1960 PLP 1064 (PTD)

CORNELIUS, C. J.‑These two certificated appeals from the same judgment of the High Court of Past Pakistan are brought before the Court by Messrs Octavius Steel & Company Limited and call in question the affirmative answers given by the High Court To two questions referred by the income‑tax Appellate Tribunal, which arose out of the assessment to income‑tax in Pakistan of certain income of Messrs Octavius Steel & Company Limited which can be correctly described as managing agency 'remuneration. The questions referred were as follows :‑ "Whether on the facts and in the circumstances of the case commission and allowances receivable outside Pakistan by the applicant for services rendered from outside Pakistan can be deemed to be income assessable in Pakistan." "Whether on the facts and in the circumstances of the case commission and allowances receivable outside Pakistan by the applicant a non‑resident company as managing agents for services rendered from outside Pakistan can be deemed to be income assessable in Pakistan." While answering these questions in the affirmative; the Division Bench also set out their opinion in a positive form as under :‑ "On the facts and circumstances of the cases, the commissions and allowances receivable outside Pakistan by the applicant for services rendered from outside Pakistan in respect of which the income accrues or arises in Pakistan, are to be deemed to be income assessable in Pakistan." Civil Appeal No. 5‑D relates to the tax assessed on the appellant‑Company for the previous years ending 31st December 1946 and 31st December 1947, the years of assessment being 1947‑48 and 1948‑

49. In each of the assessment orders for these two years, the Company was described as being "resident and ordinarily resident" in Pakistan. Civil Appeal No. 6‑D relates to the four following years, namely, the previous years ending 31st December in 1948, 1949, 1950 and 1951, the years of assessment being 1949‑50, 1950‑51, 1951‑52 and 1952‑53, as for a "non -resident." The head office of the appellant‑Company is situated in Calcutta. The Company owns no assets in Pakistan. It is a managing agency business and in Pakistan it manages the Dacca Electric Supply Company Limited, and five tea companies, namely, the Loongla Tea Company Ltd., the Looksan Tea Company Ltd., the Chandichari Tea Company Ltd., the Kaliti Tea Company Ltd., and the Lubachera Tea Company Ltd. None of these managed Companies has its head office in Pakistan. It appears that the case put forward for the appellant‑Company was that its concern was exclusively with the head offices of the managed Companies, and not directly with any of the enterprises, or plantations of the managed Companies in Pakistan. An attempt was made to show that the appellant‑Company was supplied with monthly and weekly returns through the head offices of the managed Companies, and it carried out its function of supervision, management and control from its office in Calcutta. While in Pakistan at the offices of the managed Companies, the primary accounts only such as vouchers, muster rolls and copies of returns are maintained, the principal account books are all maintained and written up in Calcutta. The basis of remuneration varies from Company to Company, but in a general way, Mr. Suhrawardy for the appellant‑Company agreed that the remuneration from the tea companies was by way of percentages on sales of tea and from the Electric Supply Company by way of a percentage on annual profits. It was on the basis of these averments that the argument was advanced on behalf of the appellant‑Company that it has no direct connection with any of the enterprises in Pakistan, but that its connection with those enterprises is through the head offices of the managed Companies in Calcutta and the function which it performs is to render a service in an advisory or consultative capacity, completely detached from all direct responsibility for the functioning of the said enterprises. In the course of the argument, however, Mr. Suhrawardy placed before the Court the terms of the agreement with the Loongla Tea Company, and it was found that this agreement expressly empowers the Managing Agents to carry on the business of the Company under the general control and supervision of the Directors. Mr. Suhrawardy agreed that the contract with the other managed Tea Companies was in similar terms. As for the Dacca Electric Supply Company, the agency agreement empowers the appellant‑Company expressly to appoint and dismiss managers, engineers, clerks, assistants and all other staff, within their discretion, for the purpose of carrying on the business of the Company. Mr. Suhrawardy was also good enough to place before the Court the annual report and balance‑sheet of the Chandichari Tea Company for a certain year. Included in the report was a statement that a representative of the Managing Agents had visited the tea garden during the year under report and had after inspection submitted a report upon its working. In the face of these facts, it is difficult to maintain the position that the appellant‑Company merely occupies an advisory or consultative capacity in relation to the enterprises here in question. The contract is, as it should be for efficient performance of the duty of "carrying on the business", a direct one. By exercising an immediate oversight over the gardens, and by assuming direct responsibility for selecting the right men to