1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act (hereinafter referred to as the Act). The assessee M/s. Bhaidas Cursondas & Co., is a registered firm carrying on cotton business on an extensive scale, both in India and Pakistan. The business is done both on ready and forward basis. On December 3, 1947, Raw Cotton Traders Ltd. of Shanghai acting as brokers of M/s. China Cotton Mills Ltd. and M/s. Lee Hsing Cotton Spinning and Weaving Co. Ltd. entered into a transaction for purchase of 4,000 bales of cotton with the assessee at Rs. 765 per candy c.i.f. Shanghai in full pressed bales shipment during December, 1947/January, 1948 at seller's option. The terms of the contract, inter alia were that buyers were to obtain the import licence before the time of the shipment and the buyers had to open an irrevocable confirmed credit in favour of the assessee in Bombay before the time of shipment. Cotton was, however, not shipped as was contemplated by the said contract. But ultimately on 24th January, 1948, reverse contract was entered into whereunder Raw Cotton Traders Ltd. resold the said 4,000 bales of cotton at Rs. 835 per candy c.i.f. Shanghai. Annexure 'B', which is a letter written by Raw Cotton Traders Ltd. to the assessee, mentions the following terms :
'This contract is in settlement of our purchase no. U-13 as we have been unable to obtain the necessary import licence and open irrevocable confirmed credit.'
2. As a result of this re-sale, the assessee had to pay Rs. 1,40,000 to the Mills : Rs. 1,05,000 out of Rs. 1,40,000 was paid by the assessee to the China Mills Ltd. and Rs. 35,000 were paid by the assessee to M/s. Lee Hsing Cotton Spinning & Weaving Co. Ltd. The payment was made in the following manner :
M/s. Volkart Bros. Ltd. on account of China
Cotton Mills Ltd. of Shanghai ... 60,000 08-04-1948
Chartered Bank in the joint account of
Mr. H. C. Umrigar ... 45,000 12-12-1948
M/s. Kilachand Devchand & Co. on account
of Lee Hsing Cotton Spinning and
Weaving Co. Ltd. of Shanghai ... 20,000 30-04-1948
Through H.C. Umrigar on account of Lee
Hsing Cotton Spinning and Weaving
Co. Ltd. Shanghai ... 15,000 14-12-1948
3. The material part of section 18(3A) of the Act as it stood then read :
'Any person responsible for paying to a person not resident in the taxable territories... any other sum chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay income-tax thereon as an agent, deduct income-tax at the maximum rate.'
4. Section 18(3C) is a similar provision relating to super-tax. Purporting to act under section 18(3A) and 18(3C), the Income-tax Officer directed the assessee to pay income-tax at the maximum rate on the said amount of Rs. 1,40,000. The appeal filed by the assessee before the Appellate Assistant Commissioner failed. The assessee took a second appeal to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal and the reasons given are in the following terms :
'M/s. Bhaidas Cursondas & Co., as has been stated earlier, dealt in ready cotton on a fairly large scale. It appears that they had actually sold 73,326 bales of cotton in India (value over Rs. 2-1/2 crores) including 18,978 bales of cotton from Pakistan (value well over half a crore of rupees). They were assessed on an income of about Rs. 12 lakhs and odd. As regards the impugned transactions, they had contracted to supply 4,000 bales of cotton as narrated above. At the time of delivery the market had risen and was rising very steeply. It may be that this led them to wriggle out of the delivery contract because they ultimately sold 3,915 bales actually at a rate of Rs. 939 per candy and made a handsome profit on this transaction. The extra profit of Rs. 2,08,000 has actually been included in the profit and loss account and subjected to an assessment in excess of whatever their actual purchase rates may have been. In other words, the assessee have actually paid tax on the purchase and sale of these 4,000 bales of cotton ready. From the extensive correspondence with the two non-resident Cotton Mills, it is abundantly clear that they also intended actual delivery and that it was with some difficulty that the assessee's brokers, M/s. Raw Cotton Traders Ltd., could arrange that the delivery was not to be given. The reason advanced for the non-delivery was that the export licence could not be arranged in Pakistan from where they were to be shipped.
