Commissioner of Income Tax, Bihar vs M/S. Patney and Co

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 326 of 1957

Decision Date: 05 May 1959

Coram: J.L. Kapur, Bhuvneshwar P. Sinha, M. Hidayatullah

In this case the Court recorded that the matter involved the Commissioner of Income Tax for the provinces of Bihar and Orissa as petitioner and the firm M/s Patney & Co as respondent. The judgment was delivered on the fifth day of May, 1959. The bench that heard the appeal was composed of Justice J L Kapur, Justice Bhuvneshwar P Sinha and Justice M Hidayatullah. The official citation of the decision is reported as 1959 AIR 1070 and also appears in the 1959 Supplement to the Supreme Court Reports, page 868. Subsequent citator references include R 1960 SC 266, RF 1966 SC 1466, R 1976 SC 1172 and the case is indexed under the Income‑Tax Act dealing with assessment of non‑resident income, agreements with resident debtors for payment outside British India, the remittance of cheques posted in British India, the place of payment and the liability of non‑residents to tax.

The factual matrix, as set out in the headnote, described the respondents as non‑resident agents carrying on business at Secunderabad, which lay within the territory of the Nizam of Hyderabad. They acted as agents for two separate firms located in Bombay and Madurai, both of which were situated in British India, for the purpose of supplying certain goods to the Nizam’s Government. The parties had agreed that the commission due to the respondents would be paid either in cash or by means of cheques at Secunderabad. Accordingly, the firms issued cheques drawn on the Bombay and Madras branches of the Imperial Bank of India and sent those cheques by post from Bombay and Madurai to the respondents in Secunderabad. Upon receipt the respondents recorded the cheques in their books, forwarded them to their banker in Secunderabad for collection and credit to their account. For the assessment year 1945‑1946 the Income‑Tax Officer at Berhampur, which lay in British India, treated these sums as taxable income on the ground that the amount was received in British India and not at Secunderabad. The Appellate Tribunal, however, observed that the respondents had treated the cheques received at Secunderabad as payment. The respondents contended that, under the agreement, the commission was to be paid at Secunderabad, that the post office functioned as the agent of the debtor rather than of the respondents, and that the amount should be regarded as received only when the post office delivered the cheques to them, thereby not constituting receipt in British India. The Income‑Tax authorities relied upon the decision in Commissioner of Income‑Tax v Ogale Glass Works Ltd. (1955 SCR 185). The Court held that when payment is made by cheques sent through the post, the determination of the place of payment depends on the agreement between the parties or their course of conduct. If the creditor expressly or impliedly authorises the debtor to send a cheque by post, ownership of the cheque passes to the creditor at the moment it is posted. In the present case, however, the agreement stipulated that the amount was to be paid at Secunderabad; consequently, when the cheques were received by the respondents there, the amount was deemed to have been received at that place, and thus it was not liable to tax in British India. The earlier decision in Ogale Glass Works was distinguished on these facts.

