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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: KESHAV MILLS Co. LTD., PETLADHonorable Justice CHAGLAN. A. Palkhivala
1963 P T D 380
1963 P T D 380
[Bombay India]
Before S. T. Desai and V. S. Desal, JJ
COMMISSIONER OF INCOME‑TAX
versus
KESHAV MILLS Co. LTD., PETLAD
Income‑tax Reference No. 2 of 1949, decided on 30th and 31st March 1960.
Income‑Place of accrual ‑ Mills situated outside British India ‑ Payments made by buyers in India, by cheques or drafts by post‑Whether income accrues in British India.
Where the evidence showed that the agreement between the buyers in British India and a company which manufactured cloth in Petlad (outside British India) was that the buyers should make payments in Petlad by cash, cheque, draft or hundis, and that the usual practice followed by the buyers and the company was that payments were made by cheques or drafts addressed to the company at Petlad but posted by the buyers in places in British India;
Held, that an implied request by the company that payments may be made by post may be inferred from the circumstances and practice, and the post office became an agent of the company to receive payments; and the amounts so remitted by the buyers were received by the company in British India.
Commissioner of Income‑tax v. Ogale Glass Works Ltd. (1954) 25 I T R 529 (S C) fol.
Where in a reference under section 66 a Bench of the High Court makes an order calling upon the Tribunal to submit a supplementary statement of the case under section 66 (4) it is not open to the Bench before which the case comes up for hearing after receipt of the supplementary state ment to consider whether the order calling for such a statement was correct.
Commissioner of Income‑tax v. Indore Malwa United Mills Ltd. (1960) 39 I T R 438 ; Commissioner of Income‑tax v. Ogale Glass Works Ltd. (1954) 25 I T R 529 ; Commissioner of Income‑tax v. Patney & Co. (1959) 36 I T R 488 ; New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 11 and Shri Jagdish Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 114 ref.
SUPPLEMENTARY STATEMENT OF CASE
In pursuance of the directions of the High Court of Judicature at Bombay, contained in their judgment dated 14/15th September, 1949, pertaining to the item of Rs. 6,71,735, the Income‑tax Officer was directed by an order of the Tribunal dated February 28, 1950, to ascertain whether there was any arrangement between the assessee company and its merchants by virtue of which the giving of drafts, cheques and hundis by the merchants to the assessee company would result in an unconditional discharge of the liability of the merchants. By the above stated judgment, the Tribunal was also directed to ascertain the circumstances under which the cheques, drafts and hundis, came to be cashed and to indicate the procedure followed by the banks and shroffs of the assessee company so that the Court would be in a position to know whether these cheques, hundis and drafts were given to the shroffs and the banks merely for collection or whether the same were cashed with them. In other words, the Tribunal was directed to find out whether the endorsee was a holder for value of the cheques or hundis or whether he was merely an agent of the assessee for collection. The Tribunal was also to ascertain whether any of these drafts, cheques, or hundis were actually cashed in Petlad.
The Tribunal remanded the case to the Income‑tax Officer directing him to get the above information required by the High Court. After the remand report of the Income‑tax Officer dated 2nd September, 1950, was received, along with several annexures, a fresh hearing was given to the parties.
A copy of this report is Annexure "A" and forms part of the case. According to the Income‑tax Officer's report, the sale proceeds involving the sum of Rs. 6,71,735 were mainly received as follows; Rs. By Drafts ... ... 5,86,487 By Hundis ... ... 80,524 By Cheques ... ... 3,129 6,70,140
The balance of about Rs. 1,600 has not been explained. From the above figures, it will be noticed that a very large amount, viz., Rs. 5,86,487, is received by drafts, on the Bank of India Ltd., the Central Bank of India Ltd., and the National Bank of India Ltd., all of Bombay. These are mostly deposited by the assessee company, after proper endorsement, to the credit of the accounts at banks in British India. If the drafts are on banks of repute named above, there is normally no question of the dishonour of these bank drafts and it would not be wrong to presume that the receipt by the assessee company at Petlad of such drafts would result in an unconditional discharge of the liability of the merchants.
