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Chhaganlal Savchand Vs. Commissioner of Income-tax, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 29 of 1962
Judge
Reported in[1966]62ITR133(Bom)
ActsIncome Tax Act, 1922 - Sections 4 and 133
AppellantChhaganlal Savchand
RespondentCommissioner of Income-tax, Bombay
Appellant AdvocateS.P. Mehta, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - taxable territories - sections 4, 66 (1) and 133 of income tax act, 1922 - whether any income in whole or in part accrued in taxable territories in respect of certain transactions of purchase of cloth from dealers in foreign countries and sale transaction of that cloth to merchants in aden - sales in respect of transactions falling under category 4 took place in taxable territories - entire profit in respect of these transactions arose in taxable territories - in respect of sale transactions referred in category 3 part of activities resulting in sale took place in taxable territories and part in territories outside taxable territories - tribunal to determine what portion of profits arising out of these sales are attributable to activities in taxable territories and what.....tambe, c.j.1. this is a reference under sub-section (1) of section 66 of the indian income-tax act, 1922, at the instance of the assessee, shri chhaganlal savchand of aden. mr. mehta, learned counsel for the assessee, stated that the assessee is dead and his legal representatives, jayantilal chhaganlal, his son, and parvatibai chhaganlal, his widow, be brought on record. by consent of parties they are brought on record. we would be referring to shri chhaganlal savchand of aden as the assessee. we are here concerned with the two assessment years 1949-50 and 1950-51. in both these years the assessee has been taxed in the status of a non-resident. during the years of assessment the business conducted by the assessee was wholesale business in woollen and cotton cloth. 2. the question that.....
Judgment:

Tambe, C.J.

1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, at the instance of the assessee, Shri Chhaganlal Savchand of Aden. Mr. Mehta, learned counsel for the assessee, stated that the assessee is dead and his legal representatives, Jayantilal Chhaganlal, his son, and Parvatibai Chhaganlal, his widow, be brought on record. By consent of parties they are brought on record. We would be referring to Shri Chhaganlal Savchand of Aden as the assessee. We are here concerned with the two assessment years 1949-50 and 1950-51. In both these years the assessee has been taxed in the status of a non-resident. During the years of assessment the business conducted by the assessee was wholesale business in woollen and cotton cloth.

2. The question that arises is whether any income, in whole or in part, accrued in the taxable territories in respect of certain transactions of purchase of cloth from dealers in foreign countries like Japan and other countries and the sale transactions of that cloth to merchants in Aden. The modus operandi of the assessee in respect of these transactions in the assessment years was that the assessee obtained import licences for importing cloth in Aden from the Aden authorities and secured permits for making remittances of money to India. The assessee transmitted those documents to the firm of Chhaganlal Savchand & Co. in Bombay, hereinafter for brevity's sake referred to as the Bombay firm. The Bombay form after securing permission of the Reserve Bank of India obtained moneys from the assessee from Aden and then credited it with some bank in Bombay. On receiving instructions from the assessee as to the quantity and quality of goods, the Bombay firm placed orders directly with the manufacturers in Japan. Simultaneously, an irrevocable letter of credit was opened by the bank in Bombay with its branches in Japan in favour of the Japanese manufacturers. At times the Bombay firm did not deal directly with the manufacturers in Japan, but negotiated the purchases with the representatives of the Japanese manufacturers in Bombay. These representatives then informed the manufacturers about the supply of goods. In both these cases, however, the manufacturers dispatched the goods in the name of the assessee to his Aden address. The documents, however, such as bill of lading, were sent by the Japanese manufacturers to the Bombay firm through the bank. When these documents were received in Bombay, the Bombay firm released these documents through the bank after making payment to the bank against the letters of credit. The Bombay firm then in certain cases transmitted the documents to the assessee in Aden who then took delivery of the goods and then sold them to persons in Aden. In certain other cases the Bombay firm itself sold the goods to parties in Aden under instructions from the assessee. Now as regards the sales effected by the Bombay firm to parties in Aden, they were effected in the following two ways : An agreement was reached with the representatives of the Aden party in Bombay. In certain cases the documents were transmitted by the Bombay firm the Aden parties and in certain other cases the documents were handed over by the Bombay firm at Bombay to the representatives of the Aden parties. The purchasers falling under both these categories, however, sent the documents to the assessee at Aden for endorsement of particulars of his import licence and also for orders to the effect that the goods be delivered to the purchasers. The transactions thus effected by the assessee by adopting the aforesaid modus operandi have been divided by the Tribunal in paragraph 5 of its order in the following four categories, and it is an admitted position that they have been correctly categorised :

(1) Transactions in which purchases are made at Bombay from parties abroad by placing orders directly and sale by the assessee in Aden on receiving the documents therefor.