occupy all important positions on the staff of the Electric Supply Company, the Managing Agents provide a sufficient foundation for holding that it is no remote control they exercise. Much less is it a detached advisory capacity which they occupy. They are, in our opinion, sufficiently shown to be in direct and active control of the enterprises in Pakistan. The balance‑sheet of the Chandichari Tea Company was found to be signed on behalf of the Managing Agents as well as by Directors of the managed Company, and it was noted that one name was common to both signatures, this being probably a Director of the appellant‑Company who had been nominated as a Director of the managed Company. On the surface, that might be thought not to indicate anything more than a connection with the accounts book of the managed Company maintained in Calcutta, but in our opinion the matter goes somewhat further. As Managing Agents entrusted with the duty of "carrying on the business", it may be presumed that the appellant‑Company assume responsibilities for everything stated in the report as well as every item appearing in the accounts. Among those items are found items relating to the Managing Agents' remuneration and commis sion. It may well be that those sums were secured to the Manag ing Agents by some independent instrument, but if the matter were to be based on the balance‑sheet alone, we do not think there need be any hesitation in holding that by stating an ascertained amount as the sum to which the Managing Agents are entitled, in the accounts and signing those accounts, the Managing Agents raise a debt against the managed Company in that sum, and the Directors of the managed Company by signing the same balance- sheet must be deemed to acknowledge that such a debt was due. From what has been said above, it appears to us to be plain that there is a mis‑statement in an important regard in the questions referred, viz., in regard to the averment that the services rendered by the appellant‑Company were rendered from outside Pakistan. Upon the facts which have been made to appear to us, we consider that there can be no question but that services are rendered by Messrs Octavius Steel & Company to each of the managed Companies, at the location of the enterprises of each of those Companies in Pakistan. Another aspect in which the questions seem to be worded in a fallacious manner is in regard to the receivability of the Managing Agents' remuneration. The questions as worded assume that the remuneration is receivable outside Pakistan. In the course of a lengthy argument, Mr. Suhrawardy for the appellant Company was unable to show us anything in the record or the instruments to indicate that the Managing Agents remuneration was, as a matter of legal obligation, payable to them by the managed Companies outside Pakistan. No doubt, if left to their option they would prefer to receive the money at their own head office which is in Calcutta, since it would be entirely to their convenience to do so. But nothing was shown to us which could indicate that there was anything in the nature of a legal contract obliging the managed Companies to pay the remuneration to Messrs Octavius Steel & Company outside Pakistan. One question of a preliminary nature which was raised in the course of the hearing was as to the description of "resident and ordinarily resident", which had been applied to the appellant Company by the Income‑tax Officer for the first two years of assessment. It seems that the reason for the application of the description lies in the definition of "taxable territories" appearing in clause (14‑A) of section 2 of the Income‑tax Act. Before the 15th August 1947, the expression means British India and after the 14th August 1947, it means Pakistan. Since the appellant Company was resident in Calcutta i.e. in British India, throughout the previous year ending 31st December 1946, the description "resident and ordinarily resident" was thought to be appropriate, and again in the previous year ending 31st December 1947, for the greater part of the year, the "taxable territory" was co terminous with British India, and this perhaps was the reason why for that previous year as well the same description "resident and ordinarily resident" was applied to the appellant‑Company. As to the year 1947, it would appear that the description was not correctly applied since by section 4 (a) (c), a Company is resident in the taxable territories in any year if the control and management of its affairs is situated wholly in the taxable territories in that year. In the Imperial Tobacco Company's case (P L D 1958 S C (Pak.) 125 :1959 P T D 21) it was held by this Court that :‑ "if a company has been resident in British India before 15th August 1947, and thereafter in Pakistan for the rest of the year, the two periods can be added together to determine the residence of the Company in Pakistan.". The same does not hold good if from the 15th August 1947 onwards, the Company ceased to be resident in Pakistan. However, the distinction between "resident" and "non‑resident" is wholly immaterial in the present case, where we are concerned with the ascertainment of "taxable income" under the provisions of section 4 of the Act. Clause (b) of subsection (1) of that section relates to the taxable income of a person resident in the taxable territories, while clause (c) of the same subsection deter mines the taxable income of a non‑resident, and in