Appeals Nos 292 and 312 of 1950
Appeals from the Judgment and Order of the High Court of Judicature at Hyderabad Ansari Qamar Hasan and Manohar Pershad JJ in Cases Nos 180 181 of 1954 F Ved Vyas section K Kapur and Ganpat Rai with him for the appellant
M C Setalvad Attorney General for India Porus A Mehta with him for the respondent
April 1
The Judgment of the Court was delivered by BHAGWATI J
These are two appeals from the judgment and decision of the High Court of Judicature at Hyderabad answering certain questions referred at the instance of the appellants by the Commissioner of Excess Profits Tax Hyderabad and adjudging the liability of the appellants for excess profits tax in regard to the amounts recieved by them as remuneration from the Dewan Bahadur Ramgopal Mills Com pany Ltd as its Agents
The Mills Company was registered on the 14th February 1920 at Hyderabad in the then territories of His Exalted Highness the Nizam
The appellants were registered as a private limited company at Bombay on 395 agreement was entered into between the Mills Company
and the appellants appointing the appellants its Agents for a period of 30 years on certain terms and conditions therein recorded
The appellants throughout worked only as the Agents of the Mills Company and for the Fasli years 1351 and 1352 they received their remuneration under the terms of the Agency agreement
A notice was issued under section 13 of the Hyderabad Excess Profits Tax Regulation by the Excess Profits Tax Officer calling upon the appellants to pay the amount of tax appertaining to these chargeable account  ing periods
The appellants submitted their accounts and contended that the remuneration received by them from the Mills Company was not taxable on the ground that it is was not income profits or gains from business and was outside the pale of the Excess Profits Tax Regulation
This contention of the appellants was negatived and on the 24th April 1944 the Excess Profits Tax Officer made an order assessing the income of the appellants for the accounting periods 1351 and 1352 Fasli at Rs 8957 and Rs 83768 respectively and assessed the tax accordingly
An appeal was taken by the appellants to the Deputy Commissioner of Excess Profits Tax who disallowed the same
An application made by the appellants under section 482 for statement of the case to the High Court was rejected by the Commissioner and the appellants filed a petition to the High Court under section 483 to compel the Commissioner to state the case to the High Court
An order was made by the HighCourt on this petition directing the Commissioner to state the case and the statement of the case was submitted by the Commis sioner on the 26th February 1946
Four questions were referred by the Commissioner to the High Courts as under 1 Whether the Petitioner Company is a partnership firm or a registered firm  2 Whether under the terms of the agreement the petitioner is an employee of the Mills Company or is carrying on business  396 3Whether the remuneration received from the MILLs is on account of service or is the remuneration for business  4Whether the principle of personal qualification referred to in section 2 clause 4 of the Excess Profits Regulation is applicable to the Petitioner Company  These questions were of considerable importance and were referred for decision to the Full Bench of the High Court
The Full Bench of the High Court delivered their judgment the majority deciding the questions 2 and 3 which were the only questions considered determinative of the reference against the appellants
The appellants appealed to the Judicial Committee
But before the Judicial Committee heard the appeals there was a merger of the territories of Hyderabad with India
The appeals finally came for hearing before the Supreme Court Bench at Hyderabad on the 12th December 1950 when an order was passed transferring the appeals to this Court at Delhi
These appeals have now come for hearing and final disposal before us
The questions 1 and 4 which were referred by the Commissioner to the High Court at Hyderabad have not been seriously pressed before us
Whether the appellants are a partnership firm or a registered company the principle of exclusion of the income from the category of business income by reason of its depending wholly or mainly on the personal qualifications of the assessee would not apply because the income could not be said to be income from profession and neither a partnership firm nor a registered company as such could be said to be possessed of any personal qualifications in the matter of the acquisition of that income
The principal questions which were therefore argued before the High Court at Hyderabad and before us were the questions 2 and 3 which involved the determination of the position of the appellants whether they were servants or agents of the Mills Company and the determination of the character of their remuneration whether it was wages or salary or income profits or gains from business
397 The appellants were registered as a private limited company having their registered office in Bombay and the objects for which they were incorporated were the following 1To act as agents for Governments or Authorities or for any bankers manufacturers merchants shippers Joint Stock Companies and others and carry on all kinds of agency business
2To carry on in India and elsewhere the trade or business of merchants importers exporters in all  their branches etc
etc 
Under Article 115 of the Articles of Association of the Mills Company the appellants and their assigns were  appointed the agents of the Company upon the terms provisions and conditions set out in the Agreement referred to in clause 6 of the Company s Memorandum of Association
Article 116 provided that the general management of the business of the Company subject to the control and supervision of the Directors was to be in the hands of the Agents of the Company who were to have the power and authority on behalf of the Company subject to such control and supervision to enter into all contracts and to do all other things usual necessary and desirable in the management of the affairs of the Company or in carrying out its objects and were to have power to appoint and employ in or