10. An attempt was made to show that the two cotton Mills obtained delivery from elsewhere. The fact that the assessee paid Rs. 20,000 and Rs. 60,000 ultimately to M/s. Kilachand Devchand & Co. and M/s. Volkart Bros. Ltd. who were both shippers of cotton, tend to support the assessee's contention. The importance of looking at the transactions as a whole rather than the isolated transaction of purchase and sale between the assessee and Raw Cotton Traders Ltd. is that this would lead to the inference that the assessee could reasonably believe that what they were paying was merely in the nature of the part of the price of the cotton which they could not supply to the non-residents at the stipulated rates, even though in isolation it looks as if the sum of Rs. 1,40,000 was in the nature of a profit paid to them. We hold that section 18 has not been properly invoked in these two cases.'
5. At the instance of the Commissioner of Income-tax, the Tribunal, after drawing up a statement of the case, has referred the following question of law to this court :
'Whether, on the facts and in the circumstances of the case, the assessee was liable to deduct tax on the amount of Rs. 1,40,000 paid by the assessee firm to the two non-resident buyers under the provisions of section 18(3B) of the Indian Income-tax Act ?' (It is not disputed before us that section 18(3B) mention in the question is through inadvertence and the material provision at that time was section 18(3A)).
It appears from the statement of case that the department had also requested the Tribunal that the question to be referred to this court should be :
'Whether there was any evidence to substantiate the finding of fact given by the Tribunal that the sums in question were not items of profits ?'
6. The Tribunal has observed in the statement of the case that in its opinion the question as framed by the Tribunal adequately brings out the point at issue. It appears that the request was made both by the department as well as the assessee to the Tribunal to include in its statement of case the relevant documents. Acceding to the request, the Tribunal has included the said documents in the statement of the case.
7. Mr. Joshi, counsel for the revenue, contends that the order made by the Tribunal and the conclusion to which the Tribunal has reached are on conjectural grounds and there is no evidence to support the finding of the Tribunal that the assessee was in default in the matter of performance of the contract. There is no evidence at all that the China Mills were therefore obliged to purchase cotton from some other dealers and, therefore, the assessee had paid the difference in price, it being unable to perform its part of the contract. On the other hand, it is the contention of Mr. Joshi that the evidence on record clearly discloses that the China Mills resold the cotton purchased by it to the assessee at profit. The profits made by the China Mills were profits chargeable to tax under the provisions of the Indian Income-tax Act. China Mills were non-residents within the meaning of the Indian Income-tax Act. The assessee, therefore, was liable to pay income-tax on the aforesaid payments made by the reason of section 18(3A) of the Act.
8. Mr. Mehta, appearing for the assessee, on the other hand, raised before us three contentions. Firstly, he contends that on the material evidence the Tribunal has found as a fact that the assessee wanted to wriggle out of the contract because the prices were rising at the time. The assessee, therefore, instead of carrying out his part of the contract, had contracted to pay the difference in price to the China Mills because the China Mills at that time were required to purchase cotton from other dealers. The payment made thus, though it was in the form of purchase price for the cotton, was really in the nature of payment of part of the price of cotton which the China Mills were required to purchase on account of the failure on the part of the assessee to perform the contract. There is evidence to support these findings of the Tribunal and this court would, therefore, be not justified in going behind those findings.
9. Mr. Mehta next contends that even if it is held that the transaction was one of resale of cotton bales by the China Mills to the assessee, the profit made by the China Mills was not chargeable to tax, it being receipt of a casual and non-recurring nature within the meaning of clause (vii) of sub-section (3) of section 4 of the Indian Income-tax Act.
10. Lastly, he contends that at any rate on the evidence on record it cannot be said that payments made to Volkart Bros., Chartered Bank, M/s. Kilachand Devchand and Co., and Mr. Umrigar were payments made to non-residents within the meaning of section 18(3A) of the Act.
11. It is first necessary to consider whether there is any evidence to support the conclusions of the Tribunal that the assessee wanted to wriggle out of the contract and, therefore, he had agreed to pay the difference in price to the contract and, therefore, he had agreed to pay the difference in price to the China Mills, who, at the time, had arranged to obtain delivery of cotton from other dealers on account of the failure on the part of the assessee to perform his part of the contract. We have already reproduced the two documents incorporating the first contract of sale by the assessee with the China Mills and also the contract of resale.
