that nothing herein or in the said agreement, dated the 29th day of September, 1924, contained shall be deemed to constitute a partnership between the proprietor and the managers and the terms, conditions and stipulations contained in the said agreement, dated the 29th day of September, 1924, shall be deemed to be in full force and binding on the parties so far as they are not inconsistent with or repugnant to or expressly superseded by the terms, conditions and stipulations herein contained'.
Pursuant to that agreement the business of Chatterjee & Co., was worked. In respect of the year of assessment the assessee received in accordance with the terms of the agreement Rs. 14,510. In respect of the same year the full profit of the business was computed by the Income-tax Officer to be Rs. 45,082. The question is whether the assessee is to be assessed upon the profits of the business, namely, Rs. 45,082 or upon Rs. 14,510 which he actually received. The assessee contends that he is to be assessed upon Rs. 14,510 whereas the Income Tax Officer contends that the assessee is to be assessed upon Rs. 49,082 which was the full profit of the business.
Section 3 of the Income Tax Act enacts :-
'Where any Act of the Indian Legislature enacts that income tax shall be charged or any year at any rate or rates applicable to the total income of an assessee, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of all income, profits and gains of the previous year of every individual, Hindu undivided family, company, firm and other association of individuals'.
Section 6 of the Income Tax Act provides :-
'Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely :-
Interest on securities.
The assessment here purports to have been made under the fourth heading 'Business'.
Sec. 10 (1) provides :-
'The tax shall be payable by an assessee under the head Business in respect of the profits or gains of any business carried on by him'.
Section 10 (2) provides that such profits or gains shall be computed after making full allowance for
(viii-a) 'any sum paid to an employee as bonus or commission for services rendered, when such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission :'
'Provided that the amount of the bonus or commission is of a reasonable amount with reference to :-
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business for the year in question; and
(c) the general practice in similar business'.
(ix) 'any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains :
Provided that nothing in clause (viii) or clause (ix) shall be deemed to authorise the allowance of any sum paid on account of any case, rate or tax levied on the profits or gains of any business or assessed at a proportion of or otherwise on the basis of any such profits or gains'.
The question here is whether the business of Chatterjee & Co. was carried on by the assessee The income-tax authorities say it was - that it was carried on by the assessee through the three Chatterjees who were his manages for the purpose of carrying on the business. The assessee contends that by the agreement of March 16th, 1931, he (the assessee) had handed over the business for the period under the agreement to the three Chatterjis and that they were carrying on the business. To determine which of these two views is correct we must have regard to terms of the agreement of March 16th, 1931.
Cl. (1) provides that the proprietor shall employ the managers as managers of his said business for the said period of five years.
Cl. (2) provides that the managers shall continue to carry on and conduct the business of the proprietor, and secure all stevedoring and dubashing work for and on behalf of the proprietor in the name of his said firm of 'Chatterjee & Co.' in respect of certain lines of steamships and vessels.
Cl. (3) of the agreement provides that the managers shall be at liberty to secure at any time during the continuance of this agreement contracts for stevedoring and dubashing work in respect of any other line of steamships and vessels for and on behalf of the proprietor and in the name of his said firm of Chatterjee & Co.
Cl. (4) provides that the managers shall pay to the proprietor five per cent. on the gross realizations in respect of dubashing works and two and half per cent. on the gross realization in respect of stevedoring works and also a further sum of Rs. 1,000 and that after paying all expenses of and incidental to the carrying on of the business of Chatterjee & Co., they shall retain the balance to themselves as and for their remuneration.
Cls. (5) and (6) give the right to the proprietor to supervise and check the collection of all bills and outstandings of the firm of Chatterjee & Co.
Cl. (7) provides for the managers indemnifying the proprietor if owing to any negligence or default on the part of the manages in carrying on the business of Chatterjee & Co., there be any loss.
Cl. (8) provides that the managers shall have full power and authority to sign, endorse and negotiate all bills and cheques in the name of the said firm of Chatterjee & Co.
Cl. (11) provides for an accounting for what is due to the proprietor and what is due to the managers each year.
Cl. (12) provides that the managers shall be at liberty to retain any capital or other moneys that they might have brought into the concern and also that nothing in the agreement shall constitute a partnership between the parties to the agreement.
