Shri Jagdish Mills Ltd vs The Commissioner Of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal Nos. 681 and 682 of 1957

Decision Date: 12 May 1959

Coram: Natwarlal H. Bhagwati, M. Hidayatullah

In the matter titled Shri Jagdish Mills Ltd versus The Commissioner of Income-Tax, Bombay, the Supreme Court issued its judgment on 12 May 1959. The opinion was authored by Justice Natwarlal H. Bhagwati, with Justice M. Hidayatullah also sitting on the bench. The petitioner in the case was Shri Jagdish Mills Ltd, a company engaged in the manufacturing and supply of textiles at Baroda, while the respondent was the Commissioner of Income-Tax for the Bombay North and Kutch regions.

The case concerned the taxation of certain payments received by the appellant during the assessment years 1942-43 and 1943-44. The payments were in the form of cheques sent by the Government of India as remuneration for goods supplied by the company, the details of which were set out in prescribed printed forms. Those forms stipulated that the Government would discharge its liability by issuing cheques. The appellant did not specifically request that the cheques be dispatched by post, nor did it write to the Government to indicate a preferred method of delivery. Nevertheless, the Government mailed the cheques from Delhi to the appellant’s premises in Baroda. Upon receipt, the appellant accepted the cheques unconditionally, deposited them in its bank accounts in Bombay and Ahmedabad, and thereby satisfied its claim for the amounts due.

The principal issue before the Court was whether the sums represented by those cheques constituted income, profits or gains that were received within the taxable territory, and therefore liable to tax under section 4(1)(a) of the Indian Income-Tax Act, XI of 1922. The Income-Tax Officer had held that the amounts were received in British India because the cheques were drawn on banks situated there. The Appellate Assistant Commissioner affirmed that view, and on further appeal the Income-Tax Appellate Tribunal ruled that, despite the absence of an explicit request by the appellant, an implied request existed for the Government to forward the cheques by post. The Tribunal relied on the earlier decision of this Court in Commissioner of Income-Tax, Bombay South v. Messrs. Ogale Glass Works Ltd. (1955) I S.C.R. 185, and concluded that the payments were received within the taxable territories, rendering them subject to tax under the cited provision.

Consequently, the appeals were brought before this Court by way of special leave. The specific question for determination was whether, given the facts and surrounding circumstances, the stipulation that payments be made by cheque could be interpreted as an implied request by the appellant to the Government to send those cheques by post, thereby rendering the Post Office an agent for the receipt of the payments. The Court noted that consideration of the general commercial usage prevailing in the case left no doubt that the parties intended the cheques to be transmitted by post, which was the ordinary agency employed for such transactions. The judgment that follows addresses this point of law and its application to the facts presented.

The Court observed that the ordinary practice of using the post office to transmit cheques created an implied request by the appellant that the Government send the cheques by post, thereby making the Post Office the agent for receiving such payments. In reaching this conclusion, the Court applied the authority of Commissioner of Income-tax, Bombay South v. Messrs. Ogale Glass Works Ltd. [1955] I S.C.R. 185 and Norman v. Rickets (1886) 3 T.L.R. 182. It also considered Pennington v. Crossley and Sons (Limited) [1879] 13 T.L.R. 513, while distinguishing Thorappa v. Umedmalji (1923) 25 Bom. L.R. 604 and Exparte Cote In-ye Deveza (1873) L.R. 9 Ch. 27.

These two appeals, numbered 681 and 682 of 1957, were filed by special leave under Article 136 of the Constitution. They challenged the order dated 2 August 1954 of the Income-tax Appellate Tribunal, Bombay Bench “A”, in Income-tax Appeals Nos. 3756 of 1948-49 and 2161 of 1950-51. The Tribunal had held that cheques amounting to Rs 1,98,643 and Rs 4,96,365, pertaining to the assessment years 1943-44 and 1944-45, were received by the appellant in taxable territories and therefore attracted tax under section 4(1)(a) of the Indian Income Tax Act (XI of 1922). At the relevant times, the appellant was a public joint-stock company incorporated under the Baroda State Companies Act, with its registered office in Baroda, and it owned a textile mill that manufactured and sold textiles at that location. In the accounting years 1942 and 1943, the Government of India invited tenders for certain articles produced by the appellant. The appellant submitted tenders, which were accepted, and orders were placed for the supply of those goods. The orders were accepted at Baroda, and the actual manufacture, sale, and delivery of the goods to the Government were carried out entirely at Baroda, which lay outside the then British India. The contractual terms stipulated that, unless otherwise agreed, payment for delivery would be made upon submission of bills in the prescribed form, following the instructions given in the tender acceptance, by cheque drawn on a Government Treasury or on a branch of the Reserve Bank of India or the Imperial Bank of India conducting Government business.

