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Hira Mills Ltd. Vs. Commissioner of Income-tax (Central), Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 48 of 1959
Judge
Reported in[1965]57ITR103(Bom)
ActsIncome Tax Act, 1922 - Sections 4(1)
AppellantHira Mills Ltd.
RespondentCommissioner of Income-tax (Central), Bombay
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
(i) direct taxation - taxable territories - section 4 (1) of income tax act, 1922 - whether sale proceeds in first and third category have been received in taxable territories within meaning of section 4 (1) (a) - profits included in sale proceeds of aforesaid sales would be taxable only when sale proceeds were received in taxable territories - bank collected amount from various dealers in british india for and on behalf of assessee - bank was not holder in due course - amounts received by assessee in british india and profits included therein were taxable - sufficient evidence on record to establish that bank was collecting agent of assessee - question referred answered in affirmative. (ii) taxable goods - whether sale proceeds in second category have been received in taxable.....tambe, j.1. on an application by the assessee under sub-section (i) of section 66 of the income-tax act, the income-tax appellate tribunal has submitted a statement of the case raising the following three questions of law : '(a) whether the proceeds of sale in the first category aforesaid have been received in the taxable territories within the meaning of section 4(1)(a) (b) whether the proceeds of sale in the second category aforesaid have been received in the taxable territories within the meaning of section 4(i)(a) (c) whether the proceeds of sale in the third category aforesaid have been received in the taxable territories within the meaning of section 4(i)(a) ?' 2. it is not in dispute that the profits included in the sale proceeds of the aforesaid sales falling in the three.....
Judgment:

Tambe, J.

1. On an application by the assessee under sub-section (I) of section 66 of the Income-tax Act, the Income-tax Appellate Tribunal has submitted a statement of the case raising the following three questions of law :

'(a) Whether the proceeds of sale in the first category aforesaid have been received in the taxable territories within the meaning of section 4(1)(a)

(b) Whether the proceeds of sale in the second category aforesaid have been received in the taxable territories within the meaning of section 4(i)(a)

(c) Whether the proceeds of sale in the third category aforesaid have been received in the taxable territories within the meaning of section 4(i)(a) ?'

2. It is not in dispute that the profits included in the sale proceeds of the aforesaid sales falling in the three categories would be taxable only in the event the sale proceeds were received in the taxable territories. It is also not in dispute that the areas within the then Native States in existence in the assessment year not taxable territories. According to the assessee the sale proceeds of the sales falling under the three categories were not received in the taxable territories but were received by him at Ujjain, which, in the relevant assessment year, was a part of the Native State, while according to e department the sale proceeds were received in the taxable territories. The contention of the department has been upheld by the Tribunal. It would be convenient to refer to the facts of each category of sale separately. We are here concerned with the assessment years 1944-45, 1945-46 and 1946-47, the relevant previous years being calendar years 1943, 1944 and 1945 respectively. The assessee is a company incorporated and carrying on the business of spinning and waving cotton textiles in Ujjain, a part of the former Indian State in existence during the relevant assessment years. It is a non-resident company. Its products were sold in the State itself as well as in the then British India to private dealers and also to the Government of India. The contracts of sales were entered into at Ujjain under which delivery was to be f.o.r. Ujjain. The assessee-company collected the sale proceeds from the private declares in British India as well as from the Government of India in various ways and it is these different ways adopted by the assessee in collecting the sale proceeds which have given rise to the three categories. We would now proceed to deal with the case relating to the proceeds of sale falling in the first category.

3. The total sale proceeds falling under this category received by the assessee in the year 1944-45 amounted to Rs. 19,66,373, Rs. 28,156 in 1945-46 and Rs. 1,89,166 in the assessment year 1946-47. Now, out of the sale proceeds of Rs. 19,66,373 received by the assessee in the year 1944-45, Rs. 1,79,616 were received on account of the sales to the Government, while the balance of sale proceeds were received in respect of sales to private dealers in British India. The mode adopted for collecting the sale proceeds in respect of sales to private dealers and the Government of India were slightly different but without there being any material distinction. We would first deal with the mode adopted by the assessee in collecting the sale proceeds in respect of sales (Rs. 17,86,757) to private dealers. The said sale proceeds of Rs. 17,86,757 were received by the assessee by means of drafts or hundis drawn by the assessee at Ujjain on the buyers in British India in favour of the imperial Bank of India, Ujjain. The assessee sent to the said Imperial Bank of India, Ujjain, railway receipts of the goods dispatched by it to the purchasers duly endorsed in favour of the bank together with the bills for the goods with instructions to the said bank to collect the amount of the said draft or hundis as also the bank charges from the buyers on whom the said drafts or hundis were drawn. The sample letter has been annexed as annexure 'A' to the first supplemental statement of the case :

'To

The Imperial Bank of India,

Ujjain.

Dear Sirs,

We beg to enclose herewith the following documents drawn in your favour which please acknowledge and arrange to collect the amounts noted against each and credit the same in our cash credit account with you.

