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PETITIONER: COMMISSIONER OF INCOME-TAX, DELHI

       Vs.

RESPONDENT: MESSRS.  P. M. RATHOD & CO.

DATE OF JUDGMENT: 20/05/1959

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. SINHA, BHUVNESHWAR P. HIDAYATULLAH, M.

CITATION:  1959 AIR 1394            1960 SCR  (1) 401

ACT: Income-tax-Place of accrual or receipt of Profits-Goods sold by  a trader in a Part B State to customers in Part A  or  C States  Goods  sent by Value Payable Post  or  by  rail-Post office,  whether agent of seller or bailee of  goods-Railway receipt sent to bankers to be delivered to customers against Payment-Concessional  rate of taxation applicable to Part  B States-Indian Sale of Goods Act, 1930 (3 Of 1930), S. 25(1)- Indian Contract Act, 1872 (9 of 1872), S. 148.

HEADNOTE:    The respondents were manufacturers of perfumery and  hair oils  at Ratlam in Madhya Bharat which at the relevant  time was  a  Part B State.  They sent out  agents  who  canvassed orders.   The goods ordered were sent to the customers  from Ratlam either through the post office by Value Payable  Post or  they  were  sent  from there by  rail  and  the  railway receipts in favour of self were sent through a bank with the direction  that  they (railway receipts) were to  be  handed over  against  payment of the enclosed  demand  draft.’  The price  when  received  by the bank was sent by  means  of  a demand draft to the respondents at Ratlam who bad it  cashed and  credited to their account at Bombay.   The  respondents were assessed to income-tax, in respect of profits from such sales of goods to customers in Part A and C States, for  the assessment year 1950-51, at the rate or rates applicable  to income,  profits  or  gains arising or accruing  in  Part  A States on the footing that the sales were effected in Part A and C States and the payments were also received there.  The respondents  claimed  that the prices  realised  constituted receipts in Ratlam 51 402 and that therefore they. were liable to be assessed only  at the  concessional  rates applicable to Part B  States.   The Appellate  Tribunal  held that the price of  goods  sent  by Value  Payable  Post  was received at  Ratlam  and  that  in respect of the price received by bank drafts which had  been realised  through  the bank at Bombay, the  amount  must  be treated  as having been received in a Part A State.  At  the instance   of  the  Commissioner  of  Income-tax   and   the

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respondents, the Tribunal referred two questions to the High Court:  (1) Whether the bank drafts payable in Part A  or  C States  but  received  at Ratlam and  encashed  through  the assessee’s bankers at Bombay constituted receipts in Part  A State?  (2) Whether the receipt of sale proceeds  at  Ratlam (which included the assessee’s profits) in respect of  goods sent  by the assessee to customers in Part A or C States  by V.P.P.  amounted to receipts of income, profits or gains  at Ratlam  in a Part B State?  The High Court  having  answered both  the questions in favour of the respondents,  the  Com- missioner  of Income-tax preferred an appeal to the  Supreme Court :-   Held:   (1)  When a question referred to the Court is  not properly  framed,  it is open to the Court  to  reframe  the question which arises on a proper appreciation of the  facts of the Case.   Narain  Swadeshi  Weaving  Mills v.  The  Commissioner  of Excess Profits Tax, [1955] 1 S.C.R. 925, followed.   The proper question that arose on the facts of the present case   was  held  to  be:  "  Whether  on  the   facts   and circumstances of this case the payment received from a buyer by  a  banker  in Part A or C  States  against  delivery  of railway receipts for goods sent by the seller is payment  in these States or in Ratlam which was a Part B State."  (2) Where  goods are sent by rail and the railway  receipts in,  favour of self are sent to a banker to be delivered  to the buyer against payment of the price, the appropriation to the  contract  is only conditional and  the  performance  is completed  only  when the monies are paid  and  the  railway receipts delivered.   Accordingly,  where, as in the present case, the  payment. was received by a banker from a buyer in a Part A or C State against delivery of a railway receipt in favour of self  for goods sent by the respondents, the contract must be taken to have been per-. formed in Part A or C States and the  income arising out of these transactions must be held to have  been received there.  (3) The  principles governing the despatch of  articles  by Value Payable Post system are:-   (i)     that the post office is an agent of the seller for the recovery of price against delivery of goods;  Mothi  Rungaya Chetty V. The Secretary of State for  India, (1904) I.L.R. 28 Mad. 213, approved.  (ii)     that  the  seller retains control over  the  goods right  up  to  the time goods are  delivered  to  the  buyer against payment and 403 the  contract  falls under s. 25(1) of the  Indian  Sale  of Goods Act, 1930;   Mirabita  v. Imperial Ottomon Bank, (1878) 3 Ex.   D.  164 and The Parchim, [1918] A.C. 57, referred to.   (iii)   that even if the post office were considered to be a  bailee  of  goods  for transmission  to  the  buyer,  the contract would fall under s. 25 of the Indian Sale of  Goods Act  and  the  appropriation is conditional  and  until  the condition  is fulfilled the property in the goods  does  not pass; and,   (iv)    that  it is the duty of the bailee to  dispose  of the  goods in accordance with the directions of  the  bailor which in this case was to deliver the goods against payment. Hence the bailee received the price at the place of delivery of goods and did so on behalf of the bailor.  Consequently, in the present case, in respect of goods sent by  Value Payable Post to a Part A or C State the price  was received there and not at Ratlam.

