Commissioner of Income-Tax, Delhi vs Messrs. P. M. Rathod and Co

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 373 of 1957

Decision Date: 20 May 1959

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

In this case the matter was titled Commissioner of Income‑Tax, Delhi versus Messrs P M Rathod and Co. The judgment was delivered on 20 May 1959 by a bench of the Supreme Court of India consisting of Justice J L Kapur, Justice Bhuvneshwar P Sinha and Justice M Hidayatullah. The petitioner was the Commissioner of Income‑Tax for Delhi and the respondents were Messrs P M Rathod and Co. The decision was reported in the 1959 volume of the All India Reporter at page 1394 and also in the 1960 volume of the Supreme Court Reporter at page 401. The case concerned the application of the Income‑Tax Act to determine the place of accrual or receipt of profits arising from the sale of goods by a trader situated in a Part B State to customers located in Part A or Part C States.

The factual background recorded that the respondents were manufacturers of perfumery and hair‑oil products at Ratlam, which at the relevant time formed part of Madhya Bharat, a Part B State. They employed agents who canvassed orders from customers residing in Part A and Part C States. Once an order was placed, the goods were dispatched from Ratlam either through the post‑office under a Value Payable Post arrangement or by rail. In the railway method, railway receipts were forwarded to a bank with instructions that the receipts should be delivered to customers against payment of the enclosed demand draft. When the bank received the payment, it issued a demand draft which was sent to the respondents at Ratlam; the respondents then encashed the draft and credited the proceeds to their account at Bombay.

For the assessment year 1950‑51 the respondents were assessed to income‑tax on the basis of profits earned from these sales to customers in Part A and Part C States. The assessment was made at the tax rates applicable to income, profits or gains arising or accruing in Part A States. The assessing authority reasoned that the sales were effected in Part A and Part C States and that the payments were also received in those states. The respondents contested this assessment, arguing that the prices realised from the sales represented receipts in Ratlam, a Part B State, and that consequently they should be taxed only at the concessional rates applicable to Part B States.

The Appellate Tribunal examined the material and held that when goods were sent by Value Payable Post the price was indeed received at Ratlam. However, regarding the price realised through bank drafts that were processed by a bank in Bombay, the Tribunal concluded that the amount must be treated as having been received in a Part A State. Because of the differing views of the Commissioner and the respondents, the Tribunal referred two specific questions to the High Court for determination. The first question was whether bank drafts payable in Part A or Part C States but physically received at Ratlam and subsequently encashed through the respondents’ bankers at Bombay should be regarded as receipts in a Part A State. The second question concerned whether the receipt of sale proceeds at Ratlam, which included the respondents’ profits, in respect of goods sent to customers in Part A or Part C States by Value Payable Post, amounted to receipts of income, profits or gains in Ratlam, a Part B State.

In the matter before the Court, the specific issue was whether the profits of the assessee that arose from goods dispatched by the assessee to customers located in Part A or Part C States under the Value Payable Post (V.P.P.) scheme should be treated as income, profits or gains received at Ratlam, which lay in a Part B State. The High Court had responded affirmatively to both questions that had been referred to it, deciding in favor of the respondents. Consequently, the Commissioner of Income‑Tax challenged those findings by filing an appeal before this Court.

The Court first observed that when a reference posed to it is not properly formulated, the Court is empowered to restate the question so that it accurately reflects the facts of the case. This principle was endorsed in Narain Swadeshi Weaving Mills v. The Commissioner of Excess Profits Tax, [1955] 1 S.C.R. 925. Applying that approach, the Court identified the correct question arising from the present facts as follows: “Whether, on the facts and circumstances of this case, a payment received from a buyer by a banker in a Part A or Part C State against the delivery of railway receipts for goods sent by the seller, should be regarded as a payment made in those Part A or Part C States or as a payment received in Ratlam, which is a Part B State.”

The Court then turned to the nature of the contractual performance when goods are transported by rail. It explained that when railway receipts, made out in favour of the seller, are forwarded to a banker for delivery to the buyer in exchange for payment, the allocation of the contract is merely conditional. Full performance of the contract occurs only when the buyer actually pays the price and the railway receipts are handed over. Accordingly, in the instant case, where a banker received payment from a buyer situated in a Part A or Part C State against the surrender of a railway receipt that favored the seller for goods dispatched by the respondents, the contract must be deemed to have been performed in the Part A or Part C State. Consequently, the income generated by such transactions should be considered as having been received in that State.