for the purposes of the transaction and managment of the affairs and business of the Company or otherwise for the purposes thereof and from time to time to remove or suspend such managers agents clerks and other employees as they thought proper with such powers and duties and upon such terms as to duration of employment remuneration or otherwise as they thought fit and were also to have powers to exercise all rights and liberties reserved and granted to them by the said agreement referred to in clause 6 of the Company s Memorandum of Association including the rights and liberties contained in clause 4 of the agreement
Article 1 18 authorised the agents to sub delegate all or any of the powers authorities and discretions for the time being vested in them and in particular 398 from time to time to provide by the appointment of an attorney or attorneys for the management and transaction of the affairs of the Company in any specified locality in such manner as they thought fit
The Agency agreement which was executed in pursuance of the appointment under Article 115 provided that the appellants and their assigns were to be the Agents of the Company for a period of 30 years from the date of registration of the Company and they were to continue to act as such agents until they of their own will resigned
The remuneration of the appellants as such Agents was to be a commission of per cent on the amount of sale proceeds of all yarn cloth and other produce of the Company including cotton grown which commission was to be exclusive of any remuneration or wages payable to the bankers Solicitors engineers etc who may be employed by the appellants for or on behalf of the Company or for carrying on and conducting the business of the Company
The appellants were to be paid in addition all expenses and charges actually incurred by them in Connection with the
business of the Company and supervision and management thereof and the appelants were entitled to appoint any person or persons in Bombay to act as their Agents in Bombay and any other places in connection with the business if the Company
Clauses 3 and 4 of the agency agreement are important and may be set out in extenso  3
Subject to the control and supervision of the Directors the said Lachminaravan Ramgopal and Son Limited shall have the general conduct and management of the business and affairs of the company and shall have on behalf of the company to acquire by purchase lease or otherwise lands tenements and other Buildings and to erect maintain alter and extend factores ware houses engine house and other buildings in Hyderabad and  elsewhere in the territories of His Exalted Highness the Nizam and in India and to purchase pay for sell resell and repurchase machinery engines plant raw cotton waste jute wool and 399 other fibres and produce stores and other materials and to manufacture yarn cloth and other fabrics and to sell the same either in the said territories as well as elsewhere in India and either on credit or for cash or for present or future delivery and to execute become parties to and where necessary to cause to be registered all deeds agreements contracts receipts and other documents and to insure the property of the Company for such purposes and to such extent and in such manner as they may think proper and to institute conduct defend compromise refer to arbitration and abandon legal and other proceedings claims and disputes in which the Company is concerned and to appoint and employ discharge re employ or replace engineers
managers retain commission dealers muccadums brokers clerks mechanics workmen and other officers and servants with such powers and duties and upon such terms as to duration of office remuneration or otherwise as they may think fit  and to draw accept endorse negotiate and sell Bills of Exchange and Hundies with or without security and to receive and give receipts for all moneys payable to or to be received by the company and to draw cheques against the moneys of the company and generally to make all such arrangements and do all such acts and things on behalf of the Company its successors and assignsas may be necessary or expedient and as are not specifically reserved to be done by the Directors
4The said Lachminarayan Ramgopal  Son Ltd shall be at liberty to deal with the Company by way of sale to the Company of cotton all raw materials and articles required for the purpose of the Company and the purchase from the Company of yarn cloth and all other articles manufactured by the Company and otherwise and to deal with any firm in which any of the shareholders of the said Lachminarayan Ramgopal  Son Ltd may be directly or indirectly concerned provided always such dealings are sanctioned passed or ratified by the Board of Directors either before or after such dealings
Clause 8 provided that two of the members for the time being of the appellants were at the option of the 400 appellants to be the ex officio Directors of the Company and clause 9 empowered the appellants to assign the agreement and the rights of the appellants thereunder subject to the approval and sanction of the Board to any person firm or Company having authority by its constitution to become bound by the obligations undertaken by the appeallants
No materials other than these were placed by the appellants either before the Income tax Authorities or the High Court and the questions that arise before us have to be determined only on these materials
If on the construction of these documents we arrive at the conclusion that the position of the appellants was not that of servants but the agents of the Company the further question would have to be determined whether the activities of the appellants amounted to the carrying on of business
If they were not the servants of the Company the remuneration which they received would certainly not be wages or salary but if they were agents of the Company the question would still survive whether their activities amounted to the carrying on of business in which case only the remuneration which they received from the Company would be income profits or gains from business
