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: 5 May 1959

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

In this matter the Supreme Court set out that the petitioner was the Commissioner of Income Tax for the provinces of Bihar and Orissa and the respondent was the firm M S Patney & Co. The judgment was delivered on 5 May 1959 by a bench comprising Justice J L Kapur, Justice Bhuvneshwar P Sinha and Justice M Hidayatullah. The case was reported in the 1959 volume of the All India Reporter at page 1070 and also in the 1959 volume of the Supreme Court Reporter (Supplement) at page 868, with later citations in the 1960, 1966, 1976 and other reports. The issue concerned the assessment of income tax on commissions earned by non-resident respondents who were carrying on business at Secunderabad, which at that time lay within the territories of the Nizam of Hyderabad. The respondents acted as agents for two firms, one situated in Bombay and the other in Madurai, both located in British India, and they were engaged to supply certain goods to the Nizam’s Government. Under the agreement between the parties, the commissions due to the respondents were to be paid either in cash or by cheques at Secunderabad. Accordingly, the firms drew cheques on the Bombay and Madras branches of the Imperial Bank of India and posted these cheques from Bombay and Madurai to the respondents in Secunderabad. Upon receipt, the respondents recorded the cheques in their books of account and forwarded them to their local banker for collection and credit to their account. For the assessment year 1945-1946 the Income-Tax Officer at Berhampur, situated in British India, assessed the amounts represented by the cheques as taxable income, holding that the amount was received in British India and not at Secunderabad. The Appellate Tribunal examined the facts and concluded that all cheques received at Secunderabad by the respondents were treated by them as payment of the commissions. The respondents contended that, because the parties had agreed that the commission should be paid at Secunderabad, the post office functioned as the agent of the debtor and not as the agent of the respondents. They argued that the amount should be deemed received when the post office delivered the cheques to them, and therefore the receipt occurred outside British India and should not be subject to tax there. 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 authorises the debtor, either expressly or impliedly, to send a cheque by post, the property in the cheque passes to the creditor as soon as it is posted. However, in the present case the agreement specified that the amount was to be paid at Secunderabad; consequently, the amount was deemed to have been received at Secunderabad, outside British India, and was not liable to tax in British India. The decision in Commissioner of Income-Tax v Ogale Glass Works Ltd. was distinguished on these facts.

The Court observed that the parties had expressly agreed that the commission should be paid at Secunderabad, a place situated outside British India. Accordingly, when the cheques were delivered to the respondents at Secunderabad, the amount had to be deemed received at that location, and therefore it could not be taxed in British India. The earlier authority Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185, was expressly distinguished. The judgment concerned Civil Appeal No. 326 of 1957, filed by special leave against the decision and order dated 16 February 1955 of the Orissa High Court in N.J.C. No. 117 of 1951. Counsel for the appellant included the Solicitor-General of India and other senior advocates, while counsel for the respondent was also appointed. The appeal was heard on 5 May 1959, and the judgment was delivered by Justice Kapur.

This appeal, granted by special leave, was brought by the Commissioner of Income-tax against the judgment of the Orissa High Court, which had held that the amounts received by the assessees-respondents were not received in British India and therefore were not liable to income tax. The respondents were non-residents who at all material times carried on business at Secunderabad, then within the territories of the Nizam of Hyderabad. They acted as agents for the supply of gas plants manufactured by Messrs T.V.S. Iyengar & Sons of Madura to the Nizam’s Government, and also as agents for the Lucas Indian Services, Bombay branch, in supplying certain goods to the same Government. The year of assessment under consideration was 1945-46.

No written contract between the two manufacturers and the respondents could be found, but the parties operated on a commission basis for the supply of goods. In pursuance of this arrangement, the respondents received from M/s T.V.S. Iyengar & Sons, Madura, cheques drawn on the Imperial Bank of India, Madras, amounting to Rs 35,202 for all goods supplied from Madura. In addition, they received from Lucas Indian Services, Bombay, cheques drawn on the Imperial Bank of India, Bombay branch, amounting to Rs 5,302 for goods supplied by that firm, making a total of Rs 40,504. These cheques were transmitted by post 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’ bank account. On the basis of these sums, the respondents immediately drew their own cheques and thus operated on the deposited amounts.

Regarding the commission from the Bombay firm, the cheque was paid into the respondents’ account on 22 December 1944, but it was only credited on 2 January 1945. The Income-tax Officer treated the entire sum of Rs 40,504 as taxable income, holding that the whole amount had been received in British India and not at Secunderabad. The respondents appealed this assessment to the Appellate Assistant Commissioner, who upheld the assessment on the ground that the income must be considered as having accrued, arisen or been received in British India. The respondents then contested this order, leading to the present appeal before the Court.

The respondents filed an appeal before the Income-Tax Appellate Tribunal, and the Tribunal held that the sums received from the firms in Madura and Bombay were commissions that had been received at Secunderabad. Consequently, the Tribunal allowed the appeal. The Tribunal expressed its finding in its own words, stating that the appellants argued that because the cheques were negotiable instruments and the creditor had accepted them and entered them in its books, the receipt should be regarded as a receipt in Hyderabad. The Tribunal agreed with this argument and cited Bhashyam’s “Negotiable Instruments Act”, 8th Edition, Revised, page 556, which provides that a creditor may accept a cheque as absolute payment of money due, thereby making it equivalent to a cash payment. On that basis, the Tribunal concluded that it could not be said that the income was received in British India.