12. We have been taken through the correspondence, which is claimed to be the evidence supporting the findings of the Tribunal. With respect, we are unable to find in this correspondence any evidence to support these findings. On the other hand, the contract of resale in express terms mentions that the reason for settlement of the original contract of sale was the failure on the part of the China Mills to obtain the necessary import licence and open irrevocable confirmed credit, to which they had agreed under the contract of sale. It has next to be seen whether there is any material on record to show that the aforesaid reason given in the contract of resale was not the real reason but the real reason was that the assessee wanted to wriggle out of the contract and, therefore, the payments made by him were merely in the nature of part of the price of the cotton which the assessee could not supply to the non-resident at the stipulated rates. There are only two letters on record between the original contract dated 3rd December, 1947, and the contract of resale of date 24th January, 1948. The first letter is of 10th January, 1948, written by M/s Umrigar and Co., the representatives of Raw Cotton Traders, and this letter discloses that the China Mills up to that date had not been able to secure import licence. It further discloses that the assessee had informed them that there was an outbreak of political riots in Karachi and, therefore, the contract should be cancelled. Umrigar and Co., however, after nothing the request of the assessee had informed the assessee that they would be soon obtaining the import licence and even if on account of the political riots the shipment is a little bit delayed, it would not matter. The mills would not like the contract to be cancelled. The mills have already sold cloth against their purchase of 4,000 bales and, therefore, the bales should be delivered to them even though shipment may be delayed on account of the political riots in Karachi. This letter further suggests to the assessee that the mills may consider the question of reselling the cotton to the assessee if the assessee so desired and if the terms were found suitable. It further appears that the assessee was directed to give delivery of the cotton bales to Volkart Bros. after they had approved the cotton. The letter of 13th January is a reply sent by the assessee to Umrigar and Co. This letter clearly so that the assessee was ready to give delivery of the 4,000 bales to Volkart Bros., though he had therein protested against the selection of cotton by M/s. Volkart Bros. In this letter the assessee mentioned that, according to the terms of the contract, he would be giving delivery of the bales marking them R.C.T. and B.C. and Co., for identification so that they would be responsible for any complaints about shortage in weight or quality of cotton supplied. It is thus clear that on 13th January, the assessee was ready and willing to give delivery to the nominee of the China Mills, viz., Volkart Bros. There is nothing on record to show that between 13th January, 1948, and 24th January, 1948, the assessee had gone back on his assurance that he would be giving delivery to Volkart Bros. This being the position on record and it being an admitted position that the China Mills were not able to secure import licence and had not opened the irrevocable confirmed credit till 22nd January, 1948, it is difficult to hold that there is any evidence on record to support the finding of the Tribunal that the assessee wanted to wriggle out of the contract and, therefore, the payment made by him was merely in the nature of part of the price of the cotton, which they could not supply to the non-resident at the stipulated rates. The other documents to which our attention was drawn by Mr. Joshi are documents subsequent to 24th January, 1948, but relating to the transaction of resale. On 5th February, 1948, both the mills wrote letter to Raw Cotton Traders including debit notes asking the Raw Cotton Traders to collect the difference in price from the assessee. The China Cotton Mills further instructed the Raw Cotton Traders that out of the amount of Rs. 1,05,000 to be received by them, Rs. 60,000 should be paid to M/s. Volkart Bros. of Bombay for account of M/s. China Cotton Mills, Shanghai, and the balance should be paid to them. After receiving these letters, the Raw Cotton Traders wrote a letter to the assessee on 12th March, 1948, asking the assessee to pay Rs. 1,78,250 inclusive of their commission of Rs. 38,250 on the transaction. Annexure 'F6' to the statement of the case is the extract from the books of account of the assessee company and in the relevant entries the reason given for the transaction of resale is the failure on the part of the China Mills to open credit and consequently the inability on the part of the assessee to continue keeping the cotton in Pakistan. These are all the documents subsequent to the contract of resale and they also go to show that the real reason for the transaction of resale was the failure on the part of the China Mills to obtain import licence and open irrevocable confirmed credit.
13. There is another letter written on 11th February, 1948, by Umrigar & Co. to the assessee and that letter shows that even up to that date the mills had not purchased cotton from any other dealer. But negotiation was for purchase of cotton from dealers in Pakistan, who perhaps were in a position to ship cotton to the Mills. This letter, which is on record, clearly shows that at the time of resale the China Mills had not purchased cotton from any other dealer. It necessarily follows that the payment of Rs. 1,40,000 made by the assessee could not be in the nature of part of the price of cotton paid by the assessee to the China Mills on account of their failure to supply the same.
