Satyanarayana Rao, J.
1. The Appellate . Tribunal referred the following two questions of law to this Court for decision under Section 66 of the Indian Income-tax Act. The questions are:
'(1) Whether on the facts and in the circumstances of the case, the profits derived by the assessee company from sales made to European and American buyers arose outside British India? and
'(2) Whether on the facts and in the circumstances of the case, the profits derived by the assessee company from sales made to European and American buyers were received outside British India.'?
The assessment years with which we are concerned in this reference are four years - 1939-40, 1940-41, 1941-42 and 1942-43. The facts are common to the assessment years and therefore it is that a consolidated reference has been made to this Court. The statement of facts by the Appellate Tribunal and the facts as set out in the order of the Tribunal on appeal from the Appellate Assistant Commissioner are not in dispute and the statement of facts drawn up by the Appellate Tribunal has been agreed to by the Commissioner of Income-tax and the assessee.
2. The Assessee is Mysore Chromite, Limited, a company registered under the Mysore Company Regulations. Its registered office is at Sinduvalli in Mysore State. It acquired certain mining rights from the Government of Mysore over certain properties situate in that State. Messrs. Oakley Bowden & Company, Limited, Madras, are the Managing Agents of the assessee, and their registered office is at No. 15, Armenian Street, Madras. The assessee sells chromite ore after converting it into a merchantable product, mostly to merchants outside India, that is to buyers in America and in Europe. Messrs. Bowden Oakley, Limited, London, are the agents of the assessee in Europe while Messrs. W. R. Grace and Company, New York are the agents for business in New York. The course of dealing carried on by the assessee through their agents to buyers in Europe is that the buyers entered into contracts for the purchase of the product through the agents of the assessee in London. In regard to the American buyers, it appears that the agents in New York themselves entered into contracts with the company without disclosing the principals on whose behalf they seem to have acted. The contracts are signed by Messrs. Bowden Oakley and Company (Madras), Limited, on behalf of the assessee at Madras in respect of the American buyers. The contracts for sale between the European buyers and the assessee are signed by Messrs. Bowden Oakley, Company, (London), Limited. Two specimen forms of contract with the European and American purchasers are set out in the order of the Tribunal.
3. The main terms of the contracts are the delivery of the goods in F. O. B. Madras or Marmagoa. It is admitted that the shipment of the goods at Marmagoa were insignificant and it was therefore taken that practically all the shipments were from Madras. The goods have to be weighed and sampled and assayed after they reach the place of destination, the expenses for which has to be borne Jointly by both the buyers and sellers. As is customary in transactions of this kind, the buyers have to open before the goods are actually shipped, a confimed letter of credit with a Bank in London and out of the full amount of the provisional invoice, 90 per cent. of it in the case of European contracts and 80 per cent. of it in the case of American contracts was to be paid to the sellers. The Eastern Bank, Limited, London, acted as the bankers for the sellers and they had also a branch in Madras. The fact that the buyer's bank obtained a confirmed letter of credit was communicated by the Eastern Bank, Limited, London to their branch at Madras and after this information was received and the goods were shipped after taking a bill of lading, a bill of exchange for the provisional invoice value of the goods was drawn up by the sellers, that is, the assessee, upon the buyer's bank in London for acceptance. The payee under this bill of exchange is the Eastern Bank, Limited, London. The bill of lading, the bill of exchange and the provisional invoice were handed over to the Eastern Bank, Limited. Madras which was the negotiating or the exchange bank. As a negotiating bank the Eastern Bank wrote a letter to the Managing Agents of the assessee offering to negotiate the drafts drawn in terms of the contracts provided that the documents, namely, the bill of lading, the bill of exchange and the provisional invoice are found to be in order. In that letter they made it perfectly clear to the sellers that the advice given to the sellers by the Eastern Bank was only for guidance and that it did not involve any responsibility on the part of the bank. The balance of the price, that is, 10 per cent in the case of European contracts and 20 per cent in the case of American contracts was to be paid at London on ascertainment of the weight of the goods after they were assayed. There was a provision in the case of European contracts for insurance by the buyers but there is no such provision in the case of American contracts. In pursuance of this mode of mercantile dealing the goods were shipped by the Managing Agents of the assessee company who prepared the provisional invoice and a bill of exchange on the buyer's bank for the 90 per cent or 80 per cent as the case may be of the value of the provisional invoice amount payable at sight in the case of European contracts and at 90 days' sight in the case of American contracts to the Eastern Bank, Limited, London. The bill of exchange and the bill of lading which wastaken in the name of the seller but endorsed in blank by the sellers and the provisional invoice were then negotiated through the Eastern Bank, Limited, Madras. The Eastern Bank, Limited, Madras which as stated already, is an exchange bank advanced 90 per cent or 80 per cent of the provisional invoice amount to the seller at Madras. These documents were ultimately sent to London to the Eastern Bank Ltd., London, which presented the bill of exchange to the buyers Bank which accepted it and obtained a bill of. lading and paid the price of the goods in accordance with the bill of exchange to the Eastern Bank, London. The Eastern Bank, London, also realised, and there is no dispute about that, the balance of the purchase price - 10 per cent in the case of European contracts and 20 per cent in the case of American contracts - after the goods were weighed and assayed so that the total amount of the purchase price of the goods was realised from the buyer's bank after the bill of exchange was accepted and the bill of lading was handed over. The Eastern Bank, London, deducted the advance already paid to the sellers by their branch at Madras and the balance of the purchase price was thereafter received by the Managing Agents of the sellers.
