Narottam and Parekh Ltd. v. C.I.T. Bombay City AIR 1954 Bom 67
Income-tax Reference No. 22 of 1952 decided on 06/03/1953
Headnote
(A) Income-Tax Act (11 of 1922) , S.4A(c)— Control and management – Expression explained.
In construing the expression “control and management” it is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business been controlled and managed. Control and management is central control and management and net the carrying on of day to day business by servants, employees or agents. The real test to be applied is where does the controlling and directing power function or where is the head and brain of the company. What has to be considered is not the ‘de jure’ control and management, but the ‘de facto’ control and management.(Para 2 3)
The assessee company whose business was stevedoring in Ceylon was registered in Bombay and its registered office was also in Bombay. The meetings of the Board of Directors and of the share-holder’s were also held in Bombay. Two managers under two powers-of-attorney which conferred the widest possible power and authority on them looked after the affairs of the company in Ceylon. But the central management and control was kept in Bombay and was exercised by the directors in Bombay. Held that the control and management of the assessee company was situated wholly in British India and the company was resident in British India within the meaning of S. 4A(c).(Para 3 7)
Cases referred :
Bhimji Naik v. Commissioner of Income-tax, Bombay [AIR 1945 Bom 271] Para 4
Talipatigala Estate v. Commr. of Inc. Tax [AIR 1950 Mad781] Para 5
Subbayya Chettiar v. Commr. of Income Tax [AIR 1951 SC 101] Para 6
Consolidated Mines Ltd. v. Howe [(1906) 5 Tax Cas 198] Para 6
Swedish Central Railway Company Limited v. Thompson [(1925) 9 Tax Cas 342] Para 6
Judgement
CHAGLA, C.J. – The question that arises in this reference is whether the assessee company is a resident company. The assessment years are 1944-45 and 1945-46. The company is a subsidiary company of the Scindia Steam Navigation Co. Ltd. and its business is stevedoring in Ceylon. It is registered in Bombay and its registered office is also in Bombay. The meetings of the Board of Directors are held in Bombay and also the meetings of the shareholders.
(2) In order that a company should be resident it is necessary that the control and management of its affairs should be situated wholly in the taxable territories or its income earned in the taxable territories should exceed its income without the taxable territories in that year. In this case we are not concerned with the second part of the definition, because the income of this company in India was Rs. 3,791 whereas its total world income was Rs. 3,28,108, the bulk of which was earned in Ceylon by the business which it did. In order to construe S. 4A(c) of the Income-tax Act, it is important to bear in mind that this section deals with residence and it deals with residence of individuals, Hindu undivided family, firms and other association of persons and of a company, and therefore, the central idea underlying this section is the idea of residence, and what has got to be determined is where a particular company is resident.
Sub-clause (c) tells us what in the eye of the law is residence with regard to a company, and as far as the first part is concerned, in order that a company‘s income should be subjected to tax as a resident, it has got to be established that the control and management of its affairs is situated wholly in the taxable territories. As we shall presently point out, ―control and management‖ is a compendious expression which has acquired a definite significance and connotation. It is also necessary that the control and management of the affairs of the company should be situated wholly in the taxable territories. Therefore, if any part of the control and management is outside the taxable territories, then the company would not be resident. In this connection, it is pertinent to look at the converse definition of a Hindu undivided family, firm or other association of persons.
In their case they are resident unless the control and management of its affairs is situated wholly without the taxable territories. Therefore, whereas in the case of a Hindu undivided family or firm or association of persons any measure of control and management within the taxable territories would make them resident, in the case of a company any measure of control and management of its affairs outside the taxable territories would make it non-resident. In construing the expression ―control and management‖ it is necessary to bear in mind the distinction between doing of business and the control and management of business. Business and the whole of it may be done outside India and yet the control and management of that business may be wholly within India.
In this particular case considerable emphasis is placed upon the fact that the whole of the business of the company is done in Ceylon and the whole of the income which is liable to tax has been earned in Ceylon. But that is not a factor which the Legislature has emphasised. It is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business been controlled and managed. ―Control and management‖ referred to in S. 4A(c) is, as we shall presently point out on the authorities, central control and management. The control and management contemplated by this sub-section is not the carrying on of day to day business by servants, employees or agents.
