1. The questions referred to this Court for its decision under Section 66(1) of the Income-tax Act are:
1. Whether the sum of Rs. 34930 being the proportionate profits on sale of sugar by the South India Corporation Ltd. is assessable to tax under the provisions of the Indian Income-tax Act?
2. Whether the profits of Rs. 1786 on the sale of molasses in Bombay were rightly included in the assessment?
2. The Mysore Sugar Co. Ltd., Bangalore is the assessee. It is a public limited company incorporated in the Mysore State and carries on business as manufacturer and seller of sugar. Its factory is situated in Mandya in the Mysore State. The questions now referred to us have arisen in regard to the assessment of this company for the year 1943-44. The assessee entered into an agreement with the South India Corporation Ltd., Pudukottah, on 1-7-1942, and the first of the questions referred to us turns upon the legal relationship established by this agreement which has been annexed to the statement of the case as annexure 'A'.
The' case of the assessee was that though the sugar manufactured by it was sold in British India as it then was, it was not a sale by it but by the South India Corporation who were outright purchasers of its product. If this were made out it would have followed that there was no receipt by the assessee of the sale proceeds of the sugar in British India, involving any tax liability on the assessee. The Income-tax Officer, Special East Circle, Madras District, issued a notice to the assessee under Section 22(2) for assessing the profits arising in British India by virtue of the sales in British India,
The company filed a 'nil' return stating that no part of the company's income accrued, arose or could he deemed to have been received, in British India. This was not accepted by the Income-tax Officer who held that under the agreement between the assessee and the South India Corporation the latter were not out-and-out purchasers and were only sole agents for the purpose of effecting sales on behalf of the assessee. Acting on this construction of the agreement the assessee company was assessed to the appropriate tax. The assessee took the matter on appeal to the Appellate Assistant Commissioner where this construction of the agreement was affirmed also by the Tribunal on further appeal. The Tribunal however at the instance of the assessee has referred the first of the questions to this Court for decision.
3. As the second of the questions referred to us does not depend upon the agreement with the South India Corporation we shall refer to the facts in relation to it separately and deal with it after disposing of the first question.
4. It would be apparent from what we have stated above that the answer to the first question wholly depends on the proper construction of this agreement between the assessee and the South India Corporation which has been set out as annexure 'A' to. the statement of the case. Before setting out the terms and discussing the legal import of the several clauses of the agreement to be construed it is necessary to refer to an earlier agreement which the assessee had entered into with Messrs. Parry and Co. Ltd., as regards the distribution of its goods.
This agreement was dated 4-2-1936, and provided for Messrs. Parry and Co. acting as sole agents for the sale of the sugar produced at the assessee's factory at Mandya. It was for a period of one year. It is common ground that it was in force upto 30th June 1942, when the South India Corporation entered in the scheme. Under the terms of this agreement Parry and Co. were specifically and in terms constituted as 'agents' for sale who were to be remunerated by a commission of 1 1/2 per cent. on the price realised for the sugar railed from the Mandya factory.
The 'agents' agreed to pay the sale proceeds of the sugar when received by them to the assessee at Bangalore. In other words, they were to be del credere agents. The contract provided for the agents discharging their duties in regard to pushing up sales properly. There is therefore no doubt that under this agreement of 1936 the sales of the assessee's sugar in British India would have been really sales effected by the assessee through Messrs. Parry and Co. as its agents.
Learned counsel for the assessee urged that the main purpose of the agreement with the South India Corporation was to effect a change in this method of dealing so as to avoid any liability to British Indian Income-tax, and that we should construe the agreement in annexure 'A' in the light of this background. We are not however persuaded that this is a proper method of interpreting the relevant document before us. In the first place, there is no reference in the agreement with the South India Corporation to the earlier agreement and we are not aware of any legal principle by which an agreement between the parties could be interpreted in the light of the terms of another agreement between one of the parties and a third person.
Secondly, even assuming that a comparison or a contrast between the two agreements would be a relevant factor for interpreting the later document, we cannot start with the presumption that the intended result has been achieved, for this depends wholly upon the real relationship established by the agreement. Again, we are not quite certain whether a close comparison or contrast between the two documents is bound to lead one to the conclusion that a different legal relationship has been established from that which was effected by the earlier document. In these circumstances we shall dismiss out of account any light or indication afforded by the document with Messrs. Parry and Co., as an aid to the construction of the contract with the South India Corporation.
5. We shall now proceed to examine the terms of the document with a view to ascertain whether the legal relationship established between the assessee and the South India Corporation was that of a seller and a buyer or one of agency for sale. The clauses relevant in this context and on which reliance was placed on either side were Clauses 1 to 3, 5 and 7. But before setting them out it will be convenient to indicate the course of dealing between the parties. The assessee made no direct sales to customers in British India and it was the South India Corporation that actually contacted these buyers.