At the Commissioner’s request, a reference under section 66(1) of the Act was made to the High Court of Orissa for its opinion on whether, in the facts of the case, the amounts of Rs. 35,202 and Rs. 5,302 received as commission from T. V. S. Iyengar & Sons Ltd. and Lucas Indian Services Ltd., respectively, constituted income that accrued, arose, or was received in British India. The High Court observed that the statement of case was imperfect and that the real question differed from the one posed. It explained that the central inquiry in such matters is not merely whether the cheques were drawn on a bank in British India and sent for collection, but whether, when the cheques were received by an assessee whose place of business lay outside British India, they amounted to absolute and final payments that effected an unconditional discharge of the liability, or whether they were merely conditional payments subject to realisation. The Court noted that the fact that the cheques were drawn on a British-India bank or that they were sent for collection through a Secunderabad banker, although relevant, was not decisive.

Accordingly, the High Court remitted the matter to the Appellate Tribunal for the submission of a supplementary statement of case. At that stage, the controversy was confined to determining whether the cheques, having been sent to Secunderabad and realised in British India, constituted a final or unconditional discharge of the debt. In its supplementary statement, the Tribunal found that the conduct of the parties demonstrated that the cheques received from the Bombay and Madura firms satisfied the commissions that had been periodically ascertained and were due on the respective dates. The Tribunal observed 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 credited the assessee’s account after charging a discount, and that the bank consequently allowed the assessee to operate on those sums without delay.

The Tribunal’s factual finding, although not expressed in exhaustive detail, concluded that the receipt of the cheques by the respondents operated as a full discharge of the commission debt owed by the two firms. The High Court subsequently decided the matter against the appellant. In the interval, this Court had rendered a judgment in Commissioner of Income-tax v. Ogale Glass Works Ltd (1955) 1 SCR 185. Even after applying the principles articulated in that decision, the High Court maintained that the income of the respondents had not been received in British India and consequently answered the issue in favour of the Revenue. The High Court declined to grant leave to appeal to this Court; thereafter, this Court exercised its jurisdiction to grant special leave to appeal. The principal question that arose was whether the commission amounts 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 observed that all the cheques, whether dispatched from Madura or Bombay, were sent by the respective firms from those locations, received by the respondents at Secunderabad, and treated by the respondents as payment of the commission. Nonetheless, the legal effect of sending the cheques by post from Madura or Bombay required clarification. The Tribunal noted that if the creditor expressly requested that the amount be paid by cheques to be sent by post, and the cheques were indeed so posted, the payment would be deemed to take place at the place where the cheques were posted. The respondents advanced the argument that there existed an agreement between the Madura and Bombay firms and the respondents that the money would be paid either in cash or by cheque at Secunderabad, and therefore, when the cheques were dispatched by post, the post office functioned as the agent of the debtor rather than as the agent of the respondents. Supporting this contention, an affidavit filed in the assessment proceedings and relied upon by the High Court stated that the commission had been verbally agreed to be paid at Secunderabad in cash or by cheque, using the phrasing: “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 effected by cheques sent by post, the determination of the place of payment depends upon the agreement between the parties or their established course of conduct. If it is shown that the creditor authorised the debtor, either expressly or impliedly, to send a cheque by post, the property in the cheque…

The Court explained that a cheque reaches the creditor as soon as it is posted, and therefore the post office acts as the creditor’s agent when the creditor gives either an express or an implied authority to send the cheque by post, as held in Commissioner of Income-Tax v. Ogale Glass Works Ltd. (1). In the present matter the assessee had explicitly asked that the Government of India remit the outstanding bills by means of cheques. The Court observed that, taking into account the general course of business usage and the surrounding circumstances, the parties must have intended the cheques to be transmitted by post, which is the usual and normal mode of sending such instruments. Consequently, the posting of the cheques in Delhi amounted to payment in Delhi, and the post office that received the cheques was deemed the agent of the assessee, a view supported by the citation (1) [1955] 1 S.C.R. 185.

The respondents argued that, absent an express or implied request, the post office could not be considered the creditor’s agent. They relied on a passage from Ogale’s case (1) at page 204, which states that without such a request the delivery of a letter or cheque to the post office is merely delivery to the sender’s own agent. Furthermore, the respondents contended that there was an express agreement that payment should be made at Secunderabad, and therefore the situation fell outside the rule in Ogale Glass Works case (1). They quoted a principle from the judgment of Das, J., asserting that the government’s engagement was to make payment by cheques, the cheques were drawn in Delhi, and the assessee received them in Aundh by post; under the prevailing business usage, the parties evidently intended the cheques to be sent by post, which was the normal agency for such transmission.

The Court found the respondents’ contention well-founded. It held that when there is an express or implied request, or when the parties’ conduct clearly shows the intention to use post as the transmission mode, the rule in Ogale Glass Works case (1) applies. However, in this case the appellant had expressly required that the commission be paid at Secunderabad, which removed the situation from the scope of the Ogale rule. Accordingly, the Court concluded that the High Court’s judgment was correct, dismissed the appeal with costs, and ordered the appeal to be dismissed.

The Court referred to the authority reported in volume one of the Supreme Court Reports of the year 1955, at page one hundred eighty-five.