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Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185 and The Badische Anilin Und Soda Fabrik v.  The Basle Chemical Works, [1898] A.C. 200, distinguished.

JUDGMENT:    CIVIL  APPELLATE  JURISDICTION :Civil Appeal No.  373  of 1957. Appeal  from  the judgment and decree  dated  September  20, 1955,  of the former Madhya Bharat High Court at  Indore  in Civil Misc.  Case No. 40 of 1954. ,   C. K.   Daphtary,  Solicitor-General  of  India,   K.   N. Rajagopal  Sastri,  R.  H.  Dhebar and  D.  Gupta,  for  the appellant.  S. S. Shukla, for the respondent.    1959.   May 20.  The Judgment of the Court was  delivered by KAPUR  J.-This appeal on a certificate by the High Court  is brought  against  the judgment of the High Court  of  Madhya Bharat  in a Reference by the Income-tax Appellate  Tribunal under s. 66(1) of the Income-tax Act.  The appellant is  the Commissioner of Income-tax and the respondents are a firm of manufacturers of perfumery and hair oils at Ratlam in Madhya Bharat  and their goods are sold throughout India.   At  the relevant time Madhya Bharat was a Part B State and the  sole question for determination is where were the income, profits and gains, 404 received  or  were deemed to be received and on  that  would depend the rate at which the respondents would be liable  to be assessed because of the concessional rates applicable  to Part B States.   The  facts  lie in a short compass.   The  respondents,  a registered firm, were assessed for the assessment year 1950- 51,  at the rate or rates applicable to income, profits  and gains  arising or accruing in Part A States.  The course  of their  business  was this: they sent out agents  to  various parts  of India.  They canvassed orders and  sometimes  took advance  payments  in full or in part  and  after  deducting their  expenses, remitted the balance to the respondents  at Ratlam through Bank drafts etc.  The goods ordered were sent to  the  customers either by V. P. P. or by  rail.   In  the latter case the Railway Receipts in favour of self were sent through  a  Bank deliverable against payment of  the  Demand Draft  drawn  upon  the buyers and  sent  with  the  Railway Receipts.  This price when received by the Bank was sent  by the Bank by means of Bank Draft to the respondents at Ratlam who sent them for being cashed and credited to their account at Bombay.   The  Income-tax  Officer held that the major  quantity  of goods  was supplied to the customers in what was Part A &  C States  either by V. P. P. or by rail, the Railway  Receipts being in favour of the respondents and payment was  received as stated above.  The  assessees’ banker was the Bank of India Ltd.,  Bombay, and  the  sale proceeds were, according  to  the  Income-tax Officer,  mainly realised through this Bank.  He  held  that the  sales  were  effected  in Part A &  C  States  and  the payments  were also received there.  He therefore  made  the assessment  on an estimated profit of Rs. 1,60,340 on  sales of  Rs. 5,09,424 without allowing any rebate on  account  of concessional  rates applicable to Part B States.  On  appeal the  Appellate  Asstt.  Commissioner reduced  the  estimated profit by Rs. 20,000.  The Income-tax Appellate Tribunal  on