The latter received orders for sugar and immediately on receipt thereof forwarded to the assessee what are termed 'sales advices'. These advices set out the quantity of sugar to be booked as well as the railway station to which the goods were to be despatched. The 'sales advices' also informed the assessee of the particular merchants who had ordered the goods, The assessee thereupon booked the requisite quantity at Mandya railway station for transit to the stations named. The railway receipts appear to have been made out in the name of the South India Corporation and these were despatched to the Corporation at Bangalore together with bills drawn against them for the sums due.
On receipt of the bills together with the railway receipts the Corporation paid the bills arid sent the railway receipts duly endorsed to the concerned consumers in British India and collected the price due from them. This was the usual course of business. Sometimes the Corporation remitted moneys in advance which were later on adjusted when the railway receipts were handed over. On occasions consumers sent moneys direct to the assessee company but the assessee transferred these moneys to the credit of the South India Corporation and intimated to the Corporation of its having done so and it was the South India Corporation which was utilised for supplying the goods to these consumers also.
6. There is no doubt whatsoever that the sales effected by the South India Corporation took place in British India notwithstanding that they had their branch office at Bangalore for the purpose of effecting the sales. From this it would follow that if the South India Corporation figured in the transactions of sales to the consumers merely as agents of the assessee, the assessee itself would be effecting sales in British India with the result that it would be liable to tax on the sale proceeds received here.
The contention however that was raised on behalf of the assessee was, that it effected an out and out sale to the South India Corporation at Bangalore and was not concerned with the further history of the sugar thus sold to the Corporation. If this were made out, no doubt the assessee would succeed. On the other hand, if this were not made out and the legal relationship effected by the agreement (annexure A) was one of an agency for sale, then for the purpose of finding out whether the assessee effected sales in British India, the existence of the South India Corporation would have to be ignored and the assessee treated as utilising the machinery of the South India Corporation to effect these sales.
7. We shall consider the exact legal relation-ship established by this agreement of July 1942, the relevant clauses of which as already stated are Clauses 1 to 3, 5 and 7 which run as follows:
'(1) Subject to the terms and conditions herein contained party No. 2 (South India Corporation) be appointed solely for effecting sales of sugar from the factory of party No. 1 (assessee) Mandya to the following areas, viz., the Presidency of Madras, Secunderabad (Deccan), the Indian States of Travancore, Cochin, Pudukottah and Hyderabad and the Province of Coorg (excluding, Mysore State).
(2) Party No. 2 do have always an office and place of business in Mysore State and transact and conduct its business with Party No. 1 within the Mysore State. The sale or sales shall take place within the Mysore State and title to goods passes on delivery of rail receipts and party No. 2 shall be liable for the sale price.
(3) Party No. 2 will arrange for the payment at Bangalore of the sale proceeds of sugar within thirty days from the date on which the sugar bags are transferred from the metre guage and loaded on the broad guage wagons at Bangalore City Party No. 2 shall deposit a sum of Rs. 50,000 in the shape of Mysore Government bonds or Treasury Savings Certificates with party No. 1 to be held by Party No. 1 and operated upon and adjusted against any balance that might be due to Party No. 1 from Party No. 2.
(5) Party No. 2 will be entitled to one per cent. on the price realised for sugar on rails at Mandya,
(7) Party No. 2 undertakes not to effect sales of sugar to any person, firm or corporation in the Mysore State but Party No. 2 shall be entitled to transact his business at his office at Bangalore and conclude all contracts with any person, firm or corporation in the Mysore State. Party No. 1 shall sell sugar for consumption in the area mentioned in paragraph 1, only through party No. 2 but in case party No. 1 effects sales for consumption in the said area by any other manner, party No. 2 shall be entitled to the commission on such sales also.
(Party No. 1 shall, as far as it lies in its power, see that sugar sold by party No. 2 for consumption within the Mysore State is not resold for consumption in the area mentioned in paragraph 1).'
8. Clause (1) refers to the South India Corporation being appointed solely for effecting sales of sugar. The reference to an appointment would appear to be more consonant with the agreement being one constituting the South India Corporation as sole agents rather than their being buyers. This is emphasised by the use of the expression 'appointed for effecting sales'. In other words, if the South India Corporation effected sale of sugar produced at the assessee's factory it would only be as agents and not as buyers for as buyers the South India Corporation would be effecting purchases and not sales.
Clause (1) therefore is more consistent with agency rather than an out-and-out sale. Clause (1) has to be read along with Clause (7) which is referred to in the later clause. Though the opening sentence of Clause (7), viz., 'undertakes not to effect sales of sugar to any person, firm or corporation in the Mysore State', is consistent with both the South India Corporation being a buyer and there being an agent for sale, the second sentence makes clear the veal legal relationship between the parties, for it provides that the assessee 'shall sell sugar for consumption in the area mentioned in paragraph 1 only through party No. 2.'
There could be a sale through the South India Corporation only in the event of the assessee itself being the seller but employing the agency of the Corporation for the purposes of effecting their sales. Clauses (1) and (7) therefore clearly indicate that the South India Corporation are not buyers but only agents for effecting sales.
