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MANU/TN/0264/1955
Equivalent Citation: AIR1955Mad648
IN THE HIGH COURT OF MADRAS
Appeal Nos. 499 and 500 of 1950
Decided On: 15.07.1954
Appellants: P. Krishna Bhatta and Ors.
Vs.
Respondent: Mundila Ganapathi Bhatta (died) and Ors.
Hon'ble Judges/Coram:
P. Govinda Menon and Ramaswami, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: T. Krishna Rao, Adv.
For Respondents/Defendant: M.K. Nambiar and K. Vithal Rao, Advs.
Subject: Civil
Subject: Property
Acts/Rules/Orders:
Code of Civil Procedure, 1908 (CPC) - Section 66; Contract Act, 1872 - Section 182
Cases Referred:
Rohee Lall v. Dindayal Lall, 21 Suth WR 257; Ram Manick Moody v. Jynaraen, 6 ID (OS) 283;
Mt. Bahuns Kowar v. Buhoory Lall, 11 W Rep 16; Mt. Bahuns Koonwar v. Lalla Buhureelall, 18
WR 157 (PC); Nataraja Mudaliar v. Ramaswami Mudaliar, AIR 1922 Mad 481; Baijnath Das v.
Bishendevi, AIR 1921 All 185; Suraj Narayan v. Ratanlal, AIR 1917 PC 12; Durgadas De v.
Bagalananda De, AIR 1934 Cal 567; Bodh Singh Doodhooria v. Ganesh Chunder Sen, 12 Beng
LR 317 (PC)
Citing Reference:

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Discussed

Mentioned

Case Note:

Civil - benami transaction - Section 66 of Code of Civil Procedure, 1908 and Section 182 of
Contract Act, 1872 - benami transaction not intended to be operative - when transaction
once made out to be benami then benamidar absolutely disappears for title - he is merely
name lender in transaction - his name is simply an alias for that of person beneficially
interested.

JUDGMENT
Ramaswami, J.