14. Our attention was also drawn by Mr. Mehta to the two affidavits filed by two persons, who were at the material time directors of the Raw Cotton Traders Ltd., which are in identical terms and, therefore, it is sufficient to reproduce only one of the two affidavits :
'It is within my own personal knowledge that Raw Cotton Traders Limited sold to the Mills in Shanghai, 4,000 bales of cotton and that owing to certain circumstances the said sale was cancelled and the Mills concerned had to purchase from sources other than Raw Cotton Traders Limited, 4,000 bales to replace those in respect of which the sale was cancelled at prices higher than those at which Raw Cotton Traders Limited had originally agreed to sell to the Mills and thereby the Mills sustained substantial loss.'
15. Again, this affidavit does not identity the party that failed to perform the contract. Nor does it say at what time and by what time and by what date the China Mills had purchased cotton from other sources.
16. The facts disclosed above, on the other hand, show that the assessee was ready to give delivery of the cotton but the China Mills were unable to take delivery of the cotton because they could neither arrange for import licence nor for opening an irrevocable confirmed credit. The prices were rising at that time. In these circumstances, the China Mills and arranged for reselling cotton to the assessee and the transaction has been so arranged as was mutually beneficial to both the parties, both the assessee as well as the China Mills getting a share in the rise of prices.
17. For reasons stated above, the findings of the Tribunal that the assessee wanted to wriggle out of the contract and that the payment made by them was merely a part of the price of cotton, which they could not supply to the non-resident at the stipulated rates are findings without any evidence on record.
18. This brings us to the second contention raised by Mr. Mehta. As already stated, it is his contention that even if it is held that the contract of resale was not the result of the failure on the part of the assessee to perform his part of the contract but was a transaction entered into by mutual agreement, the tax is not attracted to the profits made by the China Mills as it was a transaction of a casual and non-recurring nature. It is the argument of Mr. Mehta that the China Mills were not doing the business of purchase and sale of cotton. On the other hand, their business was manufacture of cloth. At the time the China Mills agreed to purchase cotton from the assessee they had the bona fide intention of taking delivery of the cotton. Subsequent thereto, they could not take delivery of the cotton because they could not arrange for import licence and failed to open irrevocable confirmed credit. It is in these circumstances only that they had entered into the transaction of resale. The profit resulting therefrom was only a casual receipt and was not a business receipt and, therefore, no tax was attracted to this receipt.
19. It is indeed true that the normal business of the China Mills was manufacture of cloth and there is evidence on record to show that the mills had the bona fide intention of taking delivery and it appears that till the 12th of January, 1948, the Mills were hopeful of getting a permit and insisting on delivery, but were ultimately unable to get permit and the transaction of resale was therefore entered into. But, for these reasons, it is difficult to hold that the profits earned by the China Mills as a result of the transaction of resale was not a business receipt or was only a casual transaction having no connection with the business. It cannot be lost sight of that for the purpose of the business of the Mills, viz., manufacture of cloth, the Mills had to purchase cotton. The expenditure incurred in purchasing cotton was, therefore, a revenue expenditure. For certain reasons already discussed, the Mills were not in a position to take delivery of the cotton. In these circumstances, this raw cotton, which they had purchased for the purpose of their business, they could not utilise for manufacture of cloth. The Mills, therefore, thought it advisable to sell the raw material in its raw stage and have earned profit over it. In these circumstances the money obtained by the Mills would be a business receipt and, therefore, the profits gained out of the transaction would be receipts arising from business. In our opinion, therefore, the case does not fall within clause (vii) of sub-section (3) of section 4 of the Act.
20. Mr. Mehta relied on a decision of their Lordships of the Supreme Court in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax. That case is distinguishable on facts and has no application to the facts of the present case. The facts in that case were : The assessee company was formed with the object of, inter alia, carrying on general business, of trade, of commission agents and bankers, undertaking the management of commercial undertakings and dealing in bills, hundies and other securities. In the year 1933, the managing director of the company entered into an agreement with a Sugar Syndicate then incorporated under which in lieu of the assessee subscribing for shares worth Rs. 3 lakhs, the assessee was to be given the managing agency of a mill of the sugar syndicate as and when such mill was erected. The mill was not erected and the agreement about acquiring the managing agency fell through. Thereafter, the managing director died some time in 1940, and the assessee company sold the shares in the syndicate. The sale of shares resulted in profits of Rs. 2 lakhs. Question arose as to whether the receipt of Rs. 2 lakhs was a receipt from business or appropriation of capital. It was held by their Lordships that the purchase of shares was an investment and not an adventure and, therefore, the profit of Rs. 2 lakhs received by the assessee over the shares was not in the nature of income from business and was not, therefore, liable to tax.
