A) ABSTRACT / HEADNOTE

This judgment in Shoorji Vallabhdas & Co., Bombay v. Commissioner of Income-Tax / Excess Profits Tax, Bombay, [1960] 3 S.C.R. 557, addresses the intricate and long-debated issue regarding the situs of income accrual for the purposes of taxation under the Indian Income-tax Act, 1922 and the Excess Profits Tax Act, 1940. The crux of the dispute revolves around whether the managing agency commission earned by the appellant, Shoorji Vallabhdas & Co., accrued in British India or in the Indian States, particularly Cochin and Travancore. Despite some operations and freight bookings at Cochin, the Tribunal and the Supreme Court found that all substantial and effective managing agency functions were executed from the head office in Bombay. The commission income, though computed as a percentage of freight, was held to accrue where the actual management services were rendered. The judgment reiterates that for managing agents, the place of accrual is determined not by where revenue arises for the managed company but by where services generating the managing agency income are actually performed. The court distinguished between the computation of income and the place of accrual, applying the ratio from K.R.M.T.T. Thiagaraja Chetty and Co. v. CIT, [1953] 24 ITR 535 (SC) and dismissed the appeal.

Keywords: Managing Agency Commission, Accrual of Income, Situs of Income, British India, Excess Profits Tax, Indian States, Income Tax Act 1922

B) CASE DETAILS

i) Judgement Cause Title
Shoorji Vallabhdas & Co., Bombay v. Commissioner of Income-Tax / Excess Profits Tax, Bombay

ii) Case Number
Civil Appeal No. 305 of 1955

iii) Judgement Date
April 19, 1960

iv) Court
Supreme Court of India

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

vi) Author
Justice S.K. Das

vii) Citation
[1960] 3 S.C.R. 557

viii) Legal Provisions Involved

• Section 14(2)(c) of the Indian Income-tax Act, 1922

• Section 5 (Proviso 3) of the Excess Profits Tax Act, 1940

ix) Judgments Overruled by the Case
None

x) Case is Related to which Law Subjects
Taxation Law, Income Tax, Corporate Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The appeal arose from assessments made under both the Indian Income-tax Act, 1922 and the Excess Profits Tax Act, 1940, pertaining to managing agency commissions. The appellant, a managing agent for three steamship companies, contested the jurisdictional reach of British Indian taxation on portions of its income allegedly earned through activities carried out in the princely states of Cochin and Travancore. The revenue authorities taxed the entire commission income under the premise that all effective control and services were executed in Bombay. The legal tussle focused on identifying the precise situs of income accrual, which necessitated the interpretation of statutory language and prior judicial pronouncements.

D) FACTS OF THE CASE

The appellant, Shoorji Vallabhdas & Co., served as the managing agent for three companies engaged in cargo transport across ports in British India and Indian States like Cochin and Travancore. The managing agency agreement stipulated a commission of 10% on freight and passage money for two companies and 25% of net profits for the third. Though the freight was earned partly in Indian States, the Tribunal found that the operational control, staff decisions, managerial services, and all crucial responsibilities were carried out from Bombay. Despite the appellant renting a flat in Cochin and claiming staff salaries there, the Tribunal deemed those arrangements superficial. Payments recorded as made in Cochin were found to be fictitious. The Tribunal and later the High Court held that merely collecting freight at Cochin did not alter the situs of income generation. Instead, the income was held to accrue where the managerial services were rendered — which was Bombay.

E) LEGAL ISSUES RAISED

i) Whether the managing agency commission income accrued wholly in British India, or partially in the Indian States of Cochin and Travancore?