(2) Transactions in which purchases are made by the Bombay firm from foreign representatives of foreign parties in Bombay and sales made by the assessee in Aden.

(3) Transactions in which purchases are made by the Bombay firm from foreign parties direct and sale is made by them to Aden parties.

(4) Transactions in which purchases are made by the Bombay firm from foreign parties through their Bombay representatives and sales made to Aden parties through their representatives in Bombay.

3. It may be mentioned that so far as transactions in category 3 are concerned, documents were transmitted by the Bombay firm to the Aden parties and so far as transactions in category 4 are concerned, the documents were handed over by the Bombay firm at Bombay to the representatives of the Aden parties.

4. We are not here concerned with transactions falling under categories 1 and 2. In respect of those transactions the Income-tax authorities have held that operations relating to these transactions were partly carried out in India and therefore, profit or loss attributable to them had to be taken into account. The authorities, therefore, have held that 50 per cent. of the profit or loss respect of the said transactions should be taken into account while determining the assessee's total income. As regards transactions falling under categories 3 and 4, the Income-tax Officer held that the mere fact the documents were finally endorsed by the assessee at Aden would not serve to hold that the sale took place there. He held that the endorsement was just a legal formality to which no part of the profits could be attributed. Accordingly the entire profits in respect of the said transactions were held by the Income-tax Officer to arise in India. The assessee preferred an appeal before the Appellate Assistant Commissioner. He held that the sale was the cumulative result of various operations out of which the final endorsement was one of them. According to him the endorsement was legally an important step in the sale transactions, but judging from the various operations involved in the sale only some part of the profit could be attributed to it. He, therefore, held that 90 per cent. of the profits on these transactions arose in India and 10 per cent. arose in Aden. Against this decision of the Appellate Assistant Commissioner both the assessee as well as the department appealed to the Tribunal. The Tribunal upheld the contentions of the department and has held that the entire profits of the transactions falling under categories 3 as well as 4 accrued in India and, therefore, were taxable. The reasons given by the Tribunal are in the following terms :

'As regards the above transactions (falling under categories 3 and 4), no evidence has been brought by the assessee on record to establish as to where the sales actually took place. In the absence of any written agreement between the parties to the transaction of sale, the situs thereof must be determined with reference to the rules laid down in the Indian Sale of Goods Act. According to section 20 of the Indian Sale of Goods Act, where there is an unconditional contract for the sale of specified goods in deliverable state the property in the goods passed to the buyer when the contract is made and it is immaterial whether the time of payment of the price and the time of the delivery of goods are both postponed. It is admitted by the assessee that the contract or agreement for sale was made in Bombay and in the absence of any indication to the contrary it must be held that the agreement or contract for sale was unconditional. The property in the goods must, therefore, be held to pass to the purchaser on the contract being made in Bombay and as such the sale must be held to have taken place in Bombay. The Income-tax Officer was, in the circumstances, justified in holding that in respect of the above transactions the sale took place in Bombay within the taxable territories. The entire profit therefrom is to be subjected to tax.

5. On an application made by the assessee, the Tribunal after stating the case has referred the following question of law to us :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sales in respect of the transactions referred to above took place in the taxable territories and the entire profit in respect thereof arose in the taxable territories ?'

6. The assessee is being taxed in the status of a non-resident. It is not in dispute that the assessee would be liable to tax in respect of the profits and gains arising out of these transactions only if it is established that the said profits are received or are deemed to be received in the taxable territories or if the profits and gains accrue or arise or deem to accrue or arise to the assessee in the taxable territories during the said assessment years. It is an admitted position that the profits have not been received and the question to be considered is whether the profits arising out of these transactions either in whole or in part accrued or arose to the assessee within the taxable territories. The answer to this question in its turn would depend on the question as to whether the said sales have taken place within the taxable territories. In other words, whether the sales to the Aden parties of these goods had taken place within the taxable territories. i.e., in Bombay. Section 4 of the Sale of Goods Act defines 'sale'. Sub-sections (1) and (2) relate to the contract of sale. Sub-section (3) provides :

'(3) Where under a contract of sale property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an agreement to sell.'