The usual mode of endorsing drafts as well as cheques, which are received by the assessee company, is as under
"Pay to ..................
For the Keshaw Mills Co., Ltd.
Sd./‑ Agent."
As regards the question whether the assessee company gives immediate credit to its merchants on receipt of drafts, cheques or hundis or postpones giving credit until it hears from the bank or shroff as to the realisation of the negotiable instrument, the practice appears to be as under;
On receipt of the cheque, draft or hundi, an entry is passed on the debit side of the cash book on the same day from which entry the account of merchant is credited. In other words, the credit is given immediately, although ordi narily the bank will give credit to the assessee company's account only after the realisation of the negotiable instrument. It is stated that there is no particular arrangement between the assessee company and its bankers whereby the banks allow the assessee company to draw in advance against the drafts, hundis or cheques deposited by the assessee company to the credit of its account. If there was such an arrangement then it may be said that the bank for allowing such facility became the holder for value of these negotiable instruments. There being no such arrangement, it will not be wrong to say that the banks merely acted as the agents of the assessee company for collection. The Income‑tax Officer in his remand report has made reference to certain correspondence between the assessee company and its merchants from which it is desired to be pointed out that the asses see company does not give immediate credit to its merchants but gives credit only on realisation. When the merchants send draft or cheque to the assessee company they direct the assessee company in varying terms, such as "which be credited to our account and reply be sent accordingly", "therefore send receipt after giving credit" "credit the same to our account after due verification and acknowledge the receipt", etc. etc. The assessee company has not been able to produce copies of letters addressed to its merchants during the relevant accounting year, but copies of letters relating to later years have been produced and it is stated that the style of correspondence is the same even ire the preceding years. From the copies of the letters produced, the following mode or writing is gathered : "The amount will be placed to your account on realisation." "On realisation of the draft, your account will be credited" etc. While sending the drafts to the credit of its account at banks in British India, the assessee company usually addresses as under : "We send you herewith a draft for Rs . ............ for favour of credit to our current account. Please acknow ledge" ; "Herewith enclosed please receive a cheque for Rs drawn on yourself in our favour which please credit to our account and let us know." Similarly, when a hundi is sent to one of the shroffs, the letter, for instance, written to the shroff appears as under : "Hundis 3 (Rs. 200+1,000+800=) Rs. 2,000 are sent herewith. Please credit them to our account and inform accordingly." On receipt of the cheque or draft, the bank acknowledges the same, for instance, as under : "The Bank of India Ltd., present their :compliments and beg to acknowledge the receipt of the remittance of Rs .to be accounted for in accordance with the instructions given."
3. All cheques, drafts, or hundis are sent to the banks or shroffs in British India after the same are first received at Petlad by the assessee company and endorsed there. It may, however, be stated that as per the Income‑tax Officer's report, a draft of Rs.4,000 was cashed with a merchant of Petlad. This is the only amount which the assessee com pany received in Petlad out of the total amount of Rs. 6,71,735. As regards receipts by hundis, the assessee company has current accounts with two shroffs in Bombay to whom it sends the hundis after they are duly endorsed, in Petlad. The hundis, on realisation are credited to the account of the assessee company by these shroffs, who in our opinion merely acted as agents of the assessee company for collection.