Finally, the Court set out the principles that govern the dispatch of articles through the Value Payable Post system. First, the post office acts as an agent of the seller for the purpose of recovering the price upon delivery of the goods, a principle approved in Mothi Rungaya Chetty v. The Secretary of State for India, (1904) I.L.R. 28 Mad. 213. Second, the seller retains control over the goods until the moment the goods are delivered to the buyer against payment; this relationship falls within section 25(1) of the Indian Sale of Goods Act, 1930, as discussed in Mirabita v. Imperial Ottoman Bank, (1878) 3 Ex. D. 164, and The Parchim, [1918] A.C. 57. Third, even if the post office were treated as a bailee of the goods for their transmission to the buyer, the contract would still be governed by section 25 of the Sale of Goods Act, making the transfer of property conditional upon the fulfilment of the stipulated condition. Fourth, the bailee is obligated to dispose of the goods in accordance with the instructions of the bailor, which in this context required delivery of the goods against payment. As a result, the Court concluded that the bailee received the price at the place where the goods were delivered, doing so on behalf of the bailor.

The bailee collected the price at the location where the goods were delivered and did so on behalf of the bailor. Accordingly, in the case before the Court, the price for goods dispatched by Value Payable Post to a Part A or Part C State was received in that State and not at Ratlam. The Court distinguished the authorities 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.

Judgment—Civil Appellate Jurisdiction. This appeal, numbered Civil Appeal No. 373 of 1957, was filed against the judgment and decree dated 20 September 1955 rendered by the former Madhya Bharat High Court at Indore in Civil Miscellaneous Case No. 40 of 1954. Counsel for the appellant comprised the Solicitor‑General of India together with additional counsel, while counsel for the respondent appeared for the opposing side. The judgment was delivered on 20 May 1959 by Justice Kapur.

The appeal arose on a certificate issued by the High Court and challenged the High Court’s decision following a reference made by the Income‑Tax Appellate Tribunal under section 66(1) of the Income‑Tax Act. The appellant in the proceedings was the Commissioner of Income‑Tax. The respondents were a firm engaged in manufacturing perfumery and hair‑oil products located at Ratlam in Madhya Bharat, and their products were marketed throughout India. At the material time, Madhya Bharat was classified as a Part B State, and the sole question for determination was the location where the income, profits and gains were actually received or deemed to be received, because that determination would decide whether the respondents were liable to be assessed at the concessional rates applicable to Part B States.

The factual matrix was concise. The respondents, being a duly registered firm, had been assessed for the assessment year 1950‑51 at the rates applicable to income, profits and gains arising in Part A States. Their business model involved sending agents to various regions of India to canvass orders. They sometimes obtained advance payments, either in full or partially, and after deducting their expenses, they forwarded the balance to Ratlam through bank drafts and similar instruments. The ordered goods were delivered to customers either by Value Payable Post (V.P.P.) or by railway. In the railway scenario, the railway receipts favoring the respondents were transmitted through a bank, being payable against demand drafts drawn on the buyers and accompanying the railway receipts. When the bank received the price, it forwarded the amount to the respondents at Ratlam by means of a bank draft; the respondents then presented the drafts for encashment and the proceeds were credited to their account in Bombay.

The Income‑Tax Officer observed that the bulk of the goods were supplied to customers located in Part A and Part C States, either through V.P.P. or by rail. The railway receipts were made out in favour of the respondents, and the payments were received in the manner described. The respondents’ banker was the Bank of India, Bombay, and, according to the Officer, the sale proceeds were mainly realised through this bank.

According to the Income‑tax Officer, the sale proceeds of the assessee were largely realised through the Bank of India Ltd., Bombay. The officer concluded that the sales had been effected in the Part A and Part C States and that the corresponding payments had also been received in those States. On this basis he made an assessment that estimated a profit of Rs 1,60,340 on total sales of Rs 5,09,424, and he did not allow any rebate that might have been available under the concessional rates applicable to the Part B States. The assessee appealed this assessment, and the Appellate Assistant Commissioner reduced the estimated profit by Rs 20,000. Upon a further appeal, the Income‑tax Appellate Tribunal reduced the total income attributed to the Part A and Part C States to Rs 2,85,376. The Tribunal determined that the amount received through the Post Office, that is, by the V.P.P. system, amounted to Rs 1,23,710, while the amount realized from goods sent by rail and collected through bank drafts was Rs 2,85,376, bringing the aggregate to Rs 4,21,955. The Tribunal also held that the advances received together with orders constituted income, profits and gains that were received at Ratlam and therefore did not belong to the Part A or Part C States. Similarly, the price for goods dispatched through the V.P.P. system was regarded as money received at Ratlam. Regarding the price realised through bank drafts, the Tribunal observed that although the drafts were received at Ratlam, they were forwarded to the assessee’s banker in Bombay for encashment; consequently, they must be treated as having been received in a Part A State, and this amount was fixed at Rs 2,85,376.

