P L D 1969 Supreme Court 527 (PLP)

MUHAMMAD YAQUB ALI, J.‑--This certificated appeal arising from a reference under section 66 (1) of the Income‑tax Act to the High Court of East Pakistan made at the instance of the assessee‑company, appellant herein, is concluded by the decision of the Court in Octavius Steel & Company, Limited v. The Commissioner of Income‑tax, Dacca (P L D 1960 S C 371). The assessee‑company, appellant herein, are the Managing Agents of Messrs Rivers Steam Navigation Company Limited with its principal office at 157, Winchester House, Old Broad Street, in the City of London, hereinafter referred to as the managed company. By an agreement executed on the 28th May 1915, the managed company, appointed Macneill & Company, the predecessor of the assessee‑company, as its sole Agents and Managers in the Empire of India as from the first day of January 1916, inter alia on the following terms and conditions: "

3. Macneill & Co. shall carry on and manage the entire business of the company in India and shall have the general conduct of the affairs of the Company in India and shall have power to do everything in India which the Board or one or more of the Directors of the Company could do as such and shall use their best endeavours to promote the interests of the Company in India.

4. As remuneration for their services the Company shall pay or allow to Macneill & Co., a commission of seven and a half percent on so much of the gross return of the business of the Company from any source in India as from the first January one thousand nine hundred and sixteen as shall remain after deducting from such gross returns. (a) All sums paid by or on behalf of the Company for materials used in any work done by the company for and paid for to the company by any other company firm or person and in respect of which material the company shall have paid a commission to Messrs Duncan Macneill & Co. of London. (b) All sums received on behalf of the company as the proceeds of sale of unused or condemned material in respect of which the company shall have previously paid commission on purchase to Messrs Duncan Macneill & Co. of London. (c) All moneys received on behalf of the company as the proceeds of sale of condemned stores the cost or value of which shall have been debited to the company in freight account.

5. Macneill & Co., shall at their own expense keep at their office in Calcutta hereinafter mentioned the accounts in India of the company with all statements and particulars necessary thereto and hitherto usually kept by them (but not including them through booking accounts which at present are kept for sake of convenience at the said office in Calcutta but at the expense of the company) and shall cause the same to be balanced, audited and settled there every six calendar months as from the first day of January one thousand, nine hundred and sixteen and shall transmit the account of the balances profit and loss to the company in England whenever required so audited.

6. Macneill & Co., shall at their own expense provide and maintain a suitable office and establishment of clerks and assistants in Calcutta for the use of the company and its agents and for carrying on the company's business there including the collection of freight or passage money payable in Calcutta the dealing with the finance of the company and the general management of the company's business. The expense of all other office workshops, godowns and premises of every kind used for the company's business in Calcutta or elsewhere and the salaries and wages of all other clerks, assistants and employees of every kind shall be paid by the company who shall also pay for the cost of keeping the accounts of the said through bookings.