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further  appeal  reduced the total income from Part  A  &  C States  to Rs. 2,85,376.  It found that the income  received through the Post Office, i.e., by V.P.P. 405 was Rs. 1,23,710 and that received in respect of goods  sent by  rail  and realized by the Bank drafts was  Rs.  2,85,376 making  a  total  of Rs. 4,21,955.  It also  held  that  the advances received with orders were income, profits and gains received  at  Ratlam  and  not in Part  A  &  C  States  and similarly the price of goods sent by V. P. P. was also money received at Ratlam.  In regard to the price received by Bank drafts  it held that they were received at Ratlam  but  were sent to the assessee’s banker in Bombay for being cashed and therefore they must be taken to have been received in a Part A State.  This amount was Rs. 2,85,376.  The Tribunal  after referring  to  the  decision of the  Bombay  High  Court  in Kirloskar  Bros.  Ltd. v. The Commissioner of  Income-tax(1) said :-               "  The  facts,  however,  in  this  case   are               entirely  different.   It  appears  from   the               printed  advice  sent by the assessee  to  its               bankers in every case that the bankers are  to                             hand  over  the goods against ’payment  of  t he               enclosed  demand  draft’.  It is  not  a  case               where   the   assessee   gives   unconditional               discharge on the receipt of either a cheque or               a  bank  draft.  We agree with  the  Appellate               Assistant  Commissioner that sale proceeds  to               the  extent of Rs. 2,85,376 were  received  at               Bombay." Both  the  assessees  and the  Commissioner  applied  for  a reference  -to the High Court under s. 66(1) of the  Income- tax Act and following two questions were referred :-               Q.1  "Whether the receipt of sale proceeds  at               Ratlam (which included the assessee’s profits)               in  respect of goods sent by the  assessee  to               customers  in Part A or C States by V.  P.  P.               amounted  to  receipts of income,  profits  or               gains at Ratlam in Part   B States?"               Q.    2. " Whether the bank drafts payable  in               Part A or  C States but received at Ratlam and               encashed  through  the assessee’s  bankers  at               Bombay constituted receipts in Part A State ?" The  High Court answered both these questions in  favour  of the assessees but gave a certificate and the (1)  [1952] 21 I.T.R. 82. 406 appeal  is therefore brought by the Commissioner of  Income- tax. Apart  from the sales which were deemed to have taken  place in  Ratlam itself the goods were, as stated above,  supplied to the customers in one of the following two ways. The goods were  either sent from Ratlam through the post office by  V. P.  P. or they were sent from there by rail and the  Railway Receipts in favour of self were sent through a Bank with the direction  that  the goods were to be  handed  over  against ’payment of the enclosed demand draft’. We  Shall first deal with that part in which the goods  were sent by post under the V. P. P. system.  The purpose of this system  is  given in Rule 133 of the Post Offices  guide  as under:-               " The V. P. P. system is designed to meet  the               requirements  of persons who wish to  pay  for               articles  sent  to  them at the  time  of  the

