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Case Comment: Lakshminarayan Ram Gopal and Sons v/s Government of Hyderabad

The year of the case is 1954. Here two appeals from the judgment and decision of the High Court of judicature of Hyderabad answering questions referred at the instance of the appellants by the Commissioner of Excess profits Tax, Hyderabad in 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 14th February, 1920, at Hyderabad in the territories of His Exalted Highness the Nizam. The appellants were registered as a private limited company in Bombay on 1st March 1920. On 20th April, 1920, an Agency agreement was entered into between the appellants and the Mills Company. The appellants were also appointed agents of the company for a period of 30 years on certain terms and conditions therein recorded. The appellants functioned as agents of the Company throughout but in the Fasli years 1351 and 1352 they received their remuneration under the terms of the agency agreement.

As per a notice issued under Section 13 of the Hyderabad Excess Profits Tax Regulation, the appellants were to pay the amount of taxes appertaining to these two accounting years at Rs 8957 and Rs 83768 respectively. The appellants contended on the ground that they were agents of the Company and the remuneration received by them was not taxable as this was not income, profits or gains from the business and fell outside the pale of Excess Profits Tax Regulation. On 24th April, 1944, the Excess Profits Regulation Officer negative the contention by stating that the assessment was absolutely correct.

An appeal was taken to the Deputy Commissioner of Excess Profits but it was once again disallowed. An application under Section 48(2) of the Excess Profits Regulation to the High Court was rejected by the Commissioner and the appellants filed a petition under Section 48(3) to the High Court to compel the Commissioner to state the case. The High Court issued an order directing the Commissioner to provide statement of the case and the same was done on 26th February 1946[1].

Four questions were raised by the Commissioner to the High Court:

  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 carrying on business?
  3. Whether the remuneration received from the Mills is on account of the service or is the remuneration for business?
  4. Whether the principle of personal qualification referred to in Section 2(4) of the Excess Profits Regulation applicable to the Company?


The questions were of considerable importance and were referred for decision to the full bench of High Court. The full bench of the High Court delivered their judgement, the majority deciding on 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 with the territories of Hyderabad with India. The appeals finally came for hearing before the Supreme Court Bench at Hyderabad on 12th December, 1950 when an order was passed to transfer the appeal to Supreme Court in Delhi.

Procedural History
After the appeals contending the payment of taxes of Excess Profit were made negative by the Excess Profits Officer and the Deputy Commissioner, the appeals went to the High Court of the judicature of Hyderabad under Section 48(3) of the Excess Profits Tax Regulation. The High Court issued an order directing the Commissioner to state the case. Questions (1) and (4) were not pressed with much effect before the High Court. Hence rendered important, Questions (2) and (3) required determination.

The questions required determination as to whether the appellants were working as agents or servants of the Mills Company and the remuneration received by them were by way of income, profits, gains or any other taxable amount. Now under Article 115 Clause (6) of the Memorandum of Association of the Mills Company, the following was observed - 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:[2]

  1. 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.
  2. To carry on in India and elsewhere the trade or business of merchants, importers, exporters in all their branches etc, etc...

The duration stated for the same was 30 years which means that the appellant firm were to perform as agents of the Mills Company for 30 years. Along with it, 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 management of the affairs and business of the Company, or otherwise for the purposes then of, 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.

Adding to that Article 115 even spoke that the remuneration of the Appellants as such Agents was to be a commission of 21/2 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.[3]

The appellants were also vested with certain residuary powers as per Article 118 of the Memorandum of Association: “ 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 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.”

After receiving an unfavourable judgement from the High Court, the case was appealed to the Supreme Court Bench in Hyderabad. But around this time, Hyderabad merged with the territories of India and the case had to be shifted to the seat of the Supreme Court in Delhi.[4]

Judgement
As the matter is taken up by the Supreme Court, it tends to stress on all four questions put up before the High Court. For questions (1) and (4), the Honourable Bench opines that when a partnership firm comes into existence it can be predicted of it that it carries on a business because partnership according to Section 14 of the Indian Partnership Act is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.[5]

In the cited case Inderchand Hari Ram v. Commissioner of Income Tax UP and CP[6], the meaning and functions of a partnership firm were clearly delineated from any other firm by Bhargava J. 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 by a private company, any two or more persons) associated for any lawful purpose may, by subscribing their names to a memorandum of association may 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[7].