----------------------------------------------------------------------Draft Railway Bill Amount Name and address of theNo. receipt No. No. Rs. merchant.-----------------------------------------------------------------------143 19 R. R. 57 12,431-3-3 M/s. Ramdas Shreeram, Bombay.-----------------------------------------------------------------------All the bank charges are to be collected from the above parties which please note. 7 1/2% interest may be collected 7 days after presentation of the documents.'

The Imperial Bank of India, Ujjain, in whose favour the railway receipt was endorsed and in whose favour the hundis were drawn, forwarded the same to its branch at the place where the drawers of the hundis carried on business. The said branch presented the drafts or hundis to the drawees and recovered the amount in British India after delivering the railway receipts to the drawees duly endorsed by the said bank in favour of the drawees. The sample of one such hundi or draft has been made annexure 'C' to the statement of the case, as some argument has been advanced on the language of this draft, which is in the following terms :

THE HIRA MILLS LTD.

Draft No. 886. Ujjain : 29-11-1943.

On demand please pay to the Imperial Bank of India, Ujjain, or order the sum of rupees one thousand three hundred and ninety-four, annas three only, for value received.

Railway Receipt No. 53129

and Bill No............. is enclosed

herewith.

Rs. 1,394-3-0.

Manager.

To

M/s. Alimohammed Brothers,

C/o. Haji Ahmedji Rahamanji,

Shree Ramvirganj,

Shreenagar.'

4. Now the contention raised on behalf of the assessee before the Tribunal was that the drafts or hundis drawn by the assessee at Ujjain on the buyers in India in favour of the Imperial Bank of India were unconditional drafts or hundis drawn without any reservation. The said Imperial Bank of India, Ujjain, was accordingly the holder in due course of the said drafts or hundis and was entitled to recover the amount of the said drafts or hundis in its own right. The amounts received by the bank on presentation of these drafts were received by the bank on its own behalf and not on behalf of the assessee. The sale proceeds were thus not received by the assessee in British India but, on the other hand , were received by the assessee Ujjain, where they drew the drafts of overdrawing on its cash credit account. On a consideration of the material on record, the Tribunal found that the assessee had a cash credit account with the bank at Ujjain. In this account were credited the proceeds of the aforesaid hundis on realisation a few days after presentation. The collection charges were independently collected by the banker from the parties. The bank had neither discounted nor purchased the drafts or hundis and credited the sale proceeds to the assessee's cash credit account prior to collection. The bank at Ujjain was, therefore, not a holder in due course of these hundis. The bank has acted in the matter purely as the assessee's collecting banker and nothing more, faithfully carrying out its instruction to collect not only the face value of the bill but also its collection charges and interest at the rates and time usance specified in the instructions and not according to the rates usually charged by it in its transactions with the assessee. It is further held that in the circumstances of the case it could not be said that it was the banker which collected the interest and bank charges as its own profit on bills belonging to it. Dealing with the argument advanced on behalf of the assessee that it had overdrawn in this cash credit account over and above the security offered by it, the excess drawn could be considered as covered by the aforesaid drafts and hundis, which the assessee had handed over to the bank pending collection, the Tribunal held that the assessee had not shown the extent of such over drawings and the bills pending collection on the respective dates. That data was not available and those facts have not been proved by the assessee. On the other hand, the assessee admitted before the Tribunal that no such over drawings can be specifically earmarked or shown as having been covered by any specified bill or bills. For these reasons the Tribunal rejected the contention of the assessee that the bank was the holder in due course of these drafts and hundis and had collected the respective amounts on its own account. As already stated, the Tribunal found that the bank was acting as only a collection agent and collected the amount from various dealers in British India for and on behalf of the assessee. The Tribunal, therefore, held that the amounts of the aforesaid proceeds were received by the assessee in British India.

5. Mr. Kolah, the learned counsel for the assessee, reiterated the argument that the bank at Ujjain in whose favour the hundis and drafts were drawn was a holder in due course. The drawing of the drafts or the handing over of the drafts by the assessee in favour of the bank was not conditional. The assessee has finally parted with the drafts or the handing over of the drafts by the assessee in favour of the bank was not conditional. The assessee has finally parted with the drafts or hundis at the time it handed over the draft and hundis to the bank, the bank in its turn allowing overdrawing facilities to the assessee on receipt of these hundis and drafts. The Ujjain Bank, thus a holder in due course of these hundis and drafts, collected the amounts from the dealers in British India on its own account and not as the collecting agent of the assessee. According to Mr. Kolah the case falls within the rule of the decision in Chiranji Lal Multani Mal v. Commissioner of Income-tax. An argument also was advanced that there could be no doubt that the assessee had handed over the drafts and bills to the bank for doubt that the assessee had handed over the drafts and bills to the bank for valuable consideration inasmuch as the sample draft, which had been enclose, on the face of it, says 'for value received'. The finding recorded by the Tribunal that the bank was not a holder in due course but only a collecting agent of the assessee is, therefore, contrary to the evidence on record and is vitiated. We find it difficult to accept this argument of Mr. Kolah and hold that the bank in the instant case was a holder in due course of the drafts and hundis and had collected the amounts in British India on its own account and not as the collecting agents for the assessee.