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1. These are two connected-appeals arising from the decrees and judgment of the learned
Subordinate judge of South Kanara in O.S. Nos. 115 of 1947 and 127 of 1948.
2. The dispute in this case relates to three items of properties, viz., two parcels of land used for
raising paddy and areca nut in Kedila village and a coffee estate in Coorg, ten miles from
Mercara.
***
3-14. (After discussing the facts of the case His Lordship proceeded.)
The points which fall for consideration are twofold, viz., whether in regard to these items of
properties Ganapathi Bhatta was benamidar and apparent owner and whether Section 66, C.P.C.
applies to the transactions relating to the two items or Kedila properties, in regard to which two
sale certificates have been issued in favour of Ganapathi Bhatta.
15. On a careful consideration of the entire circumstances of the case we have come to the same
conclusion as the learned Subordinate Judge in regard to the two items of Kedila properties and
in regard to the coffee estate we have come to the conclusion that as per the even tenor of the
sale deed which has not in any way been rebutted and shown to be what it is not, defendants 8
and 9 differing from the learned Subordinate Judge, should be held to be the real as well as
apparent owners in moieties. Here are our reasons.
16. We shall take up the two items of Kedila properties first. In regard to them there are several
circumstances clearly showing that Ganapathi Bhatta was not only the apparent but also the real
owner.
17. The question of the greatest difficulty that arises in dealing with the benami transactions is
how to distinguish the real from the benami. For indeed it is a matter of common experience that
in these benami transactions, the proceedings which would attend a real transfer are carefully
gone through in order to throw a veil of reality, and all the subordinate parts are notoriously fitted
in to correspond with the benami agreement in its entirety. The same motive which dictated an
ostensible ownership would naturally dictate an apparent course of dealing in accordance with
such ownership -- 'Rohee Lall v. Dindayal Lall', 21 SW R 257 (A). And the subsequent acts done
in the name of the nominal owner would be explained by a reference to the original transaction.
18. The essential characteristic of the benami transaction is that it is not intended to be operative.
When a transaction is once made nut to be benami, the benamidar absolutely disappears for the
title. He is merely a name-lender in the transaction, In other words, his name is simply an alias
for that of the person beneficially interested. The first thing therefore that has got to be done is to
find out the real intention of the parties.
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19. In order to find out what is the real intention of the parties to a transaction, no hard and fast
rule can be laid down, but each case, as it arises, but be decided according to its own peculiar
circumstances and probabilities. In scanning the circumstances and weighing the probabilities,
the consensus of legal decisions lay down that we must have regard to the following facts, viz.,
(i) the source from which the purchase money was derived; (ii) the possession of the property,
i.e., (a) the party in possession, and the nature and character of his possession; (b) whether
possession was taken after the alleged gift or purchase--If not taken, why not; (iii) the position of
the parties and their relation to one another; (iv) the circumstances, pecuniary or otherwise, of
the alleged transferor; (v) his motive in making the alleged transfer; (vi) the custody and
production of the title-deed; and (vii) the previous and subsequent conduct of the parties. But it
must be noted here that each of these circumstances taken by itself is of no particular value and
affords no conclusive proof of the intention to transfer the ownership from one person to the
Other. One of them may be of greater value than the other; for instance, the source of the
purchase money has always been regarded as the most important criterion, though it, in no sense,
affords conclusive proof of the matter. But a combination of some or all of them and a proper
weighing and appreciation of their value would go a great way towards indicating whether the
ownership has been really transferred, or where the real title lies. But these circumstances when
combined, or each one of them by itself, only raise a presumption of real ownership in favour of
the party, who is able to prove all or any of them, and thereby shift the burden of proof to
establish his title to the property in question upon the opposite party, and in case he is unable to
discharge the burden by adducing evidence of some one or other of the facts indicated above to
rebut the presumption, he will fail. But if he is able produce such evidence, a presumption will
again arise in his favour and thereby the burden of proof will be shifted to the other party. And
