M/s. Zoraster and Co. vs The Commissioner of Income Tax, Delhi

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 30 of 1958

Decision Date: 17 April 1960

Coram: M. Hidayatullah, S. K. Das, J. C. Shah

In this matter, the Supreme Court of India heard the appeal of M/s Zoraster and Co. against the Commissioner of Income Tax for Delhi, Ajmer and Rajasthan. The judgment was delivered on 17 April 1960. The bench comprised Justice M. Hidayatullah, Justice S. K. Das and Justice J. C. Shah. The case was reported in 1961 AIR 107 and in the Supreme Court Reporter as 1961 SCR (1) 210, with subsequent citations referring to the decision in various later reports.

The appellant, M/s Zoraster and Co., had entered into a contract with the Government of India to supply goods. For the assessment year 1942‑43 the Income‑Tax Officer assessed an income of Rs 10,80,653, and for the assessment year 1943‑44 an income of Rs 7,45,336 was assessed. The supplies were made to the Government for the city of Jaipur, and the payments were received by cheque in Jaipur. The appellant contended that the income derived from those sales was received outside the territorial limits then subject to tax, and therefore should not be taxable. The Income‑Tax Appellate Tribunal at Delhi rejected this contention. Consequently, the appellant invoked section 66(1) of the Indian Income‑Tax Act, 1922, seeking a reference to the High Court.

By an order dated 10 December 1952, the Tribunal referred to the High Court the question whether, in view of the facts and circumstances, the profits and gains arising from the sales to the Government of India were received by the assessee within the taxable territories. The High Court subsequently remanded the case back to the Tribunal, directing it to obtain a supplemental statement of case. The High Court required the Tribunal to determine whether the cheques had been sent to the appellant’s firm by post or by hand, and what instructions, if any, the appellant had given to the tax department concerning the mode of payment.

The appellant challenged the High Court’s order, relying on the precedent set in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑Tax, [1960] 1 SCR 249. The Supreme Court examined whether the enquiry contemplated by the Tribunal could legitimately incorporate the new point raised as an integral or merely incidental aspect of the original issue. The Court held that the supplemental statement to be filed by the Tribunal must be based solely on facts already admitted or found by the Tribunal and must not open the way for fresh evidence. Moreover, the Court ruled that the question framed by the High Court was sufficiently wide to encompass an investigation into whether any express or implied request had been made for the bills to be paid by cheque, thereby bringing the matter within the principles articulated in the earlier Ogale Glass Works case, [1955] 1 SCR 185. The decision clarified the limits of the Tribunal’s enquiry and affirmed the proper scope of the High Court’s direction.

In the absence of any express contrary language in the order of the Punjab High Court, it could not be concluded that the direction to obtain a supplemental statement would inevitably admit fresh evidence, since the admission of fresh evidence had been expressly barred by the decision in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax, [1960] 1 S.C.R. 249. The Court observed that the principle laid down in that case distinguished the present situation from the authority cited in Jagdish Mills Ltd. v. Commissioner of Income‑tax, [1960] 1 S.C.R. 236, as well as from earlier decisions such as Keshav Mills Co. Ltd. v. Commissioner of Income‑tax, [1950] 18 I.T.R. 407; Sir Sobha Singh v. Commissioner of Income‑tax, [1950] 18 I.T.R. 998; Kirloskar Bros. Ltd. v. Commissioner of Income‑tax, [1952] 21 I.T.R. 82; Commissioner of Income‑tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185; Commissioner of Income‑tax v. Kirloskar Bros. Ltd., [1954] 25 I.T.R. 547; and Mrs. Kusumben D. Mahadevia, Bombay v. Commissioner of Income‑tax, Bombay, [1960] 3 S.C.R. 417. These authorities were referenced to underline that any supplemental statement must arise solely from facts already admitted or found by the Tribunal and must not become a conduit for introducing new evidence.

