Agency receipts treated as business profits when agent bears commercial risk; management payments taxable only as expense reimbursements.

Whether receipts from a selling agency are business profits or salary turns on contractual rights and obligations: where the agent selects staff, contracts independently, bears commercial risks (payment for goods, liability for unsold stock), and earns commission, receipts constitute business profits assessable to excess profits tax. Payments for managing an owner operated retail shop are salary unless they demonstrably reimburse actual expenses; only the reimbursed portion must be added to the agent's business income for assessment, the excess being salary. Outcome: selling agency commission is assessable business income; shop management payments are assessable only to the extent they reimburse actual expenses.

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Issues: (i) Whether the receipts of Messrs. L. N. Gadodia and Company from the selling agency of the Cawnpore Cotton Mills Company for the chargeable accounting period 30 Oct 1940 to 19 Oct 1941 are income, profits or gains from a business liable to excess profits tax; (ii) Whether the receipts of Rs. 27,030-15-0 received by the firm for running or management of the retail cloth shop of the Cawnpore Cotton Mills Company are income, profits or gains from a business liable to excess profits tax, and if not, whether any part must be brought into account as business income by way of reimbursement of expenses.

Issue (i): Whether the selling agency receipts are business profits liable to excess profits tax or are salary.

Analysis: The Court examined the written agreement governing the selling agency and identified terms showing independent agency activity: power to choose and appoint employees, liability to pay discounts and brokerage out of commission, entitlement to commission on direct sales, obligation to pay for goods on delivery, liability to take delivery and bear consequences of unsold stock, and control over establishment and organisation subject only to limited approvals. Although the corporation retained some supervisory rights (price approval, requirement of attendance, retention of a manager with its consent), the overall contractual rights and obligations indicated that the firm carried on the selling agency as its own business, bearing commercial risks and receiving commission rather than merely receiving remuneration as a servant.

Conclusion: The receipts from the selling agency are income, profits or gains from the firm's business and are liable to assessment to excess profits tax; conclusion against the assessee.

Issue (ii): Whether the Rs. 27,030-15-0 paid for running/management of the retail shop is business income liable to excess profits tax or salary, and whether any portion must be treated as reimbursement of expenses and added to business income.

Analysis: The Court found that the retail shop was owned by the Corporation and that there was no written agreement defining the firm's rights or entitlement to profits; the firm's remuneration depended on the Corporation's discretion and the profits belonged to the Corporation. The Tribunal also found that the sum paid exceeded the actual expenses for advertising and travelling salaries for the entire business, indicating that only the portion actually reimbursing expenses should be regarded as affecting the firm's business income. The Tribunal did not determine the exact reimbursed amount; the Court held that the excess portion is salary (not business income) while the portion actually reimbursing expenses must be added to the firm's selling-agency business income for assessment purposes.

Conclusion: The amount received for running the retail shop is not business income liable to excess profits tax except to the extent that part of it reimbursed actual expenses incurred (which must be added to business income); overall conclusion partly in favour of the assessee on this issue.

Final Conclusion: The reference is answered by holding that (i) the selling-agency receipts are business profits assessable to excess profits tax, and (ii) the receipts for management of the retail shop are not business profits assessable to excess profits tax except that the portion constituting reimbursement of actual expenses must be included in the firm's business income; no order as to costs.

Ratio Decidendi: Where contractual terms show an agent bears commercial risks, receives commission and retains control over the conduct of the agency (selection of staff, contractual dealings, liability for goods and unsold stock), receipts are business profits; payments for management of an owner-operated enterprise are salary unless demonstrably limited to reimbursement of actual expenses, in which case only the reimbursed portion affects business income.

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