The distinction between a servant and an agent is thus indicated in Powell s Law of Agency at page 16  aGenerally a master can tell his servant what to do and how to do it
b Generally a principal cannot tell his agent how to carryout his instructions
c A servant is under more complete control than an agent and also at page 20 aGenerally a servant is a person who not only receives instructions from his master but is subject to his master s right to control the manner in which he carries out those infructions
An agent receives his principal s instructions but is generally free to carry out those instructions according to his own discretion 401 B Generally a servant qua servant has no authority to make contracts on behalf of his master  Generally the purpose of employing an agent is to authorise him to make contracts on behalf of his principal
c Generally an agent is paid by commission upon effecting the result which he has been instructed by his principal to achieve
Generally a servant is paid by wages or salary
The statement of the law contained in Halsbury s Laws of England Hailsham Edition Volume 22 page 113 paragraph 192 may be referred to in this connection  The difference between the relations of master and servant and of principal and agent may be said to be this a principal has the right to direct what work the agent has to do but a master has the further right to direct how the work is to be done
 The position is further clarified in Halsbury s Laws of England Hailsham Edition Volume 1 at page
193 article 345 where the positions of an agent a a servant and independent contractor are thus distinguished   An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor
A servant acts under the direct control and supervision of his master and is bound to conform to all reasonable orders given him in the course of his work an independent contractor on the other hand is entirely independent of any control or interference and merely undertakes to produce a specified resulted employing his own means to produce that result
An ament though bound to exercise his authority in accordance with all lawful instructiOns which may be given to him from time to time by his principal is not subject in its exercise to the direct control or supervision of the principal
An agent as such is not a servant but a servant is generally for some purposes his master s implied agent the extent of the agency depending upon the duties or position of the servant  Considering the position of the appellants in the light of the above principles it is no doubt true that the 52 402 appellants were to act as the agents of the Company and carry on the general management of the business of the Company subject to the control and supervision of the Directors
That does not however mean that they acted under the direct control and supervision of the Directors in regard to the manner or method of their work
The Directors were entitled to lay down the general policy and also to give such directions in regard to the management as may be considered necessary
But the day to day management of the business of the Company as detailed in Article I 1 6 of the Articles of Association and clause 3 of the Agency Agreement above set out was within the discretion of the appellants and apart from directing what work the appellants had to do as the agents of the Company the Directors had not conferred upon them the further right to direct how that work of the general management was to be done
The control and supervision of the directors was a general control and supervision and within the limits of their authority the appellants as the agents of the Company had perfect discretion as to how that work of general management was to be done both in regard to the method and the manner of such work
The appellants for instance had perfect latitude to enter into agreements and contracts for such purpose and to such extent and in such manner as they thought proper
They had the power to appoint employ discharge reemploy or replace the officers and servants of the Company with such powers and duties and upon such terms as to duration of office remuneration or otherwise as they thought fit
They had also the power generally to make all such arrangements and to do all such things and acts on behalf of the Company as might be necessary or expedient and as were not specifically reserved to be done by the Directors
These powers did not spell a direct control and supervision of the Directors as of a master over his servant but constituted the appellants the agents of the Company who were to exercise their authority subject to the control and supervision of the Directors but were not subject in such exercise to the direct control or supervision of the principals
The liberty given to the appellants under clause 4 of the Agency 403 Agreement to deal with the Company by way of sale and purchase of commodities therein mentioned also did not spell a relation as between master and servant but empowered the appellants to deal with the Company as Principals in spite of the fact that under clause 8 of the Agreement two of their members for the time being were to be the ex officio Directors of the Company
The power to assign the Agreement and the rights of the appellants thereunder reserved to them under clause 9 of the Agency Agreement though subject to the approval and sanction of the Board was hardly a power which could be vested in a servant
There was further the right to continue in employment
as the agents of the Company for a period of 30 years from the date of the registration thereof and thereafter until the appellants of their own will resigned which also would be hardly consistent with the employment of the appellants as mere servants of the Company
The remuneration by way of commission of 2 12 per cent
of the amount of sale proceeds of the produce of the Company savoured more of the remuneration given by a principal to his agent in the carrying out of the general management of the business of the principal than of wages or salary which would not normally