The real test to be applied is, where is the controlling and directing power, or rather, where does the controlling and directing power function, or to put it in a different language, there is always a seat of power or the head and brain, and what has got to be ascertained is, where is this seat of power, or the head and brain? A company or for the matter of that a firm or an undivided Hindu family has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power of the controlling and directing power. It is that authority to which the servants, employees and agents are subject, it is that authority which controls and manages them, which is the central authority, and it is at the place where the central authority functions that the company resides.
It may be in some cases that, like an individual a company may have residence in more than one place. It may exercise control and management not only from one fixed abode, but it may have different places. That would again be a question dependent upon the circumstances of each case. But the contention which Mr. Kolah has most strongly pressed before us is entirely unacceptable that a company controls or manages at a particular place because its affairs are carried on at a particular place and they are carried on by people living there appointed by the company with large powers of management.
A company may have a dozen local branches at different places outside India, it may send out agents fully armed with authority to deal with and carry on business at these branches and yet it may retain the central management and controls in Bombay and manage and control all the affairs of these branches from Bombay and at Bombay. It would be impossible to contend that because there are authorised agents doing the business of the company at six different places outside India therefore the company is resident not only in Bombay but at all these six different places.
(3) When we turn to the facts of the case before us, what has been emphasised by Mr. Kolah is that two managers under two powers of attorney look after all the affairs of the assessee company in Ceylon and our attention has been drawn to these two powers-of-attorneys, and we agree with Mr. Kolah that the widest possible power and authority has been conferred upon these two managers under these power-of-attorney. But it is equally clear from the minutes of the meetings of the Board of Directors which are also before us that the central management and control has been kept in Bombay and has been exercised by the directors in Bombay.
The minutes deal with various matters which are delegated to these two managers and yet the directors from a proper sense of responsibility to the company have retained complete control over these matters and have from time to time given directions to the managers as to how things should be done and managed. The real fallacy underlying Mr. Kolah‘s argument is to confuse the doing of business with the central control and management of that business. It is perfectly true that these two managers do all the business of the company in Ceylon and in doing that business naturally a large amount of discretion is given to them and a considerable amount of authority. But the mere doing of business does not constitute these managers the controlling and directing power.
Their power-of-attorney can be cancelled at any moment, they must carry out any orders given to them from Bombay, they must submit to Bombay an explanation of what they have been doing, and throughout the time that they are working in Ceylon a vigilant eye is kept over their work from the directors‘ board room in Bombay. The correspondence which has also been referred upon between the company here and its office in Colombo also goes to show and emphasise the same state of affairs. Mr. Kolah is right again when he puts emphasis upon the fact that what we have to consider in this case is not the power or the capacity to manage and control, but the actual control and management, or in other words, not the ‗de jure‟ control and management but the ‗de facto‘ control and management, and in order to hold that the company is resident during the years of account, it must be established that the company ‗de facto‟ controlled and managed its affairs in Bombay.
Mr. Kolah says that the two powers-of-attorney go to show that whatever legal or juridical control and management the company might have had, in fact the actual management was exercised by the two managers in Ceylon. In our opinion this is not a case where the company did nothing with regard to the actual management and control of its affairs and left it to some other agency. As we said before, the two managers were the employees of the company acting throughout the relevant period under the control and management of the company, and therefore in the case we are considering there was not only a ‗de jure‘ control and management, but also a ‗de facto‘ control and management.
(4) Turning to the authorities on which Mr. Kolah has relied, first there is a judgment of this Court in Bhimji Naik v. Commissioner of Income-tax, Bombay [AIR 1945 Bom. 271]. In that case Sir Leonard Stone, C.J. and Kania J. were really dealing with a question of construction of S. 4A(b), and the question that presented itself for decision before that Bench was whether the control and management contemplated by that sub-section was a ‗de facto‘ or a ‗de jure‘ control. In that case one Naik carried on business in South Africa. In 1912 he returned to India leaving his business in the hands of three managers. In 1937 he executed a partnership deed by which he admitted these three managers as partners. Under the partnership deed he retained to himself the full control of the business and even the right to dismiss any of the three partners.
