Judgement

Appeal (No. 41 of 1947) from a judgment of the High Court (March 27, 1945) given on the reference of a question of law made to the court under s. 66, sub-s. 1 of the Indian Income-tax Act by the Appellate Tribunal.

The following facts are taken from the judgment of the Judicial Committee. The assessee, at all material times, was the managing agent of Marsland Price and Company, Ld. (hereinafter called "the principal company"), under an agreement dated February 1, 1926, and made between the principal company of the one part and the assessee (by its then name of the Tata Construction Company, Ld.) of the other part. The remuneration of the assessee was regulated by cl. 2 of the agreement, and under sub-cl. (b) the assessee was entitled to "A commission at the rate of ten per cent, per annum oh " the annual net profits of the principal company after making "all proper allowances and deductions from revenue for " working expenses chargeable against profits but without " making any deduction for depreciation or in respect of any " amount carried to reserve or sinking fund or any payment " on account of super-tax or any deduction for expenditure " on capital account provided that such commission shall not "in any year amount to a less sum than rupees ten thousand.” The year of assessment was the year 1942/ 1943. In that year the assessee received as remuneration under the managing agency agreement a commission at the rate of 10 per cent, of the net profits of the principal company, that sum being in excess of the minimum salary secured by the agreement. The whole of that remuneration, less certain deductions which were not in question, was assessed to income tax by the income tax officer. One of the sources of income of the principal company was the manufacture of sugar from cane grown on it own farms and from other cane bought from outside, and it was not disputed that in so far as its income was derived from sugar manufactured from its own cane such income was agricultural income and, as such, was exempt from income tax. The assessee claimed that as its remuneration was calculated with reference to the income of the principal company, part of which was agricultural income, such part of the remuneration as was proportionate to the agricultural income of the principal company was itself agricultural income and, as such, exempt from income tax. That claim was rejected by the income tax officer, and in appeal by the assistant commissioner of income tax and the appellate tribunal. At the request of the assessee the appellate tribunal referred to the High Court the following question " Whether, in the circumstances of this case, that " portion of the income received by the assessee from the " principal company of Marsland Price and Company, Ld., " which is proportionate to the agricultural income earned " by the principal company, is agricultural income within the " meaning of s. 2, sub-s. 1, of the Indian Income-tax Act, 1922, " and exempt from assessment under the provisions of s. 4, "sub-s. 3 (viii), of the Act."

The High Court (Kania and Chagla JJ.) answered that question in the negative, taking the same view of the law as had been taken by the income tax officer, the Appellate Assistant Commissioner of Income-Tax, Bombay, and the Income Tax Appellate Tribunal.

" Agricultural income" was rendered exempt from income tax by s. 4, sub-s. 3 (viii.), of the Indian Income-tax Act. " Agricultural income u was defined by s. 2, sub-s. 1, of the Act, so far as relevant, as " (a) Any rent or revenue derived from land which is used " for agricultural purposes.....

" (b) Any income derived from such land by—

" (i.) Agriculture, or" (ii.) The performance of certain specified acts which may be paraphrased as acts necessary to render agricultural produce fit for market and sale. Nothing turned on the exact words of that sub-section.