either case, the condition relevant for the purposes of these cases is that the income in question should "accrue or arise . . . . .. . to him in the taxable territories during such year." As will presently be seen the crucial question is whether the ascertained sums shown in the balance‑sheets of the managed Companies as the Managing Agents' remuneration are sums which have accrued or arisen to the appellant‑Company to Pakistan. Another preliminary point may be dealt with conveniently here, namely, the question of the Inter. Dominion Agreement between India and Pakistan, shortly styled the "Two‑Man Agreement." This Agreement contains specific provision for the allocation of income derived from managing agency commission between the country in which the head office of the Managing Agents is located and the country in which the income has accrued or arisen, or to put it more generally the country where the managed Companies have earned their profits. It is a pure machinery provision, and does not touch the question of accrual or arising .directly. It is of importance however from the point of view that the Two‑Man Agreement is a safeguard against double taxation. That is to say, if in Pakistan it were to be held that the income in question accrues outside the taxable territories, and if at the same time it were to be held in India that in fact the income accrues in Pakistan, then indeed the Managing Agents might avoid all payment of income‑tax on the managing commis sion altogether. But if in either country it be held that the income arose within the taxable territories, then the claims of both countries are presumably satisfied by the application of the formula to the assessed tax. It is common ground that the specific provision governing the assessment to income‑tax of managing agency remuneration, is contained in section 42, of which subsection (1) alone is relevant. The portions of this subsection which apply in the present case read as follows :‑ "All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories . . . . . . shall be deemed to be income accruing or arising within taxable territories, . . . . . (or) where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income‑tax either in his name or in the name of his agent . . . ." The case here is of the Managing Agents being charged in their own name. In trying to avoid the application of this section, the first line of attack adopted by Mr. Suhrawardy was to declare that the con nection between his clients and the managed‑Companies was not a business connection, but merely one of professional or vocational character. Our opinion, which has been stated above, is that the function performed by the appellant‑Company in relation to the managed Companies is by no means of a merely advisory or consultative character, or even in the nature of remote control. There appears to us to be a direct connection between the appellant‑Company and the managed Companies by the exercise of immediate oversight in relation to employees of the managed Companies at their locations in Pakistan, and in relation to the operations which they carry out. It is wrong to say that the, Managing Agents exercise their control by a mere intellectual appraisement, as if by an electronic brain, of the weekly and monthly returns which they receive. If indeed they are doing so, they are taking a restricted view of their duties, and doing as little as possible to earn their salary‑and these are presumptions which we are quite unable to make since it is apparent that they are running these Companies efficiently and producing profits from year to year and they are not content with seeing things at second hand. Their duty being to carry on these businesses, we find that in fact they are carrying them on. Mr. Subrawardy's reliance on this part of the case in point of law, was upon the argument which had been accepted by a Division Bench of the Calcutta High Court in the Steel Brothers case (19 I T R 435). There by, means of an instrument, an agreement had been made between Steel Brothers, as Managing Agents of the Attock Oil Company, and the managed Company, modifying an earlier monopoly in respect of sale of all products of the managed Company. The modification was to the effect that over a certain area of the business, sales of products would be through an agent or sub‑agent, but the commission due to Steel Brothers upon such sales under the earlier agreement was to be continued. It was however given a different guise, by expression in the new agree ment, that is to say, it was expressed that this commission "is not to cover expenses incurred by Steels, but is to cover services and remunerations of Steels in connection with the head supervision and control and general advice by the managing partners of Steels or the Administrative Staff in their employ." The view of the Division Bench of the Calcutta High Court briefly was that the effect of this stipulation was that upon the sales in question "the remuneration of the assessee was not payable for doing anything in India, but for supervising and controlling the opera tion from London." With respect, and without conceding correctness to the view expresses in the above extract, we find that the factual position in the present case is totally different, and that income‑tax cannot be avoided upon the basis of any such argument here. As to the connection between the appellant‑Company and the managed Companies our view is as follows. There can be no question but that a managing agency is a business. So much is admitted by Mr. Suhrawardy. 