037-NLR-NLR-V-60-THE-COMMISSIONER-OF-INCOME-TAX-Appellant-and-SRI-LANKA-OMNIBUS-CO.-LTD.-Re.pdf
132 The Commissioner of Income Tax v. Sri Lanka Omnibus Co., Ltd.
Present: Sansoni, J., and T. S. Fernando, J.
THE COMMISSIONER OF INCOME TAX, Appellant, and SRI LANKAOMNIBUS CO., LTD., Respondent8. C. 5—Case stated under Section 74 of the Income Tax Ordinance,
BRA 1254
Income tax—Omnibus company—Business carried on through agents—Computationof profits or income of the Company—Income Tax Ordinance, as. 9 (1) (a),9 (1) (cc) (i), 9 {!) (ccc) (i)—Agency—Test of relationship of principal andagent—Omnibus Service Licensing Ordinance, No. 41 of 1942.
A company which carried on, through agents appointed by it, the businessof transport of passengers and goods under a licence issued in terms of theOmnibus Service Licensing Ordinance is entitled to claim deductions, undersection 9 (1) (a) of the Income Tax Ordinance, for the depreciation by wearand tear of the buses owned by it. and. under section 9(1) (cc) (i) or 9 (1) (ccc) (i),in respect of the cost of new buses purchased by it.
An agent, unlike an independent contractor, acts, on the whole, under thecontrol of the principal. Where an omnibus oompany operates its busii essthrough “ Branch Managers ” appointed by it but retains in itself the generalcontrol of the running of the service, tne relationship between the companyand a “ Branch Manager ” is that of principal and agent.
X. S. FERNANDO, J.—The Commissioner of Income Tax v. Sri Lanka 133
Omnibus 0o,, Ltd.
^CaSI5 stated under section 74 of the Income Tax Ordinance.
M.Tiruchelmm, acting Solicitor-General, with V. Tennekoon andM. . de Silva, Crown Counsel, for the Commissioner of Income Tax,appuTant.
11. V. Perera, Q. 0., with H. W. Jayewardene, Q. 6., and P. Ranasinghe,for the assessee, respondent.
Cur. adv. vidt..
May lo. 1958. T. S. Fernando, J.—
T1T-. case came to be stated in the following circumstances:
TA a lessee, the Sri Lanka Omnibus Company Ltd., a company incor-porated under the Companies Ordinance, with the transport of passengersand goods as its principal object, commenced business on 16th January,1943. The Omnibus Service Licensing Ordinance, No. 47 of 1942, hadmade legal provision for the introduction of a system of exclusive roadservice licences for omnibuses shortly before the establishment of thecompany , and the company was successful in obtaining licences in respectof a number of routes. The company took over 143 buses belonging to■some 36 different owners who had prior to the enactment of the Ordinancebeen plying them in various sections of the routes allotted to the com-pany. These owners were allotted shares in the company equivalentto the value of the buses, the goodwill and the value of the route licencesheld by them. Over one hundred of these buses belonged to sevenindividuals, while the balance belonged to others who owned oneor two buses each. The seven individuals referred to above were elec-ted directors of the company. The buses were run under a systemcalled the Branch System, and seven branches were establishedwith centres at seven different places, each in charge of a differentdirector.
The terms and conditions under which these seven directors were tofunction were contained in letters addressed to each of them by thecompany, and ddcument A.l dated 28th December 1943 is a copy of aletter addressed to one of the directors, the letters to the other directorsbeing similar to this in all relevant particulars. All seven directors wereinformed by these letters that they had been appointed the company’sagents as from 16th January 1943 on the terms and conditions mentionedtherein, and they all signified their acceptance of these appointments.Thereafter, by agreements dated 2fcth July 1947 entered into between thecompany and the seven agents appointed by the letters of 1943, the agentswere designated Branch Managers, each for one of seven branches of thecompany which were to do the work formerly done by the respectiveAgents. Document A.2 is one such agreement, the others being similarin all relevant particulars. One of the terms of these agreements was
134 T. S. FERNANDO, J.—The Commissioner of Income Tax v. Sri Lanka
Omnibus Co., Ltd.
that the Branch Manager should remit to the Sri Lanka Omnibus Com-pany Ltd., the gross collections of fares after appropriating 90% of suchgross collections for the payment of employees, for repairs, rents ofgarages, cost of petrol, oil, tyres and tubes, replacement of old buses,etc. Later, in April 1952, the Branch Manageis handed over their functionsunder the agreements to companies formed by them and had thesecompanies substituted in their respective places by agreements whichthey entered into with tne Sri Lanka Omnibus Co., Ltd.. A.3 is a sampleoopy of these agreements. The seven directors who had first been theagents and later Branch Managers entered into agreements similar to
3A guaranteeing the performance by the new companies of theirrespecti. e functions under the agreements similar to A.3.
