Full Judgment Text & Judicial Ruling

1963 P T D 823

1963 P T D 823

[Bombay India]

Before S. T. Desai and V. S. Desai, JJ

PETLAD TURKEY RED DYE WORKS Co. LTD. PETLAD

versus

COMMISSIONER OF INCOME TAX

Income tax Reference No. 16 of 1955, decided on 21st April 1960.

Income tax Act (XI of 1922)---- S. 66 (4) Income Accrual Sale of goods Price remitted by buyers by cheques or drafts by post-Whether income accrues where cheque or draft is posted Whether post office agent of seller Inference of implied request from facts Reference Order calling for further statement of case-Legality.

Where a company carrying on manufacture of goods outside British India received payment for the goods sold to buyers in British India by cheques or drafts sent by post by the buyers in British India to the company to its address outside British India

Held, that the income accruing to the company from the sales must be deemed to accrue in British India if from the facts and circumstances and the evidence adduced in the case an implied request by the company to the buyers to send the price by post so as to make the post office the agent of the company for receiving the cheques or drafts from the buyers, can be inferred.

[On the facts their Lordships held that such an implied request could be inferred.]

Where a Bench of the High Court hearing an application for reference has made an order under section 66(4) calling upon the Tribunal to submit a fresh statement of the case it is not open to the Bench before which the case comes on for hearing after the receipt of the statement to question the legality of the order calling for a fresh statement.

Commissioner of Income tax v. Keshav Mills Co. Ltd. (1962) 44 I T R 647 ; Commissioner of Income tax v. Ogale Glass Works Ltd. (1954) 25 I T R 529 (S C) and Commissioner of Income tax v. Patney & Co. (1959) 36 I T R 488 ref.

STATEMENT OF CASE

Their Lordships of the Bombay High Court had by their order dated September 23, 1955, in I. T. Ref. No. 16 of 1955, directed the Tribunal to submit a supplementary statement of the case to the High Court of Judicature at Bombay under section 66 (4) of the Indian Income tax Act on the same lines as their Lordships had indicated in I. T. Ref. No. 15 of 1955 (The Baroda Spg. & Wvg. Co. Ltd. v. Commissioner of Income tax). Their Lordships further directed that the supplemental statement of the case should be confined to the two amounts mentioned in the question raised on this reference, viz., Rs. 9,53,304 for the assessment year 1941 42 and Rs. 6,04,588 for the year 1942 43. Therefore, the points on which the Tribunal has been called upon to give its findings are : (1) whether the cheques were received in Petlad or in the taxable territories? (2) whether they were received by post or by hand? and (3) whether the assessee expressly or impliedly had requested the merchants to send these cheques by post to Petlad. We accordingly hereby draw up a supplemental statement of the case and refer it to the High Court of Judicature at Bombay under section 66 (4) of the Indian Income tax Act.

2. On receipt of the said order of the Hon'ble High Court the case was remanded to the Income tax Officer by the Tribunal by its order dated February 13, 1956, for a proper inquiry. The Tribunal by the said order directed the Income tax Officer to give the parties an opportunity of producing fresh material on the points involved and in the light of the observations made by their Lordships in the above said order, A copy of the remand order is Annexure "B" and forms part of the case. Thereupon, the Income tax Officer called upon the assessee to produce the necessary material and information to enable him to submit a remand report within the time fixed by the Tribunal. The assessee was in particular asked by the Income tax Officer by his letter dated October 10, 1956, to produce all the books of account for 1940 and 1941, bank pass books, files of correspondence with the merchants, banks and shroffs for the sale of the goods, delivery, payment and depositing negotiable instruments with the banks or shroffs and a list of merchants to whom goods were sold and sale proceeds were realised. Two lists were required to be preparedone showing the sales not in dispute and the other showing the sales in dispute. The assessee in spite of several letters written by the Income tax Officer and even by the Tribunal failed to produce any evidence in respect of the assessment years under reference, i.e., 1941 42 and 1942 43. The statements in paragraphs 2 and 3 of the remand report set out these facts. The assessee company concedes that the facts set out therein are correct.