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             receipt  of  the articles or of  the  bill  or               railway  receipt relating to them and also  to               meet  the  requirements  of  the  traders  and               others who wish to recover through the  agency               of  the  post office, the  value  of  articles               supplied by them.  " In  the  case  of delivery of goods by V. P. P.  it  is  im- material  whether the buyer directs the goods to be sent  by V. P. P. or the seller does so on his own accord because the goods handed over to the Post Office by the seller can  only be  delivered to the buyer against payment and this  payment is received for and on behalf of the seller.  The buyer does not  pay till the goods are received by him and once he  has paid  -the price it is the Post Office that  is  responsible for payment of the money received by it to the seller.   The buyer  has  no longer any responsibility in  regard  to  it. Therefore  a  payment to the Post Office is payment  to  the seller  and at the place where the goods are  delivered  and payment is made.  Further before the goods are delivered  to the buyer the seller has under the V. P. P. Rules the  power to  direct  the  Post Office to make  the  delivery  to  the addressee  free or to deliver against a sum  different  from that  originally  specified.  This would negative  the  Post Office being an agent of the buyer.  This shows that 407 whatever  be the jural relationship between the  seller  and the post office in respect of carriage of goods sent by  the seller under the V. P. P. system it becomes an agent of  the seller  for  the recovery of the price and if  it  fails  to recover  the  price and delivers the goods it is  liable  in damages to the seller: Mothi Rungaya Chetty v.    The Secretary of State for India (1). Under  the V. P. P. system the seller retains  control  over the  goods right up to the time the goods are  delivered  to the  buyer  against  payment  of  price  and  therefore  the contract would fall under s. 25 of the Indian Sale of  Goods Act which provides:-               Section  25(1).  " Where there is  a  contract               for the sale of specific goods or where  goods               are subsequently appropriated to the contract,               the  seller may, by the terms of the  contract               or   appropriation,  reserve  the   right   of               disposal of the goods until certain conditions               are fulfilled.  In such case,  notwithstanding               the delivery 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 pass to the buyer  until  the               conditions   imposed   by   the   seller   are               fulfilled." The  principle then is this that if the seller when  sending the articles which he intends to deliver under the  contract does so, with the direction that the articles are not to  be delivered  to the purchaser till the payment of  price,  the appropriation is not absolute but conditional and until  the price is paid the property in the goods does not pass to the purchaser.   Mirabita v. Imperial Ottomon Bank (2 )  at  pp. 172-173  (Cotton,  L.J.). See also The Parchim (3 )  at  pp. 170-171 (Per Lord Parker).  And the goods pass at the  place where the price is paid, i.e., which in the present case was in  an  A or C State.  Thus the price was  received  by  the seller in A or C State. But  it was submitted on behalf of the respondents  that  to the present case the judgment of this Court in  Commissioner of  Income-tax v. Ogale Glass Works Ltd.(4) applies.   There

