A) ABSTRACT / HEADNOTE

The Supreme Court in Qamar Shaffi Tyabji v. Commissioner, Excess Profits Tax, Hyderabad, [1960] 3 SCR 546, clarified the distinction between employment and agency in the context of tax liability under the Excess Profits Tax Act of the erstwhile Hyderabad State. The appellant, a former chairman of an Advisory Board managing two cotton mills, was appointed managing and selling agent by the Industrial Trust Fund—a government-backed body formed to assist industries. The appellant contended that his role was that of an employee and not an independent businessman, seeking exemption from excess profits tax. However, the Court, relying on the Indian Contract Act, 1872, especially Section 194, and precedents like Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, [1955] 1 SCR 393, concluded that the appellant acted as an agent with independent authority and not a servant. Consequently, his income from the managing agency agreement constituted “business income” and was taxable. The Court dismissed the appeal and reaffirmed that independent agents, even under general supervision, are liable to business tax obligations.

Keywords: Managing Agent, Excess Profits Tax, Agency vs Employment, Indian Contract Act, Business Income

B) CASE DETAILS

i) Judgement Cause Title: Qamar Shaffi Tyabji v. Commissioner, Excess Profits Tax, Hyderabad

ii) Case Number: Civil Appeals Nos. 824 and 825 of 1957

iii) Judgement Date: April 18, 1960

iv) Court: Supreme Court of India

v) Quorum: Justices S.K. Das, J.L. Kapur, and M. Hidayatullah

vi) Author: Justice S.K. Das

vii) Citation: [1960] 3 SCR 546

viii) Legal Provisions Involved:
Section 194 of the Indian Contract Act, 1872
Hyderabad Excess Profits Tax Act
Article 19(1)(g), Article 14, Article 20 of the Constitution of India

ix) Judgments Overruled by the Case: None

x) Case is Related to which Law Subjects:
Taxation Law, Contract Law, Corporate Law, Constitutional Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The roots of this case lie in post-independence interpretations of agency and taxation. The Government of Hyderabad had set up an institution—Industrial Trust Fund—for promoting industries. This body functioned through agreements appointing it as managing and selling agent for two cotton mills: Azamjahi Mills and Osmanshahi Mills. The Trustees appointed the appellant, Qamar Shaffi Tyabji, as their managing and selling agent via delegation of authority. The taxation authorities later assessed his income under the Excess Profits Tax, leading him to claim that he was merely a salaried employee and thus not liable. The Court had to resolve whether Tyabji’s status equated to an employee or an independent business agent.

The judgment gains significance for laying down the difference between an employee and an agent conducting business, under Indian law. It also discusses the applicability of excess profit tax to such agency-based earnings and the constitutional validity of the relevant provisions.

D) FACTS OF THE CASE

The Industrial Trust Fund was constituted by the Ruler of the erstwhile Hyderabad State via a Firman-e-Mubarak in 1929 to support industrial development. By agreements dated April 12 and July 27, 1934, the Trust Fund (through its Trustees) became secretaries, treasurers, and agents for two major mills—Azamjahi and Osmanshahi. These agreements gave them sweeping powers, including delegation of their roles.

In 1938, the Trustees, with approval from the mills’ Boards, entered into an agreement with the appellant, Qamar Shaffi Tyabji, under which he assumed full control over the managing and selling agency roles. This agreement fixed his remuneration at ₹2,000 per month, plus a performance-based commission tied to mill profits. The agreement also made it non-transferable and personal to Tyabji.

Subsequently, for the accounting years 1941–42 and 1942–43, Tyabji was assessed for excess profits tax. He contested this on the basis that he was not operating an independent business but merely receiving salary as an employee under the Trustees. His appeal to the Hyderabad High Court failed, prompting these appeals before the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the appellant’s earnings under the managing agency agreement constituted income from business or were merely salary received as an employee.

ii) Whether the appointment conferred on the appellant by the Trustees amounted to an independent agency under Section 194 of the Indian Contract Act, 1872.

iii) Whether the income so earned was liable to be taxed under the Hyderabad Excess Profits Tax Act.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for the Appellant submitted that Qamar Shaffi Tyabji acted under the direction and control of the Trustees of the Industrial Trust Fund. Therefore, his role was comparable to that of an employee rather than an independent contractor. He performed duties on instructions and had no autonomous authority over strategic business decisions of the mills[1].