The appeal before the Supreme Court was a civil appeal, numbered 30 of 1958, filed by special leave against the judgment and order dated 24 March 1955 of the Punjab High Court in Civil Reference No. 3 of 1953. The High Court, invoking section 66(4) of the Income‑tax Act, had directed the Income‑tax Appellate Tribunal to file a supplemental statement of the case. The special leave granted was confined to the question of whether the High Court possessed jurisdiction to issue such a direction. The assessee, Messrs S. Zoraster & Co., a partnership formed in June 1940 for manufacturing and selling blankets, felts and other woollen articles, consisted of two partners who were coparceners of a joint Hindu family and a third partner who was a stranger. A deed of partnership was executed on 16 March 1944. The partnership entered into contracts with the Government of India for supply of goods, resulting in assessments of Rs 10,80,658 for the year 1942‑43 and Rs 17,45,336 for the year 1943‑44 by the Income‑tax Officer, Contractor’s Circle, New Delhi. Payments were made by cheques drawn on the Reserve Bank of India, received in Jaipur, and endorsed in favour of the joint Hindu family acting as the assessee’s bankers. The assessee contended that the income was received outside the taxable territories at the time, a contention rejected by the Delhi Income‑tax Appellate Tribunal. Consequently, the assessee invoked section 66(1) of the Act, and on 10 December 1952 the Tribunal referred a question to the High Court asking whether, on the facts, the profits and gains from the Government sales were received within the taxable territories.

In the reference made to the High Court, the question presented for its decision was whether, taking into account the facts and circumstances of the present dispute, the profits and gains arising from the sales made to the Government of India had been received by the assessee within the taxable territories. The Income‑tax Appellate Tribunal, in the statement of the case, observed that the Government of India had effected payment by means of cheques drawn on the Reserve Bank of India, Bombay Branch, and that those cheques had been received in Jaipur. It is also important to note that the contract of sale between the assessee and the Government of India contained a specific clause governing the mode of payment. Clause twenty‑one stipulated that, unless the parties agreed otherwise, payment for the delivery of the stores would be made by the Chief Auditor of the Indian Stores Department, New Delhi, by cheque drawn on a Government treasury in India or on a branch of the Imperial Bank of India or the Reserve Bank of India engaged in Government business. While considering the reference, the High Court issued an order under section 66(4) of the Income‑Tax Act. In that order the Court remarked that the Appellate Tribunal needed, among other matters, to determine whether the cheques had been transmitted to the assessee’s firm by post or by hand and what directions, if any, the assessee’s firm had given to the Department concerning the mode of delivery. Accordingly, the High Court remanded the matter back to the Tribunal, directing it to furnish a supplemental statement of the case in accordance with the points specified by the Court.

The order of the High Court was subsequently challenged on the basis of the decision of this Court in The New Jehangir Vakil Mills Ltd. v. The Commissioner of Income‑tax (1), a judgment that was argued to be fully applicable to the present case. In that earlier case the High Court of Bombay had also sought a supplemental statement of the case, and this Court had held that the High Court had exceeded its jurisdiction in doing so. Before addressing the issue raised, it was necessary to revisit earlier authorities that had been relied upon, namely The New Jehangir Vakil Mills case (1) and Jagdish Mills Ltd. v. Commissioner of Income‑tax (2). The cited reports are ID (1) [1960] 1 S.C.R. 249 and (2) [1960] 1 S.C.R. 236. Earlier, in Keshav Mills Co., Ltd. v. Commissioner of Income‑tax (1), the High Court of Bombay, while also calling for a supplemental statement, expressed the view that if a creditor received a cheque drawn on a British Indian Bank and then presented it to his own bank for collection, the latter bank should be treated as the creditor’s agent; consequently, when the amount was realized in the taxable territory, the creditor was deemed to have received it there, even if he was physically outside the territory. Similarly, in Sir Sobha Singh v. Commissioner of Income‑tax (2), the Punjab High Court held that when cheques were handed over to a bank for collection, the receipt of the money occurred at the place where the bank on which the cheques were drawn was situated. These principles were later reiterated and applied in two further decisions of the Bombay High Court, namely Kirloskar Bros. Ltd. v. Commissioner of Income‑tax (3) and Ogale Glass Works Ltd. v. Commissioner of Income‑tax (4), wherein the courts held that unless the payee expressly appointed the post office as his agent, the mere posting of a cheque did not make the post office an agent, and the amount was deemed to be received at the place where the cheque was actually received. In Kirloskar Bros., the Court observed that posting the cheque in Delhi did not amount to receipt in Delhi because the payee had not requested the Government to send the cheque by post. In the Ogale Glass Works case, the Bombay High Court likewise asked for a supplementary statement of the case.