According to the terms of the contracts governing the supply of goods to the Government, payment for the delivered articles was to be made upon submission of the bills in the prescribed form, and the payment was to be effected by a cheque drawn on a Government Treasury or on a branch of the Reserve Bank of India or the Imperial Bank of India that dealt with Government business, unless the parties had agreed otherwise. After completing the deliveries, the appellant presented the bills in the printed format that included the clause “Government should pay the amount due to the appellant by cheque.” The appellant, however, did not specify in any correspondence to the Government the manner in which the cheque was to be sent. Subsequent to the filing of the bills, cheques were dispatched by post from the Government to the appellant’s place of business at Baroda. These cheques were drawn on a Government Treasury or on a branch of the Reserve Bank of India or the Imperial Bank of India engaged in Government transactions. Each cheque arrived together with a memorandum that began, “The undersigned has the honour to forward herewith cheque No. dated in payment of the bills noted below,” and was followed by a table setting out the numbers, amounts and dates of the bills concerned. At the top of the memorandum a direction was printed stating that the document “be immediately returned to the Controller of Supplies Accounts, with the acknowledgment form on the reverse duly signed and stamped.” The acknowledgment form itself read, “The undersigned has the honour to acknowledge cheque No. dated for Rs. ---- in payment of the bills noted in the first column on the reverse.” The appellant accepted the cheques without any qualification and regarded them as full satisfaction of its claim for the goods supplied to the Government. Upon receipt of the cheques, the appellant endorsed them and forwarded them, either to its banking account in Bombay or to its banking account in Ahmedabad. By orders dated 20 September 1945 and 16 March 1943, the Income-Tax Officer held that the sums of Rs 1,98,643 and Rs 4,96,365, which represented the amounts of the cheques received by the appellant for the goods supplied to the Government of India, constituted income, profits and gains arising in British India during the assessment years 1942-43 (account year being the calendar year 1941) and 1943-44 (account year being the calendar year 1942). The Officer reasoned that, because the cheques were drawn on banks situated in British India, the receipts were liable to tax. The appellant appealed this assessment to the Appellate Assistant Commissioner, who affirmed the Income-Tax Officer’s determinations and dismissed the appeal. The appellant then proceeded to the Income Tax Appellate Tribunal. After issuing two remand orders on various points that did not bear on the central question of the appeal, the Tribunal ultimately issued an order on 3 August 1954, confirming the previous findings.

The Tribunal observed that, although the appellant never sent a written request to the Government asking that the cheques be posted, the circumstances created an implied request for postal delivery. It noted that when a person residing in Baroda writes to someone in Delhi requesting that money owed be sent by cheque, the implication is that the cheque should be dispatched through the post. Consequently, the Tribunal concluded that the appellant could not have intended the cheques to be delivered by any other method and that it was not the case that the Government’s officials handed the cheques directly to the appellant in Baroda. Relying on the earlier decision of this Court in Commissioner of Income-tax Bombay South v. Messrs Ogale Glass Works Ltd., the Tribunal held that the amounts represented by those cheques were received by the appellant within the taxable territories and therefore attracted tax liability under section 4(1)(a) of the Act. On 20 December 1954, the appellant applied for special leave to appeal the Tribunal’s order under Article 136 of the Constitution, and this Court granted the leave by order dated 15 April 1955. A subsequent order dated 19 September 1955 consolidated both appeals for the purpose of printing the record and for filing the petitions of appeal and the accompanying statements of case. These consolidated appeals have now been placed before the Court for final hearing and disposal. The facts established earlier make it clear that the parties had agreed, as set out in Clause 21 of the printed tender form, that payment for the goods supplied would be made by cheques drawn on a Government Treasury, a branch of the Reserve Bank of India, or the Imperial Bank of India while conducting Government business. The appellant routinely submitted its bills using the prescribed printed form, which expressly required the Government to settle the amounts due by cheque. In response, the Government issued cheques to the appellant at Baroda together with a memorandum of acknowledgment stating that the cheques were being sent in payment of the specific bills listed in a tabular statement showing the amount, number and date of each bill. The acknowledgment form on the reverse side was then signed and stamped by the appellant, thereby confirming receipt of the cheques as payment of the cited bills, and the completed form was dispatched by the appellant back to the Government. The appellant accepted these cheque payments unconditionally and regarded them as full and final satisfaction of its claim for the supplied goods. The Revenue, at the first instance, had argued that although the cheques were physically received by the appellant in Baroda, they were subsequently endorsed and presented for encashment in the appellant’s banking accounts located in Bombay or Ahmedabad, and that the proceeds therefore entered the taxable territory.