1948. May 25, 26. Sir Cyril Radcliffe K.C. and R. P. Hills for the appellant. The question, one of principle, is whether when the company passed on the appellants share of its profits in the form of a commission on its profits some part of that share is itself agricultural income in the appellants hands and therefore entitled to exemption from tax. To succeed in obtaining an exemption it is not necessary to show a property interest ; in substance, the Act identifies the kind of income by its source, its derivation. If there was agricultural income of the principal company the agreement necessarily produced the result that the appellant had a share of that income. The authorities fall on either side of the decision here. In Nawab Habibulla v. Income Tax Commissioner, Bengal (( 1942) L. R. 70 I.A. 14.)—which may be called the straight salary case—there is a clear reservation of the point which is very near the present case. Here, also, there is a mixed fund of agricultural and non-agricultural-income. It was held in Go pal Saran Narain Singh v. Income Tax Commissioner (( 1935) L. R. 62 I. A. 207.) that an annuity charged on agricultural land was not rent or revenue derived from land and was not agricultural income within the meaning of s. 2, sub-s. 1, of the Act. What has been stressed in the judgments below, that the appellant is really only a managing agent and receiving this sum as remuneration, is no reason for disqualifying it from claiming exemption on the authority of Income Tax Commissioner v. Maharajadhiraj of Darbhanga (( 1935) L.R. 62 I.A. 215, 221.), where it was said that " the result .... is to exclude ‘agricultural income " altogether from the scope of the Act, howsoever or by whomsoever it may be received." [Reference was also made to British Sugar Manufacturers, Ld. v. Harris ([ 1938] 2 K. B. 220.)] If the Board take the view that because what the appellant gets is derived from contract that precludes it from being derived from land within the meaning of the definition in the Act, then the appellant would be on the wrong side of the line. The burden of the argument is that one is not prevented from saying that part of his income is derived from land within the meaning of the Act because his right to receive it is a contractual one. Part of the income of the principal company was, as is admitted, agricultural income earned in respect of land used for agriculture, and in managing the land on behalf of the company and earning thereby commission consisting of a percentage of such agricultural income the appellant received agricultural income. As no difficulty exists in identifying the agricultural income of the principal company, none exists in similarly identifying the part of the commission earned by the appellant attributable to that income, namely, an amount equal to 10 per cent, of the agricultural income of the principal company.

Millard Tucker K.C. and Handoo for the respondent, were not called on.

June 28. The judgment of their Lordships was delivered by Sir John Beaumont, who stated the facts set out above and continued Their Lordships have no doubt that the view unanimously held by the tribunals in India is correct. In the opinion of their Lordships the effect of the managing agency agreement is that the assessee is entitled, in consideration of services rendered, to a minimum annual salary of Rs. 10,000, which is payable irrespective of whether or not the principal company has made any profit. If, in any year, 10 per cent, of the profits made by the principal company exceeds Rs. 10,000 then the agent gets remuneration calculated as a percentage on the profits of the principal company, without regard to the sources from which those profits are derived. In determining the question at issue some previous decisions of this Board must be noticed. In Gopal Saran Narain Singh

v. Commissioner of Income Tax, Bihar and Orissa (( 1935) L. R. 62 I.A. 207.) the assessee was entitled to an annuity under a contract, the annuity being made a charge on agricultural land. The Board held that the annuity was not rent or revenue derived from land ; it was money payable under a contract imposing personal liability on the covenanter, the discharge of which was secured by a charge on land. In Commissioner of Income Tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga (( 1935) L.R. 62 I.A. 215, 221.) the assessee carried on business as a money lender. As security for a debt due to him in respect of his business he was put into possession of agricultural land as a mortgagee. It was held that the rents received by the assessee from the agricultural land were agricultural income and exempt from income tax, and that the exemption was not affected by the circumstance that the rents were received as part of the money-lending business of the assessee, the exemption depending on the kind of income received and not on the character of the recipient. In Nawab Habibulla v. Commissioner of Income Tax, Bengal (( 1942) L.R. 70 I.A. 14.) the assessee as the Mutawalli of a wakf received as remuner ation for his services a monthly salary. It was held by the Board that the fact that the income of the wakf was derived from agricultural land did not make the remuneration paid to the Mutawalli " agricultural income" since the remuneration did not depend either on the nature of the properties which constituted the wakf estate, or oh the amount of income derived therefrom by the estate. With this case may be compared Muhammad Isa v. Commissioner of Income Tax, Central and United Provinces (I.L.R. [ 1942] A. 425.), where the High Court of Allahabad held that the assessee as Mutawalli of a wakf was entitled, by way of remuneration for his services, to retain as a beneficiary the agricultural income of the wakf estate and that such remuneration was therefore free from income tax.

In their Lordships view the principle to be derived from a consideration of the terms of the Income-tax Act and the authorities referred to is that where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. But if the income received falls within the definition of agricultural income it earns exemption, in whatever character the assessee receives it. In the present case the assessee received no agricultural income as defined by the Act ; it received remuneration under a contract for personal service calculated on the amount of profits earned by the employer, payable, not in specie out of any item of such profits, but out of any moneys of the employer available for the purpose.

The remuneration therefore is not agricultural income and is not exempt from tax.

For these reasons their Lordships will humbly advise" His Majesty that this appeal be dismissed. The appellant must pay the costs.