be on such a basis
All these circumstances together with the power of sub delegation reserved under Article 118 in our opinion go to establish that the appellants were the agents of the Company and not merely the servants of the Company remunerated by wages or salary
Even though the position of the appellants qua the Company was that of agents and not servants as stated above it remains to be determined whether the work which they did under the Agency Agreement amounted to carrying on business so as to constitute the remuneration which they received thereunder income profits or gains from business
The contention which was urged before us that the appellants only worked as the agents of the Mills Company and no others and therefore what they did did not constitute a business does not avail the appellants
The activities in order to constitute a business need not necessarily be concerned with several
individuals or concerns
They would constitute 404 business in spite of their being restricted to only one individual or concern
What is relevant to consider is what is the nature and scope of these activities though either by chance or design these might be restricted to only one individual or concern
It is the nature and scope of these activities and not the extent of the operations which are relevant for this purpose
The activities of the appellants certainly did not come within the inclusive definition of business which is given in section 2 clause 4 of the Excess Profits Tax Regulation Hyderabad
Business is there defined to include any trade commerce or manufacture or any adventure in the nature of a trade commerce or manufacture or any profession or vocation but not to include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or giving to other persons of advice of a commercial nature in connection with the making of contracts
The work which the appellants did under the terms of the Agency Agreement constituted neither trade commerce or manufacture or any adventure in the nature of trade commerce or manufacture nor was it a profession or vocation
 The activities which constitute carrying on business need not necessarily consist of activities by way of trade commerce or manufacture or activities in the exercise of a profession or vocation
They may even consist of rendering services to others which services may be of a variegated character
The considerations which apply in the case of individuals in the matter of determining whether the activities constitute a business within the meaning of the inclusive definition thereof set out above may not apply in the case of incorporated companies
Even though the activities if carried on by individuals might constitute business in that sense they might not constitute such business when carried on by incorporated companies and resort must be had to the general position in law in order to determine whether the incorporated company was carrying on business ad 405 as to constitute the income earned by it income  profits or gains from business
Reference may be made in this context to William Esplen Son and Swainston Limited vs Commissioners of Inland Revenue 1
In that case a private limited company was incorporated for carrying on business as naval architects and consulting engineers
 Before the formation of the company a partnership had existed for many year between three persons who on incorporation became the sole shareholders and directors of the company
The partnership had carried on the profession
of naval architects and consulting engineers and the work done by the company was identical in character with that formerly done by the partnership which it succeeded
The work done by the company was identical in all respects with the work of a professional naval architect and consulting engineer and was performed by the said three shareholders and directors of the company personally
A question arose whether the company was carrying on a profession within the meaning of section 39 paragraph C of the Finance No It was contended that it carried on a profession of naval architects and consulting engineers because the members composing it were three naval architects
That contention was however negatived and it was held that even though what was to be looked at was the character of the work done by the company it was not carrying on the profession of the naval architects within the meaning of the section because for that purpose it was of the essence of a profession that the profits should be dependent mainly upon the personal qualifications of the person by whom it was carried on and that could only bean individual
A company such as that could only do a naval architect s work by sending a naval architect to its customers to do what they wanted to be done and it was held that the company was not carrying on a profession but was carrying on a trade or business in the ordinary sense of the term
When a partnership firm comes into existence it can be predicated of it that it carries on a business because partnership according to section 4 of the Indian Partnership Act is the relation between persons who have 1 1919 2 KB 731
406 agreed to share the profits of a business carried on by all or any of then acting for all
See Inderchand Hari Ram V COMMissioner of Income tax UP  CP1
But when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business
According to section 5 of the Indian Companies Act any seven or more persons or where the company to be formed will be a private company any two or more persons associated for any lawful purpose may by subscribing their names to a memorandum of association     form an incorporated company and the lawful purpose for which the persons become associated might not necessarily be the carrying on of business
When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated
As was observed by Lord Sterndale MR in Commissioners of Inland Revenuev
The Korean Syndicate Limited2   If you once get the individual and the company spending exactly on the same basis then there would be no difference between them at all