In this case the appellant, after endorsing the government cheques, deposited them either in its banking account at Bombay or at its account at Ahmedabad. The cheques were subsequently presented for payment, the proceeds were realised in the respective cities, and consequently the appellant earned the corresponding income, profits and gains within the territories that were subject to tax. The Revenue argued that the cheques were received by the appellant in Baroda and then transferred to the banking accounts in Bombay or Ahmedabad. However, that argument was rejected because, on the facts before the Court, it was undisputed that the appellant had accepted the cheque payments unconditionally and as full settlement of its claims for the goods supplied to the Government. If the cheques were deemed to have been received by the appellant in Baroda, then the income, profits and gains would also be deemed to have arisen in Baroda, which lies outside the taxable territories. Even assuming that the receipt of the cheques in Baroda constituted a conditional settlement of the appellant’s claims, the result would be unchanged. The cheques were not dishonoured; they were duly cashed, and the law treats the date of payment as the date on which the cheques were delivered. That delivery occurred in Baroda, outside the taxable area, and therefore the revenue could not maintain that the appellant’s income was earned at any place other than Baroda, as affirmed in the precedent of Commissioner of Income-Tax, Bombay South v. Messrs. Ogale Glass Works Ltd., cited at page 196.

Subsequently, the Revenue put forward a different line of argument. It contended that the government had posted the cheques from Delhi at the implied request of the appellant, and therefore the payments should be regarded as having been received by the appellant in Delhi, with the post office acting as the appellant’s agent for receipt of the funds. Counsel for the appellant opposed this view. The counsel emphasized that the only stipulation made by the appellant was that payment for the goods supplied should be made by cheque. No express or implied request was ever made by the appellant for the government to dispatch those cheques by post. Consequently, if the government chose to send the cheques from Delhi, it was doing so on its own initiative, not in response to any direction from the appellant. In that situation, the post office functioned as the agent of the government, not as the appellant’s agent, and the appellant did not obtain any money until the cheques physically arrived at Baroda. The Revenue’s reliance on the decision in Commissioner of Income-Tax, Bombay South v. Messrs. Ogale Glass Works Ltd., which was cited as (1) [1955] 1 S.C.R. 18, was therefore sought to be distinguished on the basis that the factual matrix of the present case differed from that earlier authority.

The Court observed that in the earlier decision the assessee had printed on the bill the specific expression “Kindly remit the amount by a cheque in our favour on any bank in Bombay.” That phrasing was an explicit request addressed to the Government, directing that the cheque be sent by post. Because of that express request the Post Office was deemed to act as the agent of the assessee for the purpose of receiving the cheque. In the present case, however, the appellant did not employ any such language. The only stipulation appearing in the bill was that payment should be made by cheque, which merely authorised the Government to issue a cheque. The manner in which the cheque would reach the appellant was left to the Government’s discretion, and if the Government opted to dispatch the cheque by post there was no request—neither express nor implied—originating from the appellant that would render the Post Office the appellant’s agent for receipt of the cheque.

The Court further noted that the cited authority, Commissioner of Income-tax, Bombay South v. Messrs Ogale Glass Works Ltd. (1), indeed contained the words “Kindly remit the amount by a cheque in our favour on any bank in Bombay,” and those words were interpreted as an express request by the assessee that the Government should send the cheque by post. The Court also referred to a series of other authorities—Thirlwall v. The Great Northern Railway Co. (2); Badische Anilin Und Soda Fabrik v. The Basle Chemical Works (3); Comber v. Layland (4); and Mitchell-Henry v. Norwich Union Life Insurance Society (5)—which similarly involved express statements that were construed as requests, thereby making the Post Office the agent of the party receiving the money or goods. These cases supported the Revenue’s argument that where an express request exists, the Post Office can be deemed the agent of the assessee for the purpose of receiving cheques posted by the Government in Delhi.