thus after raising proper presumptions and placing the burden of proof upon proper patties, we
must see whether the facts proved in this case fit in consistently with the theory of the benami or
real course of dealing with the property and judge accordingly.
20. Applying these principles we find that there is no motive in this case for the joint family of
Bheemayya to put the properties benami in the name of Ganapathi Bhatta. The motives which
actuate the beneficial owner have been summarised as joint family system, intention to make
secret family provision, Debutter, trand, avoidance of annoyance, mysterious desire to keep
matters secret, risk in society and wakfs. In this case in regard to item 1 the motive is stated to be
nothing more than that Ganapathi Bhatta was the factotum of Bheemayya and was looking after
his affairs and that it was convenient therefore to take the sale certificate in his name and that in
the case of item 2 there was an apprehension that Narayaua Bhatta's sons and others might cause
trouble. But this motive when analysed is found to be totally incorrect. In regard to item 1 the
case for P.W. 1 is that he himself accompanied defendant 9 to the Court auction sale and was
present both at the time when his father gave money to defendant 9 and also at the lime when
defendant 9 purchased the property in Court auction. If that were so, there can be no reason for
taking the sale benami in the name of Ganapathi Bhatta in order to avoid inconvenience, viz., not
appearing in Court, and attending to the attendant transactions. It is also significant in this
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connection that so far as Barimar properly was concerned it was purchased in the name of
Bheemayya himself. Bheemaya has also engaged Messrs. B. Ramachandra Rao and Mangesh
Rao to purchase the property at Court auction on his behalf. We are unable to follow how by
purchasing the property in the name of Ganapathi Bhatta any trouble from Narayana Bhatta's
sons and others could have been avoided. It is unnecessary to multiply these details to show that
none of the motives which is usually stated to be present for the coining into existence of a
benami transaction is either apparent or made out this case.
21. The source of purchase money is always considered to be an important factor. In regard to
item 1 a sum of Rs. 1915 had to be paid. In regard to item 2, it involved only a sum of Rs. 15
concerning which there could be no dispute that it could have come from Ganapathi Bhatta. In
addition the real consideration viz., the discharge to Rama Rao debt has been made by Ganapathi
Bhatta mortgaging items 1 and 2 in favour of the Pandit Bank as already set out. In regard to the
first item the case for the joint family of Bheemayya is that first of all Ganapathi Bhatta was a
pauper and was not in a position to finance the transaction and secondly, that this sum of money
was advanced by one Upendra Prabhu to Ganapathi Bhatta on the instructions of Bheemayya. So
far as this Ganapathi Bhatta being a pauper the evidence on record shows the exact contrary. It is
enough to refer to Ex. B. 27 which shows that this Ganapathi Bhatta was dealing in cardamom,
Ex. B.10 is a letter written by Bheemayya to Ganapathi Bhatta asking the latter to bring money.
Ex. B.9 is a promissory note for Rs. 1000 executed by Govinda Bhatta and another in favour of
Ganapathi Bhatta. Exs. B.11 and B.12 are other letters written by Bheemayya to Gasmpathi
Bhatta showing that the former was asking the latter to fetch moneys. Ex, B.31 is registration
copy of an assignment deed o# a mortgage right for Rs. 3900 executed by Ramachandra
Banninthayya in favour oi Bheema Bhatta showing that Ganapathi Bhatta had a fixed deposit in
the Vitla Society for a considerable amount. This Ganapathi Bhatta has given evidence shoeing
that he was not a pauper as he is pictured to be and that he was not dependent upon Bheemayya's
family for his maintenance. This evidence has not in any way been rebutted. Then turning to the
allegation about Upendra Prabhu, it is also the case of Ganapathi Bhatta that he took a sum of
money from Upendra Prabhu on the instructions of Bheemayya who had transactions with
Upendra and that subsequently this amount was adjusted between himself and Bheemayya. On
the other hand, it is the case for defendant 9 that this Bheemayya owed him certain moneys in
regard to rice, etc. and that therefore he took the money from Upendra on a Havala by
Bheemayya. It is quite true that in regard to this aspect of the case we have no clinching
evidence. P.W. 1 did not choose to examine Upendra who is alive and has got accounts, though
he is found to have been summoned by him several times and no explanation is forthcoming why
this Upendra has not been examined. In other words, as rightly pointed out by the learned
Subordinate Judge, the evidence regarding the funds is not clinching either way. There is only the
inconclusive evidence of P.W. 1 as against the evidence of D.W. 1 supported by some particulars.