This agreement, in my view, looking at it as a whole, is simply, an agreement between the proprietor - the assessee - and the manages - the three Chatterjis as managers of the business for five years, the business at all times remaining as that of the proprietor, the proprietor taking out of the business, as stated, each year a sum of Rs. 1,000 fixed, five per cent. of the gross realisations in respect of the stevedoring work and two and half per cent. in respect of the dubashing work with a provision that the balance after paying all expenses should be the remuneration of the managers. It was in my view an agreement whereby the managers should on those terms carry on the business on behalf of the proprietor. The business at the beginning was that of the proprietor; during the continuance of the agreement it should be that of the proprietor and at the end it should be that of the proprietor. The Chatterjis were simply the managers managing the business for and on behalf of the proprietor. That being so, it seems to me that the proprietor - the assessee - was through his managers - the three Chatterjis - carrying on the business and that consequently he falls to be assessed under sec. 10 (1) of the Indian Income Tax Act.
What is the sum in respect of which he is to be assessed It is the profits or gains of that business subject to those profits or gains being computed after making the allowance set out in sec. 10 (2) (viii-a) or (ix). The whole profits in this case are Rs. 45,082. It is contended on behalf of the assessee that under sec. 10 (2) (viii-a) or 10 (2) (ix) a deduction or allowance should be made from that sum in respect of the Chatterjis for the services they have rendered. It is suggested that this sum should be evaluated at the difference between Rs. 45,082 and Rs. 14,510. It is contended that difference represents bonus or commission for the services Messrs. Chatterjis have rendered; in other words that the proprietor would have had to pay that sum to any manager for the purpose of running the business so as to earn the profit of Rs. 45,082. It is doubtful whether this sum, which in the agreement is called remuneration, is either bonus or commission for services. If it is not bonus or commission it is not deductible. If it is bonus or commission, Sec. 10 (2) (viii-a) provides that any sum so allowed is only to be allowed when such sum would not have been payable to be employee as profits on dividend as it had not been paid as bonus or commission. In this case the sum in question has been allowed under the agreement so that it is not permissible to allow the deduction in question under Sec. 10 (2)(viii-a).
It is next contended that a similar sum should be allowed under Sec. 10 (2) (ix). It must be remembered that this sum is a hare of the profit and if allowed would be deemed to be a payment out of the profits. That position was considered by the Privy Council in the case of the Pondicherry Railway Co., Ltd. v. The Commissioner of Income Tax, Madras, and in the judgment which was delivered by Lord Macmillan it was said :
'A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits'.
Later in the same judgment his Lordship cited the words of Lord Halsbury in Gresham Life Assurance Society v. Styles where Lord Halsbury said :
'The thing to be taxed is the amount of profits or gains. The word profits I think is to be understood in its natural and proper sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realized and the meaning to my mind is rendered plain by the words payable out of profits.
Having regard to those words, it seems to me impossible to say that the allowance claimed can be made under Sec. 10 (2) (ix). Therefore the answer to the question put by the Commissioner to the Court is that the income properly assessable to income-tax of the assessee in respect of the business of Chatterji & Co., is the sum of Rs. 45,082 which was computed by the Income Tax Officer to be the full profits of the business.
I must say that I have come to this conclusion with considerable reluctance, because it appears to me that the assessee is being assessed to tax upon a sum of money which he never received in full and which he was not entitled to receive in full. But such is the operation, in my view, of the income-tax law in this particular case. The assessee has unfortunately made an agreement for the division of the trading surplus of his concern as between himself and his managers without having regard to the incidence of income-tax as laid down by the law.
The Income tax Commissioner is entitled to his costs-seven gold mohurs to Mr. Pal instructing the Advocates in this case. The fees for the Advocate appearing will be taxed in the same manner as of hearing of an appeal from a decree on the Original Side.
PANCKRIDGE, J. - I am of the same opinion.
At first it appeared to me that some difficulty might be caused by the fact that no part of the profits as such was received by the assessee. Under Sec. 3 of the Indian Income Tax Act a tax at the appropriate rate is charged subject to the provisions of the Act in respect of all income, profits, and gains of the preceding year of every individual, Hindu undivided family, company, firm and other association of individuals.
In Raja Bejoy Singh Dudhuria v. Commissioner of Income-Tax, Bengal, Lord Macmillan in delivering the judgment of the Judicial Committee observed at page 200 (of 60 I. A.) :
'When the Act by Sec. 3 subjects to charge all income of an individual, it is what reaches the individual as income which it is intended to charge'.
