Jardine Henderson Ltd. Calcutta, India

Vs.

Commissioner of In­come-Tax, Chittagong,

Supreme Court

Appellate Division

(Civil)

Present:

B. Mahmud Hussain C. J.

Ahsanuddin Chowdhury, J.

Kemaluddin Hossain J.

D.C. Bhattacharya, J.

Fazle Munim, J.

Jardine Henderson Ltd. Calcutta, India…………………Appellants in both the appeals.

Vs.

Commissioner of In­come-Tax, Chittagong…………….Respondents in both the appeals.

Judgment,

Jan. 14, 1976.

Cases Referred to:

Messers Octavius Steel Company Ltd. Vs. The Commissioner of Income-tax, Dacca reported in 12 DLR (SC) 121 same case in PLD 1960 SC 371; Octavious Steel and Company Ltd. Vs. The Commissioner of Income-tax, Dacca, 12 DLR (SC) 121 same case PLD 160 SC 371; McNeill and Barry Ltd. Vs. Commissioner of Income-tax, East Pakistan reported in 21 DLR (SC) 200 same case PLD 1969 SC 527.

Lawyers Involved:

M. Hafizullah, Advocate, instructed by A. Rab-H, Advocate-on-Record—For the Appe­llants.

A.W. Chowdhury, Sr. Advocate, instructed by A.M. Khan Chowdhury, Advocate-on-Record. —For the Respondents.

Civil Appeals No. 16 & 17 of 1974.

(From the judgment, and Order dated 30th October, 1969 passed by the Dacca High Court in Reference Cases No. 7 of 1965 and 21 of 1968, under section 66(1) of the Income-tax Act, 1922.)

Judgment:

D. C. Bhattacharya, J.—These two appeals are against a judgment of a Bench of the Dacca High Court deciding a question as to the tax­ability of certain income of the appellant, as referred by the Income-tax Appellate Tribunal under section 66(i) of the Income-tax Act. Civil Appeal No. 16 of 1974 is in respect of the appellant’s income during the four assessment years, viz. 1954-1955 to 1957-1958 and Civil Appeal No. 17 of 1974 is in respect of the ap­pellant’s income during the- next five assess­ment years, viz. 1958-59 to 1962-63.

2. The appellant is a public limited Company incorporated in India having its registered office in the city of Calcutta in India. By virtue of an agreement made on 19-3-47 the appellant be­came the Managing Agent of another Indian Company, namely, Kanknarrah Co. Ltd., hereinafter referred to’ as- the managed company which operated several mills in India and also owned some godowns, situated in Pakistan, now Bangladesh. In accordance with the terms of the agreement the appellant was vested with the power of general management of the mana­ged Company’s business transactions as well as property affairs in consideration of a commis­sion at the rate of 2 ½ % of the gross proceeds arising from the sale-of the goods produced by the mills of the managed company and any other goods sold by the managed company and also an office allowance of Rs. 200/- per mensem. The appellant’s case is that the managed com­pany had no business in Pakistan and the com­mission received by it from the managed com­pany’s- business in India having had no connec­tion, with, any business transaction in Pakistan was riot taxable in Pakistan. The Kanknarrah Co. Ltd. had, no doubt, certain immovable properties in Pakistan which the appellant had, under the terms of the agreement, to look after but such properties having been under requisition no income accrued from the said properties in Pakistan and entire commission payable to the appellant, had to be calculated on the basis of the sale of the goods which were manufactured arid sold in India. According to the appellant, the only income which may be said to have any business connection in Pakistan was the monthly allowance of Rs. 200/- per men­sem.

3. The Revenue authorities viz. the Income-tax Officer and the Appellate Assistant Com­missioner took the view that the commission earned by the appellant as well as the office allowance received by it, for the works done in India as well as Pakistan and as such assess­able under section 42 of the Income-tax Act and the appellant’s income attributable to the operations in Pakistan was computed on the basis of what was called the Two-man Com­mittee’s decision. The Income-tax Appellate Tribunal after rejecting the appeal preferred against the orders of the Appellate Assistant Commissioner referred the following questions for the opinion of the Dacca High Court under section 66(1) of the Income-Tax Act:

(i) Whether on the facts and in the cir­cumstances of the case income could be deemed to have accrued or arisen to the applicant within the meaning of sub-section (1) of Section 42 of the Income-tax Act, 1922.

(ii) Whether on the facts and in the cir­cumstances of the case commission received by the applicant on the goods sold by Kanknarrah Co. Lid. was assessable in Pakistan.

4. Relying upon a decision of the Supreme Court of Pakistan in the case of Messers Octavius Steel Company Ltd. Vs. The Commissioner of Income-tax, Dacca reported in 12 DLR (SC) 121 same case in PLD 1960 SC 371, the learned Judges of the Dacca High Court held that the Managing Agency for the purpose of mana­ging the business of another concern was itself a business and the assessee company having had to look after certain properties belonging to the managed company lying in Pakistan had obviously a “business connection” in Pak­istan within the meaning of the said expression occurring in sub-section (i) of section 42 of the Income-tax Act and as such was assessable under the’ said section.