8. This arrangement shall be binding on and ensure for the benefit of the successors of Macneill & Co., in business and any firm which by death or retirement of any partner or by the admission of any new partner or otherwise shall from time and at any time hereafter succeed to the business now carried on by Macneill & Co., shall be deemed the successors of Macneill & Co." By a supplementary agreement signed on the 9th of March 1937, the rate of commission payable to Macneill & Co., was reduced to 6% as from the Ist day of January 1936. On the 24th May 1949, the Board of Directors of the managed company by a resolution approved the proposal of the said Agents and Managers to transfer their Agencies to the Macneill & Barry Limited, assessee‑company, on the same terms and conditions as were evidenced by the agreement of the 28th May 1915, and the supplementary agreement signed on the 9th March 1937. During the account years 1949‑50, 1950‑51 and 1951‑52 the assessee‑company earned the following sums as commission for their services as Agents and Managers of the managed company at 6 % of the gross return of their business in Pakistan and India: Rs. 1949‑50 2,12,640 1950‑51 1,10,391 1951‑52 6,94,321 In response to notices issued by the Income‑tax Officer, Companies Circle‑II, Chittagong, the assessee‑company filed returns showing nil income in Pakistan on the plea that its head office was in Calcutta and all operations concerning the business of the managed company in Pakistan were conducted by them from there. The commission earned as Agents and Managers of the managed company, was, therefore, claimed to have arisen and accrued in Calcutta out the taxable territories of Pakistan. The contention was ruled out by the Income‑tax Officer by placing reliance on subsection (1) of section 42 of the Income‑tax Act which provides as under: "42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through or from any asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or arising within Pakistan and where the person entitled to the income, profits or gains is not resident in Pakistan shall be chargeable to income‑tax either in his name or in the 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: The Income‑tax Officer held that: "A considerable portion of the services relating to opera tional control and labour management are performed in Pakistan, as the managed company has wide and extensive business in this territory. It is also assessee's contention that they have no office in Pakistan. But in my opinion it is immaterial whether they maintain any office of their own in Pakistan or not as the managed company has already an office at Chittagong. The nature of the functions and services allotted to Managing Agents are such as require local control, management and supervision of the affairs of the managed company either through them or through their employees or through the employees of the managed company under their instructions and direct control within Pakistan. Therefore, in the case of this assessee the Managing Agency remuneration is the result of services rendered by the Managing Agents and the income has been brought about by the work done by them in Pakistan and in India. The Managing Agency commission on that part of the work which is done in Pakistan and for which commission is paid to the assessee certainly accrues and arises in Pakistan. The fact that it is realised at a particular place (Calcutta in this case) is only a stage or say final stage or realisation of income. But it does not follow from this that it is the sole element to which the income is to be attributed. The income is the outcome of series of operations most of which have taken place in Pakistan." Further appeals by the assessee‑company to the Appellate Assistant Commissioner and the Tribunal were dismissed with some modification in the apportionment of income between Pakistan and in India in terms of subsection (3) of section 42 of the Income‑tax Act which is to the following effect:‑ "(3) In the case of a business of which all the operations are not carried out in Pakistan the profits and gains of the business deemed under this section to accrue or arise in Pakistan shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in Pakistan." Eventually, the assessee‑company moved the Tribunal under section 66 (1) of the Income‑tax Act to refer the following questions of law to the High Court of East Pakistan for decision:‑ (1) Whether on facts and in the circumstances of this ease the Tribunal was right in law in holding that the Agency Commission arose through or from a business connection in Pakistan under section 42(1) of the Income‑tax Act? (2) If the answer to Question No. (1) is in the affirmative was the Tribunal right in ignoring the applicability of the provisions of section 42(3) for the purpose of determining the extent if any to which the Agency Commission could be deemed to accrue or arise in Pakistan? The Tribunal considered that the first of the two questions involving interpretation of section 42 of the Income‑tax Act required an authoritative pronouncement and referred it to the high Court, but declined to refer the second question or the view that the extent of the income deemed to accrue or arise in Pakistan was determined in their order dismissing the assessee's appeal. It was laid down in that order that the income should be in proportion to the managed company's income arising in Pakistan vis‑a‑vis its total income in India and Pakistan. The contentions raised by the assessee‑appellant before the High Court were:‑ (i) the assessee‑company's business operation is limited to Calcutta and it has no business in Pakistan which is the primary condition of being taxed under section 42 of the Income‑tax Act. In other words whichever income by way of commission arose or accrued to the assessee‑company it arose and accrued to them in Calcutta, because of their business at Calcutta; (ii) even if the income derived by the assessee‑company is dependent upon the business of the managed‑company which extended to Pakistan, the assessee‑company's income was not dependent upon that business; and (iii) the `course of deal' between assessee‑company and the managed company is not such as to establish a business connection within the meaning of section 42 of the Income‑tax Act. It was also pointed out that while the Appellate Assistant Commissioner had held that the income by way of commission accrued to the assessee‑company in Pakistan, the Tribunal held that it shall be deemed to have accrued and arisen in Pakistan which negatived its decision that the income was taxable under subsection (1) of section