6. Section 8 of the Negotiable Instruments Act defines 'holder' and it provides :

'The 'holder' of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to received or recover the amount due thereon from the parties thereto.'

7. Section 9, which defines 'holder in due course', provides : 'Holder in due course' means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or endorse thereof, if payable to order.'

8. Now, reading these two definitions, it is apparent that both the holder as well as the holder in due course are persons entitled in their own name to possession of the negotiable instrument and receive and recover the amount thereon. But there is a distinction between the two inasmuch as the holder in due course becomes the possessor of the negotiable instrument by reason of valuable consideration.

9. Annexure 'C' is a sample copy of the draft which the assessee drew in favour of the Imperial Bank of India at Ujjain on dealers in British India. It is indeed true that the draft in terms directs the dealer to pay to the Imperial Bank of India, Ujjain certain sum 'for value received'. Now, we have already referred to the modus operandi. It appears that the dealers were asked to make the payment to the bank on received by the dealers in the shape of railway receipts endorsed in their favour, which gave them title to the goods. Assuming that it means, as the counsel contends, that order was given to the dealers in British India to pay the amount to the bank because the assessee had received consideration from the bank, it would be an admission made by the assessee in his own favour, a piece of evidence to be judge and considered along with the other evidence. There exists on record other evidence, besides the language of the draft. Firstly, the draft was sent to the bank with a covering letter containing instructions given by the assessee to its bank, which is annexure 'A' to the statement of the case, which has already been reproduced above, and the letter in express terms tells the bank to acknowledge the receipt of the draft, arrange to collect the amount mentioned in the draft, and credit the amount in the cash credit account of the assessee. The assessee further has given instructions to the bank to collect from the dealers in British India the bank charges as well as interest at 7/12 per cent in the event the dealer failed to make payment within seven days from the presentation of the hundis or the draft. The contents of this letter is a relevant piece of evidence indicating that the bank was only a collecting agent of the hundis and not collecting the hundis on its own account. Further the books of the bank show that credit was given to the assessee in respect of the amounts of these drafts only when the bank was able to collect those amounts from the dealers in British India and not at the time the drafts were handed over to the bank. This being the evidence on record, it is difficult to accept the contention of Mr. Kolah that the finding of the Tribunal that the bank was the collecting of Mr. Kolah that the assessee had not applied to the Tribunal to submit a statement of case to this court raising a question as regards the validity or otherwise of the finding of fact of the Tribunal on this point. The bank thus having collected the amount as collecting agents of the assessee, there can hardly be any doubt that the sale proceeds received by the assessee were received by it in British India and the profits included therein, therefore, were taxable.

10. The decision on which reliance has been placed by Mr. Kolah is distinguishable on facts. The facts in Chiranji Lal Multani Mal v. Commissioner of Income-tax were : The assessee-firm owned a mill at Bhatinda. At the material time Bhatinda was not part of British India The assessee-firm received at Bhatinda cheques issued by the Government of India in its favour in payment of certain work done by the mills for the Government of India, drawn on the Reserve Bank of India, Delhi. On receiving the cheques at Bhatinda the assessee sold them to a branch of the Patiala State Bank at Bhatinda. The Patiala State Bank in its turn encashed those cheques. The assessee contended that the payments received by the Patiala State Bank on encashment of those cheques were not payments received by it, but on the other hand the payments were received by the assessee-company at Bhatinda when they sold the cheques to the branch of the Patiala State Bank at Bhatinda. In support of this contention the assessee field a certificate from the Patiala State Bank, which stated that all cheques received by the assessee from the Government and passed on to the bank were purchased in D.D. at their Bhatinda office and credits to the account of the assessee were given straightway without waiting for realisation. On these facts it was held that the property in cheques had passed in favour of the bank when the assessee endorsed them in favour of the bank at Bhatinda on the bank purchasing the cheques. The assessee must, therefore, be taken to have received the amount at Bhatinda and the subsequent receipt at Delhi by the bank were receipts by the bank and not by the assessee. It would be seen that in that case on discounting the cheques the bank gave immediate credit to the assessee at the time it purchased the cheques much before realisation of the amount on encashment of the cheques and that was the material circumstance on the basis of which it has been held that the payment was received by the assessee at Bhatinda and not at Delhi where the cheques were encashed. It would be seen that the only evidence before the income-tax authorities as well as the High Court was the certificate issued by the bank and no other evidence was led as to the precise words used in the endorsement made by the assessee in favour of the bank. Here the facts found are that no amount was credited by the bank presented the drafts or hundis to the dealers in British India through its branch. The decision in Chiranji Lal Multani Mal v. Commissioner of Income-tax in our opinion, has, therefore, no application to the facts of the present case.

11. Mr. Kolah has also referred us to decision in Sutter v. Briggs. In our opinion, the said decision can hardly be of any assistance in the present case.