However, the Court emphasized that where no express request is found and the only basis for payment is the stipulation that it be made by cheque, the question arises whether the mere posting of the cheque in Delhi suffices to make the Post Office the agent of the appellant, so that the income, profits and gains could be said to have been received by the appellant within the taxable territory. The Court held that, in the absence of any additional factor, the law does not treat the Post Office as the addressee’s agent merely because the cheque was posted. Consequently, the posting of the cheque does not constitute delivery to the addressee and does not transfer title of the cheque to the addressee. This position was supported by the decisions in Thorappa v. Umedmalji (1) and Ex parte Cote In re Daveza (2).

In the present case, the Court observed that when the facts and surrounding circumstances disclose an implied request by the creditor to have the cheque sent through the postal system, the Post Office is to be regarded as the agent of the addressee for the purpose of receiving the payment. The principle supporting this view is derived from the decision in Norman v. Ricketts (3). In that case, one of the plaintiffs, Madame Phillippe, who operated a millinery business in Bond Street, supplied goods to the defendant, Mrs. Ricketts, during the period from March 1884 to March 1885, amounting to a total of £142. Mrs. Ricketts resided in Suffolk, and at the close of March 1885 Madame Phillippe wrote to her in Suffolk stating, “the favour of a cheque within a week will oblige.” Acting upon this communication, Mrs. Ricketts, on 6 April, posted a cheque to Madame Phillippe. The instrument was an open cheque made payable to the order of Madame Phillippe. While in transit the cheque was stolen, and Mrs. Ricketts’ bankers, unaware of the theft, honoured the cheque in favour of the thief. Madame Phillippe consequently instituted suit to recover the amount. Baron Huddleston, who tried the case without a jury, held, as reported in (1885) 2 T.L.R. (607), that the act of sending the cheque constituted payment and therefore rendered judgment for the defendant. The plaintiffs appealed, but the Court of Appeal, comprising Lord Esher, M. R., Lindley and Lopes, L. JJs, dismissed the appeal.

The Master of the Rolls explained that, as a general rule, a debtor must appear before the creditor to make payment; however, if the creditor specifies a particular mode of payment, the debtor may comply with that method. When the creditor asks the debtor to pay through the post, placing the cheque in a letter and posting it satisfies the requirement of payment. The critical issue, therefore, was whether the plaintiffs, through their correspondence, had in effect requested the defendant to send the cheque by post. The Court held that an express request was not indispensable. If the plaintiffs’ words amounted to a request for postal delivery, payment had occurred. To answer this, the factual matrix must be examined. A milliner in London wrote to a lady in Suffolk requesting a cheque. The question was whether that letter would reasonably lead the lady to conclude that she should forward the cheque by post. She could not have inferred that she ought to dispatch a messenger or travel to London personally. The only sensible interpretation, irrespective of what Madame Phillippe may have intended, was that the cheque should be sent by post. Consequently, the lady reasonably believed she was invited to transmit her cheque by postal means, and she complied with that invitation, thereby effecting payment to the appellant.

She performed the act that had been requested of her, and consequently her conduct was treated as a payment to the appellant. The Lords Justices affirmed this conclusion and gave their concurrence to the judgment. The Court, while relying on the observations made in the present case, referred to the authority in Commissioner of Income-tax, Bombay South v. Messrs Ogale Glass Works Ltd. (1) at page 295, stating: “According to the general course of business usage, which must be considered as part of the surrounding circumstances under the authorities previously cited, the parties must have intended that the cheques be sent by post, which is the usual and normal agency for transmitting such articles, and, according to the Tribunal’s findings, they were in fact received by the assessee by post.” Counsel for the appellant drew particular attention to the decision in Pennington v. Crossley and Sons Ltd., a Court of Appeal judgment delivered by Lord Esher, Mr R., A L Smith and Rigby, L JJ, in which the earlier case of Norman v. Ricketts (3) was distinguished. In the Pennington case the plaintiff had sold goods on 10 December 1896, as recorded in the citation (1) [1955] 1 S.C.R. 185, (2) [1897] 13 T.L.R. 513 and (3) (1886) 3 T.L.R. 182. On the same day an invoice was forwarded to the defendants, containing a term that allowed the defendants a discount if payment was effected within fourteen days. On 24 December the defendants posted a crossed cheque made payable to the plaintiff or his order, and enclosed with that cheque a receipt form which required the plaintiff’s signature. The envelope was correctly addressed to the plaintiff, but it was not sent by registered post, and there was no express request that the cheque be sent by post. The cheque never reached the plaintiff; it was instead cashed by an unknown person who relied on a forged endorsement of the plaintiff’s name. When the plaintiff sued to recover the price of the goods delivered, the defendants argued that the act of posting the cheque constituted legal payment, and they produced evidence that for approximately twenty years preceding this transaction, payments for the same category of goods between the parties had consistently been made by cheque posted together with the receipt form described above. The learned judge held that the established course of business demonstrated that the parties had agreed that payment should be made by cheque and that the posting of the cheque therefore amounted to payment, and accordingly entered judgment in favour of the defendants. The Court of Appeal set aside that judgment. In his judgment the Master of the Rolls distinguished the earlier Norman v. Ricketts case, observing that in that precedent there had been a request—express or implied—to send a cheque by post, and the court had held that posting the cheque amounted to payment. He noted that no such request existed in the present case. The commercial relationship between the plaintiff and the defendants was therefore not interpreted as containing an implicit request that the defendants send the cheque by post, and the posting of the cheque could not be treated as payment.

