Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
AZAMJAHI MILLS LTD. HYDERABAD
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX,HYDERABAD
DATE OF JUDGMENT17/03/1976
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
GOSWAMI, P.K.
CITATION:
1976 AIR 1172 1976 SCR (3) 645
1976 SCC (2) 258
ACT:
Income-tax-Assessee in Princely State-Payment by
Government of India by cheque posted in British India-
Whether receipt by assessee in British India liable to
Indian Income Tax.
HEADNOTE:
The Government of India was placing bulk purchase
orders with the assessee-company, a textile mill, which had,
during the assessment years 1945-46, 1946-47 and 1947-48,
its registered office in the Hyderabad State outside British
India. After the despatch of the goods, the assessee was
submitting its bill in the prescribed form which also
contained the receipt. The receipt had the words ’Please pay
by cheque to self/Banker on Bank/Treasury at.....’ and the
assessee used to enter the words ’Hyderabad (Dn). in the
blank space after ’at’. But on the back of the bulk purchase
order form, there were instructions that the payment was to
be made by the Controller of Supply Accounts, Bombay, and
the Government of India had also issued general instructions
to all textile mills in the Princely States that all
payments were to be made ’by cheque on Government Treasury
in Br. India, or alternatively on a branch in Br. India,
which transacts Government business of the Reserve Bank of
India. All payments were made on behalf of the Government of
India by cheques which were sent to the assessee by post.
Some of the cheques were drawn on banks in Br. India and
others on banks in the Hyderabad State.
^
HELD: The sale proceeds should be held to have been
received by the assessee from the Government of India in
British India and not in Hyderabad State, and hence were
subject to Indian income-tax. [647F-G]
In the absence of a request by the creditor or an
agreement between the parties regarding the sending of money
by cheque by post, the mere posting of the cheque would not
operate as delivery of the cheque to the creditor. Where,
however, a cheque is sent by post in pursuance of an
agreement between the parties or a request by the creditor
that the money be sent by cheque by post, the post office
would be treated as the agent of the creditor for the
purpose of receiving such payment. Such an agreement or
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
request need not be express and may be implied from the
facts and circumstances. [648A-C]
The facts of the case and the course of dealings show
that it was the understanding between the Government of
India and the assessee that the payment would be made on
account of goods supplied by the assessee, by cheques. The
cheques were in the very nature of things to be sent from
British India by post as that is the usual and normal agency
for transmission. As the cheques were sent to the assesseee
on behalf of the Government of India by post from British
India in pursuance of an understanding between the parties,
the payment to the assessee shall be treated to have been
made in British India to the agent of the assessee. [647G-
648A]
Indo re Malwa United Mills Ltd. v. Commissioner of
Income-tax, 59 ITR 738; Commissioner of Income-tax, Bombay
South, Bombay v. Ogale Glass Works Ltd. 25 ITR 529 and Shri
Jagdish Mills Ltd. v. Commissioner of Income-tax, 37 ITR
114, followed.
Commissioner of Income-tax, Bihar & Orissa v. Patney &
Co. 36 ITR 488, distinguished.
646
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 980-982
of 1971.
Appeals by Special Leave from the Judgment and Order
dated the 9-2-70 of the Andhra Pradesh High Court in case
Referred No. 1 of 1967.
R. Vasudev Pillai and P. K. Pillai for the Appellant.
R. M. Mehta and S. P. Nayar, for the Respondent.
The Judgment of the Court was delivered by
KHANNA, J.-This judgment would disposed of three civil
appeals Nos. 980 to 982 of 1971 which have been filed by
special leave against the judgment of the Andhra Pradesh
High Court on a reference under section 66 of the Indian
Income-tax Act, 1922 (hereinafter referred to as the Act)
answering besides two other questions with which we are not
concerned, the following question against the assessee
appellant and in favour of the revenue:
"Whether, on the facts and in the circumstances of
the case, the sale proceeds were received from
Government of India in British India?"
The assessee company is a public limited company
registered in what was at the relevant time the Nizam’s
Dominion (hereinafter referred to as Hyderabad State)
outside British India. The matter relates to assessment
years 1945-46, 1946-47 and 1947-48 for which the relevant
accounting period ended on October 5, 1944, October 5, 1945
and October 5, 1946 respectively.
The assessee company had a textile mill at Warangal in
Hyderabad State. During the Second World War the company
supplied textile goods to the Department of Supplies.
Government of India under what was known as "Panel System".
The Government used to place bulk purchase orders with the
company for the supply to goods according to specifications.