9. Learned counsel for the assessee placed great reliance on the second sentence in Clause (2) establishing that the South India Corporation were not and out buyers. We shall repeat the relevant words of this clause. They are 'the sale or sales by the South India Corporation shall take place within the Mysore State and title to goods passes on delivery of rail receipts and Party No. 2 shall be liable for the sale price'. Counsel for the assessee urged that the reference to the 'title to goods passing on delivery of rail receipts' must indicate the passing of title to the South India Corporation, and that this was linked up with the rest of the sentence which makes the South India Corporation liable for the sale price. We are unable to uphold this contention urged on behalf of the assessee.
In our judgment in the context, the sale or sales referred to in Clause (2) are sales not of the assessee but of the South India Corporation, and the reference to the title to goods passing on the delivery of railway receipts is intended to prescribe the mode in which the South India Corporation ought to conduct their business. In any event the clause is very ambiguous and is wholly insufficient to outweigh the legal effect of the clear terms of Clauses (1) and (7). Further, if the South India Corporation were intended to be out and out purchasers, there appears to be no meaning in expressly stipulating that they shall be liable for the sale price. Clause (2) therefore does not militate against the interpretation which we are inclined to place on Clauses (1) and (7).
10. Learned counsel relied on Clause (5) and urged that the payment of a commission of one per cent on the price was consistent only with an agency and inconsistent with a sale. In our opinion, this is not well founded. Even in an out and out sales, there might be a discount or rebate and such reduction in the nominal price does not necessarily indicate that the transaction is not one of sale. We are not referring to other clauses in the agreement, as neither side placed any reliance on them as having any bearing on the interpretation for the present purpose.
11. Learned counsel for the assessee referred us to a few decisions particularly that of the Court of Appeal in W. T. Lam and Sons v. Goring Brick Co. Ltd., 1932 1 KB 710 (A), for the position that though a party might be described in a contract as a selling agent, he might in truth be a buyer. We do not consider it necessary to refer to the decisions cited by learned counsel as the question in each case turns wholly upon the interpretation of the particular agreement between the parties. We are clearly o: the opinion that under annexure A the South India Corporation were merely the sole selling agents and not the sole buyers with a right to resell in a named territory. The answer to the first question is therefore in the affirmative and against the assessee.
12. The facts in relation to the second question are these. The assesses effected sales of spirits, molasses and other by-products to a firm by name Herijibhai Manekji of Bombay. The terms of sale were F.O.R. Mandya. The assessee stated that according to the rules of the railway, the freight in regard to these commodities, had to be pre-paid and it did so pay it, though the contract was F. O. R. Mandya, and that it collected the freight later on from the buyer. The case of the assessee was that the property in the goods passed immediately the goods were put on the wagon at Mandya and that consequently it was not liable to be assessed in regard to the sale proceeds received from the buyer. The Income-tax Officer rejected this claim on grounds which it is not necessary to set out. The Appellate Assistant Commissioner affirmed this decision by recording:
'......the appellants contended that as the terms were F.O.R. Mandya, these sales should be held to have been effected in Mysore State. But then, the sale notes clearly showed that the freight to Bombay was paid by the appellants themselves. The contention that the freight was subsequently recovered from the Bombay merchant would not alter the position. What was recovered from the Bombay merchant was the sale price by whatever name the appellants chose to call it.'
13. The Tribunal in their order on appeal repeated this reasoning of the Appellate Assistant Commissioner. They said:
'The contention was that the terms were F.O.R. Mandya, and that the sales should be held to have been effected in the Mysore State only. This argument conveniently ignores that the freight to Bombay was paid by the assessee. It is no use saying that freight was subsequently recovered from the merchant. Call it whatever name, what was recovered from the Bombay merchant was the sale price and therefore the profit on such sales was rightly included in the assessment.'
14. We are wholly unable to accept this reasoning as sufficient to decide the point against the assessee. If the terms of the contract were F.O.R. Mandya--and this was never disputed--the fact that the assessee incurred some expenses on behalf of the buyer which it subsequently recovered does not make the other expenses a part of the price and does not. also alter either the terms of the contract or its legal incidents, including the point at which property passes to the buyer which is crucial for this purpose. Mr. Rama Rao Sahib learned counsel for the Department did not seek to support this reasoning of the Tribunal.
We therefore requested for information from learned counsel for the assessee as to the manner in which the transaction was actually put through and Mr. Subbaraya Aiyar, learned counsel for the assessee, explained to us that the assessee drew on the buyer for the price and sent the concerned railway receipts through Messrs. Grindley and Co. Bankers, who collected the price from the buyers at Bombay, and paid it over to the assessee. In these circumstances, it is clear that the sale proceeds received by the assessee were liable to the British income-tax and the assessment by the departmental authorities confirmed by the tribunal is justified. In these circumstances we answer the second question also in the affirmative and against the assessee. As the assessee has failed, it will pay the costs of the reference, counsel's fee Rs. 250/-.