In the earlier cases, the Court observed that when a cheque was handed to a bank solely for collection, the receipt of the money occurred at the location of the bank on which the cheque was drawn.

These principles were later expanded by the Bombay High Court in two decisions, namely Kirloskar Bros. Ltd. v. Commissioner of Income‑tax (3) and Ogale Glass Works Ltd. v. Commissioner of Income‑tax (4). In each of those cases the Court held that unless the payee expressly appointed the post office as his agent, merely posting the cheque did not make the post office the payee’s agent, and consequently the amount represented by the cheque was deemed to be received at the place where the cheque itself was actually received.

In Kirloskar Bros. Ltd. v. Commissioner of Income‑tax (3), the Court specifically ruled that the simple act of posting the cheque in Delhi could not be treated as receipt of the cheque in Delhi because the payee had not requested the Government to forward the cheque by post.

In the Ogale Glass Works case (4), the Bombay High Court required the Tribunal to provide a supplementary statement to determine whether the assessee had made any express request that the cheque be sent by post. The Court concluded that, because no such express request existed, the receipt of the money did not occur at the place where the cheque was posted but rather at the place where the money was actually received.

(1) [1950] 18 I.T.R. 407. (2) [1950] 18 I.T.R. 998. (3) [1952] 21 I.T.R. 82. (4) Tax Reference No. 10 of 1949 of the Bombay High Court decided on September 17, 1951.

Subsequently, the Supreme Court set aside the last two Bombay High Court decisions, holding that an intimation to the payer to “remit” the amount by cheque was sufficient to nominate the post office as the payee’s agent, as expressed in Commissioner of Income‑tax v. Ogale Glass Works Ltd. (1) and Commissioner of Income‑tax v. Kirloskar Bros. Ltd. (2).

The Court later extended this principle further in Jagdish Mills Ltd. v. Commissioner of Income‑tax (3). It held that where bills bore the endorsement “Government should pay” and the cheques were received in full satisfaction without any conditions, this created an implied request sufficient to apply the rule laid down in the Ogale Glass Works case.

Jagdish Mills case (3) and the New Jehangir Vakil Mills case (4) were decided by the Supreme Court on the same day. In the New Jehangir Vakil Mills case, the Department dealt with a non‑resident company that, at all material times, was located in Bhavnagar, one of the Indian States. Cheques issued for payment of supplies to the Government were sent from British India to Bhavnagar. The Department argued that although the cheques were received at Bhavnagar, they were actually cashed in British India and, until such encashment, the income could not be said to have been received; however, on encashment in British

In the matter before the Tribunal, it was held that because the cheques had been received at Bhavnagar, the income was also deemed to have been received at that place. In arriving at this conclusion, the Tribunal followed the decision of the Bombay High Court in the Kirloskar Brothers case. However, the Tribunal noted that if the Bombay view, which was then pending appeal before this Court, were not affirmed, it would be necessary to examine whether the bankers of the Mills at Ahmedabad had acted as agents of the Mills in collecting the sums due on the cheques. The question of whether the posting of the cheques from British India to Bhavnagar had been made at the request—express or implied—of the Mills, and whether that fact made any difference, was not considered at any stage before the case reached the High Court of Bombay. This absence of consideration was expressly acknowledged by this Court, which quoted the Revenue’s sole argument at all material stages: that because the amounts were drawn on banks in British India, were ultimately encashed in British India, and therefore could not be said to have been received in Bhavnagar, even though the physical cheques had in fact been received at Bhavnagar. The Tribunal had deferred the reference until this Court decided the cases of Ogale Glass Works and Kirloskar Brothers. Although those two decisions showed that a request for payment by cheques to be sent by post could be decisive, the Tribunal did not incorporate that aspect into its statement of the case or the question, because the issue had never previously been examined. Consequently, the question referred to the Tribunal was limited to the legal effect of the receipt of the cheques at Bhavnagar, without reference to whether the cheques had been sent by post at the request—express or implied—of the Mills. The framed question therefore read: “Whether the receipt of the cheques in Bhavnagar amounted to receipt of the sale proceeds in Bhavnagar?” This limited formulation and the accompanying statement brought into controversy the sole point that had hitherto been considered by the Tribunal and the taxing authorities. When the case was heard by the High Court, the Court sought to approach it from the perspective of the Kirloskar Brothers and Ogale Glass Works decisions and consequently asked for a supplemental statement of the case. In doing so, the High Court extended the issue beyond the controversy as it had existed, and beyond the original statement of the case and the question. The High Court then directed the Tribunal, stating: “On the finding of the Tribunal that all the cheques were received in Bhavnagar, the Tribunal to find …”

