Civil Appeal No 305 of 1955
Appeal by special leave from the judgment and order dated March 31 1952 and March 21953 of the Bombay High Court in Income tax Reference No 48 of 1951
RJ Kolah Sohrab N Vakil and section N Andley for the appellant
CK Daphtary Solicitor General of India R Ganapathy Iyer and D Gupta for the respondent
April 19
The Judgment of the Court was delivered by SK DAS J
This is an appeal with special leave from the judgment and orders dated March 31 1952 and March 2 1953 of the High Court of Bombay in an Income tax Reference No 48 of 1951 made by the Income tax Appellate Tribunal Bombay under section 661 of the Indian Income tax Act 1922 and section 21 of the Excess Profits Tax Act 1940
We may shortly state the relevant facts first
The assessee Messrs Shoorji Vallabhdas and Company Bombay appellant herein is a firm registered under the Indian Income tax Act
It held the managing agency of three companies namely 1 the Malabar Steamship Company Ltd 2 the New Dholera Steamships Ltd and 3 the New Dholera Shipping and Trading Company Ltd for the periods material in this case
The appellant as also the aforesaid three managed companies were resident in the taxable territories within the meaning of the Indian Income tax Act
The business of the Malabar Steamship Company Ltd and of the New Dholera Steamships Ltd was to carry cargo in cargo boats which touched ports in British India Cochin State Travancore State and Saurashtra as they were then known
The appellant became the managing agent of the Malabar Steamship Company Ltd with effect from April 1 1943 and the firm consisted of Shoorji Vallabhdas and his two sons
Formerly Shoorji Vallabhdas alone was the managing agent of the Malabar Steamship Company Ltd and a managing agency agreement dated September 16 559 1938 was executed between the managing agent and the managed company and that agreement as varied by two subsequent deeds dated June 26 1942 and December 7 1943 constituted the contract of managing agency between the appellant and the managed company
Under the managing agency contract the remuneration payable to the appellant after September 1 1943 was expressed in the following terms  That the remuneration of the Managing Agents as and from 1st September one thousand nine hundred and forty three shall be ten per cent
10 on the freight charged to the shippers instead of annas fourteen per ton as mentioned in clause 1 of the said first supplemental agreement dated the 26th day of June 1942
 The managing agency agreement dated June 8 1946 between the appellant and the second managed company New Dholera Steamships Ltd provided inter alia as follows  That the Managing Agents shall as and by way of remuneration for their services in relation to the shipping business of the Company receive a commission of ten per cent
10 of the gross freight charged to the shippers andor passage money charged to the passengers
Such remuneration shall be payable to the Managing Agents at the place where the same is earned by the Company unless otherwise requested by the Managing Agents
The remuneration of the Managing Agents in relation to the business of the Company other than the shipping business shall be 10 ten per cent
on the gross profits that may be earned in such business
 It may be stated here however that no question arose as to the remuneration of the Managing Agent in relation to business other than shipping business because no business other than shipping business was carried on by the managed company during the relevant period
The third managed Company viz the New Dholera Shipping and Trading Company Ltd confined its business during the relevant accounting period to stevedoring and trading only
The managing agency agreement also dated June 8 1946 with the third 560 managed company provided inter alia for the payment of remuneration in the following terms  That the Managing Agents shall as and by way of remuneration for their services receive a commission at the rate of 25 per cent
of the net profits of the company
Such remuneration shall be payable to the Managing Agents at the place where the same is earned by the Managing Agents unless otherwise requested by the Managing Agents
 The appellant was assessed to income tax for three assessment years namely 1945 1946 1946 1947 and 1947 1948 the previous years being the financial years 1944 1945 1945 1946 and 1946 1947 respectively
The appellant was likewise assessed to excess profits tax under the Excess Profits Tax Act 1940 for the respective chargeable accounting periods which were also three in number namely April 1 1943 to March 31 1944 April 1 1944 to March 31 1945 and April 1 1945 to March 31 1946
The Income tax Officer and the Excess Profits Tax Officer assessed the appellant to tax in respect of the whole of the managing agency commission received from the three managed companies on the footing that the entire managing agency commission accrued or arose in British India
The appellant went up in appeal to the Appellate Assistant Commissioner from the assessment orders on the ground inter alia that a part of the managing agency commission received from the three managed companies accrued in the Cochin and Travancore States and not in British India and was therefore exempt from tax under the relevant provisions as they stood at the material time of the Indian Income tax Act 1922 and the Excess Profits Tax Act 1940
Thus the dispute was about the place of accrual of the in
come in question
As to the managed companies the Income tax authorities accepted the position that the profits of the three managed companies partly accrued in British India and partly in the Indian States but they did not accept the claim of the appellant that part of its managing agency commission from the three managed companies accrued or arose in the Cochin and Travancore States