It was observed by Lord Stendale J. in Commissioners of Inland Revenue Korean Syndicate Ltd[8], that “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 perhaps 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 doing that is carrying on a business or not.”

Now as far as the questions (2) and (3) were concerned the Court was of the observation that the objects of an incorporated company as laid down in the Memorandum of Association were certainly not conclusive of the question whether the activities of the company amounted to carrying on or business. But they are relevant for the purpose of determining the nature and scope of such activities. The same kind of a dilemma arose in a landmark case East India Prospecting Syndicate Calcutta, v. Commissioner. of Excess Profits Tax, Calcutta[9]. Here the court tried to made a clear demarcation between the activities of a business.

Clearly, 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.

The situation thus stands that the appellants stand as agents of the business and constitute the work which they did by way of general management of the business of the company an agency business. Jagannadhadas J. concluded “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.”[10] 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.

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 into consideration along with the fixity of tenure the nature of remuneration and the assignability of their rights, were sufficient for the Bench 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 gains from business. Hence the final decree to pay the stipulated taxes was to prevail as ordered by the Supreme Court.

Analysis Of The Researcher
A case built up on certain similar grounds was Ram Pershad v. Commissioner Of Income-Tax, New Delhi[11]. In this case involving a couple, the husband a professional received remuneration from a business for the services provided by him.

He claimed to be an agent of the said business and contended that the taxes applicable were invalid. In this case also the court held the remuneration payable to him is salary. In this view, the other questions need not be considered, and the appeal is dismissed with costs, which means that the income as salary is taxable. In the main judgement by the Supreme Court the cases cited Inderchand Hari Ram v. Commissioner of Income Tax UP and CP[12] and East India Prospecting Syndicate Calcutta, v. Commissioner. of Excess Profits Tax, Calcutta[13] are certain cases the merit of which have been decided on somewhat similar questions of law such as determination and distinction between a partnership firm and a business firm, a very important question that has been a part of the case. And the other questions pertained to whether the remuneration received was taxable.

In the cited cases the remuneration received was always perceived to be income, profits or gains from business hence in all the judgements the trends have been the same, i.e., in all of them the remuneration has been taxable. From these decisions emanates a very important distinction between agent and a servant. In the Ramgopal case, the appellants were deemed to be servants of the Mills Company and not agents as their income was taxable within the ambit of the Excess Profits Regulation.

Conclusion
In the case, an important distinction between agent and servant has been established as:[14]

  1. Generally a master can tell his servant what to do and how to do it.
  2. Generally a principal cannot tell is agent how to carry out his instructions.
  3. A servant is under more complete control then an agent.
  4. Generally, 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 instructions. An agent receives his principal's instructions but is generally free to carry out those instructions according to his own discretion.
  5. Generally, a servant, has no authority to make contracts on behalf of his master. Generally, the purpose of employing an agent is to authorize him to make contracts on behalf of his principal.
  6. 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.


Hence it is evident that Lakshminarayan Ram Gopal and Sons v. Government of Hyderabad has wide scale ramifications in Contract Law as this accurate judgement has taken shape of a landmark case which determines agency agreements and nature of business contracts. This forms the core of certain sections such as Section 182 and Section 184 of the Indian Contract Act, 1872.

End-Notes:

  1. (1955) 1 SCR 393; AIR 1954 SC 364.
  2. (1955) 1 SCR 393; AIR 1954 SC 364.
  3. Ibid.
  4. Ibid.
  5. Inderchand Hari Ram v. Commissioner of Income-tax, U. P. and C. P, AIR 1952 All 706.
  6. Ibid.
  7. (1955) 1 SCR 393; AIR 1954 SC 364.
  8. (1921) 12 Tax Cas 181.
  9. AIR 1952 Cal 40.
  10. (1955) 1 SCR 393; AIR 1954 SC 364.
  11. AIR 1973 SC 637; (1972 ) 2 SCC 696.
  12. AIR 1952 All 706.
  13. AIR 1952 Cal 40.
  14. Raphael Powell, LAW OF AGENCY, 12th ed, 1952, pp. 16-20.

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