7. It follows therefore that the question to be considered is whether the property in the goods was transferred to the Aden parties at Bombay as a result of the said transactions falling under categories 3 and 4. Chapter III of the Sale of Goods Act, in which section 19 and 20 occur, deals with transfer of property as between seller and buyer. These sections are material for the purposes of this case. Section 19 is an important section which lays down the basic principles and sections 20 to 24 are the rules enacted by the legislature for ascertaining the intention of the parties Section 19 is in the following terms :

'19. (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

(3) Unless a different intention appears, the rules contained in sections 20 to 24 are the rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.'

8. It is clear that the point of time at which the property in specific goods is transferred by the seller to the buyer depends on the intention of the parties. There is no fixed rule about it. The intention has to be gathered from various sources, such as the terms of the contract between the parties, the conduct of the parties and the circumstances of each case. The rules mentioned in sections 20 to 24 have been enacted as an aid for gathering this intention. But if either the terms of the contract or the conduct of the parties or the circumstances of the case disclose a different intention of the parties, then the rules do not come into play.

9. It would be recalled that the Tribunal has held that the rule enacted in section 20 of the Act governs the case. The arguments advanced by counsel for the parties center round the provisions of this section. It would therefore be convenient to read that section before we proceed to deal with the respective arguments. Section 20 is as follows :

'20. Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.'

10. It would be noticed that to attract the provisions of section 20, the following two conditions must be fulfilled : (1) the contract of sale must be for specific goods in a deliverable state, and (2) the contract must be an unconditional one. Unless these two conditions are fulfilled, the section is not attracted. If these two conditions are fulfilled, then the question that arises next is whether there is anything either in the terms of the contract or in the conduct of the parties or in the circumstances of the case indicating an intention of the parties contrary to the rule enacted in this section. If no such contrary intention could be gathered therefrom, then it necessarily follows that the intention of the parties was that the property in the goods was to pass to the buyer at the time the contract was made.

11. We now first proceed to consider whether the aforesaid two basic conditions necessary to attract section 20 have been satisfied in the present case. The first question then is whether the contract was in respect of sale of specific goods in a deliverable state. 'Specific goods' have been defined in sub-section (14) of section 2 as goods identified and agreed upon at the time the contract of sale is made. It is not in dispute that at the time the contract was made the goods were on the high seas and the bill of lading in respect of those goods was with the Bombay firm. The goods sold thus were identified at the time of the contract and it is also not in dispute that the contract of sale was in respect of specific goods. The second question is whether they were in a deliverable state. Mr. Mehta had contended that at the time of the contract of sale the goods were not in deliverable state, because the buyer could not have obtained delivery without obtaining the endorsement on the documents. In out opinion, the argument is not well conceived. To ascertain whether the goods are in a deliverable state or not, the question to be asked is whether the seller had anything more to do with the goods themselves in order to deliver them to the buyer. Matters which are not in any manner concerned with the state of the goods itself have no bearing in ascertaining whether the goods were in a deliverable state or not. Sub-section (3) of section 2 defines as to when goods are in a deliverable state and it provides :

'2. (3) Goods are said to be in a 'deliverable state' when they are in such state that a buyer would under the contract be bound to take delivery of them.'

12. It is thus clear that if the contract be in respect of ascertained goods relating to which the seller has to do nothing more, then the buyer is bound under the contract to take delivery and the seller is bound to give delivery of those goods to the buyer. It is an admitted position that the goods that were purchased were on the high seas represented by the bills of lading. These goods were sold by the Bombay firm to the Aden parties and the Aden parties had to take delivery of those goods. The endorsement to be made on the bills of lading and the other documents was only for purposes of enabling the purchasers to obtain delivery from the shippers. The endorsement had no concern and had nothing to do with the goods or for giving finishing touches to the goods for the purpose of delivering them to the buyer. In our opinion, therefore, the first condition, namely, that the contract was in respect of specific goods in a deliverable state has been fulfilled.