12. Turning to the collection of the sale proceeds of Rs. 1,79,616 in respect of the sales to the Government of India, the method adopted by the assessee was that it drew at Ujjain drafts and hundis upon the sub-contractors in British India in favour of the Imperial Bank of India, Ujjain. The assessee then forwarded to the said Imperial Bank at Ujjain the railway receipts under which the goods were sent to the sub-contractors in British India and the drafts or hundis with instructions to the bank to collect the amounts of the drafts or hundis as also the bank charges from the sub-contractors on whom the said drafts or hundis were drawn. The Imperial Bank of India at Ujjain then forwarded the railway receipts as well as the drafts or hundis to its branch in British India where the sub-contractors were carrying on their business. The branch office then presented the hundis or drafts to the sub-contractors, realised the amount from the sub-contractors and in its turn endorsed the railway receipts in favour of the sub-contractors. It would be seen that the only different between the mode adopted for realisation of the sale proceeds of Rs. 17,86,757 and for the collection of Rs. 1,79,616 is that the drawees in the former case were the private dealers while the drawees in the latter case were not the dealers but the sub-contractors. No separate argument had been advanced as regards the aforesaid amount of sale proceeds. The modus operandi being similar except this minor difference, the argument advanced were common to both these items. We have already dealt with all these arguments.

13. For reasons stated above, in our opinion, the answer to the aforesaid question (a) which relates to the sale proceeds falling under the first category, should be in favour of the department and against the assessee.

14. Turning to the sale proceeds falling under the second and third categories, the sale proceeds represent the sales made by the assessee to the Government of India. It would be convenient to deal first with the sale proceeds in respect of the sales made in the assessment year 1944-45, amounting to Rs. 4,81,588, Rs. 7,98,493 in the assessment year 1945-46 and Rs. 5,02,323 in the assessment year 1946-47, falling under the third category separately.

15. We have already said that these sale proceeds relate to sales effected by the assessee to the Government of India in the aforesaid three assessment years. The statement of the case does not give the details as regards formation of the contract. The sales were to the Department of Supply, Government of India. At the stage of the arguments, it was admitted both by the counsel for the assessee as well as for the revenue that the term in the agreement relating to payment was identical as was in the case of Commissioner of Income-tax v. Indore-Malwa United Mills Ltd. That term has been reproduced in the aforesaid case at page 441 and is in the following terms :

'Payment' : Unless otherwise agreed between the parties payment for the delivery of the stores will be made on submission of bills in the prescribed form in accordance with the instructions given in the Acceptance of Tender by cheque on a Government Treasury in British India or on a branch in British India of the Reserve Bank of India or the Imperial Bank of India transacting Government business.'

16. Annexures 'F' and 'G' to the statement of the case are the forms of the bill which had to be submitted by the seller to the Government of India demanding payment for the goods supplied. It shows that along with the bill the seller had to enclose an inspection note in a particular form (WSB Forms 65). At the foot of the form of the bill there is a form of the advance receipt and it is in the following terms :

----------------------------------------------------------------------

Received payment (One Anna Please pay by cheque to

thirty-three receipt Imperial Bank

thousand two stamp on

hundred and original Bank

fifty-six only copy only) on-------at Indore

Treasury 33,256-0-0

For Hira Mills Ltd., For the Hira Mills Ltd.,

Sd. /- J. C. Jall, Sd. /- J.C. Jall,

Manager. Manager.

----------------------------------------------------------------------

17. The form of the receipt indicates that the advance stamped receipt for the amount of the bill had to be sent by the seller to the Supply Department giving instructions to the Government of India relating the mode of payment of the bill and the mode contemplated is either to pay it by cheque on a branch of the Imperial Bank of India or a Government Treasury at the place indicated by the seller. The statement of the case shows that the instructions given by the assessee by completing the form of bill in respect of each sale was in the following terms :

'Please pay by cheque to the Imperial Bank Indore'.

18. On receipt of these bills the Government of India paid for the sales either by cheques or demand drafts on the Imperial Bank of India, Indore. These cheques and drafts were posted by the Department of Supply, Government of India, in Delhi, and were received by the assessee at Ujjain or Indore and collected by the assessee in due coruse. The sale proceeds received by the assessee by cheques fall within category No. 3 and the sale proceeds received by it by demand drafts fall under category No. 2. The contention of the assessee was that the sale proceeds were received by it at Ujjain or Indore, both places in the Native State, where the cheques were received and not at Delhi where the cheques were posted. On the other hand the contention of the department before the Tribunal was that the cheques had been sent by post by the Supply Department of the Government of India at the request of the assessee made by the assessee in the instructions given by it at the foot of the bill. The post office thus was the agent of the assessee and, therefore, the sale proceeds received the profits included therein were taxable. The Tribunal held that the case fell within the rule laid down by their Lordships of the Supreme Court in Commissioner of Income-tax v. Ogale Glass Works Ltd. It, therefore, overruled the contention raised by the assessee. As already stated, we would deal first with the sale proceeds falling under category No. 3, viz., the sale proceeds paid by the Supply Department of the Government of India by cheques, which were posted at Delhi by the Supply Department of the Government of India and received by the assessee at Ujjain.