The Appellate Assistant Commissioner by different orders all dated 561 May 41950 dismissed all the appeals
The Appellant went in appeal to the Income tax Appellate Tribunal
By its order dated December 11 1950 the Tribunal also dismissed the appeals
The appellant then made an application to the Tribunal to refer certain questions of law which arose out of its order to the High Court of Bombay
The Tribunal referred two such questions  1 Did a part of the managing agency commission earned by the assessee accrue or arise in the Cochin State inasmuch as the managing agency commission is computed on the basis of the freight earned by the managed company in the Cochin State or otherwise 2Did the whole or part of the dividend income accrue or arise in the Cochin State   The expression Cochin State in the questions obviously referred to both Cochin and Travancore States
On March 31 1952 the reference came up for consideration before the High Court and after hearing Counsel the High Court reformulated the first question as follows  Where the actual business of managing agency was done which yielded the commission which is sought to be taxed  The High Court directed the Tribunal to submit a supplemental statement of the case on the first question as reformulated
The second question was not pressed by learned counsel for the appellant and does not now survive
The Tribunal submitted a supplemental statement of the case on August 29 1952
The reference was finally heard on March 2 1953 and the High Court answered the question by saying that the actual business of the managing agency which yielded the commission was done at Bombay and not at Cochin
In arriving at the conclusion the High Court proceeded on the footing that the finding of the Tribunal in effect was that barring freight and collecting it at Cochin all other important and responsible work of managing the managed companies was done from the head office at Bombay
It has been argued on behalf of the appellant that the High Court erroneously reformulated the question 562 and that the real question of law is whether on the facts and circumstances of the case any part of the managing agency commission accrued outside British India so that the appellant would be entitled to an apportionment of the managing agency commission and to claim exemption from tax in respect of the commission which accrued outside British India under section 142c of the Indian Income tax Act 1922 as it then stood and the third proviso to section 5 of the Excess Profits Tax Act 1940
It has been further contended that in view of the findings of the Tribunal that a the commission earned was a percentage of the freight and passage money received by two of the managed companies in Cochin and Travancore States b a part of the commission was payable there and c a part of the services was also rendered by the appellant as managing agent in those States the High Court was in error in coming to its conclusion that the whole of the managing agency commission accrued or arose in Bombay
While we agree with learned counsel for the appellant that the real question in this case is whether any part of the managing agency commission accrued outside British India we do not agree with him that the High Court was wrong in reformulating the question
The Tribunal formulated the question as though the computation of the appellants remuneration on the basis of freight determined the place of accrual in this the Tribunal was in error and the High Court rightly pointed out that the test to be applied was not how the remuneration was to be computed or quantified but where the services were performed by the appellant which yielded the profits sought to be taxed
The High Court rightly reformulated the question on that basis and asked the Tribunal to submit a supplemental statement of the case on the materials available and placed before it by the appellant bearing on the question as reformulated by the High Court
What did the Tribunal find in this case as to the place where the actual business was done ie the services were performed by the appellant as managing agent which yielded the commission  After referring to the agreements relating to the computation of remuneration the Tribunal said in its order dated 563 December 11 1950 that a from time to time one of the partners of the appellant firm went to Cochin to attend to the business b the managed companies had an officer in Cochin and c the payments said to have been made to certain employees at Cochin were fictitious
In the supplementary statement the Tribunal pointed out that it was not known whether the  partner who went to Cochin went in his capacity as partner of the appellant firm or as a director of one of the managed companies the appellant firm had rented a flat at Cochin on Rs 20 per month and maintained some employees at Cochin for securing freight and the local office of the appellant firm at Cochin rented at Rs 10 per month maintained only one book containing cash journal and ledger
The Tribunal concluded its supplementary statement thus As for the staff maintained at Cochin it was alleged that K P Joshi and subsequently G H Narechania were paid Rs 18000 each year
The so called payment was disallowed by the Appellate Tribunal
It observed that debit entries in regard to the salaries paid by the asessee firm were collusive and fictitious
As for the presence of the partners of the assessee firm at Cochin it appears from the Appellate Assistant Commissioner s order that it was admitted before him that none of the partners of the firm ever attended to the company s business at Cochin or Alleppey
There is no clear evidence on the record as to what the assessee firm did as the managing agents of the three managed companies in other words how the assessee firm was carrying on the managing agency business