It may be mentioned that the Income‑tax Officer, on receipt of the Tribunal's order under section 66 (4) of the Act dated February 28, 1950, appears to have written to the assessee company on July 8, 1950, asking for information on the lines indicated by the Tribunal in its order of February 28, 1950. The assessee company gave information by its letter to the Income‑tax Officer dated July 12, 1950, and August 5, 1950. A copy each of the assessee's letters dated July 12, 1950, and August 5, 1950, are Annexures "B" and "D" res pectively and form part of the case. The letter of 5th August 1950, is in reply to the Income‑tax Officer's letter of July 19, 1950, to the assessee company. A copy of the Income-tax Officer's letter dated July 19, 1950, is Annexure "C" and forms part of the case. Th‑1 first letter makes reference to the arrangement with merchants, but it is admitted that the arrangement is not specifically recorded in writing. It is also stated in one of the replies that the cheques, hundis or drafts were not sent for collection but were sent "as negotiable instruments to be dealt with by them as such and in the course of their banking business." The discussion on this point revealed that the drafts or cheques were not cashed with the bank but were just sent to be credited to the account of the assessee company. There are two ways in which a bank can receive drafts and cheques from its constituents. One is against any advance given by the bank to the constituent, the security being the negotiable instrument, in which case the bank is the holder for value ; and another is for the purpose of collecting the amount of the cheque or the draft on behalf of the constituent. It is admitted that the assessee company did not hand over the drafts and cheques to its bankers in the first category. Therefore, the only other alternative is that the same were sent to the bank for collection. The assessee company cannot get away from that position, despite the fact that it has hesitated to admit. It may also be mentioned that before a fresh hearing was given, the assessee company's manager, Manilal Maganlal Shah, has made an affidavit on 5th March 1951, in reply to the Income‑tax Officer's report dated September 2, 1950. As desired by Mr. Ambalal, a copy of this affidavit is made Annexure "E" and forms part of the case.
5. In answer to the points raised by their Lordships in the above‑mentioned judgment, we state as under;
(i) There was no specific arrangement or agreement between the assessee company and the merchants that the giving of cheques or hundis by the merchants to the assessee company would result in an unconditional discharge of the liability of the merchants.
(ii) That the drafts, cheques or hundis were handed over to the banks or shrotfs for the purpose of collection only, excepting a draft of Rs. 4,000 which was cashed in Petlad.
6. Both the parties to this reference agree that the facts are properly stated and that no material facts are omitted. Mr. Kolah for the assessee company, however, stated that the assessee company, did not agree with the legal inferences drawn by the Tribunal in this statement of case.
7. As the parties to the case desired that the submission of the further statement should await the decision of the Supreme Court in Kirloskar Bros. Ltd., and Ogale Glass Works, Ltd., this further statement was not submitted up to now.
G. N. Joshi with R. J. Joshi for the Commissioner.
N. A. Palkhivala (R. J. Kolah with him) for the Assessee.
JUDGMENT
CHAGLA, C. J.‑In this reference a question arose with regard to 3 amounts and when the reference came on before us we disposed of the questions arising out of two amounts and directed the Tribunal to submit a supplementary statement of the case with regard to the amount of Rs. 6,71,735 and that supplementary statement has now been submitted to us.
The question that arose with regard to this amount was whether this amount had been received by the assessee in British India. The supplementary statement that we called for was necessary before the Supreme Court delivered its judgment which is reported in Commissioner of Income‑tax v. Ogale Glass Works Lid. ((1954) 25 I T R 529). After this judgment the position with regard to receipt has been considerably simplified. Now, in this case the amount concerned was paid by the various merchants to the assessee by drafts, hundis and cheques, and the Supreme Court has laid down that where there is on the part of the seller a request, express or implied, to pay the amount by cheque or hundi or draft by post then the seller constitutes the post office his agent, and when the cheque, hundi or draft is posted in law there is a receipt by the seller. If, therefore, these drafts, hundis and cheques were posted in British India at the request of the assessee, which is the seller in this case, then the amount represented by the drafts, hundis and cheques would be received in British India.