We are concerned in this case stated only with the assessments madeupon the Sri Lanka Omnibus Co., Ltd., (wliich I shall hereafter refer to asthe assessee-company) during the years of assessment (i) 1946-47 and (ii)1948-49 to 1953-54. During these periods the Branch Managers furnishedreturns of income to the Income Tax Department on the basis that eachof them was carrying on the business of transport cf passengers at one orother of the seven centres referred to above, and were assessed on thatbasis. They did not claim, nor were they allowed, a deduction from theirprofits or income in respect of (1) depreciation of the buses or (2) thepercentage fixed by law of the cost of the new buses purchased for theefficient running of the transport service. The assessee-company wasassessed for income tax on the basis of its share of the 10% of the grosscollections remitted by the Branch Managers in terms of the agreement
2. A claim by the assessee-company to deduct, in computing itsprofits or income, (1) the depreciation of the buses in terms of section9 (1) (a) of the Income Tax Oidinance and (2) a percentage or the cost ofthe new buses purchased in the relevant period in terms of section 9
(cc) of the Ordinance was disallowed by the assessor. An appealto the Commissioner having been unsuccessful, an appeal was preferredto the Board of Review which has held that the claim for both deductionsshould be allowed. The Commissioner, desiring to canvass the decisionof the Board, has caused this ease to be stated for determination by thisCourt.
The three questions which the Commissioner requested to be stated areset down as follows :— 1
(1)Whether the agreement dated the 29th day of July 1947—A.2—
between the assessee-company and the person styled the BranchManager therein can be deemed in law to have constituted thesaid person an agent of the assessee-company ?
If the answer to (1) is in the negative, can the assessee-company be
considered in law to have used their buses to carry on thebusiness of transporting passengers or goods ?
Whether, on the facts established in this case, the assessee-company
is entitled in law to a deduction
T. S. FERNANDO, J.—The Commissioner of Income Tax v. Sri Lanka 136
Omnibus Co., Lid.
(а)in such sum as the Commissioner considers reasonable under
the provisions of section 9 (1) (a) for the depreciation bywear and tear of the buses owned by it;
(б)under the provisions of sections 9 (1) (cc) (i) or 9(I)(ccc) (i),
in respect of the cost of buses purchased in its name duringthe years of assessment 1946-47 and 1946-49 to 1953-54inclusive i
At the commencement of the hearing before us, learned counsel whoappeared for the assessee-company questioned whether any matter oflaw really arises upon this case stated. The objection, however, wasnot pursued, and the learned Solicitor-General who appeared for theCommissioner was permitted to argue the appeal. At the terminationof the argument it appeared to us that the questions that do arise, viz. (a)whether the Branch Managers were agents of the assessee-company and(6) whether under the agreements the industrial undertaking was carriedon by the assessee-company, were in reality questions of fact, and thatin coming to its conclusion the Board of Review had not applied anywrong principles of law. Upon that view of the matter it does not appearto us that there was here any case to be stated under the provisions ofsection 74 of the Ordinance and, as there was evidence before the Boardto support the decisions it reached, those decisions must stand.
At the same time as the questions stated were fully argued before us,I would like to examine the arguments. Before doing so, however, it isnecessary to state that the deduction in terms of section 9 (1) (a) wouldbe available to the assessee-company only if it could be established thatthe buses were used by it in a trade or business carried on by it, and that interms of section 9(1) (cc)(i)or9 (1) (ccc) (i) would be available only if thenew buses were purchased by it and used in an industrial undertakingcarried on by it in the relevant period. It may be mentioned that theexpression “industrial undertaking ” in section 9 (1) has been defined asmeaning also an undertaking for transporting persons or goods.
The Solicitor-General contended that the arrang ment reached betweenthe assessee-company and the Branch Managers constituted the latternot agents of the former but in reality independent contractors. Hepointed to the fact that, as the Branch Managers have to pay to theassessee-company a sum of a rupee a day in respect of each bus givenover to them, the buses which constituted the assessee-company’s capita]assets had been hired out by the assessee-company which thereby ceasedto carry on the undertaking of transporting persons. As against this, itwas urged on behalf of the assessee-company that this was accepted bythe Commissioner as not being a hiring-out of the buses and no more thanthe making of a nominal payment to ensure that the title of the assessee-company to the buses would not be disputed by the Branch Managers.It appears not to have been disputed that a reasonable sum for the hireof a bus for a day would have to be estimated at about Rs. I Oft.In
these circumstances the Board of Review appears to me to be justifiedin stating that this arrangement did not result in making the assessee-company a hirer of the buses.
130 T. f>. FERNANDO, J.—The Commissioner of Income Tax v. Sri Lonha
Omnibus Co., Ltd.