19. Mr. Kolah contends that the Tribunal was in error in holding that the rule in Commissioner of Income-tax v. Ogale Glass Works Ltd. governed the decision of this question. According to Mr. Kolah, the rule laid down in Ogale Glass Works case has no application to the facts of the present case. On the other hand, the rule that could govern the decision of this issue is the one laid down by their Lordships in Commissioner of Income-tax v. Patney & Co. According to Mr. Kolah, the instructions given by the assessee were : 'Please pay by cheque to the Imperial Bank at Indore', which clearly indicate that the assessee had proposed that the place of payment should be at Indore. The Government of India complied with the instructions of the assessee and sent the cheques to Indore. A valid agreement thus was constituted between the assessee and the Government of India agreeing Indore to be the place where the sale proceeds were to be paid. That being the position, the Supply Department's sending the cheques by post would not make the post office as the agent of the assessee, but on the other hand the post office must be deemed to be the agent of the Supply Department. It is on this ground that Mr. Kolah contends that though the cheques were posted at Delhi in British India, the sale proceeds were received by the assessee in the Native State.

20. Mr. Joshi, on the other hand, contends that, on the facts found the question which we have to consider is governed by the decisions of the Supreme Court in Commissioner of Income-tax v. Ogale Glass Works Ltd. Shri Jagdish Mills Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Indore Malwa United Mills Ltd. Mr. Joshi contends that the facts of this case are identical with the facts of the Indore Malwa Mills case and the decision in Indore Malwa Mills case would govern the case before us.

21. Having regard to the rival contentions raised before us, it is necessary to examine the decisions on which reliance has been placed by counsel for parties. It may be stated that the assessment cases of Ogale Glass Works, Shri Jagdish Mills Indore Malwa Mills as well as the case before us relate to the sale proceeds received by various dealers doing business in different States in respect of sale of goods made by them to the Supply Department of the Government of India in the war years.

22. Ogale Glass Works was a non-resident company carrying on business of manufacturing certain articles in the State of Aundh. The term relating to the payment of the bills in the agreement was in substance identical with the term relating to the payment in the present case. Ogale Glass Works submitted bills in the prescribed form and wrote on them as follows :

'Kindly remit the amount by a cheque in our favour on any bank in Bombay.'

23. The Government of India issued cheques to the assessee and the assessee received the cheques at Aundh. The cheques were drawn on the Bombay branch of the Reserve Bank of India. The assessee endorsed the cheques in favour of the Ogalewadi Branch of the Aundh Bank, which in its turn endorsed them in favour of a Bombay bank. The Bombay bank cleared the cheques through the Clearing House in Bombay. The Aundh Bank credited the assessee's account on the very day the cheques were received from the assessee with the amount of the cheques less the collection charges and the assessee credited the account of the supply Department and made corresponding debits to the bank's account and the bank charges account. The assessee also sent a formal stamped receipt to the Government of India. The department contended that the assessee received income, profits or gains within British India within the meaning of section 4(1)(a) on the ground that the encashment of cheques in Bombay amounted to receipt of income in British India. An alternative contention was raised before the High Court and the Supreme Court held that the request made by the assessee to the Government to remit the amounts of the bills by cheques amounted to an express request by the assessee to send the cheques by post. The Government posted the cheques in Delhi and this in law amounted to payment in Delhi and, therefore, income, profits or gains in respect of the sales made to the Government of India was received in British India within the meaning of section 4(1)(a). At page 545 of the report, Das J. observed :

'There can be no doubt that as between the sender and the addressee it is the request of the addressee that the cheque be sent by post that makes the post office the agent of the addresee. After such request the addressee cannot heard to say that the post office was not his agent, and, therefore, the loss of the cheque in transit must fall on the sender on the specious plea that the sender having the very limited right to reclaim the cheque under the Post Office Act, 1898, the post office was his agent, when in fact there was no such reclamation. Of course, if there be no such request, express or implied, then the delivery of the letter or the cheque to the post office is delivery to the agent of the sender himself. Apart from this principal of agency there is another principal which makes the delivery of the cheque to the post office at the request of the addressee a delivery to him and that is that by posting the cheque in pursuance of the request of the creditor the debtor performs his obligation in the manner prescribed and sanctioned by the creditor and thereby discharges the contract by such performance (see section 50 of the Indian Contract Act, and illustration (d) thereto).'