Now, in the letter written by the assessee, which is Annexure "B" to the supplementary statement of the case, there is a clear and unequivocal statement that "the arrangement with the mer chants has been uniformly followed during the long course of conduct of business, that payments would be accepted (apart from cash) by cheques, hundis, drafts and these had to be sent by buyer to us at the mills". Therefore the case here stands on a higher foot ing than a request by a seller to the purchaser to send the amount by a cheque, hundi or draft. The assessee is relying on an agreement or an arrangement to that effect. Now, it is true that in this case the seller does not ask the buyer to send the amount by a cheque or hundi or draft by post ; but the Supreme Court points out that whether the request is to send a particular document by post or not may be implied from the surrounding circumstances, and one of the most important circumstances, as again pointed out by the Supreme Court, is commercial practice. There could not be the slightest doubt in this case that when the mill company which is situated in Petlad requests merchants all over India to send the amounts by cheques, hundis or drafts, it impliedly is requesting these merchants to send the payment by cheques, hundis or drafts by post. Therefore, in our opinion, this case comes within the ratio of the Supreme Court decision and there is an implied request by the assessee company to the merchants to send the amount by post. But Mr. Kolah rightly urges that there is no finding of fact by the Tribunal that this amount was in fact sent either by drafts or hundis or cheques by post. Mr. Kolah says that it may well be that a merchant might send the amount by a draft, hundi or cheque by a messenger and a draft, hundi or cheque might be delivered to the mill company at Petlad itself. Therefore, before we can determine upon the liability of the assessee company we do require an additional fact whether the sum in question was sent by drafts, hundis or cheques by post.
It will, therefore, be necessary to send the matter back to the Tribunal with a direction that they will determine on the evidence led by both parties whether the sum in question was paid by various merchants by sending drafts, hundis or cheques by post. If the Tribunal finds that in some cases the amount was not sent by post, then they will determine what amount was sent by post and what amount was sent otherwise than by post. Costs reserved.
SUPPLEMENTARY STATEMENT OF CASE II
As requisitioned by their Lordships of the Bombay High Court we 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 Income‑tax Act.
2. The direction given to the Tribunal is;
"'.That the Tribunal will determine on the evidence led by both parties whether the sum in question was paid by various merchants by sending drafts, hundis or cheques by post. If the Tribunal finds that in some cases the amount was not sent by post, then they will determine what amount was sent by post and what amount was sent otherwise than by post."
3. On the receipt of the order of the Hon'ble Court, the case was remanded to the Income‑tax Officer with a view to gather facts. The Income‑tax Officer has submitted a remand report. In paragraph 3 of the report the Income‑tax Officer writes
"The principal officer of the assessee company has stated in this letter that the records are not available at this distance of time and that the assessee agrees to presuming that the whole of the said sum of Rs. 6,71,735 came by post, by cheques, drafts, hundis or cash."
A copy of the letter dated October 4, 1956, from the principal officer of the assessee company and a copy of the report of the Income‑tax Officer are Annexures "F" and "G" and form part of the case.
4. On these facts, our finding is that the sum of Rs. 6,71,735 was received by the assessee by cheques, drafts or hundis by post.
5. The Departmental Representative accepts the statement of the case and has no suggestions to offer. Mr. Kolah, on the other hand, relies upon a recent decision of the Supreme Court reported as Commissioner of Income‑tax v. Patney & Co. ((1959) 36 I T R 488) and wants to make out entirely a new case for the assessee for the first time at this stage. We cannot allow him to do so. Our duty is confined to carry out the direction given by their Lordships in their order dated February 15, 1955.
JUDGMENT
S. T. DESAI, J.‑This reference of 1949 has had a very chequered history and raises the vexed question relating to payment by cheque to an assessee carrying on business outside the then British India and we are asked by the Revenue, at whose instance this reference has been made, to hold that there were on the part of the seller‑mills, the assessee, request express or implied made to the buyers of the goods in British India to pay the amounts by cheques, drafts or hundis so as to constitute the post office the agent of the assessee‑mills to receive the amounts in British India. Unusually variegated has become the pattern of this reference as will be seen from the fact that we have before us three statements of case of which two are supplemental statements made in pursuance of directions of this Court on two occasions. Even now we have before us a notice of motion, which inter alia asks this Court to send for a further statement of the case.
Principles applicable to this type of case before us are now well established and difficulty arises not so much in understanding and appreciating those principles as in the application of those principles to the facts of the case set out in the statements of the case, which, as we have already mentioned, are three.