3. The Tribunal had by its order in I. T. As. Nos. 1494 and 1495 of 1949 50 dated August 3, 1954, in respect of the assessment years 1943 44 and 1944 45 remanded the case to the Income tax Officer to ascertain afresh the modus operandi of the assessee in effecting the sales in dispute in view of certain decisions of the Supreme Court and for making a report. The Income tax Officer had heard the assessee and submitted his remand report dated October 18, 1951, for the assessment years 1943 44 and 1944 45. A copy of the said remand report with all its enclosures, the objections filed by the assessee company and the rejoinder by the Department is collectively Annexure "C" and forms part of the case.

4. Though the assessee could have produced the evidence called for the assessment years 1941 42 and 1942 43 it did not choose to produce any. The correspondence appears to have been produced at the original assessment stage when the extracts were taken by the Income tax Officer. The explanation that the correspondence could not be traced was not accepted by the Income-tax Officer and in the circumstances the Income tax Officer had to make the report on the materials available. As the Income tax Officer in making his remand report for the assessment years 1943-44 and 1944-45 had also to consider similar questions as in this case, he submitted his report dated May 7, 1957, for the assessment years 1941-42 and 1942-43 largely relying on the said report for the later years. A copy of the remand report dated May 7, 1957, for the assessment years 1941-42 and 1942-43 is Annexure "D" and forms part of the case. The assessee had not filed any objections to the same but had filed objections to the remand report for the subsequent two years and the Department had filed its rejoinder and answers to the objections of the assessee. From the records it is not found whether in fact the assessee company at any time represented to the Income tax Officer to treat the remand report for the later years (i.e., for the years 1943-44 and 1944-45) as the material for the earlier years. But before us both the assesse as well as the Department referred to the said report for the assessment years 1943 44 arid 1944-45 and addressed lengthy arguments to enable us to give the findings as required by the order of the High Court referred to above. The assessee could have produced and, in fact, ought to have produced the evidence that it was called upon to produce. The significance of the non production of the account books, correspondence, etc., vide the Income tax Officer's letter dated October 10, 1956, will be apparent from the later paragraphs of this statement. However, the parties addressed their arguments before us on such materials as were available.

5. Assessment year 1941-42 : The remand report indicates that the claim of the assessee is confined to the sum of Rs. 9,41,716. The break up of this figure is as follows:

Rs.

Received in cash at Petlad

89,618

Cheques and hundies received at Petlad but passed on to the creditors at Petlad

3,59,397

Cheques and hundies received at Petlad but negotiated with banks in the Baroda State

57,407

Cheques and hundies received at Petlad but passed on to the creditors in British India

83,769

Cheques and hundies negotiated with banks in British India

3,51,525

Total

9,41,716

??????????????????????? Assessment year 1942-43 : The amount in dispute is the sum of Rs. 6,04,588 made up of :

Rs.

(1) Cheques and hundies drawn on British Indian banks and negotiated in favour of merchants of British India to discharge the debts

1,91,877

(2) Cheques and hundies received from British Indian merchants and deposited with banks and shroffs of British India

4,12,711

Total

6,04,588

6. These amounts and is the break up of these figures as furnished by the assessee at the earlier stages of the proceedings (grounds of appeal before the Appellate Assistant Commissioner) are not in dispute. Mr. Kolah, the learned counsel for the assessee, stated that the entire amount pertaining to both the years was received by post at Petlad. We accept his position and, therefore, our findings on the first and second points are that the entire amounts were received by post at Petlad.