We need not point out that when Ganapathi Bhatta has not been shown to be a pauper and that he
was a person possessed of means and could have financed the transaction and he has also put
forward a plausible explanation as to how the money taken from Upendra was as a result of
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adjustment between himself and Bheemayya, it cannot be said that P.W. 1 has affirmatively and
satisfactorily shown that the source of the purchase money for the purchase of these two items of
property was the joint family funds of Bheemayya.
22. There is no dispute regarding the custody of documents of title. All of them are coming only
from Ganapathi Bhatta. It is inconceivable that if Ganapathi Bhatta was a benamidar Bheemayya
would not have taken the precaution of keeping in his custody the original title deeds relating to
these properties. The custody of title deeds has always been considered to be an important
circumstance showing who the real owner is. It is quite true that in order to get over this P.W. 1
has been alleging that Ganapathi Bhatta was his maternal uncle and that they expected him to
hand over all the properties to them and that it was only after the death of the father Bheemayya
that he started double-crossing them. It is easy to make allegations of this nature. In 1943 itself
the family of Bheemayya, according to P.W. 1, had started suspecting the reliability of Ganapathi
Bhatta and took the agreement Ex. A.51. If that were so, why did they not ask for the handing
over of the title deeds following it up with the transfer of registry or the execution of the
Saswatha Mulgeai referred to in Ex. A.51? The learned Subordinate Judge therefore has rightly
placed reliance upon this circumstance as discounting the story of P.W. 1 and the custody of the
title deeds with D.9 as a strong circumstance in favour of his version.
23. Though it was asserted by P.W. 1 that they were in possession of the properties in dispute, it
is found as a matter of fact that Ganapathi Bhatta was in possession of these properties. The
changing leases in respect of item 1 are in favour of Ganapathi Bhatta and have been marked as
Exs. B.14 and B.15. There has been no transfer of the registry or the leases. In regard to item 2
the Chalgeni chits in the name of Ganapathi Bhatta have been marked as Ex. B.8 series. The
patta in favour of Ganapathi Bhatta is marked as Ex. B.17.
In regard to the payment of cist, P.W. 1 has admitted in cross-examination that the assessment in
respect of the properties appear in the name of defendant 9. It is also evidenced by Ex. B-16.
P.W. l, did not produce any assessment receipts. In cross-examination though he deposed that the
areca garden alone is in the possession of-defendant 9 and all the paddy fields are in his
possession, he deposed that he did not know in whose name the leases of the paddy fields had
been taken and that he was not present when they were executed and that they are not with him
and that the leases executed after the death of his father fire with him and that he had not
produced them, that as defendant 9 was absent the leases were not got executed in 1946, that he
(defendant 9) used to attend to all those affairs and he was attending to the household duties and
that after disputes arose he did not remember if he "took leases from the tenants or not. He also
admitted that he produced certain leases in the suits filed by defendant 9 against his tenants but
that he did not remember to which year they related though they were in his name and he Bled
them to prove that lie had taken the leases. In Other words, it is clear that the lease deeds have all
been taken by defendant 9 as spoken to by him and that for a couple of years when he was absent
leases were taken by P.W. 1. This cannot be said to be due to ignorance of P.W. 1 because P.W. 1
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is the Patel and is also seen to be well-versed in Court affairs. It is obvious that the patta, cist
receipts and leases all stand in the name of defendant 9. It is not the case for P.W. 1 that this
Ganapathi Bhatta was being paid any remuneration as agent or Kariyasthan. On the other hand,
the correspondence filed shows that Bheemayya was asking Ganapathi Bhatta to bring moneys
and did not treat him as a Kariyasthan at all. (24) So possession which is generally considered an
important factor for determining whether a transaction is a benami one or not is found to be
definitely with Ganapathi Bhatta in his own right and not as the Kariyasthan or agent of
Bheemayya.
***
25. to 35. (After discussing the facts of the case His Lordship proceeded.) Therefore, differing
from the learned Subordinate judge, we hold that one-half of this coffee estate is joint family
property of Bheemayya and therefore liable for partition in the partition suit. The decree and
judgment of the lower Court in O.S. No. 127 of 1948 will stand suitably modified in so far as one
moiety of this coffee estate is concerned and in the light of the observations made above.
