TaxTMI 
TaxTMI 
1952 (3) TMI 36
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....er in face of the partnership deed 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 quest....
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....o be referred to the High Court. The findings of fact arrived at by the predecessor Bench and the reasons therefor incorporated in paragraph 4 of the order which is reproduced below:- "Section 4 of the Partnership Act defines 'partnership' as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively 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 p....
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....ion 2 of the Indian Companies Act includes a "managing agent", the assessee must necessarily be taken to be a servant of the company. Section 2(1) of the Act provides:- "In this Act unless there is anything repugnant in the subject or context- (ii) 'Officer' includes any Director, Managing Agent, Manager or Secretary........" It would thus appear that the definitions are confined to the purposes of the Act. As for instance, under Section 64 of the Companies Act, a managing agent, as an officer of the company, is subject to the prescribed 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 ....
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....sessment years, viz., 1940-41 and 1941-42. Since the question that arose was common to both the references, the Income- tax Appellate Tribunal, Allahabad, made one consolidated order of reference and, by it, referred the following question to this Court for opinion:- "Whether, in the circumstances of the case, the income derived by the applicant-firm both as managing and sole agents of Messrs. Shankar Sugar Mills, Limited, Captainganj, Gorakhpur, was rightly assessed under Section 10 or whether the income is assessable under Section 7 of the Indian Income-tax Act?" The facts relating to these references, 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....
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....ach of the years as income from business under Section 10 of the Indian Income-tax Act. The contention of the assessee-firm that the income received by it for working as managing agents as well as for working as sole agents of Messrs. Shankar Sugar Mills, Limited, should be treated as salary and assessed under Section 7 of the Act was rejected by the Income-tax Officer. The assessee appealed to the Appellate Assistant Commissioner of Income-tax and, on dismissal of the appeals, to the Income-tax Appellate Tribunal. The latter also dismissed the appeals and consequently, the assessee The only question to be decided in these references is whether the assessee-firm, in working as managing and sole agents of Messrs. Shankar Sugar Mills, Limited, was working as a servant earning salaries falling within clause (i) 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....
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....to the control and direction of the directors, has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not." It is clear that there are only two main distinctions between a manager and a managing agent. The chief distinction is that a manager need only have the management of the whole affairs of the company whereas the managing agent is entitled to the management of the whole affairs of the company which means that any person, who actually happens to be managing the affairs in any capacity whatsoever, will be deemed to be a manager whereas to be a managing agent, he must be entitled, as of right, to the management of the affairs of the company, the right 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 pers....
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....rm Messrs. Inderchand Hari Rain, as it is at present constituted or as it may be from time to time constituted or their assigns or successors in business whether under the same or any other name, style or firm whether incorporated or unincorporated, shall be entitled to remain and continue as such managing agents (unless it be resigned by them) for a period of thirty-one years certain from the date of the incorporation of the company, and thereafter until they be removed therefrom by a special resolution of the shareholders of the company................" These words used in the Articles of Association do not give any indication that the assessee firm was being appointed managing agents as servants and not merely as agents under a contract. In this case, therefore, a consideration of the documents 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 ....
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....director an employee of the company; but independently of such special contract, a director of a company is not the employee of a company" in support of his arguments that, by contractual relationship between the company and the director, a director can be constituted an employee of the company. This view is also of no assistance to the assessee in the present case where, as we have said before, there is no evidence at all to show that the agreement between the assessee and Messrs. Shankar Sugar Mills Limited, or the Articles or Memorandum of Association of the latter created any contractual relationship by which the assessee was constituted an employee of the company. In this case, therefore, in order to determine the status of the assessee while working as managing 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 fo....
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.... J., in Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited* followed the above view of Lord Sterndale, M.R., and held that "when you are considering whether a certain form of enterprise is carrying on business or not, it is material to look and see whether it is a company that is doing it." Under section 4 of the Indian Partnership Act (No. IX of 1932), partnership is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Under this Act, therefore, the relationship of partners can be brought into existence only when there is a "business" carried on by all or any of them acting for all partners. "Business" under the Act is defined as including every trade, occupation and profession. The partnership collectively 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....
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....tion and profession. The difference between the definitions of the word "business" in the Indian Partnership Act and in the Indian Income-tax Act is, therefore, of no consequence. The profits of a business using the word "business" as defined in the Indian Partnership Act would all be profits of a business, profession or vocation falling within Section 10 of the Indian Income-tax Act. Consequently, the profits, which the assessee-firm earned from their business of working as managing agents of Messrs. Shankar Sugar Mills, Limited, must be held to be their profits or gains from business, profession or vocation assessable to income-lax under Section 10 of the Indian Income-tax Act. Learned counsel for the assessee-firm 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 rel....
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....and securing of its managing agency. After the managing agency had been secured, the assessee-firm had to and did actually continue to work as managing agents of Messrs, Shankar Sugar Mills, Limited, and continued to manage its affairs. This continuous management of the affairs of the company was precisely the business of the assessee-firm which was one of the purposes of its formation under the Indian Partnership Act. In this case, therefore, there was a continuity of the business of the firm. Secondly, ever a single venture can sometimes constitute the business of a firm or a company. In In re Abenheim; Ex parte Abenheim**, Phillimore, J., held:- "I think that from 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 decisi....