13. The second question that arises is whether the contract was unconditional. It is the argument of Mr. Mehta that the contract was a conditional one and the condition was the assessee making an endorsement on the documents in Aden. The contract made by the Bombay firm in Bombay thus was not an unconditional one. It therefore had not the effect of passing the property in the goods to the Aden party in Bombay Mr. Joshi, on the other hand, contends that having regard to the nature of the transaction, the contract was an unconditional one. In our opinion, the contention raised on behalf of the revenue is well-founded. The Income-tax Officer has held that the making of the endorsement on the documents was merely a formality. The Tribunal has, in its order, observed that having regard to the admitted position that the agreement or contract for sale was made in Bombay and having regard to the fact that no evidence has been tendered by the assessee to show any intention to the contrary, it is to be held that the agreement or contract for sale was unconditional. We are in agreement with the finding of the Income-tax Officer that endorsing of the documents had in the circumstances remained only a formality and did not appear to be a condition of the contract as such. The assessee had produced no evidence as to the terms of the contract, nor has it produced any evidence as to the point of time when the price was paid to the assessee by the Aden purchasers. None of the purchasers or their representatives in Bombay have been examined by the assessee. Only one person by name Tarachandbhai, an employee of the Bombay firm of which the assessee is a partner, had been examined. His evidence has not been accepted, and obviously not accepted, because it was interested evidence. It cannot be lost sight of that the assessee is a partner of the Bombay firm. The Bombay firm was not merely an agent of the assessee, but the employees of the Bombay firm were in fact the employees of the assessee himself. The entire transaction has been conducted by the Bombay firm. It is the Bombay firm that has placed orders for purchase of goods from Japanese manufacturers. It is to the Bombay firm that the documents had been transferred. It is the Bombay firm that has released these documents form the bank on payment. It is an admitted position that it is the Bombay firm that had entered into agreements with the representatives of the Aden parties for the sale of these goods. It is the Bombay firm which in some cased had handed over the documents at Bombay to the representatives of the Aden parties and in some other cases sent them to the Aden parties. Throughout the Bombay firm was acting in accordance with instructions received from the assessee. Having regard to these facts there can hardly be any doubt that obtaining the endorsement of the assessee in Aden was merely a formality, obviously because the import licence was in his name and also because the goods were transmitted or were shipped to his address, and it is therefore necessary to obtain his endorsement to enable the purchasers to obtain delivery of goods from the shippers. The statement of the case also shows that it was only for that purpose that the documents were submitted to the assessee and not for the purpose of completing the transaction of sale. The statement of the case says that the purchasers sent the documents to the assessee at Aden for endorsement of the particulars of his import licence and also for orders to the effect that the goods be delivered to them. In our opinion, therefore, the conditions mentioned in section 20 are fulfilled. The presumption that could therefor arise is that the property in the goods passed to the Aden buyers in Bombay at the time the contract was made, unless of course a different intention of the parties appears either from their conduct or from the circumstances of the case.

14. Now, as regards transactions falling under category 4, the only thing that had remained to be done was obtaining the endorsement on the documents. The documents had already been transferred by the Bombay firm to the representatives of the Aden parties. The documents which were transferred included also documents of title to the goods, namely, the bills of lading. In the commercial world, the bill of lading represents the goods themselves which are on the high seas and the transfer of the bill of lading tantamounts to the transfer of the goods themselves. Mr. Mehta, however, contended that mere transfer of documents of title is not sufficient to effect transfer of the goods. It was transfer of documents duly endorsed that alone constitutes the transfer of the goods. The endorsements had to be made in Aden. Till the endorsements were made the goods were not transferred or possession of the goods was not given to the Aden parties and this is a circumstance indicating the contrary intention of the parties. He placed reliance on a decision of this court in Milkhiram (India) Private Ltd. v. State of Bombay, in support of his contention that a transfer or delivery or possession of goods is effected not merely by delivery of documents but delivery of documents duly endorsed. The observations on which he placed reliance are in the following terms :

'It would thus be seen that the delivery after endorsement of the bill of lading will be effectual in passing the property in the goods where such is the intention of the parties. It would also be seen that unless there is evidence of a contrary intention between the parties, the transfer of the bill of lading with endorsement in favour of the buyer would amount to the sale of the goods and the passing of property in the goods from the seller to the buyer.'

15. We are unable to read any proposition laid down in the aforesaid observations to the effect that delivery after endorsement of the bill of lading is the only way by which property in the goods is passed by the seller to the buyer. The question that we had to consider in that case was whether even though there was delivery after endorsement of the bill of lading, there was anything in the terms of the contract or the conduct of the parties or the circumstances of the case indicating a contrary intention of the parties showing that the parties did not intend to pass the title in the goods to the buyer at the time of the delivery after endorsement of the bill of lading. We may here reproduce the observations of Bowen L. J. which have been cited with approval by the Supreme Court and which indicate as to what the bill of lading represents. These observations are at pages 24-25 of the report and they are :

'A cargo at sea while in the hands of the carrier is necessarily incapable of physical delivery. During this period of transit and voyage, the bill of lading by the law merchant is universally recognised as its symbol, and the endorsement and delivery of the bill of lading operates as a symbolical delivery of cargo. Property in the goods passes by such endorsement and delivery of the bill of lading, whenever it is the intention of the parties that the property should pass just as under similar circumstances the property would pass by an actual delivery of the goods.'