The High Court, while examining I.T.R. 547, asked what portion of the cheques had been received by post and whether the assessee had, either expressly or impliedly, requested that the sums represented by those cheques be forwarded to Bhavnagar by post. The Court dismissed the objection that such an enquiry fell outside the matter decided by the Tribunal and might necessitate fresh evidence, stating that the enquiry was essential to answer the question raised in the Reference. It explained that, under section 66(4) of the Income‑tax Act, the Court possessed an independent right, irrespective of the parties’ conduct, to direct the Tribunal to state further facts so that the Court could properly exercise its advisory jurisdiction. The Supreme Court later observed that the High Court had exceeded its authority under section 66(4) of the Indian Income‑tax Act. The Court noted that if the question referred did not clearly disclose the real dispute between the parties, the High Court could re‑frame the question to bring before it the matter actually agitated before the Tribunal. However, section 66(4) could not be used to raise a new question of law that did not arise from the Tribunal’s order, nor to direct the Tribunal to investigate new or additional facts necessary to decide such a new question that had not been referred under sections 66(1) or 66(2), nor to require a supplementary statement of the case. The Supreme Court further pointed out that only the facts admitted or found by the Tribunal could form the basis of any question of law said to arise out of the Tribunal’s order. Consequently, two limits were placed on the High Court’s jurisdiction under section 66(4): the advisory jurisdiction was confined to (a) the facts recorded on the record or found by the Tribunal, and (b) the question that emerged from the Tribunal’s order. The Court emphasized that the High Court was not empowered to order a fresh enquiry into new facts for the purpose of expanding the record, and likewise it could not decide a question of law that did not stem from the Tribunal’s order. To illustrate this point, the Court compared the question framed by the Tribunal with the question the High Court sought to decide. The Tribunal had only referred to whether the receipt of the cheques at Bhavnagar amounted to receipt of sale proceeds in Bhavnagar. In contrast, the High Court intended to decide whether the posting of the cheques in British India at the expressed or implied request of the appellant amounted to receipt of sale proceeds in British India.

In the earlier discussion the Court observed that the two questions presented were entirely unrelated, and therefore the High Court could not entertain a matter that differed from the one decided by the Tribunal, nor could it require a fresh statement of facts on that new issue. The principle stated in the Jehangir Vakil Mills case (1) received reinforcement from another recent decision of this Court. In Kusumben D. Mahadevia v. Commissioner of Income‑tax Bombay (2) the Court remarked: “In our opinion, the objection of the assessee is well‑founded. The Tribunal did not address itself to the question whether the Concessions Order applied to the assessee. It decided the question of assessability on the short ground that the income had not arisen in Baroda but in British India. That aspect of the matter has not been touched by the Bombay High Court. The latter has, on the other hand, considered whether the Concessions Order applies to the assessee, a matter not touched by the Tribunal. Thus, though the result is the same so far as the assessment is concerned, the grounds of decision are entirely different.” (1) [1960] 1 S.C.R. 249. (2) [1960] 3 S.C.R. 417, 421. The Court explained that Section 66 of the Income‑tax Act confers on the High Court only the authority to refer a question of law that arises from the Tribunal’s order; it does not empower the High Court to decide a different legal question that does not arise from that order. While the same legal question may admit different methods of resolution and the High Court may broaden the question to include all relevant approaches, the question must still be the one that was before and decided by the Tribunal and cannot be a wholly new question never considered by the Tribunal. Consequently, the inquiry in such situations must determine whether the question decided by the Tribunal can incorporate the new point as an essential or even incidental element. Even when a supplemental statement is ordered, that statement must be based on facts that the Tribunal has already admitted or found, and it must not open the way to fresh evidence. The fact that, in the Ogale Glass Works case (1), the Bombay High Court sought a supplemental statement in the same manner as in the Jehangir Vakil Mills case (2), and that this Court did not reject the new issue, does not aid the assessee here, because in that earlier case the jurisdiction of the High Court was not challenged as it was in the Jehangir Vakil Mills case or in the present matter. Accordingly, the present case requires an examination of whether the question that was decided and that has been referred to the High Court permits the return of the case for a supplemental statement in accordance with the directions given in the appealed order.