The delivery of the goods used to be made by the company FOR
Warrangal. After the goods were despatched, the assessee
company submitted bill in form W.S.B. 116 giving details of
the supply. The prescribed form contained the following
receipt:
"Received Payment One anna Please pay by Cheque to Self
stamp on ==============
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
original Bankers
copy only. on Bank at...........
------------
Treasury
Contractor’s Signature Contractor’s signature "
The assessee used to enter the words "Hyderabad (Dn)" in the
blank space after the word "at". On the back of the bulk
purchase order form, there were instructions that the
payment was to be made by the Controller of Supply Accounts
Bombay. The Government of India issued general instructions
to all textile mills in the Indian States that all payments
were to be made "by cheque on Government Treasury in British
India, or alternatively on a branch in British India, which
647
transacts Government business of the Reserve Bank of India".
All payments were made on behalf of the Government of India
by cheques, which were sent to the assessee by post. Some of
these cheques were drawn on banks in British India and the
others on banks in Hyderabad State. All the cheques received
from the Government, including those drawn on banks in
British India, were collected through the assessee’s bankers
in Hyderabad State.
In making the assessment the Income-tax Officer held
that the sale proceeds in respect of cheques, which had been
drawn on banks in British India, were received by the
assessee in British India and as such the assessee was
liable to tax under the Act. In respect of cheques drawn on
the banks in Hyderabad State, the Income-tax Officer held
that no income had accrued in British India and was,
therefore, not subject to assessment under the Act. The
assessee took the matter in appeal to the Assistant
Commissioner claiming that no portion of the income had been
received in British India. The Appellate Assistant
Commissioner held that the entire sale proceeds had been
received in British India and he, therefore, passed an order
enhancing the assessed amount. On further appeal by the
assessee the Income-tax Appellate Tribunal upheld the order
of the Assistant Commissioner. At the request of the
assessee the question reproduced above along with two other
questions relating to the power of the Appellate Assistant
Commissioner to enhance the amount of assessable income as
also the question of limitation were referred to the High
Court. The High Court answered the question reproduced above
as well as the other two questions with which we are not
concerned, in favour of the revenue and against the
assessee. So far as the question reproduced above is
concerned, the High Court took the view that the matter was
concluded by the decision of this Court in the case of
Indore Malwa United Mills Ltd. v. Commissioner of Income-
tax(1).
In appeal before us Mr. Vasudev Pillai on behalf of the
appellant has assailed the judgment of the High Court and
has contended that on the facts and circumstances of the
case, the sale proceeds should be held to have been received
by the assessee from the Government of India not in British
India but in Hyderabad State. There is, in our opinion, no
force in this contention.
It would appear from the resume of facts given above
that all payments were made on behalf of the Government of
India by cheques and those cheques were sent by post from
British India to the assessee. The facts of the case and the
course of dealings show that it was the understanding
between the Government of India and the assessee company
that the payment would be made on account of the goods
supplied by the assessee by cheques. The cheques were in the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
very nature of things to be sent from British India by post
as that is usual and normal agency for transmission of such
articles. As the cheques were sent to the assessee company
on behalf of the Government of India by post from British
India in pursuance of an understanding between the parties,
the payment to the assessee shall be treated to have
648
been made in British India. The post office in such cases is
taken to be an agent of the assessee company. The position
in law is that in the absence of a request by the creditor
or an agreement between the parties regarding the sending of
money by cheque by post, the mere posting of cheque would
not operate as delivery of the cheque to the creditor.
Where, however, a cheque is sent by post in pursuance of an
agreement between the parties or a request by the creditor
that the money be sent by cheque by post, the post office
would be treated as the agent of the creditor for the
purpose of receiving such payment. The agreement or request
need not, however, be express; it may also be implied to be
spelt out from the facts and circumstances of the case.
The question of law arising in this case is not res
integra and is concluded by three decisions of this Court.
In Commissioner of Income-tax, Bombay South, Bombay v. Ogale
Glass Works Ltd. the assessee, a non-resident company
carrying on business of manufacturing certain articles in
the State of Aundh, secured some contract for the supply of
goods to the Government of India. The contract provided that
"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 instructions given
in the acceptance of tender by cheque on a Government
Treasury in India or on a branch of the Reserve Bank of
India or the Imperial Bank of India transacting Government
business." The assessee submitted the bill in the prescribed
form and wrote on it as follows: "Kindly remit the amount by
a cheque in our favour on any bank in Bombay." The assessee
received cheques drawn on the Bombay branch of the Reserve
Bank of India. The assessee realised the amount of the
cheques through the Aundh Bank. It was held that the posting
of cheques in Delhi in law amounted to payment in Delhi. It
was further observed that the circumstances of the case
revealed an implied agreement under which cheques were
accepted unconditionally as payment. Even if the cheques,
according to this Court, were taken conditionally the
cheques having been not dishonoured, the payment related
back to the dates of the receipt of the cheques and in law
the dates of payment were the dates of the delivery of the
cheques. Income, profits and gains in respect of the sales
made to the Government of India were accordingly held to
have been received by the assessee in British India. Dealing
with the question of the understanding between the parties
in that case, this Court observed:
"According to the course of business usage in
general to which, as part of the surrounding
circumstances, attention has to be paid, under the
authorities cited above, the parties must have intended
that the cheques should be sent by post which is the
usual and normal agency for transmission of such
articles and according to the Tribunal’s findings they
were in fact received by the assessee by post."