42. On similar facts the provisions of section 42 of the Income tax Act came up for interpretation by this Court in the case Octavious Steel Co. Ltd. v. Commissioner of Income‑tax, Dacca. The appellant in that case was: "a company with its head office situated in Calcutta. It managed one Electric Supply Company and five tea companies and none of them had its head office in Pakistan. The nature of managing agency agreement with all the companies was similar, but the basis of managing agency remuneration varied from company to company. The appellant‑company was entitled to remuneration by way of percentage on the sale of tea from the Tea Company and similarly, on the annual profits from the Electric Supply Company. Under the terms of agreement, the appellant‑company was expressly empowered to "carry on the business" of managed tea companies in Pakistan under the control of its Directors. As regards the Electric Supply Company, the agreement expressly empowered the appellant‑company 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. In an annual report and balance‑sheet of a Tea Company, it was found that the managing agents visited the tea garden and had inspected its working. The balance‑sheets of the managed companies were signed by the Directors of the Managing Companies and managed companies as well. In the balance‑sheets, the ascertained sum of remuneration were raised as debt against the managed companies. There was nothing to show that the managing agents' remuneration was, as a matter of legal obligation or contract, receivable outside Pakistan." It was held: "that the appellant‑Company did not merely occupy an advisory or consultative capacity in relation to the enterprises fn Pakistan. The contract was, 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, 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 provided a sufficient foundation for holding that it was no remote‑control they exercised. Much less was it a detached advisory capacity which they occupied. They were sufficiently shown to be in direct and active control of the enterprises in Pakistan." The conclusion that the Managing Agents "exercised their control by a mere intellectual appraisement, as if by an .electronic brain, of the weekly and monthly returns which they received" was ruled out as their duty was to carry on business of the managed company and in fact they were carrying them on. The contention that a managing agency is not a business and the connection between the Managing Agents and the managed-company is not business connection within section 42(1) was likewise repelled with the observations: "There could be no question but that a managing agency is a business. It was clear also that managed‑Companies were 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 was clear that the managed businesses were being managed on a business basis, that, is by a remuneration proportionate to the income earned, so that the managing business was encouraged to expand the business of the managed business to the same extent as the latter might have done for itself and the connection between the appellant‑company and the managed businesses was a business connection" Lastly, as to the place where the income of the managing agents accrued it was remarked: "It was true that the fons et origo of the income 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 else, and the connection to be sought for must therefore be rather more proximate than more remote. The appellant-Company was remunerated by the tea-Companies a percentage on sales of tea grown in Pakistan. One would say that the income accrued out of the sale when they took place in Pakistan or out of the tea. Similarly the profits earned by the Electric Supply Company were earned in Pakistan, and the remuneration of the appellant‑Company being a percentage thereof, that percentage accrued out of the profits. It may be that the accounting was done outside Pakistan, but it was not accounting that either earns profits or grows or sells the tea. 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. The income shown as being the managing agency remuneration from the six managed Companies was clearly taxable income within Pakistan." Mr. S. M. Hussain appearing for the assessee‑company was unable to meet the dictum in the aforementioned case, but tried to distinguish it on facts. It was strenuously maintained by him that the assessee‑company had no office in Pakistan staffed by their own men and that the control and supervision and management was from Calcutta by issuing directions from time to time. He relied in this behalf on the order of the Tribunal dated the 18th April 1959, in which an assumption to this effect was made. We see no force in the contention raised by the learned counsel as perusal of the agreement of Agents and Managers dated the 28th May 1915, reproduced in the beginning of this order leaves no manner of doubt that the managed‑company with its principal office in London is concerned only with profit and loss accruing to it as a result of the business transacted on its behalf by the assessee‑company in India and Pakistan. The contention that the assessee‑company controls and supervises the business of the managed‑company from its head office in Calcutta is, therefore, factually incorrect. Indeed full control of business operations of the managed‑company is in their hands and for this purpose it is provided in clause 3 that they have the power to do everything in India and Pakistan which the Board or one or more of the Directors of the managed‑company could do. Similarly, the assessee‑company keeps the accounts in India and Pakistan of the managed‑company with all statements and particulars neces sary thereto at their Calcutta office and to cause the same to be balanced, audited and settled there every six calendar months and transmits the account of the balances, profit and loss to the managed‑company in England whenever required so audited. Thus, whereas in the case of Octavious Steel. Company Limited the Managing Agents carried on business under the general control and supervision of the directors of the managed‑company in the Present case the totality of control and supervision vests in the assessee‑company. It may be pointed out that on the facts found by the Income Tax Officer and the Appellate Assistant Commissioner the income by way of commission arose and accrued to the assessee‑company in the taxable territories of Pakistan, but the Tribunal in their order dated the 18th April 1959, remarked that it shall be deemed to have arisen and accrued in Pakistan under section 42(1) read with subsection (3). This was contrary to the facts found by the Tribunal itself. Similarly, the Tribunal was wrong in assuming that the assessee‑company controlled, supervised and managed the business of the managed‑company by issuing directions from time to time from Calcutta. In fact as seen above, the entire business operations of the managed‑company in Pakistan are in the full and complete control of the assessee‑company. It was rightly stated by the income‑tax Officer in the assessment order dated the 31st March 1955: "The nature of the functions and services allotted to the Managing Agents are such as require local control, management and supervision of the affairs of the managed‑company either through their employees or through the employees of the managed‑company under their instructions and direct control within Pakistan." This disposes of all the contentions raised by Mr. S. M. Hussain in support of the appeal. In conclusion we see no substance whatever in the appeal and dismiss it with costs. K. B. A. Appeal dismissed.