4. On these facts the two questions referred to us have been raised. The assessee will be liable to pay tax on the profits realised by the sales if he is within the purview of either Section 4(1)(a) or 4(1) (c) of the Income-tax Act. The assessee is not a resident in British India and therefore he would be liable to pay tax on the profits only if the income had accrued or had arisen In British India during the accounting year or if it was received in British India during the relevant accounting period. The accrual of the income, It is common ground, would depend upon the place at which the sale took place. It is pointed out by the Appellate Tribunal both in the statement of facts and also in the order that it was accepted by both the parties that the income arises at the place where the sale takes place, and that therefore the only question for determination is whether the sale had taken place in British India or outside. This in its turn depends upon the application of the principles of Law relating to sale of goods under the Sale of Goods Act to the facts as set out above. Where did the sale take place in the circumstances of this case? It is contended on behalf of the department that the sale took place at Madras, where the sellers did all that they were required to do under the contract and received a part payment out of the amount of the provisional invoice. The sale, it must be remembered, is not a sale of ascertained goods but of unascertained goods. The sale takes place and is completed and the profits arise at the place and at the moment, when the property in the goods passed to the buyer.
5. Where did the property In the goods pass in the present case? Section 18 of the Sale of Goods Act lays down that in the case of sale of unascertained goods, the property in the goods does not pass to the buyer unless and until the goods are ascertained. Under Section 23 of the Act in the case of sale of unascertained goods unconditional appropriation of the goods to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller passes the property in the goods to the buyer. But it must be noticed that the appropriation in such a case must be unconditional. Under Section 25 of the Act it is open to a seller either by virtue of the terms of the contract or by his appropriation, to reserve the right of disposal of the goods until certain conditions are fulfilled. In such a case, it is stated in the section 'notwithstanding the deli-very of the goods to a buyer, or to- a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not bass to the buyer until the conditions imposed by the seller are fulfilled'. From the facts stated above, it is clear that until the buyer's bank accepted the bill of exchange, the bill of lading which was taken in the name of the seller but endorsed in blank, would not be delivered by the Eastern Bank Limited, London to the buyer's Bank who acted on behalf of the buyer. The condition therefore to be fulfilled so as to entitle the buyer to obtain the property in the goods and to obtain their delivery is to pay the purchase price at London and take delivery of the bill of lading, the document of title to the goods. This is the ordinary mercantile usage by which where a seller and buyer are in distant countries, the seller's and buyer's rights are secured. On the one side the seller would be anxious not to part with the property fn the goods to a foreign merchant whose financial status is not known to the seller, on the other hand the buyer would not be willing to part with his money until he secures his title to the goods. Both the parties therefore are brought together at the crucial point of time, namely, the delivery on the one hand of the title deeds to the goods, that is, the bill of lading and the payment of the money by the buyer at the same time. Of course, in all these stages both the buyer and the seller are represented by their agents and also by their banks. The problem therefore viewed from the plain language of the provisions of the Sale of Goods Act seems to be of easy solution. The provisions of the Indian Sale of Goods Act, are modelled on the English Sale of Goods Act which in its turn embodies in a crystallised form the well established principles of law relating to the sale of goods, and in particular the point of time at which the property in the goods passes from the seller to the buyer.