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 businesses are being managed on a business basis, that is, by a 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 in our opinion impossible to deny that the con nection between the appellant‑Company and the managed) businesses is a business connection. Mr. Suhrawardy's contention that there should be a debt, created in favour of the Managing Agents, in support of which he placed great reliance on the E. D. Sassoon & Company Limited case (26 I T R 27), has already been dealt with above. We are perfectly clear in our minds that, through the ascertainment by the Managing Agents of their own remuneration, and the entry of the ascertained sums in the balance‑sheet, which they signed, and which was also signed on behalf of the managed Company, sufficient evidence is furnished of a debt created in favour of the Managing Agents. But Mr. Suhrawardy argues that this debt has not been created in Pakistan, but only in India where it appears for the first time in the balance‑sheets prepared out of the main books kept by the Managing Agents. The answer to this argument is that it is not the debt upon which the tax falls, but upon income accruing or arising in Pakistan. To meet this contention Mr. Suhrawardy argued that the income shown in the balance‑sheet did not accrue or arise out of any of the business processes of the enterprises in Pakistan, but it accrued to the Managing Agents out of their contracts with the managed Companies. It is true that the fons et origo of the income is the contract, but only in the sense of an ultimate cause. The expressions "accrue" and "arise" convey the sense of something being added as a natural growth to something else, or of something springing out of something else, and the connection to be sought for must therefore be rather more proximate than more remote. Here, the appellant‑Company is remunerated by the tea‑Companies a percentage on sales of tea grown in Pakistan. One would say that the income accrues out of the sales when they take place in Pakistan or out of the tea. Similarly the profits earned by the Dacca Electric Supply Company are earned in Pakistan, and the remuneration of the appellant Company being a percentage thereof, that percentage accrues out of the profits. It may be that the accounting is done outside Pakistan, but it is not accounting that either earns profits or grow or sells the tea. It is contended then that if there be some accrual or arising of income in Pakistan, it is not accrual or arising in favour of the appellant‑Company. Normally, the commission payable to a Managing Agent accrues at the place where the services are performed, and as has, been seen already, the appellant‑Company is in no position to deny that it actually perform services in relation to the managed Companies inside Pakistan. The argument adopted in the Indian case of the Salt and Industries Agencies Limited (960 I T R 58) leading to the conclusion that the commission in such cases accrues at the place where the accounts of a managed Company are made up, does not appear to us to possess the merit of soundness in reason. We agree with the learned commentators Kanga and Palkhivala in the opinion expressed in their book "The Law and Practice of Income‑tax" (1st Edition), at page 167 that this opinion requires to be re‑considered. In our .opinion all the remuneration in the present cases has accrued to the Managing Agents in Pakistan. Lastly, Mr. Suhrawardy stressed the aspect of receivability of the commission. The statute does not require that income in order to be taxable should also be receivable. It speaks of accruing and arising and it has long been settled that the aspect of accrual or arising is to be understood in contradistinction to the act of receiving, which ordinarily follows and may often follow long after the accrual or arising of the income. Mr. Suhrawardy made a grievance of the fact that his clients had not yet been able to receive the money which they earned from these six companies in the six years in question here. As has been remarked already, we have not been shown that there was any legal obligation in favour of the appellant‑Company that the remuneration would be paid to it outside Pakistan. On the other hand, Mr. Suhrawardy could not suggest any reason for supposing that, once the balance sheet of a managed Company has been passed and signed by the Directors of that Company, the Managing Agents do not thereafter possess authority to pay to themselves the amount of their remuneration, as a debt due from the managed Company. They would certainly possess authority to pay all other dues of the managed Company, under their agreement, and in principle there would appear to be no difference between a debt due to say a foreign Company supplying equipment to a managed Company and a debt due to the Managing Agents by the same managed Com pany. Mr. Suhrawardy was unable to indicate that there was any thing to prevent the appellant‑Company from receiving the money due to it from each of the managed Companies in Pakistan through a duly authorised representative or assignee. Whether or not the appellant‑Company will be able to take the money out of the country is not the concern of the Income‑tax authorities or of this Court. Accordingly, we are of the opinion that the income