In the present matter, the Court observed that because the agreement between the parties required the commission to be paid at Secunderabad, which lay outside British India, the receipt of the cheques by the respondents at that location meant that the amount was to be regarded as received there. Consequently, the sum was not subject to tax in British India. The Court distinguished the earlier decision in Commissioner of Income‑tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185. The appeal, filed by special leave, was numbered Civil Appeal No. 326 of 1957 and challenged the judgment and order dated 16 February 1955 of the Orissa High Court in N. J. C. No. 117 of 1951. The Solicitor‑General of India, assisted by counsel, represented the appellants, while counsel for the respondent appeared on the opposite side. The judgment was delivered on 5 May 1959 by Justice Kapur. This appeal was brought by the Commissioner of Income‑tax against the High Court of Orissa’s finding that the amounts received by the assessee‑respondents had not been received in British India and therefore were not taxable there. At all material times the respondents were non‑resident agents conducting business at Secunderabad, which at that time formed part of the Nizam’s territories of Hyderabad. They acted as agents for the supply of gas plants manufactured by Messrs T. V. S. Iyengar & Sons, Madura, to the Nizam’s Government, and also as agents for the Lucas Indian Services, Bombay branch, for the supply of certain goods to the same Government. The assessment year concerned was 1945‑46. No written agreement existed between the two manufacturers and the respondents, but the goods were supplied on a commission basis. Pursuant to this arrangement, the respondents received from M/s T.V.S. Iyengar & Sons, Madura, cheques drawn on the Imperial Bank of India, Madras, totalling Rs 35,202 for all goods supplied from Madura, and also received from Lucas Indian Services, Bombay, cheques drawn on the Imperial Bank of India, Bombay branch, for Rs 5,302 relating to goods supplied by that firm, making a combined total of Rs 40,504. These cheques were posted and, upon receipt at Secunderabad, were entered in the respondents’ account books and forwarded to their banker, G. Raghunathmal, for collection and credit to the respondents’ account. The respondents immediately drew cheques on these deposited sums and thus operated on the amounts. With respect to the commission from the Bombay firm, the amount was deposited on 22 December 1944 but was only credited on 2 January 1945. The Income‑tax Officer assessed the entire Rs 40,504 as taxable income, holding that the whole amount was received in British India rather than at Secunderabad. The respondents appealed this assessment to the Appellate Assistant Commissioner, who affirmed the assessment, maintaining that the income must be deemed to have accrued, arisen, or been received in British India. The respondents then appealed this decision, seeking reversal.

The respondents filed an appeal before the Income‑tax Appellate Tribunal, contending that the sums received from the firms in Madura and Bombay represented commission earned by them. The Tribunal examined the circumstances and concluded that, although the commissions originated from those firms, the amounts were actually received at Secunderabad. Consequently, the Tribunal allowed the appeal and held that the receipt of the sums should be treated as occurring in Secunderabad. In its own words the Tribunal stated that the appellants argued that the cheques, being negotiable instruments, were accepted by the creditor and entered into the creditor’s books, thereby effecting receipt in Hyderabad. The Tribunal agreed with this submission and referred to Bhashyam’s Negotiable Instruments Act (8th Edition, Revised, page 556), which provides that a creditor may accept a cheque as absolute payment of a debt, rendering the cheque equivalent to a cash payment. Relying on this principle, the Tribunal held that it could not be said that the income was received in British India.

At the instance of the Commissioner, a reference under section 66(1) of the Income‑Tax Act was made to the High Court of Orissa for its opinion on whether the sums of Rs 35,202 and Rs 5,302, received as commission from T V S Iyengar & Sons Ltd. and Lucas Indian Services Ltd. respectively, should be treated as income that accrued, arose or was received in British India. The High Court observed that the statement of case presented to it was imperfect and that the real issue differed from the one framed by the Commissioner. It explained that the essential question was not merely where the cheques were drawn or to which bank they were sent for collection, but whether the assessee, whose place of business lay outside British India, received the cheques as absolute and final payments effecting an unconditional discharge of the debt, or whether the receipt was merely conditional, dependent upon later realisation. The Court noted that the fact that the cheques were drawn on a bank situated in British India, or that they were sent for collection through a Secunderabad banker of the assessee, was relevant but not determinative. Accordingly, the High Court remitted the matter back to the Appellate Tribunal, directing the parties to file a supplementary statement of case. At this stage the controversy was confined to the question of whether cheques sent to Secunderabad and subsequently realised in British India amounted to a final, unconditional discharge of the commission liability. The Tribunal, after considering the supplementary statement, found that the conduct of the parties demonstrated that the cheques were received from the Bombay and Madura firms as full satisfaction of the commission that had been periodically ascertained and was due on the respective dates. The Tribunal highlighted that entries reflecting these receipts were made in the assessee’s books, that the cheques were promptly deposited in the bank, that the bank immediately granted credit to the assessee after discounting the amounts, and that the bank allowed the assessee to operate on those sums without delay.

The Tribunal concluded that, although its finding was not expressed in precise terms, the receipt of each cheque by the respondents amounted to a complete discharge of the commission debt owed by the two firms. The High Court subsequently ruled against the appellant, while the Supreme Court had already delivered its judgment in Commissioner of Income‑Tax v. Ogale Glass Works Ltd (1). Even after taking that decision into account, the High Court held that the respondents’ income had not been received in British India and therefore decided in favour of the Revenue. The High Court declined to grant leave to appeal to the Supreme Court, but the Supreme Court later exercised its discretionary power to grant special leave.