The above case been sought to be distinguished by Mr. Pillai
on the ground that in that case the assessee had written on
the bill form the
649
words: "kindly remit the amount by cheque in our favour on
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
any bank in Bombay." It is said that the bill submitted by
the appellant contained no such writing. A similar argument
was advanced on behalf of the assessee company in the case
of Shri Jagdish Mills Ltd. v. Commissioner of Income-tax(1)
and it was held that the absence of such an express request
would not make material difference if the course of dealings
between the parties showed an implied request by the
assessee company to send the cheques by post. In Jagdish
Mills’ case the assessee company was incorporated in Baroda
State outside British India. The company accepted orders for
the supply of goods F.O.R. Baroda to the Government of
India. The manufacture and delivery of goods took place at
Baroda. The company after effecting delivery of the goods
submitted bills in the prescribed form which contained the
sentence that "Government should pay the amount due to the
company by cheque." There was, however, nothing in the bills
to show in what way the payment by cheque was to be made.
The company thereafter received at Baroda, in payment of its
bills, cheques through post from the Government drawn on a
Government Treasury or on a branch of the Reserve Bank of
India or the Imperial Bank of India transacting Government
business. The company endorsed the cheques and sent them
either to Bombay or Ahmedabad in its banking account at such
places. It was held that according to the course of business
usage in general which was followed in the 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. An implied request by the company to send the
cheques by post from Delhi was accordingly inferred. The
post office was held to have become the agent of the
assessee for the purpose of receiving those payments. This
Court consequently came to the conclusion that the amounts
of cheques were received by the assessee in British India
and as such were liable to be taxed under section 4(1) (a)
of the Act.
The facts of the case of Indore Malwa United Mills Ltd.
v. Commissioner of Income-tax (supra) were similar to those
of the present case. In that case the assessee, a non-
resident, carried on the business of manufacturing textile
goods at Indore, outside British India. The assessee
supplied textile goods to the Stores Department of the
Government of India under orders placed by the latter with
the assessee at Indore. The delivery of the goods was F.O.R.
Indore. The bills contained the following instruction for
payment: "Please pay by cheque to self on a bank at Indore."
The Government of India drew cheques in favour of the
assessee for the amounts of the bills on the Reserve Bank of
India, Bombay and sent them by post to the assessee at
Indore. The assessee deposited the cheques in its account
with the Imperial Bank of India, Indore and on clearance,
the amounts were credited to that account. Question which
arose for decision was whether the assessee company was
liable to pay tax in the taxable territories on the ground
that the sale proceeds, which included the profit element
therein, were received in the taxable territories. It was
held that if by an agreement, express or implied, between
the creditor and the debtor or
650
by request, express or implied, by the creditor, the debtor
is authorised to pay the debt by a cheque, and to send the
cheque to the creditor by post, the post office becomes the
agent of the creditor to receive the cheque and the creditor
receives payment as soon as the cheque is posted to him. It
was also held that there was an implied agreement between
the parties that the Government of India would send the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
cheque by post to the assessee. The sale proceeds which
included the profit element therein were, in the opinion of
this Court, received in British India where the cheques were
posted, and the profits in respect of the sales were taxable
under section 4(1) (a) of the Act.
Mr. Pillai has referred to the case of Commissioner of
Income-tax, Bihar & Orissa v. Patney & Co. This case cannot
be of much help because in that case the assessee had
expressly required the commission to be paid at Secunderabad
outside British India. It was because of this circumstance
that this Court found that the rule laid down in Ogale Glass
Works’ case (supra) did not apply and the money was not
received by the assessee in British India.
So far as the present case is concerned it has already
been pointed out above, that the circumstances of the case
and the course of dealings between the parties show that
there was an implied agreement or understanding between the
parties that the money would be sent to the assessee by
cheques posted from British India. The High Court, in our
opinion, rightly decided the question reproduced above
against the assessee appellant and in favour of the revenue.
The appeals consequently fail and are dismissed but in the
circumstances without costs.
V.P.S. Appeals dismissed.
651