The partners of the assessee firm not necessarily all were on the Board of Directors of the managed companies
They held a large number of shares in the managed companies
The Malabar Steamship Co Ltd had an office of its own to secure freight 
The Cochin office of the assessee firm as far as one could make out did practically nothing except receive 10 of the gross freight at Cochin and retain the net income therefrom  564 fact reached by the Tribunal where did the commission payable to the managing agent accrue  It is well to remember that the problem in this case is not so much when the commission accrued as where it accrued though the question as to where and when may be interlinked
We think that normally the commission payable to the managing agents of a company accrues at the place where the services are performed by the managing agents
It was so held by this Court in K R M T T Thiagaraja Chetty and Company vs Commissioner of Income tax Madras No 21
The assessee in that case Thiagaraja Chettiar claimed that a portion of the commission or edited to it in the company s accounts accrued to it in the Indian States where the company had opened branches for selling yarn and as the commission was not remitted to British India it was not assessable to tax
This Court observed The short answer to this argument is that the business of the company was carried on in British India that the commission earned by the firm on the profits made by the company in the States arose out of one indivisible agreement to charge the reduced commission of 5 per cent
on the profits of the company and that the managing agents had been doing the business of the agency in British India and not in the States
It is not suggested that the managing agents performed any functions in the States
 The same question of the place of accrual arose in a somewhat different context in Commissioner of Income tax Bombay Presidency and Aden vs Chunilal B Mehta 2 where a person resident in British India and carrying on business there controlled transactions abroad and the question was it he was liable to pay tax upon profits derived by him from contracts made for the purchase and sale of commodities in various markets Liverpool London New York etc
The assessee disputed his liability in respect of such profits on the ground that they were not profits  accruing or arising in British India 
It was held that the mere fact that the profits made depended on the exercise in 1 2 565 British India of knowledge skill and judgment on the part of the assessee did not mean that the profits arose or accrued in British India and there was no necessity rising out of the general conception of a business as an Organisation that the profits of the business must arise only at one place namely the place of central control of the business
Delivering the judgment of the Privy Council in that case Sir George Rankin observed  The words accruing or arising the British India may be taken provisionally and in the first place as an ordinary English phrase which derives no special meaning from the Act
The alternative  accruing or arising in and the antithesis between these words and the words  received in  or  brought into  afford no safe inference of any special meaning
 Profit accruing or arising in British India  are words which in their ordinary meaning seem to require a place to be assigned as that at which the result of trading operation comes whether gradually or suddenly into existence         Their Lordships are not laying down any rule of general application to all classes of foreign transactions or even with respect to the sale of goods
To do so would be nearly impossible and wholly unwise
They are not saying that the place of formation of the contract prevails against everything else
In some circumstances it may be so but other matters acts done under the contract for example cannot be ruled out a priori
In the case before the Board the contracts were neither framed nor carried out in British India the High Court s conclusion that the profits accrued or arose outside British India is well founded
 A similar view was expressed in two earlier decisions 1 In Re The Aurangabad Mills Ltd where a reference was made to Commissioner of Taxation vs Kirk 1900 Appeal Cases page 588 and it was pointed out that the circumstance that the affairs of the company were directed from Bombay was not the determining test was the test was where the processes 1 Bom
1286 74 566 which yielded the income were carried out and that was outside British India 2 The Commissioner of Income tax Bombay Presidency vs Messrs Sarupchand Hukamchand of Bombay a firm 1 where the assessees acted as the secretaries treasurers and agents of a mill company registered at Indore outside British India and under the terms of agreement the assessees were entitled to charge and receive as selling agents commission on the gross sale proceeds of all cloth produced by the mill and the company opened a shop in Bombay for the sale of cloth produced by the mill which was managed by the assessees
The sale proceeds were sent to Indore and the assessees were paid the commission at Indore
The question arose whether the com mission was liable to be assessed to income tax in Bombay and it was held that the income accrued in British India
In Commissioner of Income tax Bombay vs Ahmedbhai Umarbhai and Co Bombay 2 this Court dealt with a case where a firm resident in British India carried on the business of manufacturing and selling groundnut oil it owned some oil mills within British India and a mill in Raichur in the Hyderabad State where oil was manufactured