The material facts and the history of the reference require to be stated in some detail. The assessee is a non‑resident company, which was carrying on business at Baroda at the material time. The assessment year is 1942‑43 (calendar year 1941). The company manufactured textile goods and sold the goods ex‑mill. The contention of the company was that being a non‑resident company, it was not liable to pay any tax on its profit or income as none of the profits made by the company had been received in British India. Three sums representing a large number of sales effected by the Mills to merchants in British India, were the subject matter of disputes between the Revenue and the assessee‑Mills. The reference originally related to three items of Rs. 12,68,480, Rs. 4,40,878 and Rs. 6,71,735 and came up for decision before Chagla, C. J. and Tendolkar, J. on 14th September 1949. The question that was referred to the Court embraced all the three items and was as under;
"Whether on the facts and in the circumstances of the case the sums of Rs. 12,68,480, Rs. 4,40,878 and Rs. 671,735 or any of them which represent receipts by the assessee company of its sale proceeds in British India, include any portion of its income in British India ?"
As to the first two items, there was reframing of it into two questions and they were answered in favour of the Revenue and against the assessee, the conclusion of the Court being that the income of the assessee in respect of the goods forming the subject‑matter of those two items had been received by the assessee in British India and was, therefore, liable to tax under the Indian Income‑tax Act. As to the third question, their Lordships took the view that the facts set out in the statement of the case were not adequate and therefore they gave certain directions in that behalf. It is not necessary for us to refer to those directions because in view of what transpired later on, it was felt necessary to ask for a further statement of the case. It may be mentioned that the law on the subject as then understood by the High Courts was in certain material respects different from that ultimately laid down by their Lordships of the Supreme Court in a series of decisions, the first of them being what is generally described as the case of the 0gale Glass Works ((1954) 25 I T R 529).
A statement of the case as directed by the Court was made by the Tribunal and the reference came up for hearing before the same learned Judges on 15th February 1955. The case of Ogale Glass Works one of which we have just made mention, had by that time been decided by the Supreme Court and we are informed that after hearing arguments for considerable time a further statement of the case was felt necessary as the tests, which had formerly found favour with the Courts, were not accepted by the Supreme Court in the case of Ogale Glass Works. In directing the Tribunal to make a further statement of the case, the learned Chief Justice observed;
"The supplementary statement that we called for was necessary before the Supreme Court delivered its judgment which is reported in Commissioner of Income‑tax v. Ogale Glass Works Ltd. After this judgment the position with regard to receipt has been considerably simplified."
The argument, which was advanced before the Court at that hearing, apparently turned on the contention of the Revenue that there were facts on the record of the case, which invited the operation of the principle laid down by the Supreme Court in the case of Ogale Glass Works and it was urged that those facts, which were undisputed and undisputable, went to establish that there was an express or implied request made by the seller‑mills to the fills buyers to pay the amount of the price of the goods by cheques, hundis or drafts by post and thereby the seller‑mills had con stituted the post office their agents and when the cheques, hundis or drafts were posted, there was a receipt by the seller‑mills at the place where the cheques, drafts or hundis were posted. It is convenient to mention here that there is now no dispute that the cheques, drafts or hundis were posted to the seller‑mills from places in the then British India. Nor is it in dispute that the cheques, drafts or hundis were received by the seller‑mills by post at its mills at Petlad. After hearing the arguments advanced by counsel at that hearing their Lordships observed;
"Now, in the letter written by the assessee, which is Annexure 'B' to the supplementary statement of the case, there is a clear and unequivocal statement that 'the arrangement with the merchants has been uniformly followed during the long course of conduct of business, that payments would be accepted (apart from cash) by cheques, hundis, drafts and these had to be sent by buyer to us at the Mills'. Therefore the case here stands on a higher footing than a request by a seller to the purchaser to send the amount by a cheque, hundi or draft. The assessee is relying on an agreement or an arrangement to that effect. Now, it is true that in this case the seller does not ask the buyer to send the amount by a cheque or hundi or draft by post ; but the Supreme Court points out that whether the request is to send a particular document by post or rot may be implied from the surrounding circumstances, and one of the most important circumstances, as again pointed out by the Supreme Court, is commercial practice. There could not be the slightest doubt in this case that when the mill…
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