24. In the case of Shri Jagdish Mills Ltd. v. Commissioner of Income-tax facts in brief were : The assessee, Shri Jagdish Mills was a company incorporated in Baroda State (non-taxable territory). The Government of India placed orders with the mills for the supply of certain goods manufactured by the mills. These orders were placed at Baroda and accepted by the mills at Baroda. The supply of the goods was f.o.r. Baroda to the Government of India. The term relating to payment was in similar terms to the one in the present case. That term we have already reproduced above. After the goods had been supplied, the assessee-mills submitted their bills in the prescribed printed form and relating to the payment for the goods supplied the instructions given by the mills were : 'Government should pay the amount due to the company by cheque'. The mills further did not give any instructions to the Government in what way the payments by cheque was to be made. The cheques issued by the Government of India in payment of the bills and the sent them either to Bombay or Ahmedabad in its banking account. Question arose whether the receipt of the sale proceeds was outside the taxable territories. The instructions in Ogale Glass Works were : 'remit the amount by cheques' and the instructions in Jagdish Mills were : Government should pay the amount due to the company by cheques. It would also be noticed that in Ogale Glass Works their Lordships have held that the request to send the cheque by post. Here the word used was not 'remit'. Contention was raised that the ratio of the decision in Ogale Glass Works was not application to the facts of this case and there was in the case of Jagdish Mills no request made by the mills to send the cheques by post. This contention was repelled by their Lordships and it was held that according to the course of business usage in general, which was followed in this case, the parties must have intended that the cheques should be sent by post which was the usual and normal agency for transmission of such articles and there was necessarily imported an implied request by the company to send the cheques by post from Delhi thus constituting the post office its agent for the purposes of receiving those payments. The principal was laid down by their Lordships in the following terms :

'Where no express words are used requesting that the cheque be sent by post and the matter rests merely in the stipulation that the payment be made by cheque and if there is nothing more, the position in law is that the post office would not become the agent of the addressee and the mere posting of the cheque would not operate as delivery of the cheque to the addressee so as to pass the title in the cheque to the addressee. Where, however, on the facts and circumstances of the case, an implied request by the creditor to send the cheque by post can be spelt out, the post office would be constituted the agent of the addressee for the purposes of receiving such payment'.

25. The circumstances taken into account in holding that there was an implied request for sending the cheque by post were the Government of India was located in Delhi; and the cheques would be necessarily drawn by it from Delhi; that the cheques were to be sent to Baroda and that in the normal course of affairs the cheques drawn in Delhi would be sent to Baroda by post and not by a messenger so that they may be delivered to the creditor at Baroda.

26. In the case of the assessment of Indore-Malwa Mills, Commissioner of Income-tax v. Indore Malwa United Mills Ltd., which came before this court, the facts were also similar, the difference being the assessee was doing business at Indore and not at Baroda. The goods were supplied to the Supply Department of the Government of India located in Delhi. The term relating to payment is also in identical terms. In the bills sent by the mills the instructions given were : 'Please pay by cheque to self on bank at Indore'. The question arose whether the sale proceeds were received by the assessee outside the taxable territories at Indore or at Delhi within the taxable territories, where the cheques were posted. Post office, by reason of the request : 'Please pay by cheque to self on bank at Indore', was acting as agents for receiving payment on behalf of the mills. Justice Shah, as he then was, upheld the contention of the department and held that the principle of Ogale Glass Works Ltd. and Jagdish Mills Limited was decisive of the issue, which had arisen before him. The assessee-mills had made a request to the Government of India to pay the amount of the bills by cheque to self at Indore. The normal agency for transmission of the cheques is the post office. The cheques would be regarded as duly handed over at Delhi - the headquarters of the Government of India - and the post office at Delhi became the agents of the assessee to receive the cheques. Mr. Justice S. T. Desai, however, took the view that the request made by the assessee to pay by cheque to self on the bank at Indore indicated an unmistakable intention of the assessee to receive payment by cheques at Indore and itr was impossible to read by implication a request to send the cheque by post so as to constitute the post office an agent of the assessee for receiving payment. In this view of the matter he held that the post office was not an agent of the assessee-mills for receiving cheques. The case was then placed before Mr. Justice K. T. Desai, as he then was. He agreed with the view taken by Mr. Justice Shah. He held that the principles enunciated in Ogale Glass Works and Shri Jagdish Mills were applicable to the facts of the present case. An argument was advanced before him that the request made in Shri Jagdish Mills case and the request made in the Indore Malwa Mills case were differently worded. In Shri Jagdish Mills case the request was : 'Please pay by cheque' while the request made or instructions given in the present case (Indore Malwa case) was : 'Please pay by cheque to self made the difference. The contention was not accepted and the learned judge observed at page :

'In my view the words used in the present case contain by necessary implication an implied request by the assessee to send the cheques by post from New Delhi, thus constituting the post office its agent for the purpose of receiving those payments.'

27. An argument was also advanced on behalf of the assessee on the strength of the words 'at Indore' and that was that request made 'Please pay by cheque to self on bank at Indore' amounted to request for payment at Indore. The Government complied with this request and made the payment by cheque on a bank at Indore. The payment was thus received at Indore outside the taxable territories. The case, therefore, fell within the principle enunciated in Patney's case. This argument was also not accepted. The learned judge observed at page 488 of the report :

'The request is to make the payment by cheque. The cheque is desired to be drawn on a bank at Indore. The place of payment in such a case is not the place where the bank at Indore. The place of payment in such a case is not the place where the bank at Indore. The place of payment in such a case is not the place where the bank on which it is drawn enhances the cheque, but the place where the cheque is received. In my view, on the facts of this case it is not possible to say that there was any agreement to pay monies at Indore or that any request was made to pay the monies at Indore. The decision in Patney & Co.'s case is not applicable to the facts of the present case in the way in which Mr. Kolah seeks to apply it'.