16. So far as India is concerned, 'documents of title' have been defined by sub-section (4) of section 2 of the Act and it provides :

'Document of title in goods includes a bill of lading... and any other document used in the ordinary course of business as proof of possession or control of the goods or authorising or purporting to authorise either by endorsement or by delivery the possessor of the document to transfer or receive the goods thereby represented.'

17. It would be clear that in India the bill of lading in the commercial world is used in the ordinary course of business as proof of possession or control of the goods themselves, and the possessor of the bill of lading is taken in the commercial world as a person authorised to transfer these goods either by making an endorsement on the bill of lading or even by mere delivery of the bill of lading. The endorsement on the bill of lading thus, having agreed to the provisions of sub-section (4) of section 2, cannot be said to be necessarily a condition precedent for the transfer of the goods. It is, therefore, not possible for us to accept the argument of Mr. Mehta. Thus, so far as the transaction falling under category 4 is concerned, in out opinion, neither the conduct of the parties nor the circumstances of the case indicate any intention contrary to the presumption that arises under section 20 of the Act. In our opinion, therefore, the Tribunal was right in holding that the profits arising out of the sale transactions falling under category 4 were in their entirety taxable in the hands of the assessee.

18. The question that arises next is whether as regards transactions falling under category 3, the conduct of the parties or the circumstances of the case indicate any contrary intention. Now, the distinguishing feature between transactions falling under category 4 and category 3 is that in the former case the documents including the bill of lading were delivered by the Bombay firm to the representatives of the Aden parties in Bombay, but in the latter case there was no such delivery made. On the other hand, the documents were sent by the Bombay firm to the parties at Aden. The delivery of the documents thus has taken place in Aden, that is, outside the taxable territories. The circumstances, in our opinion, having regard to the totality of the facts and circumstances of the case, are indicative of the contrary intention. It would be noticed that to fully transfer title in the goods from the seller to the buyer, the assessee's representatives being in Bombay not only entered into a contract with the representatives of the Aden parties but have also transferred the documents of title. The transfer of documents of title thus appears to have been one of the conditions of the contract between the parties for the transfer of title in the goods to the buyer. The Tribunal had made no distinction between transactions falling under category 3 and category 4 and it is on account of that reason that they have treated both the transactions on the same footing. We find it difficult in the circumstances of the case to so treat the transactions, for reasons which we have already given. In the circumstances, in our opinion, the presumption falling under section 20 would not arise so far as transaction falling under category 3 are concerned.

19. Mr. Joshi contended that practically the major part of the transaction of sale to the Aden buyer had taken place in Bombay. Delivery of the document at Aden was also in the circumstances a mere formality and that would constitute a very insignificant part. We should, therefore, restore the order of the Appellate Assistant Commissioner in respect of transactions falling under category 3 and hold that 90 per cent. of the profits arising out of those transactions arose in India and 10 per cent. arose in Aden. Mr. Mehta, on the other hand, contends that we should uphold that only 50 per cent. of the profits on these transactions arose in India and 50 per cent. arose in Aden. In our opinion, we would not be justified in entering into the consideration of the question as to what portion of the profits is attributable to the activities in the taxable territories and what portion of the profits is attributable to the activities in the taxable territories and what portion of the profits is attributable to the activities and what portion of the profits is attributable to the activities outside the taxable territories. The matter is for the Tribunal to decide.

20. For these reasons our answer to the question referred to us is that, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sales in respect of transactions falling under category 4 took place in the taxable territories and the entire profit in respect of these transactions arose in the taxable territories. So far as the sales in respect of transactions referred to in category 3 are concerned, part of the activities resulting in the sale took place in the taxable territories and part in territories outside the taxable territories. What portion of the profits arising out of these sales are attributable to the activities in the taxable territories and what portion is attributable to the activities outside the taxable territories would be determined by the Tribunal.

21. The assessee to pay half the costs of the Commissioner.


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