21. It can hardly be said that the cotton purchased by the China Mills in the instant case was an investment of a capital nature. On the other hand, as already stated, it was raw material purchased by the Mills for the purpose of the business of the Mills and the expenditure incurred thereon was of a revenue nature, and consequently, the receipts received by the sale of that material in the course of its business was a revenue receipt arising from the business.
22. A decision in George Thompson & Co. Ltd. v. Commissioners of Inland Revenue, would come very near the facts of the present case. The assessee company was carrying on business, inter alia, as ship-owners, merchants, ship-brokers, etc. For the purpose of business it had entered into a contract for purchase of coal. Subsequent thereto some of the company's ships were requisitioned by the Government. This resulted in a surplus of coal in the hands of the assessee company. The assessee company, therefore, sold the benefits of the contract for purchase of coal to another company. The question arose whether the profits resulting from this transaction of sale of the benefits of the contract for purchase of coal was business income liable to tax. It was, inter alia, contended on behalf of the assessee that even if the transaction amounted to sale of coal by the assessee company, it was an isolated transaction, which did not amount to the carrying on of a trade. Any profit made was, therefore, a casual profit from an isolated purchase and sale and should not, therefore, attract liability to tax. This contention was repelled by Rowlatt J. in the following terms :
'I think the substance of the matter is simply this, that they had got coal; they had assured their supply of coal on revenue account; they found that they did not want it, and that they could free themselves of those deliveries at a profit or a saving (whatever you like to call it) to themselves, and I think quite simply the whole of it comes into the account of their business as shipowners. Sir Leslie put it - it could not have been put more clearly or more forcibly, or more temptingly - that this really was a separate little matter. It did not begin as a separate matter. They clearly arranged for this coal as part of their business. What is one to say Is one to say that it disappears; that this coal transaction having begun as a coal transaction on revenue account ceases to be on revenue account if it disappears from their revenue expenditure at a profit I do not think the argument is much advanced. Really what Sir Leslie has to contend for is that when they found that this coal was not wanted, and so disposed of it, the whole coal transaction disappeared ab initio - that is what it seems to me is the difficulty - from their operations as a shipowning company. On the facts I cannot look at it in that way. As I say it depends just how you look at the facts. On the facts. On the facts I think this is simply a case of a person who is bound to buy a certain amount of consumable stores, who over-buys and is lucky enough to dispose of those consumable stores which he has got in the way of his business in relief of his business at a profit, or whatever way in which you like to put it. He has simply got out of it, and not only escaped the expense, but there is something put in his pocket for it in the way of his business. I think the whole of it comes in.'
23. The second contention raised by Mr. Mehta should, therefore, fail.
24. Lastly, Mr. Mehta contended that the payments were not made to the non-resident but on the other hand payments were made to Volkart Bros., Chartered Bank, Khilachand Devchand & Co. and Mr. Umrigar, who, at the material time, were all residents. Mr. Mehta, however, did not argue this point in view of the decision of this court in Narsee Nagsee & Co. v. Commissioner of Income-tax  35 I. T. R. 134 He only stated that he would like it to be mentioned that he had raised this point.
It is next to be seen whether on the facts of this case section 18(3A) is attracted. That section as it stood then was in the following terms :
'Any person responsible for... any other sum chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay income-tax thereon as an agent, deduct income-tax at the maximum rate.'
25. It is not in dispute that the China Mills, to whom payment was made, are non-residents. On the facts found the amount paid represents the profit made by the Mills on the sale of cotton. As already stated, in our view, the profits made arose from business and tax would, therefore, be chargeable on profits under the Indian Income-tax Act. It is also not in dispute that the assessee was not an agent in India of the China Mills. In our opinion, therefore, the assessee should have deducted income-tax as required by section 18(3A) of the Act at the time he made the payment to the China Mills.
26. Our answer to the question referred to us is, therefore, in the affirmative. Assessee shall pay the costs of the department.