Having regard to those observations and the words of Sec. 3, I was disposed to think that it was possible that the provisions of Chapter III of the Act were to some extent limited by Sec. 3. If that were so, it is possible that the profits or gains of any business carried on by an assessee would not be taxable unless they were his profits or gains within the meaning of Sec. 3. I have come to the conclusion, however, that no such difficulty arises and that the provisions of Chapter III must be construed as they stand.
For example, it is clear that under Sec. 9 an assessee is liable in respect of the annual value of property of which he is the owner although in the year in question he had, in fact, derived no income or other profit or advantage from his ownership. There is accordingly no difficulty in arriving at the conclusion that the assessee in this case is liable to be taxed on the profits or gains of the business of Chatterjee & Co., if that business can properly be said to be carried on by him within the meaning of Sec. 10 (1). The section does not require that the business should be carried on by the assessee personally. Indeed, in modern commercial conditions businesses are often carried on by agents entrusted with wide powers by their principles, with whom regular communication is not practicable. To arrive at the conclusion whether or not the business in this case was carried on by the assessee, it is necessary to examine the agreement of the 16th of March, 1931. I have no doubt that in Sec. 10 (1) the Legislature contemplated that the business carried on by the assessee was the assessees business. At the same time I do not wish it to be brought that I express the opinion that in no circumstances can persons be assessable in respect of profits of a business which is not a business owned by them.
When I turn to the agreement, I find that the first clause in it is that the proprietor shall employ the managers as managers of his business for a period of five years. To my mind those words are apt to express an agreement by one party to employ another as agent to carry on the business belonging to the first party. If that is he legal position established by this agreement then, in my opinion, the assessee can rightly be described as carrying on the business, although he carried it on, not personally but through his agents.
The second clause appears to me to emphasize this aspect of the relationship, for that clause provides that the managers shall continue to carry on and conduct the business of the proprietor and secure all stevedoring and dubashing work for and on behalf of the proprietor in the name of the his firm 'Chatterjee & Co.' in respect of the specified lines of steamships.
The third clause gives the managers liberty to secure contracts with other lines of steamships for and on behalf of the proprietor and in the name of the firm of Chatterjee & Co.
The assessee attaches considerable importance to the fact that under the agreement he has no control of the conduct of the business. I will assume that this is so, although I may observe that there is no covenant on his part to abstain from interfering with the business and, as has been pointed out, he could at any time revoke the authority of the managers, although if he did so without justification he would be liable to make compensation by reason of the provisions of Sec. 205 of the Indian Contract Act. Moreover, in the case of a breach of one of the covenants entered into by the managers, the proprietor has the right to determine the agreement and to recover a sum of money by way of liquidated damages. In any event, however, I do not think that it can be said that the principal cannot properly be described as carrying on business through his agents merely because there is no provision in the agreement permitting the principal to interfere in the executive control of the business. I accordingly agree with my Lord the Chief Justice that this is a 'business carried on by the assessee' and that tax is payable by him in respect of the profits and gains of the business.
With regard to the claim of the assessee, on the assumption that he is liable to be assessed, to deduct the difference between the sum payable to him under the agreement and the net trading profit of the business under Sec. 10 (2) (viii-a) or, alternatively, under Sec. 10 (2) (ix), I am of opinion that the contention cannot prevail, It is not argued that payment of the balance of the profits under cl. (4) of the agreement is a 'bonus' within the meaning of sub-cl. (viii-a). I should find some difficulty in holding that they were commission, for the question naturally arises-commission upon what Personally I should find great difficulty in holding that the balance of the profits could be properly described as commission upon the profits. Apart from that I agree with my Lord that the sub-clause cannot apply because the net profits after payment of the expenses and the sum due to the proprietor under the agreement are payable under cl. (4) to the managers. In these circumstances, in my opinion, the condition that the commission must not be payable to the employee as profit or dividend if it has not been paid as commission is not fulfilled.
With regard to sub-cl. (ix), after the observations of the Judicial Committee in the case of Pondicherry Ry. Co. v. Commissioner of Income-tax, Madras, it is quite impossible to hold that the remuneration of the managers can be described as 'expenditure incurred solely for the purpose of earning profits or gains'. To my mind it is absurd to say that the whole or any part of the profits can be expenditure for the purpose of earning profits.
In these circumstances, I agree that the question propounded by the Commissioner of Income Tax, Bengal, should be answered in the manner formulated by my Lord.
Reference answered accordingly.