V.N. Subramania Iyer vs K.M.S.R.M. Kannappa Chetti and Others

This appeal arises out of a suit between a principal and his agent. The plaintiff had a cloth shop in Kumbakonam and he was also doing some

money lending business there. The defendant became his agent at Kumbakonam under a salary chit (Ex. A) dated 28th April 1919. As usual it was

for a period of three years and provided that the defendant should receive a salary of Rs. 50 per mensem. On 18th of May however, the plaintiff

gave a letter (Ex. 1) to the defendant which records a previous under, standing to the effect that in addition to salary, the defendant was to be paid

5 per cent, of the profits after deducting ""interest charges"" and other charges. To facilitate the conduct of business, a power of attorney (Ex. B)

was executed by the plaintiff in favour of the defendant on 12th November 1920; this was not in terms limited to any specified period. When

approaching the expiry of the three years term under Ex. A, the defendant was apparently pressing the principal for increased remuneration and in

Ex. 1-a, dated 13th May 1922, the principal wrote to the defendant to say that from 28th April 1922 when the stipulated term of Ex. A ends) the

salary might be fixed according to the scale that might be settled hereafter. Ultimately, on 24th August 1922, a new salary chit (Ex. C) was

executed by the defendant and accepted by the principal, under which the defendant was to be paid a salary of Rs. 90 per mensem and the share

of profits was fixed at 7 per cent, both to take effect from 13th April 1922. The defendant continued in the business of agency up to 29th January

1925 when he started a new business of his own and left the plaintiff''s shop.

A number of allegations were made against the defendant in the plaint, in respect of the manner in which he had conducted the business and in

respect of the alleged omissions on his part to render proper accounts and to prepare stock list, out-standings list and so on. On most matters the

lower Court has found in the defendant''s favour. But as it was of opinion that there had not been a complete rendering of accounts, in the sense

contemplated by law as between principal and agent, it passed a preliminary decree for accounts being taken. It is in respect of some of the

directions given in that preliminary decree that questions have been raised in the appeal as well as in the memorandum of objections. A general

question was also raised in the appeal to the effect that the suit was barred by limitation.

The question of limitation may be disposed of at the outset. On behalf of the appellant (defendant) Mr. K.V. Krishnaswami Ayyar contended

that the suit must be held to be governed by Article 90 and not by Article 89 and, in the alternative, that even under Article 89, the two agencies

under Exs. A and C must be treated as distinct agencies and the suit must be held to be barred so far as the accounts of the first agency are

concerned, because the present suit was instituted only on 25th January 1928. We do not think that either of these contentions is well founded.

The present suit is undoubtedly a suit for account, though, as the plaintiff was in possession of the accounts relating to the defendant''s conduct of

the agency, the plaintiff had not to pray for a general accounting but only took exception to particular matters appearing in the accounts. The mere

fact that the plaint also contained allegations that in certain transactions the defendant had acted in excess of his authority will not make the suit any

the less one governed by Article 89 Muthiah Chatty v. Alagappa AIR 1918 Mad 31 The argument founded upon the existence of two salary chits

is equally un tenable. As has been observed in Ramanathan Chetty v. Kasi, AIR 1917 Mad 455 and the connected oases, the principal purpose of

the salary chit is to fix the remuneration of the agent. Whether on the termination of the period fixed in the salary chit the agency also terminated or

not is a question of fact and not a question of law. The defendant himself in his deposition admits that the object of the salary chit was only to fix his

salary; he adds ""the period of business was not fixed, i.e. of the business to be done by me When it is Remembered that there was a continuous

course of management by the defendant and no new accounts were opened for the so called second period of agency and no new power of

attorney was executed in respect of the second period of agency and the increased remuneration provided for under Ex. C is made to take effect

not from the date of Ex. C but even from 13th April 1922, which covers part of the period covered by Ex. A, we do not think there is any

justification for artificially splitting up the defendant''s conduct of the plaintiff''s business into two separate agencies. We therefore overrule the plea

of limitation.

The main objection taken on the merits in the memorandum of appeal relates to the way in which the lower Court has directed the profits to be

calculated for the purpose of determining the five per cent, or seven per cent, payable to the defendant under Ex. 1, as part of his remuneration.

The plaintiff had invested some money as capital in the Kumbakonam business. In the deposition he states it was Rs, 21,000. He claims that before

the profits of the business can be ascertained for the purpose of calculating the defendant''s share there, in, interest at reasonable rate on the capital

thus invested by him should be deducted. The lower Court has acceded to this contention apparently on the ground that the plaintiff spoke in

favour of it in his evidence. The matter is however one of construction of Ex. 1 and not one to be decided on oral evidence.