36. Point 2. -- From the earliest times down to the present day benami purchases at auction sales
have been forbidden by the Civil Procedure Code; see Regulation VII of 1799 and the Sudder
Dewani Adalat case of--'Ram Manick Moody v. Jynaraen', 6 I D 283 (B). Then the same
inhibition was enacted in Section 260 of Act 8 of 1859; vide the Full Bench ruling in--'Mt.
Bahuns Kowar v. Buhoory Lall,' 11 W. Rep 16 (C), which became -- 'Mt. Bahuns Koonwar v.
Lalla Bunureelall'', 18 W R 157 (D). Section 317 of the Act of 1832 in its turn gave rise to
conflicting decisions. To do away with the divergence of judicial opinion Section 68 of the
present Code was enacted. But there have always been two limitations in regard to this
prohibition under Section 86 C.P.C. Suits for recovery of possession were not barred under
Section 317, C.P.C. of 1882 or stand barred under Section 60 of the Code of 1908 if the purchase
is made by persons with express or implied authority or agency or by persons who stand in a
fiduciary position.
The second limitation is about the purchases made with joint family funds by the managing
member of a Hindu family in the name of a third person. Where the managing member of a
Hindu family makes a purchase with joint family funds but takes the sate in the name of a third
person, there is a conflict of opinion as to whether any member of the family can sue the third
person on the grounds that the purchase was benami for the managing member and so empires
for the benefit of the Family. This Court has held that he can--Vide Nataraja Mudaliar v.
Kamaswami Mudaliar', A I R 1922 Mad 481 (E). The reason is that a purchase by a managing
member in the name of a third-person cannot be considered to have been made on behalf of all
the members of the family and so cannot be considered to have been made "on behalf of the
plaintiff" within the meaning of the section. The Allahabad High Court has held to the contrary
basing its decision on the ground that a purchase by a managing member is made on behalf of all
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the members of the family and so is made on behalf of the plaintiff; Baijnath Das v. Bishendevi,
MANU/UP/0084/1921 : AIR1921All185 (F).
It purported to follow the decision of the Privy Council in Suraj Narayan v. Ratanlal, AIR 1917 P
C 12 (G) which was, however, a case under Section 317 of the old Code which barred a suit on
the ground that the purchase was made "on behalf of any other person," The decision in
MANU/UP/0084/1921 : AIR1921All185 (F) was dissented from in MANU/TN/0036/1922 : AIR
1922 Mad 481 (E). The object of Section 66 is, as has already been seen, to put a stop to benami
purchases at Court sales and when a managing member makes such a purchase in the name of a
third person, he is doing something which is wholly wrong and cannot be presumed to be acting
on behalf of the family. In the present case Ganapathi Bhatta has been pressing the application of
Section 66, C.P.C., on the ground that the suit in the present circumstances would not lie. The
other side anticipating this objection has throughout been alleging in the pleadings that
Ganapathi Bhatta was an agent for the joint family of Bheernayya throughout these transactions
and that therefore the prohibition under Section 66, C.P.C., would not apply to this case.
Ganapathi Bhatta by no stretch of imagination can be described as the agent of Bheemayya for
the purpose of buying this property in Court auction sale.
In legal phraseology, every person who acts for another is not an agent. A domestic servant
renders to his master a personal service; a person may till another's field or tend his Hocks or
work in his shop or factory or mine or may be employed upon his roads or ways; one may act for
another in aiding in the performance of his legal or contractual obligations to third persons, as
when he serves a public carrier, warehouse-man or innkeeper in performance of the latter's duties
to the public. In none of these capacities he is an "agent" within the above meaning as he is not
acting for another in dealings with third persons. It is only when he acts as representative of the
other in business negotiations, that is to say, in the creation, modification, or termination of
contractual obligations between that other and the third persons, that he is an "agent."
Representation of another in business negotiations with third persons so as to bind such other by
his own acts as if they were done by the former, is of the essence of the relation of agency and
the distinguishing feature between art "agent" and other persons who act for another.
Looked at from this point of view, an agency is a contract of employment for the purpose of
bringing another-in legal relation with a third party or in other words, the contract between the
principal and agent is primarily a contract of employment to bring him into legal relation with a
third party or to contract such business as may be going on between him and the third party. An