**ii) Whether the appellant was entitled to apportion the commission income and seek tax exemption under Section 14(2)(c) of the Income-tax Act, 1922 and the third proviso to Section 5 of the Excess Profits Tax Act, 1940?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that

The managing agency commission was calculated on gross freight that included income earned in Indian States. Therefore, they argued, a proportion of the commission accrued outside British India. They cited Section 14(2)(c) of the Income-tax Act, 1922, which exempts income accruing outside British India. They further pointed to the contractual clause stating that remuneration would be paid at the place where it was “earned,” arguing that some services were performed at Cochin. The appellant maintained staff and premises there and processed freight bookings. The appellant also highlighted that the managed companies themselves acknowledged partial accrual of profits in the Indian States, suggesting similar treatment for managing agent income. Reliance was placed on Chunilal B. Mehta v. Commissioner of Income-tax, [1938] 6 ITR 521 to assert the place of performance matters in determining the source of income.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that

The Revenue contended that all substantial services under the managing agency agreements were performed in Bombay. They argued that the computation method (based on freight) did not affect the place where income accrued. They emphasized that the head office at Bombay managed hiring, maintenance, correspondence, and control over the business operations. The staff at Cochin was marginal, and their remuneration entries were found fictitious by the Tribunal. The Revenue relied on K.R.M.T.T. Thiagaraja Chetty and Co. v. CIT, [1953] 24 ITR 535 (SC) to argue that place of control and service matters in determining situs of accrual. They distinguished other cases where contracts or sales occurred outside British India but where no substantial services occurred at those locations.

H) RELATED LEGAL PROVISIONS

i) Section 14(2)(c), Indian Income-tax Act, 1922
This provision exempted income accruing or arising without British India unless received or brought into British India.

ii) Section 5, Proviso 3, Excess Profits Tax Act, 1940
This allowed exemption for profits accruing or arising in a native state where the business operations were conducted outside British India.

I) JUDGEMENT

a. RATIO DECIDENDI

i)
The Court ruled that managing agency commission accrues at the place where the managing agent performs services, not where the managed company earns freight. Since the Tribunal found all key responsibilities and decisions were executed from Bombay, the Court held that the commission accrued entirely in British India. The Court cited K.R.M.T.T. Thiagaraja Chetty and Co. v. CIT as precedent, reaffirming that situs of income is based on location of service, not revenue computation. The Court found the Cochin operations nominal, holding that “except booking freight, all responsible work was done at Bombay.”

b. OBITER DICTA 

i)
The Court discussed that merely calculating income on freight earned in Indian States does not imply services were rendered there. The income computation method is distinct from the place of accrual. The Court also noted that even in mixed business models, the entirety of managing agency income accrues where business control is exercised.

c. GUIDELINES 

• Place of accrual for managing agency commission depends on where services are actually performed.

• Income computation methodology (e.g., percentage of freight) does not determine situs.

• Tribunal’s factual findings on service location are binding unless perverse.

• Physical presence or token operations at other locations do not suffice for income accrual unless substantive services are rendered there.

• A unified approach to managing agency duties must be adopted without artificial segmentation.

J) CONCLUSION & COMMENTS

This decision remains a landmark precedent for determining the place of income accrual under Indian tax laws. It clarified that for managing agency contracts, where managerial services are rendered defines the taxable situs. The ruling discouraged token operations outside the taxable territories for tax avoidance. This case also emphasized the distinction between income computation and income accrual. The reliance on practical functions over contractual language promotes substance-over-form analysis. The Court’s endorsement of Tribunal findings reaffirms the role of appellate tax tribunals as factual arbiters. The judgment harmonized prior authorities and laid foundational jurisprudence for situs-based tax exemption claims under pre-independence tax laws.

K) REFERENCES

a. Important Cases Referred

1. K.R.M.T.T. Thiagaraja Chetty and Co. v. Commissioner of Income-tax, Madras, [1953] 24 ITR 535 (SC)

2. Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., [1950] S.C.R. 335

3. Commissioner of Income-tax, Bombay Presidency v. Chunilal B. Mehta, [1938] 6 ITR 521

4. Salt and Industries Agencies Ltd. v. Commissioner of Income-tax, Bombay City, [1950] 18 ITR 58

5. In re The Aurangabad Mills Ltd., [1921] ILR 45 Bom 1256

6. Commissioner of Income-tax, Bombay Presidency v. Messrs. Saurachand Hukumchand, [1930] ILR 55 Bom 231

b. Important Statutes Referred

1. Indian Income-tax Act, 1922 – Section 14(2)(c)

2. Excess Profits Tax Act, 1940 – Section 5, Proviso 3