28. The decision is binding on us and we hardly find any material difference in the terms of the request or instructions in the Indore Malwa United Mills case. There the instructions were : 'Please pay by cheque to self on bank at Indore'. Here the instructions are : 'Please pay by cheque to the Imperial Bank at Indore'.

29. Mr. Kolah argued that there is a difference between the terms of the request made in the Indore Malwa Mills case and the terms of the request made by the assessee in the present is to pay by cheque to the Imperial Bank. The receiver of the cheque in the Indore Malwa Mills case was the assessee himself, but the receiver of the cheque in the instant case is the bank and the bank is at Indore. The payment, therefore, is made and received by the assessee at Indore, the Government sending the cheques as per instructions of the assessee.

30. With respect, we are unable to hold that there is any material difference in the terms of the request made in the Indore Malwa Mills case as well as in this case. It is true, the drawee mentioned in the Indore Malwa Mills case was the assessee himself and the drawee mentioned in the instant case was the Imperial Bank, but that only makes the Imperial Bank at Indore a nominee of the assessee to receive payment on behalf of it. In our opinion it has not the effect of constituting any agreement as to the place of payment of the bills. We have already said that the words 'at Indore' also have not any effect of constituting an agreement between the assessee and the Government of India making Indore the place of payment.

31. Applying these principles to the facts of the present case, the circumstances that the assessee is doing business at Ujjain; that the Supply Department of the Government of India, who had purchased the goods from the assessee, is located in Delhi; that the agreement between the parties to make payment of the bills for the goods supplied by cheques on the Government Treasury in British India or on a branch in British India of the Reserve Bank of India or the Imperial Bank of India transacting Government business; that this payment by cheque to the Imperial Bank at Indore', and that the normal course of sending the cheques would be by sending them by post and not by sending them with a messenger, spell out an implied request on the part of the assessee to the Supply Department of the Government of India to send the cheques by post. The post office receiving the cheques posted by the Supply Department of the Government of India, at Delhi, would thus be the agent of the assessee receiving payment of the bills. In our opinion, therefore, the Tribunal was not in error in holding that the payment of bills received by the assessee by cheques from the Government of India, were received in British India and, therefore, the profits included in those sale proceeds were received in the taxable territories. The instructions 'Pay the amount to Imperial Bank at Indore' only, in our opinion, make the Imperial Bank at Indore the nominee of the assessee for the purposed of receiving the payments. The words 'at Indore' only specify the particular branch of the Imperial Bank of India.

32. The decision in Commissioner of Income-tax v. Patney & Co. on which reliance is placed is distinguishable on facts. The assessee-company (Patney & Co.) was in the relevant assessment years a non-resident company carrying on business at Secunderabad, a place in the territory of Hyderabad State, a place outside the taxable territories. The assessee-company acted as agents for two companies resident in British India for the supply of certain goods to the Nizam's Government. The assessee received cheques drawn on banks in British India towards commission from resident companies. The cheques were sent by post from places in British India. The amounts of the cheques were sent to their bankers for collection and crediting in their account. The assessee-company contended that the amounts were received in Secunderabad outside the taxable territories and therefore, the profits earned by him were not taxable. The respondents assessee in support of their contention that the moneys were received in Secunderabad outside British India, filed an affidavit stating that it was verbally agreed that the commission would be paid at Secunderabad in cash or by cheque, as the case may be. The assessee-company's contention has been upheld and the Commissioner of Income-tax had taken an appeal to the Supreme Court. Their Lordships held that as the assessee company had expressly required the commission to be paid at Secunderabad outside. British India, the rule in Ogale Glass Works did not apply to the case and the moneys were not received by the assessee in British India.

33. It is clear that in view of the express agreement pleaded by the assessee-company and supported by an affidavit that there was an agreement to pay the commission at Secunderabad, there was no room to spell out a request on the part of the assessee-company to the companies in British India to send the cheques by post and, therefore, the case fell out of the rule in Ogale Glass Works. The principle enunciated in Ogale Glass Works and confirmed in Shri Jagdish Mills case was stated by Mr. Justice Kapur in the following terms at page 491 :

'In the case of payment by cheques sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send a cheque by post the property in the cheque passes to the creditor as soon as it is posted. Therefore, the post office is an agent of the person to whom the cheque is posted if there be an express or implied authority to send it by post...... Of course, if there be no such request, express or implied, then the delivery of the letter or the cheque to the post office is delivery to the agent of the sender himself.'

34. Turning to the facts of the case, which were before them, their Lordships observed :

'Whatever may be the position when there is an express or implied request for the cheque for the amount being sent by post or when it can be inferred from the course of conduct of the parties, the appellant (assessee) in this case expressly required the amount of commission to be paid at Secunderabad and the rule of Ogale Glass Works' case would be inapplicable'.