agent is thus a person either actually or by law held to be authorised and employed by any person
to bring hint into contractual or other legal relations with a third party. He is a representative
vested with authority, real or ostensible, to create voluntary primary obligations for his principal
by making promises or representations to third persons calculated induce them to change their
legal relations. Representative character and derivative authority may briefly be said to be the
distinguishing features of an agent.
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It is not stated in the pleadings in the present case as to when precisely Ganapathi Bhatta was
constituted an agent, or on what terms he was so constituted or when the agency was got
terminated or other details to spell out an agency. On the other hand, it is seen that Ganapathi
Bhatta was a man of moderate affluence and was in a position to purchase these properties and
there was no motive for him to be the 'agent of Bheemayya and Bheemayya had no motive to
constitute him as an agent. In fact P.W. 1 accompanied him to the Court for these purchases and
that when Bheemayya wanted to constitute an agent he Constituted two lawyers for that purpose.
The correspondence in this case clearly snows that Bheemayya's family and Ganapathi Bhatta
were not in the relationship of principal and agent. On the other hand, in regard to the first two
items Ganapathi Bhatta was in possession and enjoyment of those properties in his own right and
as regards the coffee estate he and the joint family of Bheemayya were working as equal
partners. Therefore, the plea of agency invented to get over Section 66, C.P.C., fails. In regard to
the plea of Ganapathi Bhatta the decision in MANU/TN/0036/1922 : AIR 1922 Mad 481, (E)
referred to above is an authority directly against the position taken by him. The same position has
also been taken in a decision of the Calcutta High Court in -- 'Durgadas De v. Bagalananda De
MANU/WB/0033/1934 : AIR1934Cal567 . The position is clearly put thus at p. 568 ;
"The purchase was not made on his behalf within the meaning of the section, but on behalf of
defendant 1, it on behalf of any one. These words in the section refer to private agreements or
understandings between the 'benamidar' and the person who employs him;--'Bodh Singh
Doodhooria v. Ganesh Chunder Sen,' 12 Beng L R 317 (1). Plaintiff does not claim the property
on the ground that it was brought on his behalf, or even on behalf of the joint family. His case is
that the joint family, in fact, bought it because it was bought with funds belonging to the joint
family by defendant 1, who as 'karta' was, in the words of Mayne in his work on Hindu law
acting as its mouth-piece. The 'karta' is not the agent, or trustee of the joint family, but his
position has been described as like that of a chairman of a committee.
The purchase being made out of joint family funds, 'ipso facto' it become immediately the
property of the joint family by operation of law.--'Bodh Singh Doodhooria v. Ganesh Chunder
Sen,' (supra) (I). Nor does the plaintiff claim through defendant 1, in the sense indicated in the
section. His title is not derivative, like that of an heir, legatee, assignee or purchaser, and, if it
could be argued that the plaintiff however unfortunately, did fall within the words of Sub-section
(1), if read literally and strictly, he is protected under the provisions of Sub-section (2)."
The learned Advocate Mr. Krishna Rao sought to get over this position by pleading that the term
"person" in Section 66, C.P.C., cannot be made to cover joint family and for this contention we
see no authority or reason to uphold. On the other hand, the term ' person" is wide enough to
cover the joint family of Bheemayya and in the plaint it has been made clear beyond all doubt
that the property was purchased by the joint family of Bheemayya benami in the name of
Ganapathi Bhatta out of their joint family funds and that the beneficial interest was held by the
joint family and that the property should revert to the joint family and become partible property.
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In other words, this was not a case of Bheemayya purchasing the property in derogation to the
joint family but the joint family itself purchased it and is not the case of the Chairman of the
Committee referred to in the Calcutta decision buying property but the Committee itself buying
the property. It is this entity or person which is hit by Section 66, C.P.C. Therefore, though it has
become theoretical in view of our previous findings, we hold that Section 66, C.P.C., on the
pleadings of the joint family of Bheemayya, will constitute a bar for the recovery of the two
items of properties covered by the sale certificates.
37. In the result A.S. No. 499 of 1950 is dismissed with costs, and in A.S. No. 500 of 1950, the
decree of the lower Court is modified in the manner stated above. Each party will bear his costs
in the appeal, and in the lower Court.