In this matter the Court observed that the plaintiffs faced the genuine risk that cheques could be lost while in transit. The defendants had, for each of the various sales, placed the corresponding cheques in the post and had also enclosed a separate receipt form which the plaintiff was required to sign. The signing of the receipt was to be done independently of any prior arrangement concerning the method of delivery. The Court found that the surrounding circumstances offered no justification for treating the mere act of posting a cheque as equivalent to delivering the cheque to the plaintiff. The only facts, as recorded in the earlier decision (1) (1886) 3 T.L.R. 182, were that the defendants habitually sent cheques by post and that, upon receiving each cheque, the plaintiff promptly returned the duly signed receipt. The Court held that this situation did not oppose the principle articulated in Norman v. Ricketts (1), but actually confirmed it. The Court of Appeal noted that, had it been possible to discern any express or implied request by the plaintiff to have the cheques sent by post in the earlier case, the earlier decision would have been affirmed. However, because no such request could be inferred, the Court of Appeal warned that it would be “most monstrous” to read into the facts a request to post a cheque and to conclude that the plaintiff considered himself to have received the cheque as soon as it was posted. The other Lord Justices concurred with this view, and consequently the appeal was allowed.

The ratio set out in the earlier case proved decisive for the issue before the Court. The contract between the appellant and the Government expressly provided that payment would be made by cheque. The Government of India was situated in Delhi, and consequently the cheques had to be drawn there. It was not reasonable to imagine that, in ordinary commercial practice, cheques drawn in Delhi would be conveyed by a private messenger to Baroda for delivery, or that a government officer would travel personally to Baroda to hand the cheques to the appellant. The logical and proper method, given the facts, was for the Government to send the cheques to the appellant at Baroda by post. The general course of business, as reflected in the present case, indicated that the parties intended the cheques to be transmitted by post, which is the usual and normal agency for moving such instruments. From this intention, an implied request by the appellant to have the cheques posted from Delhi could be inferred, thereby making the Post Office the agent for the purpose of receiving those payments (1) (1886) 3 T.L.R 182. Counsel for the appellant further drew the Court’s attention to certain provisions of the Post Office Act, 1898, and the accompanying postal regulations, arguing that the Post Office functioned as the Government’s agent in this context.

The Court noted that the Government retained the power to recall the cheques at any time before the cheques actually arrived at the appellant in Barbar. It observed that the same statutory provisions had earlier been examined by this Court in the decision of Commissioner of Income-Tax, Bombay South v. Messrs Ogale Glass Works Ltd. (1955) 11 S.C.R. 185, where the Court had held that those provisions did not operate in favour of the assessee. The Court then reproduced the reasoning given on page 204 of that judgment, stating that there could be no doubt that, between the sender and the addressee, it is the addressee’s request that a cheque be sent by post which makes the post office the addressee’s agent. Once such a request—express or implied—has been made, the addressee could not later claim that the post office was not his agent and therefore try to shift the loss of a cheque lost in transit onto the sender by invoking the limited right of the sender to reclaim the cheque under the Post Office Act, 1898. The Court clarified that, in the absence of any such request, the delivery of a letter or cheque to the post office amounted to delivery to the sender’s own agent. The Court further expressed the opinion that the principle articulated in the Ogale Glass Works case applied equally to the facts of the present matter, even though the specific words “to remit the amount by cheque” were not used in the present pleadings. The Court held that the omission of those words did not alter the legal position and that the present case could not be distinguished from the earlier case on that ground alone. Consequently, the Court concluded that the Income-Tax Appellate Tribunal had been correct in its finding, and accordingly ordered both appeals to be dismissed with costs, the costs to be borne by the parties on a one-set-off basis.