35. The existence of an express agreement as regards the place of payment rules out the possibility of any implied agreement contrary to the express agreement founded on the course of dealings between the parties. Here in the case before us, there is no express agreement as regards the place of payment. On the other hand, we have already said that the agreement was only to pay by cheque on certain specified banks. A request was made to make payment by cheques nominating the Imperial Bank of India at Indore as the nominee of the assessee to receive the payment. The issue, which we have to consider, therefore, will fall within the rule of Ogale Glass Works, Shri Jagdish Mills Ltd. and Indore Malwa United Mills Ltd.

36. The answer to the third question, therefore, in our opinion, will have to be against the assessee.

37. Turning to the second category of sale proceeds, we have already said that payments were made by the Government of India by drafts. The drafts were posted at Delhi and were received by the assessee at Ujjain. The drafts were drawn on the Imperial Bank at Indore. The contention of the assessee is that the mere fact that the drafts were posted at Delhi would not constitute the post office as an agent of the assessee. There is no request made by the assessee either express or implied to make payment by drafts.

38. Mr. Joshi, on the other hand, contends that even though the request made by the assessee in express terms does not say that payments be made by drafts, it does in express terms say that payments be made by cheque. There is no difference between the payment by cheque and payment by drafts. Both are negotiable instruments. Therefore, the request to make payment by cheques includes request to make payment by drafts. In support of his contention he referred us to certain observations in Halsbury's Laws of England, volume II, to which we would presently advert. Ordinarily, when a cheque or a draft or a letter is posted by the sender, the post office acts as an agent of the sender and not as a agent of the addressee. To this general rule there is an exception and that exception is when a creditor asks his debtor to make payment by cheque; and if the circumstances of the case indicate that the normal course of making payment in that manner is to dispatch the cheque through post office, then the post office acts as an agent of the creditor in receiving the payment, the title in the cheque passing to the creditor on posting. The same result would also equally follow by virtue of the provisions of section 50, illustration (d), of the Contract Act, the debtor performing his obligation in the manner prescribed and sanctioned by the creditor. It would thus be seen that it is the request made or instructions given by the creditor to his debtor to discharge his obligation by sending cheques by post either in express terms or by necessary implication, which converts the post office into an agent of the creditor from one which ordinarily is an agent of the sender. There can hardly be any doubt that there is no express request made by the assessee to the Government of India to make payment by drafts. The first question that would arise, therefore, is whether from the circumstances of the case it could be inferred that ordinarily the word 'cheque' is understood to include a 'draft'. Nothing has been shown to us that in the commercial world ordinarily where a creditor asks his debtor to make payment by cheque, it is understood to mean to make payment either by cheque or draft. The mode of making payment by cheques and the mode of making payment by drafts are different and distinct modes. We are, therefore, unable to accept Mr. Joshi's contention that the request made by the assessee in this case to make payment by cheques would include request to make payment by drafts.

39. The first passage read by Mr. Joshi is in paragraph 358 at page 190 of Halsbury's Laws of England, third edition, volume 2, and the second passage is at page 202, paragraph 375. They read :

'Paragraph 358 : Drafts payable on demand drawn by a branch office on the head office of the same bank, or vice versa, are not cheques, but the crossed cheques provisions of the Bills of Exchange Act, 1882, apply to such drafts as if they were cheques. Such a draft is one payable on demand and drawn by or on behalf of a bank upon itself, whether payable at the head office or some other office at the bank. They are presumably negotiable. A banker receiving payment in circumstances amounting to conversion is liable to the true owner for the face value unless he can bring himself within the Bills of Exchange Act (1882) Amendment Act, 1932, and, if drawn on the same bank, the bank as a whole is protected if it has paid them on a forged endorsement if payable to order on demand, whether the draft be inland or foreign.

A demand draft drawn by one bank on another is a cheque, and may be crossed and dealt with as such.'

'Paragraph 375 : Drafts drawn by one bank on another are merely cheques, and may in all respects be dealt with as such.'

40. Now, the first difficulty in the way of Mr. Joshi is that there is no foundation laid by the department by leading evidence that the drafts which the Government of India sent was a draft drawn by a bank on its own branch or by a branch office on its head office or drawn by a branch of a bank on another branch of the same bank. In the absence of any finding to that effect, we fail to see how the observations on which reliance is placed would have any relevance for the purpose of decision of the issue before us. Apart from it, all that can be gathered from these passages is that such drafts can, for certain purposes, be deemed as if they were cheques. It is different from saying that the drafts are cheques or that the commercial community takes drafts and cheques as interchangeable expressions. In our opinion, therefore, the posting of these drafts in payment of the bills by the Government of India cannot be said to be by post either on the express or implied request of the assessee. The post office, therefore, was not an agent of the assessee in receiving the payment. It is not in dispute that if the post office is not an agent of the assessee, then the payment has been received by the assessee in Ujjain, a place outside the taxable territories. The profits included in these sale proceeds falling under category 2, which amount to Rs. 8,33,378, are, therefore, not received by the assessee in the taxable territories. The answer to the question relating to the sale proceeds falling under category 2 will, therefore, have to be in favour of the assessee and against the department.

41. For reasons stated above, we answer questions (a) and (c) in the affirmative and question (b) in the negative. Assessee shall pay two-thirds costs of the department.


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