7. Mr. Kolah next contended that the onus of proving that these remittances were made by post, at the express or implied request of the assessee, was on the department and that the department had not discharged the same. For his proposition he relied upon the authority of a decision of the Bombay High Court in the case of Commissioner of Income tax v. New Jehangir Vakil Mills Ltd. ((1956) 30 I T R 664, 669). Mr. Joshi, appearing for the Department, on the other hand contended that the onus was on the assessee, it had not produced any evidence though called upon specifically to do so and that in the absence of the production of the account books, the bank pass books and the correspondence we must draw an inference adverse to the assessee and hold that there were instructions by the assessee to its several customers to remit the amounts by post. He urged that the case relied upon by Mr. Kolah was inapplicable to the facts of this case as the point at issue was different and it was only a concession by the Department. Both Mr Kolah and Mr. Joshi would have it that the remand reports supported their respective contentions. Undoubtedly, if the assessee had produced the correspondence and account books it would have been easier to ascertain the truth. For example, the amounts due to the assssee from a customer have been paid to the Central Bank or other persons. Circumstances under which they were so paid are not now clear. We do not know whether there are similar payments by other customers. The correspondence and the account books, if produced, would certainly have clarified the position. In the absence thereof we have necessary to draw an inference adverse to the assessee. We consider that it was the duty of the assessee company to have produced the account books, etc., which it was called upon to produce.

8. The report for the assessment years 1943 44 and 1944 45 has many annexures thereto ; some of them are affidavits from several constituents of the assessee company in regard to the practice that obtained in their dealings with the assessee company and also generally as to the custom prevalent. These deponents have been cross examined by the Department and re examined by the assessee. Mr. Kolah also relies on the letter dated June 2 4, 1955, of the secretary of the assessee company. This letter, according to Mr. Kolah, sets out the modus operandi adopted by the parties. Therefore, we would extract the relevant portion of the letter :

"(1) Our sales were on terms of payments at Patlad. When goods were ready we used to send our invoice (a copy of which has already been filed) and a covering letter. Forms of invoice and covering letter are attached (with English translation). These show that there was no demand to send payment by post or otherwise but the same contained request to credit the amount to us.

(2) The buyers were bound to pay at Petlad. They were free to pay by cheque or draft or hundi or cash in the mariner they liked. There was do stipulation or demand to send the payment by post. We debited the buyers when we sent the invoices and as has been stated so often we credited the buyers on the date that we received the cheque, hundi or draft as our books show without waiting for realisation."

This letter would show, it is urged, that the condition of the sale was that the payment should be made at Petlad, that there was no demand to send the payment by post or otherwise and that the constituents were free to make the payments in any manner they liked. The secretary of that company Mr. Keshavlal Shah has been examined by the Income tax Officer. He states as follows :

Question. What was the modus operandi of the company in 1942 and 1943 in effecting the sales?

Answer. Our modus operandi was to sell ex mill delivery and to receive payments at the mills. I may explain. The merchant sent the offer for the goods he wanted to purchase from us. We considered the offer and if suitable accepted it. A bill was prepared and the goods were despatched. The merchants will then send the payment.

In answer to a further question he stated that the bills and invoices were sent by post and that that mode was adopted "because that is the convenient and usual mode of sending." To another question, whether the assessee wrote to the merchants "to send up the payments", he answered "No."

9. Copies of the bills and covering letters have been produced. The relevant portions of these are as follows : . . . . . . bales of your order are despatched .

. . . . . . Railway receipts . . . . . invoices of the same for Rs . . . . . bundles . . . lbs . . . . . are sent with this letter, which please credit to our account and reply. Please immediately acknowledge receipt of the Railway Receipt.

Enclosures : R. R. Nos.

Invoice Nos. Signed..................

THE PETLAD TURKEY RED DYE WORKS COMPANY LIMITED

Agents : Parikh Naranbhai Keshavlal & Company (Petlad)

Shethji ?????????..........?? Place?????....... Note that?????. bales of your order as under have been despatched. The same may be credited to our account.

Bales number

Count of yarn

Colour of yarn.

Trade Mark

Bales

Bundles

Lbs.

Rate

Total Price

Remarks

Rs.

Rs.

Rs.

??????????????????????????????????????????????????????????????????????????????????????????????? Total------------------- In words Rs????..Annas?????..Pies?????.Please credit this to our account, (Underlining by us) Samvat 199...

