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TMI Blog1952 (3) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... tered under the Indian Partnership Act, having come into existence through a deed of partnership which mentioned that it was being constituted with a view to floating, a private limited company to be called the Shankar Sugar Mills, Limited, with a capital of 13 lacs out of which a sum of 12 lacs of rupees was to be subscribed by the partners according to their shares in the firm and to securing its managing agency. The partnership deed provided that: "The business of the partnership shall be to float and obtain the Managing Agency of the proposed Shankar Sugar Mills, Limited, and shall be carried on at Captainganj, District Gorakhpur, and at such other place or places as the partners may from time to time agree upon." In pursuance of this deed of partnership, a private company called the Shankar Sugar Mills, Limited, was actually floated and the managing agency of the company was obtained by the assessee-firm. According to the Memorandum and Articles of Association of the Shankar Sugar Mills, Limited, the assessee-firm styled as Inder Chand Hari Ram or their assignees or successors in business were entitled to remain and continue as managing agents for the period from the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r vocation mentioned in clause ( iv ) of that section. We may first take up the question of the capacity in which the firm worked as managing agents of Messrs. Shankar Sugar Mills, Limited. In clause (9A) of sub-section (1) of section 2 of the Indian Companies Act, a managing agent is defined as meaning. "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." This definition of managing agent makes it clear that a managing agent need not necessarily be a servant of the company whose affairs are managed by that managing agent. All that is needed is that the managing agent should have an agreement with the company under which he receives the right of management of the whole affairs of the company thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the control and direction of the directors whereas the control and direction of the directors over the managing agent may be modified by the terms of the agreement. The third distinction between a managing agent and a manager is that while a managing agent may be a person, a firm or a company, the manager can be only a person. The explanation added to the definition of managing agent further lays down that if a person happens to occupy the position of a managing agent, he shall be regarded as such even though he may call himself a manger and shall thereupon not be regarded as a manager. These definitions of manager and managing agent make it quite clear that the managing agent occupies a position which is normally not the position of a servant of the company. No servant can claim the management of the company as of right, nor can a manager do so. The managing agent, on the other hand, manages the affairs of the company by virtue of a right acquired by him by an agreement with the company. The circumstance that the managing agent receives an allowance for the work done as such is certainly an incident which also occurs in the case of a servant but the existence of one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e work as managing agents was to be done by the assessee as a business of theirs or as a servant. Learned counsel for the assessee referred us to a few cases in support of his contention that persons otherwise connected with a company in the capacity of a director or a managing agent may also be working in the capacity of servants of the company. In Commissioner of Income-tax, Bombay v. L. Armstrong Smith, it was held that "a director of a company as such is not a servant of the company and the fees he receives are by way of gratuity. But that does not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company." In that case, a business carried on by the assessee was taken over by a private limited company in which the assessee held most of the shares while two of his nominees held the rest. The articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned office or died or ceased to hold at least one share in the capital of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a firm constituted under the Indian Partnership Act which limits the purposes for which a firm can be brought into existence. This is the consideration that weighed with, the Income-tax Appellate Tribunal for holding that the firm, in working as managing agents of Messrs. Shankar Sugar Mills Limited, was carrying on a business. In Commissioners of Inland Revenue v. The Korean Syndicate, Limitted, Lord Sterndale, M.R., had to consider the case of a work being done by a company in order to decide whether it constituted business of the company. In dealing with this question, he held as follows: "A great deal of argument was addressed to us to this effect; that you could not possibly say that in this case if the respondents were an individual, he was carrying on a business, and that there can be no difference between an individual and a limited company. Now I am sorry to say I do not assent to either of those two propositions. I do not think it would have been at all clear that if the respondents were an individual, he was not carrying on a business; and for this reason. You would have to see what he was doing and why he was doing this, and if he was doing it under the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be business. The word "business" as defined under the Partnership Act does not include employment as a servant. In this case the assessee-firm, according to the deed of partnership, was constituted for doing the business of floating and obtaining the managing agency of the proposed Shankar Sugar Mills Limited. The partnership deed went on to recite that -this business of the firm was to be carried on at Captainganj, District Gorakhpur, and at such other place or places as the partners may, from time to time, agree upon. Avowedly, therefore, the assessee firm was to take up the work of floating and obtaining the managing agency of Messrs. Shankar Sugar Mills Limited, as the business to be carried on by the partnership. We have already expressed our opinion that the work of managing agents of a company can be carried on by a servant as well as a business by a person working as managing agent. If the managing agent happens to be an individual, he can take up the work of a managing agent in either of the two capacities of a servant or as a personal business of his own. In the case of a firm, which can be constituted only for the purpose of sharing profits of a business, the work of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company could not, therefore, be held to be the business of the firm. Learned counsel relied on the remarks of Rowlatt, J., in Commissioners of Inland Revenue v. Marine Steam Turbine Company Limited to the effect that "the word 'business', however, is also used in another and a very different sense, as meaning an active occupation or profession continuously carried on, and it is in this sense that the word is used in the Act with which we are here concerned." These remarks were made by Rowlatt, J., when considering the question whether the profits in respect of which the appellants made a claim to excess profits duty were profits arising from any "business" carried on in that country by the respondent company within the meaning of those provisions. In the case of Commissioner of Income-tax, Bengal v. Shaw Wallace and Company their Lordships of the Privy Cruncil held as follows: "By section 2 (4) business 'includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture'. The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court of Appeal in some others under section 3 of the same Act. It has been suggested to me that 'business' does not mean an isolated adventure, but that it means the regular trade of people even though they may have two or three separate trades. I see no reason for construing it in this way. I look at section 1, sub-sections (1), (2) and (3), and the general trend of commercial law on this subject, and I come to the conclusion that there is no reason for limiting 'business' in the way suggested by the creditor." In the present case also, a single venture of floating the Shankar Sugar Mills Limited, securing its managing agency and subsequently managing its affairs was clearly intended by the partners of the assessee-firm to be an adventure in the nature of a business by them. We are, therefore, not impressed by the argument that because the assessee-firm had not taken up the business of promoting companies and securing managing agency in general, it was not carrying on any business when it promoted one single company, secured its managing agency and thereafter managed its affairs in the capacity of managing agents. The second part of the question referred to us relates to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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