One of the questions for decision was whether the profits of that part of the business viz the manufacture of oil at the mill in Raichur accrued or arose in Raichur within the meaning of the third proviso to section 5 of the Excess Profits Tax Act 1940
A majority of Judges held that the profits arose in Raichur and in a composite business the profits need not arise at one place only but may arise at more than one place and an apportionment may be necessary
This was not however a case of managing agency
We now come to the decision in Salt and Industries Agencies Ltd Bombay vs Commissioner of Income tax Bombay City3 a decision of the same learned Chief Justice in respect of which learned counsel for the appellant has made some very serious comments
The facts of that case were these  the assessees a company incorporated in Bombay were the managing agents of another company incorporated in Bombay and having its salt works at Aden and at Kandla in the Kutch 1 Bom
231 2  3 1950 567 where the board of directors met the books of account were maintained and various types of work connected with the company were done
Under the managing agency agreement the assessees were entitled to a commission at the rate of 12 12 per cent
per annum on the annual net profits of the company and in any event a minimum of Rs 30000 per annum
The agreement also provided that such portion of the commission as was attributable to the net profits of the company arising or accruing in the Indian State was to be paid to the managing agents in such State and that with regard to the minimum commission half of it was to be
paid in the State
In pursuance of the assessees  articles of association the board of directors passed a resolution delegating a particular director to guide the company s operation in the State of Kutch and during the year of account that director supervised the salt works at Kandla
The question was whether the sum of Rs 88O65 representing assessee s commission attributable to the salt works at Kandla accrued or arose at Kandla or in British India
First the learned Chief Justice referred to the test to be applied in order to determine where the profits of the assessee company accrued or arose and he said that the test was to find out where the actual business of the company was done which yielded the profits sought to be taxed
In that connexion he said  The work of the managing agents must be looked upon as a unit and not as divided up into so many different categories to each one of which a certain portion of the commission earned by the managing agents can be attributed or allocated
He then went on to consider when the right to managing agency commission arose in that case and came to the conclusion which was decisive in his opinion that it arose when all the accounts of the working of the company were submitted to the head office in Bombay and the profits were determined therefore the sum of Rs 88065 accrued or arose to the assessees in Bombay and not in the Indian State both for purposes of income tax and excess profits tax
568 Now learned counsel for the appellant has no quarrel with the decision in so far as it laid down that a the test is to find out where the business is actually done i e where the services are performed and b the right to managing agency commission arose in that case when all the accounts of the working of the company were submitted to the head office in Bombay and the profits were determined
Learned counsel has contended that in the case under our consideration the services were performed partly in British India and partly in Cochin and the right to managing agency commission arose as soon as the freight was paid at least in respect of two of the managed companies
He has submitted however that the learned Chief Justice was in error if he intended to lay down a rule of universal application that the work of the managing agents must always be looked upon as a unit and can never to be divided into categories
It is contended that the services of a managing agent can be performed at more than one place and legally it is possible to apportion the commission and attribute a part of it to services rendered outside the taxable territories
We consider it unnecessary in the present case to decide the question of performance of services and resultant apportionment if any on a theoretical or hypothetical basis because the case can be disposed of on the short ground that on the findings of the Tribunal the remuneration of the managing agents accrued at Bombay
We had referred earlier to the findings reached by the Tribunal
These findings show that except for an attempt at make believe no services were really performed by the appellant at Cochin
No doubt some freight was secured and paid for at Cochin
But the managed company also had an office at Cochin to secure freight
It has been argued that under the terms of the managing agency agreements the managing agents employed the staff etc and for two of the companies which carried on the cargo business securing freight was the principal part of the managing agency business
The High Court however rightly
pointed out 569  In our opinion it is not possible to read the managing agency agreement in that light
All that clause 2 of the agreement does is to lay down the standard by which the commission is to be computed and determined and it lays down two different standards one with regard to the shipping business and the other with regard to the other businesses but as far as the business of the managing agency is concerned their responsibilities and their duties are integrated duties and responsibilities which are set out in the different clauses of the agreement
It is impossible to contend that they had not to supervise control and manage the shipping business and as we have already said the business of a shipping company is vastly more detailed and responsible than the mere task of finding people to go by ship or send their goods by ship and for that purpose paying freight