5.  Leave was granted by the Supreme Court of Pakistan to consider the following point:

Whether even after the requisition of the asset of the managed company in Pakistan it can be said that any income accrued to the managing company in Pakistan or that the managed company was doing business in Pakistan under section 42 sub-section (1) of the Income-tax Act.

6. Admittedly, the managed company had several mills operating in India and also some immovable properties including certain godowns in the then Pakistan (now Bangladesh) most of which were requisitioned by the Government of Pakistan.

7. According to the Revenue the income in question arose out of the appellant’s managing agency business whose operations were carried out both in India and the then Pakistan, and the apportionment of the income attributable to the operations carried out in the then Pakistan, contemplated in sub-section (3) of section 42,-was made on-the basis of the decision of the so-called Two-man Committee. The issue was joined by the Appellant on the question whether the appellant had any income, profits or gains at all in the then Pakistan within the meaning of sub-section (1) of section 42, but no objection was taken by it to the method of appointment followed -by the Revenue.

8. Mr. Hafizullah, the learned Counsel, arguing the case of the appellant,  has sub­mitted that the Kanknarrah Co. Ltd., did not carry on any business in Pakistan which is now Bangladesh during the relevant years but had only some immovable properties which had been  requisitioned by the Government and did not yield any income to its owner as such the appellant cannot be said to have earned any commission in Pakistan and could not there­fore, be assessed in Pakistan under sub-section (1) of section 42 of the Income-tax Act. The learned Counsel has submitted that the appel­lant did not earn any income whatsoever directly or indirectly in Pakistan and that the entire co­mmission earned by it having been fixed on the bias of the sale of the goods manufactured and sold in India, cannot be said to have any business connection in Pakistan within the meaning of the aforesaid provision of the In­come-tax Act. According to the learned Coun­sel, the only properties belonging to the mana­ged company, which were in Pakistan, having been requisitioned by the Government of Pakistan there was nothing left in Pakistan for the mana­ging company to be concerned about.  He has further contended that the Managing Agency Agreement having provided that the managing company would receive, by way of remunera­tion of their service of general management of the managed company’s business transactions, properties etc. a commission on the gross sale proceeds from the goods manufactured and told in India  and also an office allowance of Rs. 2,400/- per annum, the said amount of office allowance only could be said to have had some kind of relation or connection with some transaction of properties in Pakistan.

9. Mr. A.W. Chowdhury, learned Counsel appearing on ‘behalf of the Revenue, has on the other hand, contended that the method of payment of remuneration to the managing company for their services rendered has little relevance for determining the question whether the income, profits and gains accrued or earned directly or indirectly through or from any business connection or any properties or source in taxable territories. It has been submitted by him that the commission received by the managing company being partly in respect of the ser­vices rendered by the said company with re­gard to the properties of the managed company lying in Pakistan such commission may very well be said to have accrued or earned from business connection or properties in Pakistan.

10. In order to appreciate the correctness of the respective contentions as to the appli­cability of the relevant provision of the Income-tax Act, namely, section 42(1), to the facts of the instant case, the said provision may be quoted as follows:

“42 (1) All income, profits or. gains accruing or arising, whether directly or indirectly, through or from any business connection in taxable territories or thro­ugh or from any asset or source of income in taxable territories or through or from any money lent at interest and brought into taxable territories in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in taxable terri­tories shall be deemed to be income ac­cruing or arising within taxable territories and where the person entitled to the in­come, profits or gains is not resident in taxable territories shall be chargeable  income-tax either in his name or in th« name of his .agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.”

11. In deciding the question whether the in­come earned by a Managing Agent of a Com­pany carrying on a business -in the taxable territory was an income within the meaning of the said provision, the Supreme Court of Pak­istan held in the case of Messrs. Octavious Steel and Company Ltd. Vs. The Commissioner of Income-tax, Dacca reported in 12 DLR (SC) 121 same case PLD 160 SC 371 that the managing agency was a business and that the connection between the managing company and the managed business was £ business con­nection.

12. The appellant of the said case was a limi­ted company incorporated in India which had no asset in Pakistan, but it was the Managing Agent of five tea producing companies and one electricity supply company, all- of which were situated in the then Pakistan. In dealing with the question whether the managing company could be said to have any business connection in Pakistan so as to make its income assessable in Pakistan under section 42(1) of the Income-Tax Act, Cornelius, C.J. expressed the view of the Supreme Court of Pakistan in the following words”:”

“There can be no question but that a managing agency is a business, It is clear also that the managed companies are each of them individually a business. The management of one bu­siness by another business can hardly be regarded as anything else but a business. It is clear that the managed business are being managed on a business basis, that is, by remuneration proportionate to the income earned, so that the managing business is encouraged to expand the business of the managed business to the same extent as the latter might have done for itself. It is impossible in our opinion to deny that the connection between the appellant company and the managed business is a business connection.”