6. It is however, argued by Mr, Rama Rao Saheb that the payment of 80 per cent or 90 per cent of the provisional invoice price by the Eastern Bank Limited, Madras to the seller is really the realisation of part of the purchase price and a payment on account by the Eastern Bank Ltd. Madras. We think that this contention proceeds on a misapprehension of the relationship between the Eastern Bank Ltd., Madras, and the seller. The Eastern Bank Ltd. Madras is only an exchange bank, a bank which negotiated the bill of exchange as provided in the contract itself and also as Intimated by the letter of the Eastern Bank to the sellers. Their position, therefore, was merely that of Intermediate financiers who, on the security of the documents of title to the goods which have been handed over to them and the bill of exchange under which they are the payees, agreed to advance 90 per cent or 80 per cent of the provisional invoice price to the sellers. Of course, these devices are intended to prevent the seller's money being locked up for a long time and make it unavailable for purposes of trade. It is a well known method of securing money for purposes of further trade. It is nothing more than a mere loan to the sellers on security of the goods, it is not payment of the purchase price as at that moment of time the property In the goods did not pass and the Eastern Bank Ltd. were not acting in any sense of the term as agents of the buyers. The letter of credit was given by the buyer's bank and that fact was intimated through the Eastern Bank Limited, Madras to the sellers. The Eastern Bank throughout acted as bankers acting on behalf of the sellers and they had nothing to do with the buyers.
7. A further contention that was argued on behalf of the department is that the conditionsImposed under the contract namely, provision for. payment and assay are Indicative of the Intention of the parties that the property in the goods had already passed and that they were merely conditions subsequent. We do not think that this correctly states the position. After the goods were delivered to the buyers when the bill oi exchange was accepted under the terms of the contract the buyers had the right to have the goods weighed and assayed in order to find out whether the specification in the contract of the percentage of chromite in the ore is satisfied or not, and if they were not so satisfied it was open to them to make the necessary adjustments in the price. The price was finally determined after weighment and assay and when that was finalised the amounts mentioned in the provisional invoice is revised and the price of the goods is finally fixed. It is after that that the balance of the purchase price deducting the amount payable under the term of the contract, namely, 90 per cent in the case of European contracts and 80 per cent. in the case of American contracts was realised. The conditions, therefore are not conditions which would indicate that already the property in the goods had passed at an earlier point of time earlier even to the acceptance of the bill of exchange and that subsequently if there was a breach of those conditions there was a defeasance of the title in the goods which was vested in the buyers. It is really unnecessary In view of the clear language of the Sale of Goods Act to refer to the decisions on the point but the position was examined and clearly defined in two decisions, one of the Privy Council and the other of the House of Lords. The decision of the Privy Council is in 'THE PRINZ ADALBERT', (1917) AC 586. In that case Lord Sumner points out at page 589 the legal effect of transactions of sale of a similar nature and the point of time at which the sales takes place. The learned Lord observed:
'By general mercantile understanding, which has the force of law where transactions originate, like the present, in time of peace without prospect of war, the delivery of an indorsed bill of lading, made out to the shipper's order while the goods arc afloat, is equivalent to the delivery of the goods themselves, and is effectual to transfer ownership if made with that intention. The bill of lading is the symbol of the goods. Apart from specific formalities or similar prescriptions of Municipal Law, which are not now material, such intention is a question of fact. The usual course of dealing in the export of merchandise and the interest of parties concerned in it, suffice for the necessary inference in the absence of evidence to the contrary. When a shipper takes his draft, not as yet accepted, but accompanied by a bill of lading endorsed in this way, and discounts it with a banker, he makes himself liable on the instrument as drawer, and he further makes the goods, which the bill of lading represents, security for its payment. If, in turn, the discounting banker surrenders the bill of lading to the acceptor against his acceptance, the inference is that he is satisfied to part with his security in consideration of getting this further party's liability on the bill, and that in so doing he acts with the permission and by the mandate of the shipper and drawer. Possession of the indorsed bill of lading enables the acceptor to get possession of the goods on the ship's arrival. If the shipper, being then owner of the goods, authorizes and directs the banker, to whom he is himself liable and whose interest It is to continue to hold the bill of lading till the draft is accepted, to surrender the bill of lad-Ing against acceptance of the draft, it is naturalto Infer 'that he intends to transfer the ownership when this is done, but intends also to remain the owner until this has been done'. Particular arrangements made between shipper and consignee may modify or rebut these inferences, but in the absence of evidence to the contrary, and apart from rules which arise only out of a state of war existing or imminent at the beginning of the transaction the general law infers under these circumstances that the ownership in the goods is transferred when the draft drawn against them is accepted.' (Italics (here words in single quotations) are mine)
