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TMI Blog1952 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ed being registered under Section 26A of the Act the payment to Messrs. Kani Ram Hazari Mal by way of sales commission is allowable expense or not? 2. The applicant had at first stated the above questions in substance in the form of grounds of appeal to which the learned Commissioner took objection by his written reply dated the 9th November, 1944. The objection of the learned Commissioner is right that the applicant does not state the questions of law to be referred. The application for reference should be in a proper and correct form. The learned counsel for applicant has appreciated the position and has put in an application for amendment in order to remove the difficulty. We have permitted the applicant to amend the application. The questions stated above are the questions sought to be referred. It is common ground that question No. (1) is a question of law and we proceed to state the case. The Tribunal had before it an appeal for decision under Section 33(4) of the Act which was disposed of by an order dated 29th May, 1944. The applicant does not challenge any of the findings of fact arrived at in the said order but he only wants the questions of law that emerge therefrom to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a 'firm'. The definition of partnership, therefore, contains three elements: first, there must be an agreement entered into by all the persons concerned; secondly, the agreement must be to share profits of the business and thirdly, that the business must be carried on by all or any of the persons concerned, acting for all. In law, therefore, the element to share profits of business must be present before a group of associates can be held to be partners. In the present case, the firm came into existence with a view (1) to floating a private limited company called the Shankar Sugar Mills, Ltd., with a capital of 13 lakhs out of which a sum of 12 lakhs was to be subscribed by the partners according to their shares in the firm, and (2) to securing its managing agency. The procurement of the managing agency forms an integral part of the purpose for which the firm came into being. Clause 1 of the partnership deed provides as follow:- "The business of the partnership shall be to float and obtain the managing agency of the proposed Shankar Sugar Mills Ltd., and shall be carried on at Captainganj, District Gorakhpur, and at such other place or places as the partners may fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed penalty for concealment of the names of a trade or for wilful misrepresentation of the nature or amount of the debt or claim of any creditor. We do not think that it follows from Section 2 of the Companies Act that a managing agent is a servant of the company so as to attract the operation of Section 7 of the Income-tax Act. We, therefore, hold that income from the source in question has been rightly treated as the profits and gains of a business and has been properly assessed as such." Opinion of the Tribunal.-The opinion of the Tribunal is that assessment should be made under the head "business" as was held in Doraiswami Iyer and Co., In re [1920] 1 I.T.C. 93 at p. 96:- "Obviously it was never intended that persons in the position of the petitioners acting as agents, secretaries and treasurers, or agents of a mill company under the usual form of agreement and remunerated by a commission which would depend either on the out-turn or on the amount of profits, were to be considered as carrying on a business excepted under Schedule 1. Nor can it be said that the petitioners are wholetime officers or servants of the business, because all that the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, as given in the statement of the case, are that the assessee is a firm registered 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 he to float and obtain the Managing Agency of the proposed Shangar 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 busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 6 of the Indian Income-tax Act, or earning profits and gains of business, profession or 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht being granted by an agreement with the company. The second difference is that a manager must always work 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 manager 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 wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments appointing the assessee as managing agents of Messrs. Shankar Sugar Mills, Limited, does not make it clear whether the 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 [1946] 14 I.T.R. 606, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g agents of Messrs. Shankar Sugar Mills, Limited, the point has to be examined on other considerations. It appears to us that a very important and significant point that has to be considered is that the assessee is 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, Limited [1921] 12 Tax Cas. 181 at p. 202, Lord Sterdale, M.R., had to consider the case of a work being done by a company in order to decide whether in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y entered into by persons is called a "firm". The Act, therefore, envisages the creation of a firm only for the purpose of carrying on a business which includes every trade, occupation and profession. Whenever, therefore, a firm comes into existence, the purpose of the firm mast 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m argued that in this case, the firm was constituted merely for the purpose of floating a sugar company and taking its managing agency and that there is nothing to indicate that the floating of the company and taking over of its managing agency were to be carried on by the firm as a. regular business involving continuity of activity. The mere taking over of managing agency of one 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom that time forward there can be no doubt that, if I am right in construing the word 'business' in the Partnership Act of 1890 as relating not merely to a life-long or a universal business or a long undertaking, but to any separate commercial adventure in which people may embark, this was a contract which came within Section 2, sub-section 3(d), of the Act with the liabilities imposed in such cases and possibly in accordance with a decision in the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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