Freight is merely the resultant profit which accrues to a shipping company
In order that that profit should result the company has got to have ships it has got to have seaworthy ships it has got to have sailors and officers it has got to look to the repairs of the ships the renovation of the ships and the replacements of the ships
All this is part of the shipping company s business and all this business had to be attended to by the managing agents and the question is where did they attend to this business
The finding on this question is clear
The finding in effect is that barring booking freight and collecting freight at Cochin all other important and responsible work of managing the managed companies was done from the head office at Bombay and not from Cochin
 On the findings reached the position in law is quite clear
The decisions to which we have referred clearly establish that normally the commission payable to the managing agents accrues at the place where the business is actually done that is where the services of the managing agents are performed
In this case the appellant practically performed all the services at Bombay and therefore the commission which it earned though computed on the percentage of freight andor passage money in respect of two of the managed companies accrued or arose in British 570 India
As to the third managed company whose business was stevedoring and trading and the remuneration was payable at 25 per cent
of the net profits there can be no doubt that the remuneration accrued at Bombay
Therefore the High Court of Bombay correctly answered the question against the appellant
The appeal accordingly fails and is dismissed With costs
Appeal dismissed


Summary:
N a coparcener of the Hindu undivided family of G carrying on business in Kathiwar then outside British India entered into a partnership with strangers in Bombay in 1944
A total sum of Rs 150000 was remitted to N from the undivided family 621 funds and utilised as capital in the partnership business
N s brother joined the partnership in Bombay
The partnership started another firm in Banaras and a third brother of N joined the firm
For the year of assessment 1945 46 the Income tax Officer held that the Hindu undivided family of G was resident in the taxable territories and included the said sum in the income of the family under section 41biii of the Indian Income tax Act 1922 as having been brought into or received in British India in the relevant year and made the assessment on that basis
On appeal by the assessee the Appellate Assistant Commissioner affirmed the assessment but the Income tax Appellate Tribunal holding that in the year of assessment the family was not resident in the taxable territories deleted the said sum from the assessed income
The decision of the Appellate Tribunal was upheld by the High Court in a reference under section 661 of the Act made at the instance of the appellant Held per section K Das and J L Kapur jj that the expres sion control and management  occurring in section 4Ab of the Indian Income tax Act means de facto control and management and the word  affairs  means the affairs of the Hindu un divided family capable of being controlled and managed by the said family as such
It is well settled that a Hindu undivided family cannot exercise any controlling power of management of a partnership entered into by a coparcener with strangers either under the  or under the Hindu law
The partnerships in the instant case could not therefore constitute affairs of the Hindu undivided family within the meaning of section 4Ab of the Act although the incomes from the said partnerships might belong to the said family and could not determine its residence
The place of accrual of income of a Hindu undivided family and the place of its residence need not necessarily be the same under the Indian Income tax Act 1922
VV R N M Subbayya Chettiar vs Commissioner of Incometax Madras   Kshetra Mohan Sannyasi Charan Sadhukhan vs Commissioner of Excess Profits Tax West Bengal and B R Naik vs Commissioner of Income
tax  referred to
Per Hidayatullah J Under section 4Ab of the Indian Incometax Act what are really affairs of the Hindu undivided family must be decided in the light of the Hindu law and not the law of Partnership
It is well settled that a coparcener of a Hindu undivided family cannot claim any item of property or share of his own and consequently where certain coparceners enter into partnerships with strangers by investing capital from out of the undivided family funds as in the instant case the income from the business must belong to the undivided family
Where the Hindu undivided family enters into a business activity in the taxable territories through its coparceners invests money and earns income even though the partnership which results may not be an 81 622  affair  of the family there is still a business activity resulting in the partnership and the partnership is the evidence of that business activity
This activity of a permanent character is sufficient for purposes of income tax law to constitute an affair of the family within the meaning of section 4Ab of the Indian Income tax Act
Approvier vs Rama Subba Aiyan 1866 11 MIA 75 Katama Natchiar vs Rajah of Shivaganga  Mangalchand Mohanlal Inre  Murugappa Chetty  Sons vs Commissioner of Income tax and Kaniram Hazarimull vs Commissioner of Income tax  referred to
VV R N M Subbayya Chettiar vs Commissioner of Income tax Madras   considered
Control and management in the case of a Hindu undivided family can be exercised by one or more of its coparceners even though partly and if such coparceners reside in the taxable territories and manage its affairs the family must be treated as resident in such territory