13. The next case in which the Supreme Court of Pakistan have to consider a similar question was the case of McNeill and Barry Ltd. Vs. Commissioner of Income-tax, East Pakistan reported in 21 DLR (SC) 200 same case PLD 1969 SC 527. The assessee company in the said case had its Head Office in Calcutta and was the Managing Agent of Messrs. Rivers Steam Navigation Company Ltd. having its principal office in the city of London, but its operations spread over both India and Pakistan. Revenue authorities in Pakistan were of the view that the remuneration earned by the managing company was assessable in Pakistan under section 42(1) of the Income-tax Act but as all the operations of the managed company were not carried out in Pakistan, the profits and gains of the business attributable to the operations in Pakistan were assessable in Pakistan under sub-section (3) of section 42 of the Income-tax Act. The Supreme Court of Pakistan applied the principle laid down in the case of Messrs Octavious Steel Company Ltd. in deciding that case and in holding that the re­muneration earned by the Managing Agent having its principal office in India was assess­able in Pakistan as the management of the busi­ness of the managed company involved business operations if Pakistan were in full and com­plete control of the assessee company.

14. In our opinion, it was correctly deci­ded by the Supreme Court of Pakistan in those two cases that the nature of the functions per­formed by a managing agent in managing the business of another company was a kind of business. It is also clear from such a formula­tion that if  any part of the operations of the said business was in the taxable territory, the portion of the income which  could be attri­butable to the said part of the operations would be   assessable under section   42 of the Act   in the  said   territory.

15.  In order to find whether in the instant case the remuneration earned by the managing company accrued or arose directly or indirectly, through or from any business connection or any properties or any assets or source in Pak­istan, we shall have to examine the relevant  terms of the Managing Agency Agreement un­der which the managing company Operated for the   purpose of earning the said remuneration, which are as follows:

“Unless otherwise mutually agreed between the Managing Agents and the Directors, (subject to the provisions of sections 87B (f) and 87C (2) of the Act) the Managing Agents shall receive by way of remuneration for their services (a) a commission of two and half per cent on the gross proceeds arising from the sale of goods produced at the Mills of the Company and any other goods sold by the Company, and (b) an office allow­ance of Rupees two hundred per mensem.”

“The Managing Agents shall have the general management of the Company’s business transactions, “books, papers, effects, property affairs and concerns, with full power to do all acts, matters and things deemed necessary, proper or ex­pedient for carrying on the business and concerns of the company including po­wer to purchase or obtain all necessary stores, goods and materials of any kind .whatsoever and to sell such machinery, stores, goods, materials and/ or any of the articles manufactured or acquired by the Company and to make, draw, en­dorse, sign, accept, negotiate and give all cheques, notes, hoondies, bills of lading, drafts, orders, Government of India and other Promissory Notes and other negotiable instruments required in the business of the Company, and may also sign and give all receipts, releases and other discharges from money pay­able to the Company and for the claims and demands of the Company and (sub­ject to the provision of the Act) may exercise such of the powers of the Direc­tors as may from time to time be lawfully delegated to them other than a power to issue Debentures.”

16. From the previously mentioned provisions of the Agreement it appears that the remuneration which the Managing Agent earned were in connection of the services it rendered by way of inter alia, the general management of the managed company’s ‘business transactions’ and ‘property affairs and concerns’. The remuneration which was agreed to be paid to the managing company was, of course, a certain percentage of the sale proceeds of the goods produced  by the managed company or any other goods sold by the said company and as such the whole of the fund out of which the said remuneration was to be paid may have arisen outside Pakistan, but this remuneration was to be paid partly in consideration of the services in looking after the immovable proper­ties of the managed company, such as the go-downs situated in Pakistan. It is not disputed on behalf of the Revenue, that most of these properties were requisitioned by the relevant authority in Pakistan but the fact of requisition does not put an end to the responsi­bility of the managing company to look after the said properties and collect the necessary compensation in respect of the requisitioned properties. It may be true that the substantial part of the duties of the managing com­pany as  enjoined  under the said Managing Agency Agreement comprised ‘in the manage­ment of the factories and other properties lying in India and the duty of the Managing Com­pany for looking after the Pakistani properties of the said  managed company may not have constituted comparatively a very significant part of  its works, but, all same, it can hardly be again said that the commission earned by the managing company was partly attri­butable to their services in respect of the Pak­istani properties. The works of the managing company in respect of the Pakistani properties cannot be presumed to have ended because of the requisition of the said properties. The trouble of the managing company Blight, on the other hand, have been increased manifold on account of such requisition, requiring the said company become very active and enter­prising to get the just compensation assessed and collected.

17. The works of the managing agency in managing the factories and property affairs of the managed-company being a sort of busi­ness, the part of the works pertaining to the management of the god owns lying in Pakistan should also be regarded as the part of the same business. It does not appear to be a matter of any importance that the business of mana­gement involves certain operations relating to the management of some immovable proper­ties yielding periodical income in the shape of rent or compensation to the managed com­pany. The management of such properties undoubtedly established a business connection between the managing company and the taxable territory, within the meaning of section 42(1) of the Income-tax Act, from which a part of the remuneration of the assessee company arose.

We are therefore of opinion that the High Court took the correct view in answering the question referred to it under section 66(1) of the Income-tax Act.

Both the appeals are dismissed with costs.

Ed.

Source: 1976, (AD)