The Tribunal then referred to the Bombay High Court decision in Kirloskar Bros. Ltd. v. The Commissioner of Income‑tax (1) and observed: “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 the 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 assessee and the Commissioner then applied for a reference to the High Court under section 66(1) of the Income‑tax Act, posing two questions: (1) whether the receipt of sale proceeds at Ratlam— which included the assessee’s profits— for goods sent by the assessee to customers in the Part A or Part C States via the V.P.P. system amounted to receipts of income, profits or gains at Ratlam in the Part B States; and (2) whether bank drafts payable in the Part A or Part C States but received at Ratlam and subsequently encashed through the assessee’s bankers in Bombay should be treated as receipts in a Part A State. The High Court answered both questions in favour of the assessee and issued a certificate, the citation of which is (1) [1952] 21 I.T.R. 82. Consequently, the Commissioner of Income‑tax filed an appeal against the High Court’s decision. Apart from the sales that were deemed to have taken place in Ratlam, the proceedings continued as outlined above.

The goods were supplied to customers in exactly the two manners described earlier. Either the merchandise left Ratlam through the post office using the V P P system, or it was dispatched by rail and the accompanying railway receipts, addressed to the seller, were transmitted via a bank together with instructions that the goods should be handed over only upon receipt of the enclosed demand draft. The Court first examined the portion of the transactions in which the goods were sent by post under the V P P scheme. Rule 133 of the Post Office guide explains the purpose of this scheme, stating that it is intended to serve persons who wish to pay for articles at the time they receive the articles or the bill or railway receipt relating to them, and also to serve traders and others who wish to recover, through the agency of the post office, the value of the articles they have supplied. In relation to delivery of goods by V P P, it is immaterial whether the buyer directs the seller to use V P P or the seller independently chooses the scheme, because the seller hands the goods to the post office and the post office will release the goods to the buyer only against payment. That payment is received by the post office on behalf of the seller. The buyer does not make any payment until the goods reach him, and once the buyer pays, the post office is obligated to forward the amount received to the seller. Consequently, the buyer’s obligation ends with the payment to the post office, and a payment made to the post office is deemed a payment to the seller at the place where the goods are finally delivered and payment is effected. Moreover, before delivery the seller, under the V P P rules, may direct the post office either to deliver the goods free of charge or to deliver them against a sum different from the amount originally specified, which precludes the post office from acting as an agent of the buyer. This demonstrates that, irrespective of the legal relationship between the seller and the post office concerning the carriage of goods sent under V P P, the post office functions as the seller’s agent for the purpose of recovering the price, and if it fails to recover the price and nevertheless delivers the goods, it becomes liable for damages to the seller, as held in Mothi Rungaya Chetty v. The Secretary of State for India. Accordingly, under the V P P system the seller retains control over the goods up to the moment the buyer receives them against payment, and this arrangement places the contract within the ambit of section 25 of the Indian Sale of Goods Act.

Section 25 (1) of the Sale of Goods Act provides that when a contract is made for the sale of particular goods, or when goods are later appropriated to such a contract, the seller may, by the terms of the contract or by the appropriation itself, retain the right to dispose of the goods until certain conditions are satisfied. Accordingly, even if the goods are delivered to the buyer, or to a carrier or other bailee for the purpose of forwarding them to the buyer, the legal ownership does not pass to the buyer until the seller‑imposed conditions have been fulfilled.

The Court explained that the effect of this provision is that, if the seller, when dispatching the articles that he intends to deliver under the contract, gives explicit instructions that the articles are not to be handed over to the purchaser until the purchase price has been paid, the appropriation of the goods is not absolute but conditional. Consequently, until the price is actually received, the legal title to the goods remains with the seller. This principle was illustrated in the decisions of Mirabita v. Imperial Ottoman Bank at pages 172‑173 (Cotton, L.J.) and The Parchim at pages 170‑171 (per Lord Parker).

The Court further observed that the point at which ownership passes is the place where the price is paid. In the present dispute the place of payment was an A or C State, and therefore the price was received by the seller in that State. This factual finding was essential to the determination of the tax consequences of the transaction.

Respondents submitted that the judgment of this Court in Commissioner of Income‑Tax v. Ogale Glass Works Ltd. should govern the present case. In that earlier case the assessee was a company carrying on business in an Indian State outside British India, and its liability to Indian income‑tax depended on whether it received money within British India. The Government of India had agreed, at the assessee’s request, to make payments for goods supplied by drawing cheques in Delhi on a Bombay Bank, posting those cheques in Delhi, and having the assessee receive them in the Indian State. The Court held that the Post Office acted as the agent of the assessee. However, the Court in the present matter held that the principle laid down in Ogale Glass Works does not apply, because that case did not involve a contract for the sale of goods, nor did it consider the receipt of price against delivery of goods, nor the location where the seller actually receives the purchase price.