8. It is therefore obvious from this passage that until the bill of exchange is accepted, the bill of lading is to be retained. The obvious intention is that the seller intends to retain the ownership in the goods till the condition namely the acceptance of the bill of exchange is fulfilled by the buyer or the banker of the buyer. The question was recently examined by Lord Wright in 'Ross T. Smith & Co v. T.D. Bailey, Son & Co.', (1940) 3 All ER 60 where also the law is stated in similar terms, though the contract in that case was a C. I. P. contract. The learned Lord examined the corresponding provisions of the English Sale of Goods Act in the course of the Judgment, and the principles therein laid down as applicable even to the present case. At page 65 the learned Lord states in his speech:
'I think, with respect, that the Court of appeal, presumably because they had not the bills of lading before them, have by inadvertence fallen into an error, which, if not explicitly and fully controverted by this House, might be taken to lay down a general principle, and so have serious consequences in unsettling the course of business generally in C. I. P. contract. The notice of appropriation under an ordinary C. I. P. contract is not intended to pass, and does not pass, the property, whereas here, the sale is of unascertained goods by description there are, at that stage, no goods to which the contract can attach. The seller is free to appropriate to the contract any goods which answer the contract description. This he does by the notice of appropriation which specifies and defines the goods to which the contract attaches. These thereupon he is bound to deliver and the buyer is bound to accept subject to the terms of the contract. That, however, does not involve the passing of the property. The property cannot pass under a contract of sale until the goods are ascertained (the Sale of Goods Act, 1893, Section 16), but, once they are ascertained, the property passes at the time when the parties, Intended it shall (Section 17(1).). As the parties seldom express any such intention, or perhaps even think of it, the intention will generally be a matter of inference from the terms of the contract, the conduct of the parties, and the circumstances of the case.'
9. Then Section 18 of the English Sales of Goods Act was quoted and at page 66 while referring to the requirement that the appropriation must be unconditional this is what the learned Lord says:
'However, the Court, I venture to think, should: not have disregarded the word 'unconditionally' in Sub-rule (1) (corresponding to Section 23 of the Indian Sale of Goods Act). I do not construe Sub-rule (1). as limited to a case where there is an express-term that the notice of appropriation is unconditional, or, on the other hand, to a ease where the notice of appropriation is in terms, conditional, though the words contained is the notice-of appropriation namely, 'under the usual reserves as per contract' - would, I think, necessarilyimpart that the contract conditions were to be borne in mind. In this case, the facts known to both parties would import that the appropria- tion was conditional. The bills of lading were held by the appellants. The contract provided for cash or (at sellers' option) an acceptance of Sellers' draft against documents. That condition for the transfer of the documents had not been fulfilled. The bills of lading were the symbols of the goods, and the appellants by retaining them, retained, as against the respondents title and control over the goods. All the respondents had at that stage was a contractual right to obtain control, and thereby become owners upon taking up the documents.'
Later on the provisions of Section 19 (corresponding to Section 25 of the Indian Sale of Goods Act) were also referred to. The principles applicable for ascertaining the intention of the parties are enunciated at page 67:
'In particular, the provision already referred to for cash against shipping documents clearly contemplated that the sellers (the appellants) were to retain the documents, including the bills of lading, until the condition of payment was fulfilled. It is true that, by the bills of lading, the goods were not in terms made deliverable to the seller or his agent, but for all purposes of the contract, the position was the same as soon as the bills of lading (which were to the shipper's order) were indorsed in blank and transferred to the appellants. When that happened, the appellants had title in and control over the goods. They could deal with the goods as they liked, even though to deal with them contrary to the notice of appropriation would 'prima facie' be a breach of the contract. No property passed to the respondent until the conditions stipulated in the bills of lading for the transfer of the property were fulfilled.'
10. It is therefore obvious that the property in the goods did not pass at any place in British India and passed only in London where the bills of exchange were accepted and the delivery of the bills of lading were obtained from the Eastern Bank Ltd., London. It follows therefore that the profits arose outside British India in London and the answer to the first question referred to us must be in the affirmative and against the Income-tax Commissioner.