shown in the present case as being the managing agency remuneration from the six managed Companies was clearly taxable income within Pakistan. The answer to the Reference by the High Court is correct, except in so far as it goes beyond the necessities of the case in referring to receivability outside Pakistan, and the rendering of services from outside Pakistan, As to each of these points, the' orders and judgment which have come under review suffer from the defect that the references are not based on any clear or comprehensive findings of fact. The error is attributable initially to failure on the part of the Income‑tax Appellate Tribunal to ascertain the facts with that degree of care which is requisite for making a reference under section 66, Income‑tax Act. The following passage from the appellate order of that Tribunal dated the 18th January 1958 contains nearly everything that has been said in that order regarding the facts relevant to the questions (1) whether all services are rendered outside Pakistan and (2) whether the remuneration is legally receivable only outside Pakistan :‑ "All the above managed companies are in Pakistan. The managing agency relates to them and the commission is claimed to be earned in India and not in Pakistan. The managed companies are managed from Calcutta or London according as the head office of the managed companies are situated. It is said that the .managing agency commissions are credited in the books of accounts at Calcutta but not yet received as the amounts were not transferred as yet so far as the Indian‑rupee companies are concerned. But for the Sterling‑Tea Companies, the sales of tea being in the United Kingdom the commissions are realised from the sale proceeds in United Kingdom. It is admitted by Mr. Osman and verified by an authorised officer of the assessee company that the managing agents get a monthly and weekly returns from the managed companies, supervision, manage ment and control done by the managing company from their office in Calcutta where the accounts are maintained. In the offices of the managed companies only vouchers, muster rolls, copies of returns are kept. The ledger and cash book are written in Calcutta and maintained there." "The question in whether on the facts as stated above it can be said that the income of the managing agents who are residents for the first two years and non‑residents for the last four years could have accrued or arisen in Pakistan so far as the manag ing agency commission earned by them in their office at Calcutta was concerned." On the first point, the findings are confined to things done outside Pakistan ; no enquiry was made as to whether anything was done inside Pakistan. The question put, at the close of the quotation has reference only to remuneration relatable to "commission earned (by the Managing Agents) in their office at Calcutta", and not to the remuneration as a whole. The same limitation appears in the facts set out in the Statement of the Case, as follows :‑ "On facts there was no dispute that the assessee Company was the managing agents of several limited tea companies and the Dacca Electric Supply Company Limited which were all situated in Pakistan. The managing agency relates to them and commission was earned outside Pakistan as the managed companies were managed from Calcutta or London through Calcutta where the head offices of the managed companies were situated. The Managing Agents get monthly and weekly returns from the managed companies, supervision, management and control were done by the managing company from their office in Calcutta where the accounts were maintained." The point of receivability was not made the subject of a finding at all. The real reason for the making of the reference was placed by the Statement of the Case, upon the decision of this Court in the Imperial Tobacco Company case, where however the main point for decision was wholly different from what it is in this case. The High Court rightly found that that case was disting uishable from the present case. But, as regards the facts, the statement in the decision of the High Court fails to clarify the uncertainty appearing in the appellate order of the Tribunal and in the Statement of the Case. The Statement of Facts is as follows:‑ "Some of these managed companies i.e. the first two tea companies are managed from London and in case of the other companies commissions are credited in the books of accounts in Calcutta but no amount has been received in Calcutta as the amounts were not transferred, so far as the Indian‑rupee companies were concerned and so, according to the assessee company they are all receivable, in Calcutta and not assessable in Pakistan." In this judgment, we have attempted to clarify the real questions which arise in the case, on the basis of facts admitted by Mr. Suhrawardy, and such as appear from authentic instruments produced by him. Without such clarification, the real issue remains clouded in uncertainty. That issue was whether the income had accrued to the appellant‑Company in Pakistan, and in eliminating from the question referred to the High Court, the two erroneous assumptions of fact indicated above, we con sider we have done no more than to resettle and reframe the ques tion, to extract the real issue and thus to facilitate its solution. These appeals are accordingly dismissed. The appellant Company will pay the costs of the respondent‑Commissioner. Appeals dismissed.