10. Some of the customers, in all twenty three in number, have, as stated already, filed affidavits in support of the assessee's contention. Mr. Joshi appearing for the Department objects to the affidavits being considered as being of no evidentiary value His main objection thereto is that these affidavits were prepared on stamp papers purchased by the assessee and sent to the several deponents, the affidavits are stereotype in form, the deponents have not applied their minds to the contents of the affidavits and therefore no reliance could be placed on those affidavits. These deponents have been cross examined by the Income tax Officer either by himself or by issuing commissions. Mr. Joshi relies on the evidence of these witnesses. If he relies on the cross examination, we fail to see how these affidavits are not of evidentiary value. Mr. Joshi drew our attention particularly to the examination of some of these deponents wherein they have stated that they signed the affidavit because they were asked to do so. But in a few instances the deponents have stated that they consulted their legal advisers and others before signing the affidavit.

11. The affidavits, as stated, set out the modus operandi which was, according to the assessee, adopted in the dealings between the assessee company and the constituents. To quote one f or example "according to the practice acceptable to all buyers, delivery was to be ex mill delivery and the payment was to be made in Petlad in the usual manner, namely, by cash, cheque, draft, or hundies as may be convenient to the buyer. The method and manner of payment was left to us. There was no condition that the payment should be made by cheques nor was there any request from the mills that the same should be sent by post . . . . We had all these years made payments to the said limited company by sending them to Petlad cheques, hundies or drafts and that is the accepted mode` of payment? between us as evident from the fact that every year in course of dealings with them we have paid them accordingly." In another part of the affidavit we find the statement : "Our liability as the buyer ceased and extinguished at Petlad when the said company received the instrument at Petlad as payment according to our course of dealings and credited the amount in our account at Petlad in their books. I know that the above mode of payment is the recognised mode of all merchants in our province with the Petlad Turkey Red Dye Works Co. Ltd, Petlad, and it is also recognised and customary mode of payment by buyers of other concerns . . . . . There was no arrangement that we should send the price by post. We were free to pay the amount in any manner and whether in cash, by cheque, hundies or draft as we wished and we could send the price by post or in any other manner as we liked and there was no obligation on us to send by post. The remittances from us were at our cost and risk and the company was to give us credit on the date of receipt . . . . ."

12. On this Mr. Kolah's argument

is that there was an arrangement or agreement by which the customers were sold the goods on terms of ex mill delivery, that payment was to be made at Petlad and that the buyer may choose his own method of remitting the money. Mr. Kolah further stated that there were no instructions to remit or pay the amount as we find in some other cases. Therefore, in the absence of such instructions it cannot be said that there was a request either express or implied to make the payment by post. The deponents have also been cross examined at length by the Income tax Officer. They also more or less confirm the statements made by them in the affidavits. But in the examination we find that one thing is brought out that the customers, though there was no condition that the payment was to be made by cheque nor was there any request from the company that the same should be sent by post in fact sent the money by post as that was the usual practice. They also show that that was the practice followed for very many years. Mr. Joshi contended that the instruction in the bill was that the amount should be credited to the account of the assessee, that money so credited has been received by the assessee in the course of the year and in the circumstances the customers would not have remitted the amount except under some instructions by the assessee to remit and that in the absence of the correspondence, purposely withheld by the assessee, it must be presumed that these moneys were remitted by the customers only on instructions by the assessee to do so. For this he relies on the evidence of Harilal Jethalal Shah wherein in answer to the question "Here I show you certain entries in the books of accounts of the Petlad Co. concerning you. On journal page 150 it is stated that you paid Rs. 4,000 to M/s Vallabhram Ramchand on account of the company. On page 180 it is narrated that you paid Rs. 5,000 in the account of the Central Bank of India of the company. Why did you do so ?" he states : "I do not remember today." To another question "did the Petlad Co. ask you to make payments at these two places ?" he answers: "I do not remember." The argument is that the customers would not have paid either into the Central Bank or to Vallabbram Hemchand the moneys due by him to the assessee except on specific instructions in that behalf. The other argument of Mr. Joshi is that the accepted general practice as spoken to by the several witnesses being that in the absence of any specific instructions in that behalf, if remittance were made by post, by cheque or otherwise, it must be presumed that the remittance were so made only at the implied request of the assessee.