The ordinary rule of law, as stated in Lindlay on Partnership, Edn. 10, page 465, is that as between partners or between the principal and an

agent who is paid for his services by a share of the profits of the business, interest on capital is not to be charged in taking accounts unless there is

some agreement to that effect. The decision in Riston v. Grissell (1868) 5 Eq 326 carried this rule so far as to disallow interest even in a case

where the principal bad invested borrowed money in the business. The present case is no doubt distinguishable as one in which there is an

agreement between the parties regulating the matter. But in determining the scope of that agreement, one has to remember that such is the rule of

law and except to the extent to which the agreement has clearly indicated a different arrangement between the parties, the defendant will be entitled

to the benefit of the general rule. There can be little doubt that the present case differs from Riston v. Grissell (1868) 5 Eq 326 so far as any

portion of the money invested in the business had been borrowed. Ex. 1 expressly provides that the profits are to be ascertained after allowing for

interest expenditure"" but the collocation of the words ""interest expenditure"" (vatti chilavu) clearly suggests that all that was meant was ""charges or

outgoings"" to be debited to the business on the ground that they had to be paid to outsiders. It seems to us too much to say that the parties

intended that the profits realized in the business should be notionally divided into two portions, one to be regarded as interest on the capital

invested in the business and the other to represent profits. It is noteworthy that the document does not provide any standard or rate with reference

to which the interest is to be so calculated. The use of the expression ""vatti chilavu"" is more consistent with the view that the parties meant to

exclude only the payments actually made by way of interest to strangers. The direction in the lower Court''s decree must therefore be varied to the

extent that it allows even interest on the plaintiff''s capital to be conducted before ascertaining the profits.

The other objection raised by Mr. K.V. Krishnaswamy Iyer in his appeal is against the direction in the lower Court''s decree that the profits

should be ascertained on the basis of the amount actually realized by the sales or other kind of business done by the defendant after deducting the

shop expenses ignoring all bad and irrecoverable debts. This matter assumes importance in the case because the defendant had in accordance with

the course of business made sales in credit to a large extent and a considerable portion of these out-standings had not been realized by the time the

defendant left the plaintiff''s business. The implication of the direction above quoted from the lower Court''s decree is that except to the extent to

which the amounts due from customers to whom goods had been sold on credit had actually been realized in cash, the business should be deemed

to have made no profits at all for the purpose of ascertaining the defendant''s share of the profits. This implication is not altogether justified. Mr.

Krishnaswami Iyer went to the extreme length of contending that as the debts due from the customers were taken over into the new accounts

which the plaintiff opened when the defendant left the shop, all the debts so taken into the new account must be deemed to have been actually

realized or at any rate to have been accepted as good assets and the profits should therefore have been calculated on the basis that they all have

been realized. We do not think this extreme contention is warranted. The process of a succeeding agent taking: over at a valuation the out-

standings due during the conduct of a business by a prior agent is no doubt well-known amongst Chetties; but the evidence does not show that any

such process was gone through in the present case. The business was a single business and when the defendant left the business the plaintiff had no

alternative but to accept all the outstanding as they stood at the time the defendant left the business and make his best efforts to realise them. The

mere fact of the entries having been carried into the new books does not justify the inference that all the out-standings were accepted by the

plaintiff as good assets.

On the other hand, Mr. K.V. Krishnaswami Ayyar is justified in his contention that where particular out-standings arising out of credit

transactions were really realisable assets on the date when the defendant left the business, the mere fact that by reason of subsequent events, i.e.

either on account of change in the situation of the debeors or because of laches or negligence on the part of the plaintiff or his agents in making the

collections, some of these out-standings have not been realized should not be insisted on to the prejudice of the defendant, even in calculating

profits. It is also true that the out-standings need not be classified under these two heads as though they are exhaustive; it is possible that some out-

standings still remain unrealized or have merged in later accounts, without having actually become bad and irrecoverable. This possibility must be

ascertained with reference to the facts in each case. The direction in clause (d) of the lower Court''s preliminary decree must therefore be varied so

as to make it clear that in ascertaining profits for the purpose of calculating the defendant''s share therein, the Commissioner and the Court will have

due regard to the state of the debtors at the time that the defendant left the business and while the plaintiff will be entitled to exclude the debts

which may be actually found to be or to have become bad or irrecoverable through no fault of his or his agent, the defendant will be entitled to

have taken into account not merely the out-standings actually realized but the out-standings which might in due course have been realized except

for the laches or negligence or undue delay on the part of the plaintiff or his later agents. It was suggested by Mr. K.V. Krishnaswami Iyer that the

question as to what out-standings must be treated as bad and irrecoverable must be decided by the Court. This is of course so. But normally the

matter will be dealt with in the first instance by the Commissioner and both parties will be at liberty to raise objections before the Court to any

opinion pronounced by the Commissioner on this point. Subject to the modifications above indicated, the decree of the lower Court is confirmed

and the appeal is otherwise dismissed. As the appellant has succeeded in part and failed in part, there will be no order as to costs in the appeal.

In the memorandum of objections the plaintiff attempts to raise two points: (1) one against the finding of the lower Court as to the defendant''s

authority to sell goods on credit and (2) the other against the lower Court''s finding disallowing the plaintiff''s claim in respect of the lace business

carried on by him in partnership with one Chellam Iyer. As regards the first point, we see little force in the objection; not merely has it been the

course of business to sell on credit but the evidence also shows that the plaintiff was all along aware of this course having been followed by the

defendant and never took any exception. As regards the lace business, the lower Court was right in its view that it had nothing to do with the

particular contract of agency to which the suit relates. The memorandum of objections is accordingly dismissed with costs.