The principal issue for determination was whether the commissions paid by cheques drawn on banks in Madras and Bombay and posted from Madura and Bombay could, under the facts of this case, be regarded as having been received in British India or at Secunderabad. The Appellate Tribunal found that all cheques, whether originating from Madura or Bombay, were dispatched by the respective firms from those places, received by the respondents at Secunderabad, and treated as payment of the commissions. The remaining question concerned the legal effect of sending the cheques by post from Madura or Bombay. The Tribunal observed that if the creditor expressly requested payment by cheque to be sent by post, the place of payment would be the location where the cheque was posted. The respondents contended that an agreement existed between the Madura and Bombay firms and themselves that the money would be paid either in cash or by cheque “at Secunderabad,” and consequently, when the cheques were mailed, the post office acted as the agent of the debtor rather than that of the respondents. To support this position, an affidavit filed in the assessment proceedings and relied upon by the High Court was presented. The affidavit stated that the parties had verbally agreed that the commission would be paid at Secunderabad in cash or by cheque, using the wording: “The above commission was verbally decided to be paid to Messrs. Patney & Co. Ltd., Secunderabad the Agent Company in Hyderabad State at Secunderabad in cash or by cheque as the case might be.” In situations where payment is made by cheque sent through post, the determination of the place of payment depends on the parties’ agreement or their established course of conduct. If it can be shown that the creditor authorized the debtor, either expressly or impliedly, to send a cheque by post, the property in the cheque

The Court explained that when a cheque is posted, it passes to the creditor as soon as it is posted. Consequently, the post office serves as an agent of the person to whom the cheque is addressed, provided there is an express or implied authority to send it by post, as held in Commissioner of Income‑Tax v. Ogale Glass Works Ltd. (1). In the present matter, the assessee had expressly requested that the Government of India remit the outstanding bills by means of cheques. The Court observed that, considering the general course of business usage as part of the surrounding circumstances, the parties must have intended that the cheques be sent by post, which is the usual and normal mode of transmission. Therefore, the posting of cheques from Delhi amounted to payment in Delhi to the post office, which was constituted as the agent of the assessee.

The respondents, however, argued that in the absence of such a request the post office could not be deemed the agent of the creditor. They relied on a passage from Ogale’s case (1) at page 204 which states: “Of course if there be no such request, express or implied, then the delivery of the letter or the cheque to the post office is delivery to the agent of the sender himself.” The respondents further contended that in the present case there was an express agreement that payment should be made at Secunderabad, and therefore the matter did not fall within the rule in Ogale Glass Works case (1). They cited a principle expressed by Das,, which held that applying the above principles to the facts found by the Tribunal, the engagement of the Government was to make payment by cheques, the cheques were drawn in Delhi and received by the assessee in Aundh by post, and, according to the course of business usage considered as part of the surrounding circumstances, the parties must have intended that the cheques be sent by post, the usual agency for transmission, and the Tribunal found that they were indeed received by post.

The Court found the respondents’ contention well‑founded. It held that when there is an express or implied request for the cheque to be sent by post, or when such a request can be inferred from the parties’ conduct, the rule in Ogale Glass Works case (1) applies. In the present case, however, the appellant expressly required that the commission be paid at Secunderabad, rendering the rule in Ogale inapplicable. Consequently, the Court affirmed that the High Court’s judgment was correct and dismissed the appeal with costs.

The judgment recorded a citation to a decision that appeared in the 1955 volume of the Supreme Court Reports, specifically in the first volume, beginning on page one hundred eighty‑five. The reference was presented in the abbreviated form “[1955] 1 S.C.R. 185,” indicating the year of publication, the volume number of the official law reporter, and the initial page of the reported judgment. By citing this authority, the Court signaled that it was relying on the legal principles set out in that earlier decision to support its reasoning. The citation served as a concise bibliographic indication for readers to locate the full text of the precedent in the published reports of the Supreme Court of India, which are commonly used for reference in subsequent cases. No additional factual detail about the content of the cited case was provided in the present judgment; the citation functioned solely as a pointer to the earlier reported authority.