Case: Shoorji Vallabhdas &amp; Co., Bombay Vs. The Commissioner Of Income-Tax/Excessprofits Tax, Bombay

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, 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 termsthe 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 Cl. (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 followsthe 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 and/or 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 suchmay 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.4. 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 managed company provided inter alia for the payment of remuneration in the following termthe 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 Managingappellant 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,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 income 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 May 4, 1950, 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.5. 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 questionsDid 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?2. Did the whole or part of the dividend income accrue or arise in the Cochinexpression 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.6. 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 a 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.

Court's reasoning:
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.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 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.13. 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.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 and/or passage money in respect of two of the managed companies, accrued or arose in British 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.