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Ltd.

MANU/SC/0089/1954
Equivalent Citation: AIR1954SC364, [1954]25ITR449(SC), [1955]1SCR393
IN THE SUPREME COURT OF INDIA
Decided On: 01.04.1954
Appellants:Lakshminarayan Ram Gopal and Son Ltd.
Vs.
Respondent:The Government of Hyderabad
Hon'ble Judges/Coram:
Sudhi Ranjan Das, N.H. Bhagwati and B. Jagannadhadas, JJ.
Subject: Direct Taxation
Acts/Rules/Orders:
Partnership Act - Section 4

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Cases Referred:
East India Prospecting Syndicate vs. Commissioner of Excess Profits Tax
MANU/WB/0002/1952
Disposition:
In Favour of Department
Authorities Referred:
Powell's Law of Agency; Halsbury's Laws of England - Hailsham Edition - Volume 22;
Halsbury's Laws of England - Hailsham Edition - Volume 1
Citing Reference:

Discussed

Mentioned

Case Note:
Direct Taxation - assessment of income - Section 4 of Partnership Act - appellant a
registered company entered into an agreement with Mill company appointing its agent for
thirty years - amount received by appellant from Mill company were assessed under
income tax - appellant contended remuneration received from the Mills company was not
taxable as it was not profit or gains from business - following question referred to High
Court - whether under the terms of the agreement the petitioner is an employee of the Mills
Company or is carrying on business - whether the remuneration received from the Mills is
on account of service or is the remuneration for business - matter decided against appellant
- appellant moved to the Supreme Court - Court observed the objects of the appellants in
this case inter alia were to act as agents for Government - appellants were therefore rightly
assessed for excess profits tax.
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Industry: Importers
JUDGMENT
N.H. Bhagwati, J.
1. 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 received by them as
remuneration from the Dewan Bahadur
Ramgopal Mills Company Ltd. as its
Agents.
2. 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, 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. 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 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 ?

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(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 ?
3. 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.
4. 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 not

a registered company as such could be said

to be possessed of any personal qualification
in the matter of the acquisition of that
income.
5. 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.
6. 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
for
any
bankers,
manufactures, 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.......
7. 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

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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 thereof, and from time to
time to remove or suspend such managers,
agents, clerks and other employees as they
though 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 118
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.
8. The Agency agreement which was
executed in pursuance of the appointment
under Article 115 provided that the
appellants and their assign 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
1/2 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.
9. Clause 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 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 factories, warehouses, 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

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and repurchase machinery, 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 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 assigns as
may be necessary or expedient and as are
not specially reserved to be done by the
Directors.
4. The said Lachminarayan Ramgopal &
Son Ltd., shall be at liberty to deal with the
Company by way of sale of 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 appellants to be the exofficio 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 appellants.
10. No materials other than these were
placed by the appellants either before the
Income-tax Authorities or the High Court
and the question that arise before us have to
be determined only on these materials. If on
the construction of these documents we
arrive at the conclusions 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

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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.
11. The distinction between a servant and an
agent is thus indicated in Powell's Law of
Agency, at page 16 :(a) Generally a master can tell his servant
what to do and how to do it.
(b) Generally a principal cannot tell his
agent how to carry out his instructions.
(c) A servant is under more complete control
than an agent,
and also at page 20 :(a) 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,
(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.

12. 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 agent
has to do : but a master has the further right
to direct how the work is to be done."
13. 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 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 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 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."

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14. Considering the position of the

appellants in the light of the above
principles it is no doubt true that the
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 116 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, re-employ 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 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 1/2 per cent. of the amount

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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
principals 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.
15. 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 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.

16. 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 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.
17. 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 other which
services may be of a variegated character.
The consideration 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

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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 so 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 v. Commissioners of
Inland Revenue [1919] 2 K.B. 731. 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 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
paragraphs 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.
18. 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 agree to share the profits
of a business carried only by all or any of
them acting for all. (See Inderchand Hari
Ram v. Commissioner of Income-tax U.P. &
C.P. [1952] I.T.R. 108) 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

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Sterndale. M.R., in Commissioners of Inland

Revenue v. The Korean Syndicate Limited
(1921) 12 Tax Cas. 181 :
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
whether doing that is carrying on a business
or not."
19. Justice Rowlatt followed the above view
of Lord Sterndale, M.R., in Commissioner
of Inland Revenue v. Birmingham Theatre
Royal Estate Co., Limited (1923) 12 Tax
Cas. 580 , 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 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
andMANU/WB/0002/1952
:
[1951]19ITR571(Cal) ). But they are

relevant for the purpose of determining the

nature and scope of such activities.
20. 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

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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 into 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 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.
21. The appellants were therefore rightly
assessed for excess profits tax and these
appeals must stand dismissed with costs.
22. Appeal dismissed.

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