13. To sum up, therefore, the contention of the assessee is that there was no express or implied request to remit the amount by post, the customers were at liberty to choose any mode they liked, whenever they liked. there was an agreement to make payments at Petlad and therefore the decisions of the Supreme Court in the case of Commissioner of Income tax v. Ogale Glass Works Ltd. ((1954) 25 I T R 529) and the other cases did not apply to the facts of this case and that this case will be covered by the decision of the Supreme Court in the case of Commissioner of Income tax v. Patney & Co. ((1959) 36 I T R 488). The contention of Mr. Joshi on the other hand is that these affidavits have no evidentiary value as they. are made for a certain purpose deliberately to suit the case of the assessee, that the examination of the deponents should be relied upon, that the letter of the secretary of the company and his examination really show a custom and if a custom is shown there is an implied request to remit the sale proceeds by post, that even if these affidavits have any evidentiary value, they also establish the existence of the custom and therefore an implied request to remit by post and the case was exactly covered by the decision of the Supreme Court in the case of Shri Jagdish Mills Ltd. v. Commissioner of Income tax ((1959) 37 I T R 114) and the decision of the Bombay High Court in the case of Commissioner of Income tax v. Keshav Mills Co. Ltd. Petlad ((1962) 44 I T R 647). Mr. Joshi contended that there is no evidence to show that there was an agreement between the parties to the effect that the payment was to be made at Petlad. The secretary of the company does not refer to any such agreement. Many of the witnesses have in fact deposed that there was no agreement to make the payment at Petlad. He, therefore, contended that, in the circumstances of the case, the decision in Patney's case has no application.

14. On these facts and having considered the respective contentions we find as regards the first question that the cheques, etc., were received at Petlad. As regards question No. 2, the remittances were received admittedly by post. Even in cases of receipt of cash Mr, Kolah fairly conceded that the receipt was by post at Petlad. We find a mention of cut notes being sent by post in the evidence of one of the witnesses. Therefore, the only remaining question that has to be considered and a finding given is question No. 3.

15. On the evidence we find the position as follows. The bills and covering letters give the instruction to the "credit the a/c." Moneys, cheques etc., have admittedly been received by the assessee by post at Petlad. The affidavits and evidence of the deponents are to the effect that the customers could make the payment at Petlad as they chose. The admissibility of the affidavits as being of evidentiary value or not is one thing, and the acceptability is altogether different. In the examination of one witness we find the following :

Question. You have stated in your affidavit that you were free to pay amount in any form. On what evidence do you state this?

Answer. On the basis of usual practice that is being followed for the past many years. The correspondence received from Petlad Mills relating to Samvat Years 1998 and 1999, i.e., Diwali ended November 8, 1942, and October 29, 1943; is not now available.

In the examination of another witness we find the following :

Question. Can you produce the letters and the correspondence in question ?

Answer. It is difficult to trace.

In another part of the same statement we find :

Question. You have stated in your affidavit that the company gave you actual credit on the day they received cheque, draft, hundi or cash. How do you know when they passed in the books of the company ?

Answer. On the basis of annual statement sent by the company.

Question. Have you got these annual statements ?

Answer. It is not possible to trace them out.

The evidence of the other witnesses is almost on the same lines. All he deponents consistently deny having the correspondence or other evidence to support their version as to the modus operandi. The bills and covering letters (forms) and "Please credit to our account" whereas the customers' affidavits and evidence speak of making payments at their pleasure at Petlad. The bills and covering letter are the earliest pieces of evidence. It is very difficult to believe that there was an agreement between the assessee company and the customers that payments should be at Petlad. There is an air of unreality about the affidavits and the circumstances under which they were got executed are very artificial. The affidavits, as stated, cannot be accepted as setting out the correct position. Take the case of customers situate at distant places. Can it be said that there was an arrangement or agreement apart from that contained in the bills or covering letters, unless there be…

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