11. The next question for consideration is whether it can be said that the profits were received in British India, as 80 per cent and 90 per cent of the provisional invoice price were paid by the Eastern Bank Ltd., Madras, in the circumstances already set forth. The attempt of the department is to tax the assessee on the ground that even if the profits arose outside British India they were at least received in British India and therefore he is liable to pay tax. The contention strongly pressed before us by Mr. Rama Rao Saheb, the learned Advocate for the Income-tax Commissioner is that the amount paid to the Eastern Bank Ltd. Madras as advance is really receipt of part of the purchase price atMadras in British India and therefore it is that the assessee is liable to pay tax on the income. Here again one should not overlook the position that arises on the facts of the case. In the first place it must be remembered that at the time the Eastern Bank Ltd., Madras, paid this money it was not paid as part of the purchase price. No doubt there was the confirmed letter of credit by the buyer's bank on the strength of which it was that the Eastern Bank Ltd., London, intimated to the sellers through their branch at Madras that such a letter of creditwas given on behalf of the buyer. But that was only to assure the seller that he should despatchthe goods. The transaction between the Eastern Bank Ltd', Madras, and the sellers regarding the payment of the 80 per cent or 90 per cent of the invoice price was based solely upon the letter which the Eastern Bank Ltd., Madras, passed on to the sellers, offering to act as a negotiating bank & to accommodate the sellers if necessary as against the documents by advancing the amount of 80 per cent or 90 per cent of the provisional invoice price. That in our opinion was advanced on the strength and on the security of the documents of title which have been handed over to the Eastern Bank Ltd., along with the bill of exchange for negotiation. Under the bill of exchange it must be remembered the payee was the Eastern Bank, London, which is their own head office of the Madras Branch. The sale was not completed and under the terms of the contract the buyer was not bound to pay the price at that moment. The payment therefore must be treated merely as a loan and it has no other legal effect. At the other end when the sale was completed the price was paid by the buyer's bank to the Eastern Bank Limited, London. The price, therefore, was received on behalf of the sellers by the Eastern Bank Limited, London. Thereafter the Eastern Bank Ltd., London,' adjusted from and out of the sale price the amount which has already been advanced by their branch at Madras to the sellers and the balance alone was paid to the sellers. The first receipt therefore of the price was by the Eastern Bank, London, on behalf of the sellers. Thereafter they made the necessary disbursements from and out of the receipts which they made from the buyer's bank. The receipt of the sale price out of which profits must have accrued was undoubtedly in London. It cannot be said that the adjustment of the loan amount from and out of the sale price received by the Eastern Bank Ltd., London, is either a remittance or a receipt of the sale price, in Madras by the sellers. The argument is that when the sale is completed the amount received at Madras from the Eastern Bank Limited as advance was converted retrospectively into sale price and therefore it operated as receipt of the profits. We are unable to accept this contention.
12. The effect of the adjustment was only to lessen the liability of the assessee in British India to the Eastern Bank Limited, Madras. That can-hot be treated as a receipt of the profits in British India. As has been pointed out by Kania, J., as the officiating Chief justice as he then was in 'Sarupchand Hukumchand, In re : 13ITR245(Bom) a mere lessening of liability In British India is not a receipt. To constitute a receipt there must be a receipt of the amount or at least by appropriate book entries of an asset which can be pointed out as resulting from the receipt (vide at page 260, and observations of Chagla, J., at page 262). As pointed out in the Gresham Case 'Gresham Life Assurance Society v. Bishop', (1902) AC 287 'the income may be received in specie or in any form known to the commercial world for the transmission of money from one country or place to another'; and that is the test which was adopted in 'Commr. of Income-tax Bombay v. Ahmeda-bad Advance Mills Ltd', ILR (1938) Bom 171 and also in 'Commr. of Income-tax, Bombay v. New India Assurance Co. Ltd', ILR (1938) Bom 803 and also In 'Commr. of Income-tax, Madras v. Muhammad Ismail', ILR (1940) Mad 618 Lord Lind-ley in 'Gresham Life Assurance Society v. Bishop', (1902) AC 287, stated:
'A sum of money may be received in more ways than one, for example, by the transfer of a coin or a negotiable instrument or other documentwhich represents and produces coin, and it treated as such by business men.'
If however there is no receipt of the money in the manner and in the mode known to business men it cannot be said that there is a receipt of the money. The mere fact that the liability to the Eastern Bank Limited was adjusted in London cannot be treated as a receipt in British India. We think it is really unnecessary to advert to this aspect as in the present case the person who paid the purchase price and the person who received the purchase money are two different persons. The sale price was realised in London by the buyers Bank paying it to the Eastern Bank Ltd., who was acting on behalf of the sellers. That was the first receipt. It cannot be said that by subsequent adjustment towards the debt there was further receipt of the sale price by the sellers so as to attract the provisions of the Income-tax Act. The situation probably might have been different and it is unnecessary to go into that if the person who paid and received the sale price in the first instance happens to be one and the same person. That Is not the case here. It is clearly a case where a receipt of the sale proceeds was in London exclusively and the subsequent adjustments made by the Eastern Bank would not at all affect the legal position and would not make the adjustment a further receipt in British India. We therefore think that the question referred to us must also be answered in the affirmative, and against the Commissioner of Income-tax. As the assessee has succeeded, he is entitled to costs which we would fix at Rs. 250.