But the fact that the limited company comes into existence in a different way is a matter to be considered
An individual comes into existence for many purposes or per
haps sometimes for none whereas a limited company comes into existence for some particular purpose and if it comes into existence for the particular purpose of concessions and turning them to account then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not Justice Rowlatt followed the above view of Lord Sterndale MR in Commissioners of Inland Revenue vs Birmingham Theatre Royal Estate Co Limited1 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 it doing it
 The objects of an incorporated company as laid down in the Memorandum of Association are 1 2 at P 202
3 1923 I2 Tax Cas
580 at P 584
407 certainly not conclusive of the question whether the activities of the company amount to carrying on of business
See Indian Law Reports 55 Calcutta 1059 and 1951 But they are relevant for the purpose of determining the nature and scope of such activities
The objects of the appellants in this case inter alia were to act as agents for Governments or Authorities or for any bankers manufacturers merchants shippers Joint Stock Companies and others and carry on all kinds of agency business
This object standing by itself would comprise within its ambit the activities of the appellants as the agents of the Company and constitute the work which they did by way of general management of the business of the company an agency business
The words  carry on all kinds of agency business  occurring at the end of the object as therein set out were capable of including within their general description the work which the appellants would do as agents for Governments or Authorities or for any bankers manufacturers merchants shippers and others when they acted as agents of the Company which were manufacturers inter alia of cotton piece goods they would be carrying on agency business within the meaning of this object
Apart however from this there is the further fact that there was a continuity of operations which constituted the activities of the appellants in the general management of the Company a business
The whole work of management which the appellants did for the Company within the powers conferred upon them under Article 116 of the Articles of Association and clause 3 of the Agency Agreement consisted of numerous and continuous operations and comprised of various services which were rendered by the appellants as the agents of the Company
The appellants were also entitled though with the sanction or ratification by the Board of Directors either before or after the dealings to enter into dealings with the Company by way of sales and purchases of various commodities
There was nothing in the Agency Agreement to prevent the appellants from acting as the agents of other manufacturers Joint Stock Companies etc and the appel lants could have as well acted as the agents of other 408 concerns besides the Company
All these factors taken into consideration alongwith the fixity of tenure the nature of remuneration and the assignability of their rights are sufficient to enable us to come to the conclusion that the activities of the appellants as the agents of the Company constituted a business and the remuneration which the appellants received from the Company under the terms of the Agency Agreement was income profits or gain from business
The appellants were therefore rightly assessed for excess profits tax and these appeals must stand dismissed with costs
Appeal dismissed


Summary:
The difference between the relations of master and servant and of principal and agent may be said to be this a principal has the right to direct what work the agent has to do but a master has the further right to direct how the work is to be done
The positions of an agent a servant and independent contractor are distinguished as under An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor
A servant acts under the direct control and supervision of his master and is bound to conform to all reasonable orders given to him in the course of his work an independent contractor on the other hand is entirely independent of any control or interference and merely undertakes to produce a specified result employing his own means to produce that result
An agent though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal is not subject in its exercise to the direct control or supervision of the principal
An agent as such is not 9 servant but a servant is generally for some purposes his master s implied agent the extent of the agency depending upon the duties or position of the servant
Held that the position of the appellants in the light of the principles stated above and the terms of the Agency Agreement was that of the agents of the Dewan Bahadur Ram Gopal Mills Ltd and they carried on the general management of the business of the company subject to the control and supervision of the Directors
394 The control and supervision of the Directors was however a general control and supervision and within the limits of their authority the appellants as the agents of the company had perfect discretion as to how that work of general management was to be clone both in regard to the method and the manner of such work and therefore the circumstances of the case together with the of power of sub delegation reserved under the Articles of Association established beyond doubt that the appellants were the agents of the company and not merely the servants of the company remu nerated by wages or salary
Held further that various factors along with the fixity of tenure the nature of remuneration and the assignability of their rights were sufficient to prove that the activities of the appellants as the agents of the company constituted a business and the remuneration which the appellants received from the company under the terms of the Agency Agreement was income profits or gains from business and the appellants were rightly assessed under the provisions of Hyderabad Excess Profits Tax Regulation