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the assessee was a company which was (1) (1904) I.L.R. 28 Mad. 213,  (2)     (1878)  3  Ex.    D. 164. (3)  [1918] A. C. 1157.       (4)  [1955] 1 S.C.R. 185. 408 carrying  on  business in an Indian State  (outside  British India) and its liability to Indian Income-tax depended  upon its receipt of money within British India.  The assessee had to be paid for goods supplied to the Government of India and at  his  request  the Government of  India  agreed  to  make payments  by cheques which were drawn in Delhi on  a  Bombay Bank  and were posted in Delhi and received by the  assessee in  the Indian State.  It was held that the Post Office  was the  agent of the assessee.  The principle of that case  has no application to the facts of the present case.  That  case did not deal with sale of goods or receipt of price  against delivery  of goods or the place where the price of goods  is received  by  the seller.  Reference was also  made  by  the respondents’ counsel to a judgment of the House of Lords  in The  Badische Anilin Und Soda Fabrik v. The  Basle  Chemical Works  (1).  In that case a trader in England ordered  goods from  a  manufacturer in Switzerland to be sent by  post  to England.    The  manufacturer  addressed  the  goods  to   a forwarding agent who in turn addressed them to the trader in England and delivered them to the Swiss Post Office by  whom they  were forwarded to England.  The goods were  such  that they  invaded an invention protected by an  English  patent. It  was  held  that the contract of sale  was  completed  by delivery  to the post office in Switzerland and as the  post office was the agent of the buyer and not of the vendor  the vendor  could not be said to have contravened the  invention within the ambit of the patent and that the patentee had  no right  of action against the vendor for an  infringement  of the patent.  In that case also there was no question of  the Swiss  manufacturer keeping control over the goods till  the price  was paid nor of any conditional delivery to the  post office  as  in the present case and besides that was  not  a case  dealing with the passing of the ownership in goods  or the  appropriation  of  goods to the  contract  of  sale  by delivery to a carrier.   The  argument raised by counsel for respondents  was  that the  respondents delivered the goods to the Post  Office  at the instance of the buyer and that the Post (1)  [1898] A.C. 200. 409 Office  acted  merely  as  a  bailee  for  the  purpose   of transmission  to  the  buyer.  But even as  such  bailee  it cannot  act  against  the instructions  of  the  bailor  and deliver the goods to the buyer without receiving their price and  when  he does recover he recovers it on behalf  of  the bailor.   Even a bailment for transmission would fall  under s.  25  of  the  Sale  of Goods Act  and  there  is  only  a conditional appropriation and until the condition imposed is fulfilled the goods do not pass.  Under s. 148 of the Indian Contract  Act  a   bailment ’ is delivery of  goods  by  one person to another upon a contract that they shall, when  the purpose is accomplished be returned or otherwise disposed of according  to the directions of the person delivering  them. A  bailee’s  duty  therefore  is  to  deal  with  the  goods according  to  the  directions  of the  bailor  and  if  the direction in the present case was that the goods were to  be delivered  to  the buyer on payment then  the  bailee  would receive the price on behalf of the seller at the place where the goods were delivered to the buyer. Thus the principle governing a despatch of articles by V. P.

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P.  is that the appropriation is conditional and goods  only pass  when  the condition is fulfilled, i.e., the  price  is paid against delivery.  The Post Office is an agent for  the seller and receives the price from the buyer at the place of delivery for transmission to the seller.  The income in  the present  case  was therefore received in Part A  or  Part  C States and not in Ratlam.  In our opinion, the answer to the first   question   should  have  been  in  favour   of   the Commissioner.   It should have been held that the income  in respect of goods sent by V. P. P. was received in Part A and C States and not in a Part B State. The  next question is unfortunately not properly framed  and therefore  it  is  necessary to reframe it as  was  done  in Narain Swadeshi Weaving Mills v. The Commissioner of  Excess Profits  Tax  (1).  The proper question that arises  on  the facts  is: " Whether on the facts and circumstances of  this case the payment received from a buyer by a banker in Part A or C (1)  [1955] 1 S.C.R. 952. 52 410 States against delivery of Railway Receipt for goods sent by the seller is payment in these States or in Ratlam which was a  Part  B State ". We have already set out  the  course  of business  in regard to the second mode of supply  of  goods, i.e.,  goods were sent by rail and the Railway  Receipts  in favour  of self were sent through a Bank with the  direction that  they  were to be delivered against payment  of  demand drafts drawn and sent along with the Railway Receipts.   Now in  this case as in the case of goods sent by V. P.  P.  the Railway Receipts in favour of self could not be delivered to the buyer till the money was paid and although the goods had been  handed over to a common carrier the  appropriation  to the  contract was only conditional and the  performance  was completed  only  when the monies were paid and  the  Railway Receipts  delivered.  These contracts also must be taken  to have been performed in Part A or C States and the price paid to  the Bank as agent of the seller at the place of  payment and  delivery of Railway Receipts.  The income, profits  and gains  were  therefore received in these States and  not  at Ratlam.   This  question should also have been  answered  in favour of the Commissioner and the income, profits and gains arising out of these transactions must be held to have  been received by respondents in Part A or C States. In both the cases the respondents would not be entitled to a concessional rate of taxation applicable to Part B States. The  appeal is therefore allowed.  The respondents will  pay the  costs  of the appellant of this Court and of  the  High Court.                                            Appeal allowed. 411