They contended that since the Trustees themselves were the officially designated managing and selling agents for the mills, Tyabji could not have independently taken on the business of agency. The delegation merely authorised him to act as a conduit or representative. The character of the employment thus remained that of master-servant[2].

It was argued that the use of the phrase “personal to himself” in Clause 9 of the agreement reinforced his role as a personal appointee, not a business entity. Consequently, the remuneration should be treated as salary, and not business income liable to excess profits tax[3].

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the managing agency agreement clearly delegated business operations and full management rights to the appellant, Qamar Shaffi Tyabji. The Trustees delegated comprehensive authority to him with approval from the respective mills’ Board of Directors[4].

They highlighted that the contract was not an employment contract. It had business-like features including fixed-term tenure, performance-linked commission, and first refusal rights on transfer of the managing agency. Such terms are never seen in contracts of service[5].

They referred to Section 194 of the Indian Contract Act, 1872, to argue that the Trustees, as agents of the mills, had legal authority to appoint another agent to act on their behalf. This made Tyabji a direct agent of the principal, not merely an employee of the Trustees. The business income flowing from such an agency agreement is taxable[6].

H) RELATED LEGAL PROVISIONS

i) Section 194, Indian Contract Act, 1872
If an agent has express authority to name another person to act for the principal, such person is deemed an agent of the principal.

ii) Hyderabad Excess Profits Tax Act
Applies excess tax on business incomes during war-time economy to curb profiteering.

iii) Article 19(1)(g), Constitution of India
Guarantees the right to practice any profession or to carry on any occupation, trade, or business.

iv) Article 14, Constitution of India
Ensures equality before law.

v) Article 20, Constitution of India
Provides protection in respect of conviction for offences.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Court ruled that the managing agency agreement dated 6 December 1938 was a delegation of business operations and not an employment contract. The Trustees had express authority under the 1934 agreement to appoint an agent to act on their behalf. Hence, Tyabji operated as an agent of the mills themselves, not merely of the Trustees[7].

He had independent responsibilities, operated under general supervision, and was remunerated via commission and fixed payments. These attributes were indicative of a business, not employment. Thus, his income was liable to be taxed under the Excess Profits Tax laws[8].

b. OBITER DICTA 

i) The Court noted that not all restrictions on assignability in contracts imply employment. Clause 9, although stating the personal nature of the appointment, did not negate the underlying business character of the arrangement. The structure and terms of the agreement indicated a commercial agency, not employment[9].

c. GUIDELINES 

• Courts should examine the substance of an agreement, not just terminology used.

• Determining employment vs agency must involve review of control, remuneration mode, and authority.

• If an agent operates with autonomy and earns commission, the arrangement qualifies as business.

J) CONCLUSION & COMMENTS

The Supreme Court decisively distinguished employment from business agency. This case reaffirms that delegation of authority by an agent with the principal’s consent leads to a direct agency and not subservience. Even when supervision exists, the structural and contractual independence is key to determine taxability.

The ruling also settled that managing agency operations conducted for profit fall squarely within the ambit of taxable business under excess profit legislations. It reinforces the judicial principle that one must go beyond mere labels and look at practical control, autonomy, and responsibility to determine the true character of a relationship.

This judgment serves as a beacon for taxation and corporate structure matters, especially where agents operate under delegated contracts. It mandates that tax obligations apply based on actual operational realities, not artificial constructs.

K) REFERENCES

a. Important Cases Referred

[1] Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, [1955] 1 SCR 393
[2] J.K. Trust, Bombay v. Commissioner of Income Tax/Excess Profits Tax, Bombay, [1958] SCR 65
[3] Inderchand Bari Ram v. Commissioner of Income-tax, [1952] 22 ITR 108

b. Important Statutes Referred

[4] Indian Contract Act, 1872, Section 194
[5] Hyderabad Excess Profits Tax Act
[6] Constitution of India, Articles 14, 19(1)(g), 20