The Income Tax Appellate Tribunal found that the firm was resident in British India as the legal right to control and manage vested in Naik and he was resident in British India and it was not shown that he had not exercised any control. The Court remanded the matter to the Tribunal taking the view that what they were concerned with was actual events which would go to show where the actual control and management of the affairs was ‗de facto‘ situated and as the Tribunal had merely held that on the legal aspect of the partnership deed there were not sufficient facts on which they could express an opinion. It is rather important to note that Mr. Setalvad who appeared for the Commissioner attempted to argue that the position in the case was not materially different from that of a man owning a business and having employees, and the learned Chief Justice dealt with that argument as being
[D]estructive of the whole reference, which proceeds on the basis that we are dealing with a partnership firm, as indeed is the case when the partnership deed is considered.
Therefore, the learned Chief Justice was at pains to draw a distinction between the case of a partner and the case of an agent or an employee, and inasmuch as in that case the business was being managed by the partners of Naik in South Africa, the question of ‗de facto‘ management had to be considered. Kania, J. at p. 274 states that the question whether the assessee is resident within the meaning of S. 4-A is a question of fact, and he goes on to say:
―As it is difficult to apply the test of physical residence to an association of persons or a firm, the test is held to be: where the central control and management actually abides.
Therefore, the learned Judge holds that the expression ―control and management‖ means where the central control and management actually abides.
(5) The other case relied on is a Madras case – Talipatigala Estate v. Commr. of Income Tax [AIR 1950 Mad.781]. There the question that arose was whether the assessee firm had any part of the control and management within British India. There a rubber estate in Ceylon was managed by the assessee firm consisting of two partners, one of whom was resident in British India, and the estate was managed by an agent holding a power-of-attorney from the partners, and the Court held that not only the right to exercise control and management over the firm‘s affairs in Ceylon vested with the partner resident in British India but some amount of control and management of the firm‘s affairs was actually exercised in British India and the assessee firm was therefore resident in British India within the meaning of S. 4-A.
The Court was concerned to determine whether any part of the control and management was within British India and notwithstanding the fact that the rubber estate was managed by an agent holding a power-of-attorney, it was found that there was the exercise of control and management by the partners from British India.
(6) The third decision relied on is a decision of the Supreme Court in Subbayya Chettiar v. Commr. of Income Tax [AIR 1951 SC 101]. That was a case of an Hindu undivided family and the Supreme Court has laid down certain important tests for determining what is control and management within the meaning of S. 4-A of the Act. Fazl Ali J. in his judgment accepts the rule which has been applied in England to cases of corporations in order to determine their residence, and he quotes with approval Lord Loreburn‘s dictum in De Beers Consolidated Mines Ltd. v. Howe [(1906) 5 Tax Cas 198]:
A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business.
He also lays down four principles which are enunciated in Swedish Central Railway Company Limited v. Thompson [(1925) 9 Tax Cas 342]. With regard to the first principle he accepts a passage of Patanjali Sastri J. (p. 102):
Control and management signifies in the present context, the controlling and directive power, the head and brain as it is sometimes called, and situated implies the functioning of such power at a particular place with some degree of permanence, while wholly would seem to recognise the possibility of the seat of such power being divided between two distinct and separate places.
The second principle is that the mere activity by which the company in a place does not create residence. The third is that the central management and control of a company may be divided, and it may keep house and do business in more than one place. Finally, in case of dual residence, there may be two centres of management. But the important principle which applies to the present case is the one that has been first set out and which emphasises the fact that what we have to consider in order to determine the residence of a company is as to where its head and brain is, and the head and brain of the company will be where its controlling and directive power functions. Mr. Kolah has relied on what Fazl Ali J. says (p. 102):
Secondly, we take it that the word ‗affairs‘ must mean affairs which are relevant for the purpose of the Income-tax Act and which have some relation to income.
Mr. Kolah says that it is not any business that the company does which has got to be considered, but the affairs of the company in the sense in which Fazl Ali J. has explained that expression. With respect, that is perfectly correct. In order to determine the head and brain of the company we are not to concern ourselves with any other work that the company does except its business which yields profits, and in this particular case we have got to consider where the head and brain of the company is with regard to the stevedoring business in Ceylon which has yielded the income. But even applying that test, as already pointed out, we do come to the conclusion that the head and brain of the company with regard to this particular business or with regard to its affairs was in Bombay and not in Ceylon.
(7) The question, therefore, which has been submitted to us must be answered in the affirmative.
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