LAKSHMINARAYAN RAM GOPAL AND SON LTD. v. THE GOVERNMENT OF HYDERABAD
Citation: [1955] 1 S.C.R. 393; 1954 INSC 37
Court: Supreme Court of India
Bench: SUDHI RANJAN DAS , NATWARLAL HARILAL BHAGWATI, B. JAGANNADHADAS
Judgment date:
Case summary
1954 INSC 37. Supreme Court of India judgment dated 1954-04-01. LAKSHMINARAYAN RAM GOPAL AND SON LTD. v. THE GOVERNMENT OF HYDERABAD. Read the judgment and...
Judgment text
S. C. R. SUPREME COURT REPORTS 393 The result therefore is that in our opinion the provisions of sections 3, 4 and 6 of the Essential Supplies Bagla (Temporary Powers) Act, 1946, are constitutional and the impugned order is also constitutional. Accordingly this appeal is dismissed, and the trial Court is directed to proceed expeditiously with the ca~e in accordance with law. Appeal di. fmissed. LAKSHMINARAYAN RAM GOPAL AND SON LTD. tJ. THE GOVERNMENT OF HYDERABAD. [S. R. DAS, BHAGWATI and JAGANNADHADAS n. ·1 Master and Servant-Principal and Agent-Distinction between -! fyderabad Excess Profits Tax Regulation-Activities tt•hicl1 constitute business-Remuneration which constitutes income, profits \Vere 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 \Vas income, profits or gains.
fro1n business and the appellants \Vere rightly assessed under the provisions of Hyderabad Excess Profits Tax Regulation. CIVIL APPELLATE JURISDICTION: CIVIL 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, (S. K. Kapur and Ganpat Rai, with him) for the appellant. M. C. Setalvad, Attorney-General for India (Poru> A. Mehta, with him) for the respondent. 1954. April I. 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 m regard to the amounts received by them as remuneration from the Dewan Bahadur Ramgopal Mills Company 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 the 1st March, 1920. On the 20th April, 1920, an Agency 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 accounting 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, 19'l4, the Excess Profits Tax Officer made an order assessing the income of the appellants for the accounting periods 1351 and 1352 Fasli at Rs. 8,957 and Rs. 83,768 · 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 48(2) 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 48(3) to compel the Commissioner to state the case to the High Court.
An order was made by the High Court on this petition directing the Commissioner to state the case and the statement of the case was submitted by the Commissioner on the 26th February, 1946. Four questions were referred by the Commissioner to the High Courts as under:- (1) Whether the Petitioner Company 1s 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 ? 7-87-S. C. India/ 59 (3) Whether the remuneration received from the Mills is on account of service or is the remuneration for business ? ( 4) Whether 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 qu~tions (I) 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 remunera- ;,.. tion whether it was wages or salary or income, profits or gains from business.
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: (1) To act as agents for Governments or Authorities or tor any bankers, manufacturers, merchants, shippers, Joint Stock Companies and others and carry 'On all kinds of agency business. (2) To carry on in India and elsewhere the trade or business of merchants, importers exporters m 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 m the management of the affairs of the Company or m carrying out its objects and were to have power to appoint and employ m or for the purposes of the transaction and management 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 incJuding the rights and liberties contained in clause 4 of the agreement.
Article 118 authorised the agents to sub-delegate ~l or any of the powers, authorities and discretions for the time being vested in them, and in particular 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 2!
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 appellants 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 of the Company. Clauses 3 and 4 of the agency agreement are impor-tant and may be set out in extenso :- 3.
Subject to the control and superv1SJon of the Directors, the said Lachminarayan 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 factor-ies, 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 machi-nery, engines, plant, raw cotton, waste, jute, wool and 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 dispu-tes m which the Company is concerned and to appoint and employ discharge, re-employ or replace engineers, managers, retain commission dealers, mucca-dums, 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 assigns as may be necessary or expedient and as are not specifically reserved to be done by the Directors.
4. The said Lachminar~yan 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 pur. chase 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 appellants to be the ex-officio Directors of the Com ..
pany 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 obliga-tions undertaken by the appellants. 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 re. ceive ;;: had existed for many years 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 is 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. 2) Act, 1915. 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 be an 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 K. B. 731. agreed to share the profits of a business carried on by all or any of them acting for all. (See lnderchand Hari 1 Rain v. Commissioner of Income-tax, U. P. & C. P. ( )). 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 incorporate<l company, and the lawful purpose for which the persons become associated might not necessarily be the carrying on of business. \\Then 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, M. R. , in Commissioners of Inland Revenue v. The Korean Syndicate Limited('): "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 . carrying out a transaction by getting possession 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 Stern<lale,- M. R. , in Commissioners of Inland Revenue 3 v. Birmingham Theatre Royal Estate Co. , Limited( ) 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. " The objects of an incorporated company as laid down in the Memorandum of Association are (1) (1952) I. T. R. 108. (2) (1921) 12 Tax C'.. as. 181 at p. 202. (3) (1923) 12 Tax Gas. 580 at p. 584.
, 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] 19 l. T. R. 571). 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 1"c. 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 arnbit 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 otherg; 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 mean-. ing of this object. Apart however from this there is the further fact that there was a continuity of opera-. tions 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 appellants could have as well acted as the agents of other concerns besides the Company.
All these factors taken mto consideration along with the fixity of tenure, the nature of remuneration and the assignability of their rights, are sufficient to enable us to come to the con-of clusion that the act1V1t1es 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 mcome, 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. WAZIRCHAND v. THE STATE OF HIMACHAL PRADESH. (With connected Appeal) [MEHR CHAND MAHAJAN c. r. , MuKHERTEA, VIvIAN BosE, BHAGWATI and VENKATARAMA AYY. AR JJ. ] Constitution of India, articles 19, 31, 370-Code of Cri'niinal -"! ' Procedure (Act V of 1898) ss. 51, 96, 98, 165, 523-Whether seizure " ·of property not sanctioned by ss. 51, 96, 98 and 165 of the Code . infringes fundamental rights under Arts.
19 and 31 of the Constitu~ :tion-Effect of dismissal of application under s. 523 of the Code in such a case-Effect of Art. 370. The provisions regarding search and seizure by the Indian police are contained in sections 51, 96, 98 and 165 of the Code of Criminal Procedure, 1898. None of these sections had any -application to the facts and circu1nstances of the case. Any seizure by the Indian police of any property of a citizen not sanctioned under the law stated above or under any other law infringes the fundamental rights of the citizen guaranteed under Art. 19 and Art. 31 of the Constitution of India. This position is not affected even if the citizen \vhose goods are so seized files an application under s. 523 of the Code and his application is dismiss~ ed by the Magistrate. In view of the provisions of Art. 370 it is doubtful if an offence committed in Jammu and Kashmir could be investigated by the police in India. CML APPELLATE JURISDICTION: Civil Appeals Nos. 129 and 130 of 1952.
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