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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

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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                 ==============

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                   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

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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

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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

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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