The Solicitor-General next urged that there were other terms of theagreements which indicated that the real operators of the services werethe Branch Managers, and that by entering into agreements like A. 2and A. 3 the assessee-company had contracted away its rights to carry onthe business which had in truth been assigned to the Branch Managers.Stress was laid on the faot that the buses were placed under the manage-ment of the respective Branoh Managers who were to run the Luces onthe routes for which the assessee-company held the licences, maintainthem in good repair, employ drivers or other employees at their expense,provide garage accommodation and indemnify the assessee-company fordamage arising out of the negligence of the employees. On the otherhand, counsel for the assessee-company pointed to other conditions in theagreement in support of his argument that, whatever be the terms betweenthe parties, the true relationship between them was that of principal andagent. It was emphasized that the assessee-company could direct theBranch Managers to discontinue employees found to be unsatisfactoryby the Board of Directors of the assessee-company, that the time andfare tables were prepared by the assessee-company and that the latterretained for itself the right to purchase new vehicles it considered neces-sary for the efficient running of the service although the purchase pricefell to be paid by the Branch Managers out of the 90% of the collectionsthey were permitted to retain. The Branch Managers were required tomaintain proper waybills and returns, and the administration of theservice was to be guided by the rules and regulations laid down by theBoard of Directors of the assessee-company. The agreements stipulatedthat the Branch Managers shall faithfully and efficiently carry out theorders of the Board of D rectors of the assessee-company. In thesecircumstances it is evident that on the whole the agreements preservedthe control of the running ol the service throughout in the assessee-eom-pany. It should be added that the assessee-company paid the licencefees for the buses and the premiums on the insurances obligatory underthe Motor Car and the Workmen’s Compensation Ordinances.
In considering the answers to the questions raised in this case it is notirrelevant to note that the running of a road service by any one of theseBranch Managers without a licence in his name would have been illegaland that, although there has been no secrecy about the arrangementreached between the assessee-company and the Branch Managers, neitherthe Commissioner of Motor Traffic nor any other authority at any timetook up the position that this arrangement was illegal. The amount oftax in dispute in this Case is considerable, and it is significant that at nostage in these proceedings was it suggested that the arrangement evi-denced by A.2 or A.3 was a blind. In the circumstances disclosed itwould appear to me to have been difficult to maintain such a suggestion.
I am of opinion that the Board of Review has rightly concluded thatfl) the buses were used by the assessee-company in the business of thetransport of persons carried on by it upon licence duly obtained thereforand (2) the new buses, although paid for in the first instance by the BranchManagers from the share of the collection, retained by them, were pur-chased bv the assessee-company as all the collections were in law moneybelonging to the assessee-company.
T. S. FERNANDO, J.—Tlie Commissioner of Income 'Cam v. Sri Lanka137
Omnibus Co., Ltd.
Certain authorities were cited before ns at the argument, but it willsuffice to mention only two of them. The learned Solicitor-Generalsought to find support for his contentions in the decision of the Court ofAppeal in The Union Gold Storage Go. Ltd. v. Jones1 where certaindeductions claimed as representing (1) fire insurance premiums paid by aBritish Company in respect of certain premises and (2) wear and tear ofmachinery and plant were disallowed. The British company had trans-ferred certain foreign cold storage business carried on by it to an Americancompany for a term of years. The premises, machinery and plant of theforeign businesses remained the property of the British company, but theywove placed under the sole control of and were used by the Americancompany for the purpose of carrying on the businesses as it thought fit.They were not demised or leased to the American company and no rentwas payable for their user, but the American company was to beep themin proper repair and working order, save as regards all ordinary wear andteav and damage by fire. In these circumstances it was held that thedeductions claimed did not represent money wholly and exclusively laidout or expended for the purpose of the trade of the British company.This case is dearly distinguishable from the case before us where upon aconstruction of the agreements A.2 and A.3 it is evident that the BranchManagers were to carry on the business under the orders of the assessee-eompany.
The other case that might be examined is that of London GeneralCah Co., Ltd. v. Commissioners of Inland Revenue2. While there arecertain superficial resemblances between the facts in that case and thosein the case before us, it is clear upon a consideration of the judgment ofVaisey J. that the decision of the Court rested on the question whetherthe Cab Company was a “ statutory undertaker ” in whose favour therewas an exemption from profits tax. A statutory undertaker was definedin the Finance Act of 1937, and the learned Judge came to the conclusionthat the Cab Company did not come within that definition. There hadbeen an admission before the General Commissioners that for certainpurposes the relationship between the Cab Company and its drivers wasthat of bailor and bailee of the cabs. The decision of the Court turnedon the admission, and upon this admission it was held that the relation-ship between the Cab Company and its drivers was not that of principaland agent or master and servant, and that the people who were reallycarrying on the business of transport of persons were not the Cab Companybut the drivers who were the bailees under the agreement reached betweenthem and the Company. The Solicitor-General argued that the relation-ship between the assessee-company and the Branch Managers was reallythat of bailor and bailee, but it seems to me to be impossible to say thatthe true construction of the agreements is not that reached by the Boardof Review.
The appeal to this Court therefore fails and must he dismissed withcosts.
Sansoni, J.—I agree.
Appeal dismissed.
2 {1950) 29 Tax Cases 407.
(1924) 8 Tax Cases 725.