At the outset, the Court observed that the legal issue presented in the present matter differed markedly from the issue considered in the Ogale Glass Works case and from the issue examined in the Jehangir Vakil Mills case. In the first two cases the question was framed in a broad manner, whereas in the Jehangir Vakil Mills case the court confined the question to a very limited point. The Court illustrated this contrast by placing the three questions side by side. The first question, quoted from the Tax Reference No. 19 of 1949 of the Bombay High Court decided on 17 September 1951, concerned whether the receipt of the cheques in Bhavnagar amounted to receipt of the sale proceeds in Bhavnagar. The second question, taken from the Ogale Glass Works case reported in [1955] 1 S.C.R. 185, asked whether, on the facts of that case, the income, profits and gains in respect of sales made to the Government of India were received in British India within the meaning of Section 4(1)(a) of the Act. The question in the present case, as recorded in [1960] 1 S.C.R. 236, was whether, on the facts and circumstances of the present case, the profits and gains arising from sales made to the Government of India were received by the assessee in taxable territories. From this comparison the Court concluded that the question framed in the present case was sufficiently wide to permit an enquiry into whether there was any express or implied request that the amounts of the bills be paid by cheque, thereby bringing the matter within the doctrine laid down by this Court in the Ogale Glass Works case and the Jagdish Mills case. The Court further held that the first limitation on the High Court’s jurisdiction, as defined by this Court, was not breached by the High Court when it exercised its powers under section 66(4) of the Income‑tax Act. The breadth of the question allowed the Court to entertain an alternative line of reasoning: if there was a request – either express or implied – to transmit the amount due under the bills by cheque, then the post office would function as the assessee’s agent, and the income would be deemed to have been received in the taxable territory at the moment the cheques were posted.

The Court then turned to the second limitation implicit in section 66(4), namely that any question must arise out of the facts that have been admitted or found by the Tribunal. The High Court had observed that “it would be necessary for the Appellate Tribunal to find inter alia whether the cheques were sent to the assessee‑firm by post or by hand and what directions, if any, were given by the assessee‑firm to the Department in that matter.” The Court noted that if the Tribunal were required to conduct a fresh investigation that would lead to the admission of new evidence, such a direction would conflict with the precedent set in the Jehangir Vakil Mills case. Conversely, the Court indicated that the direction could be interpreted to mean that the Tribunal should confine its findings to the facts already admitted or determined, without inviting fresh evidence. This distinction was crucial in assessing whether the High Court had exceeded its jurisdiction. The Court therefore concluded that, although it would have been preferable for the High Court to limit its directions strictly to the record before the Tribunal, the absence of an explicit contrary instruction meant that the direction did not inevitably compel the admission of fresh evidence. Consequently, the Court held that the present case did not fall within the rule prohibiting fresh evidence as articulated in the Jehangir Vakil Mills case, and accordingly dismissed the appeal with costs.

The Court observed that a finding must be limited to the facts that have either been admitted by the parties or have been established by the Tribunal, and therefore a direction based on such a finding could not be characterized as exceeding the jurisdiction of the High Court. The Court noted that it would have been preferable for the High Court to have issued directions that were strictly confined to the material that was already part of the record before the Tribunal. However, the Court also held that, in the absence of any express indication to the contrary, it could not be said with certainty that the direction would inevitably compel the admission of fresh evidence. The Court further explained that, at this stage, the admission of fresh evidence could not be entertained because the decision in Jehangir Vakil Mills (1) expressly prohibited the admission of new evidence. In the present matter, the Court expressed the view that the facts and circumstances did not fall within the rule laid down in Jehangir Vakil Mills (1), and thus the case was distinguishable from that precedent. Accordingly, the Court concluded that the appeal could not be allowed. The appeal was therefore dismissed with costs, and the order of dismissal was affirmed. (1) [1960] 1 S.C.R. 249.