Respondents also urged reliance on a House of Lords decision, The Badische Anilin und Soda Fabrik v. The Basle Chemical Works. In that case a trader in England ordered goods from a manufacturer in Switzerland, and the goods were to be sent by post to England. The Swiss manufacturer addressed the goods to a forwarding agent, who in turn addressed them to the English trader and delivered them to the Swiss Post Office, which then forwarded them abroad. The Court in that case held that the contract of sale was completed upon delivery to the Swiss Post Office, which acted as the buyer’s agent, not the vendor’s, and consequently the vendor could not be held liable for patent infringement. The present Court noted that the facts of Badische Anilin are dissimilar: the Swiss manufacturer did not retain control over the goods pending payment, there was no conditional delivery to a post office, and the case did not address the passage of ownership or the appropriation of goods to a contract of sale. Therefore, the House of Lords decision was not applicable to the matter before this Court.

In the earlier decision, the goods after being forwarded from Switzerland were sent on to England. Those goods were found to infringe an English patent. The court in that case held that the contract of sale was deemed complete at the moment the goods were delivered to the Swiss post office, because the post office acted as the agent of the buyer and not as the agent of the vendor. Consequently, the vendor could not be said to have infringed the patented invention, and the patent holder therefore had no cause of action against the vendor for patent infringement. The court also observed that the facts of that case did not involve the Swiss manufacturer retaining possession of the goods until payment was received, nor did they involve any condition that required delivery to the post office before the price could be collected, as was alleged in the present matter. Moreover, the earlier case was not concerned with the transfer of title in the goods or with the appropriation of the goods to the contract of sale by delivering them to a carrier.

The respondents’ counsel argued that the goods were delivered to the post office at the buyer’s request and that the post office functioned merely as a bailee for the purpose of transmitting the goods to the buyer. However, even when acting as a bailee, the post office could not contravene the instructions of the bailor by delivering the goods to the buyer without first receiving the price; any recovery made by the bailee would be on behalf of the bailor. Such a bailment for transmission falls within section 25 of the Sale of Goods Act, which provides that only a conditional appropriation exists and that the goods do not pass until the stipulated condition is satisfied. Section 148 of the Indian Contract Act defines bailment as the delivery of goods by one person to another under a contract that, once the purpose is accomplished, the goods shall be returned or otherwise disposed of according to the directions of the person who delivered them. Accordingly, a bailee’s duty is to handle the goods in accordance with the bailor’s directions. If, in the present case, the direction was that the goods should be delivered to the buyer only upon receipt of payment, then the bailee would be required to collect the price on behalf of the seller at the place where delivery to the buyer occurs. The principle that therefore governs the dispatch of articles by V. P. P. is that the appropriation is conditional and that ownership of the goods transfers only when the condition—payment in exchange for delivery—is fulfilled. Under this view, the post office acts as the seller’s agent, receiving the buyer’s payment at the point of delivery and transmitting it to the seller. Consequently, the income arising from the present transaction was received in a Part A or Part C State and not in Ratlam. In the Court’s opinion, the answer to the first question should have been in favour of the Commissioner, and it should have been held that the income with respect to the goods sent by V. P. P. was received in Part A.

In this part of the judgment the Court observed that the income, profits and gains were deemed to have arisen in Part A or Part C States and not in a Part B State. The Court then noted that the next issue presented before it had not been properly framed. Accordingly, the Court decided to re‑formulate the issue in the same manner as it had done in the earlier case of Narain Swadeshi Weaving Mills v. The Commissioner of Excess Profits Tax (1). The properly framed question, according to the Court, was: “Whether, on the facts and circumstances of the present case, the payment received from a buyer by a banker in a Part A or Part C State against delivery of the railway receipt for goods sent by the seller, should be treated as payment made in those Part A or Part C States or as payment made in Ratlam, which was a Part B State?” The Court recalled that it had already described the commercial arrangement that involved the second mode of supply of goods. Under that arrangement the goods were dispatched by rail and the railway receipts in favour of the seller were sent through a bank, with explicit instructions that the receipts would be handed over only on receipt of demand drafts accompanying the receipts. The Court explained that, similar to the earlier situation involving goods sent by V. P. P., the railway receipts could not be delivered to the buyer until the money was actually paid. Although the goods had been handed to a common carrier, the Court held that the contract’s performance was conditional upon payment, and the performance was complete only when the monies were paid and the railway receipts were delivered. Consequently, the Court concluded that these contracts were performed in Part A or Part C States, the price being paid to the bank acting as the seller’s agent at the place of payment and receipt delivery. Because of this, the income, profits and gains derived from the transactions were received in those Part A or Part C States and not in Ratlam. The Court therefore held that this question also ought to be answered in favour of the Commissioner, and that the respondents could not claim the concessional tax rate that applied to Part B States. Accordingly, the Court allowed the appeal, ordered the respondents to pay the costs of the appellant both in this Court and in the High Court, and entered the order that the appeal was allowed.