The Commissioner of Income Tax, Madhya Pradesh and Bhopal vs Bhopal Textiles Ltd., Bhopal

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 755 of 1957

Decision Date: 17 October 1960

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

In this case, the Supreme Court of India heard a petition filed by the Commissioner of Income‑Tax, Madhya Pradesh and Bhopal, against Bhopal Textiles Ltd., Bhopal, and delivered its judgment on 17 October 1960. The bench comprised Justices M Hidayatullah, S K Das and J C Shah. The decision is reported as 1961 AIR 426 and 1961 SCR (2) 9 and is also cited as RF 1967 SC1907 (7). The matter concerned the provisions of the Income‑Tax Act relating to the place of receipt of payment when a non‑resident company supplies goods, the role of a bank acting as the seller’s agent, and the nature of a railway receipt as a document of title. Bhopal Textiles Ltd., a non‑resident company, in the relevant accounting year supplied goods that were shipped F O R Bhopal to buyers located in British India. The seller handed the railway receipts to a bank in Bhopal and instructed the bank to deliver those receipts to the named consignees only after the buyers had paid the bill and the collection charges. The bank’s branches within the taxable territory collected the sums due from the buyers and transmitted the amounts to the Bhopal branch, crediting the respondent. The issue before the Court was whether the profit on those goods was received, or could be deemed to be received, in British India. The Court held that the precedent set in Commissioner of Income‑Tax v P M Rathod & Co. applied, and therefore the income, profit or gain must be treated as having been received within the taxable territory. The Court explained that the place where money is said to be received by the seller is determined by the fact of payment to the seller’s agent. Because the bank, under the seller’s instructions, could not release the railway receipts to the buyers unless payment for the value of the goods was received, the bank was effectively an agent of the seller. Consequently, the receipt of money by the bank satisfied the condition for receipt within the taxable territory. The Court further observed that a railway receipt functions as a document of title to the goods and, for all practical purposes, represents the goods themselves. When the receipt is handed over to the consignee on payment of the price, the property in the goods passes to the consignee. The Court relied on the earlier authority of Commissioner of Income‑Tax v P M Rathod & Co., [1960] 1 SCR 401. The appeal, numbered Civil Appeal No 755 of 1957, was filed by special leave against the judgment and order dated 23 March 1955 of the Nagpur High Court in Miscellaneous Civil Case No 240 of 1953. Counsel for the appellant and counsel for the respondent appeared, and the judgment was delivered by Justice Hidayatullah.

In this case a reference was made under section 66(1) of the Indian Income‑tax Act, 1922, and the High Court answered the reference question in the negative. The question presented to the Court was whether the proportionate profits on goods valued at Rs 4,10,785 were received or deemed to be received in British India during the year of account, by or on behalf of the assessee company within the meaning of section 4(1)(a) of the Indian Income‑tax Act, 1922. The appellant was the Commissioner of Income‑tax, Madhya Pradesh and Bhopal, and the respondent was Bhopal Textiles Ltd., Bhopal. For the assessment year 1944‑45 the company, although a non‑resident, was treated as a “resident and ordinarily resident” under section 4(1)(c) of the Income‑tax Act. In the relevant year of account the company supplied its manufactured articles either to the Government of India or to nominees of the Government located at Agra, Allahabad and Delhi. By order of the Government the goods were dispatched directly to the persons nominated, and those persons made payment for the goods. All the goods were sent for delivery to Bhopal, and the freight and other railway charges were to be borne by the buyers; railway receipts were issued in the name of the consignees and were sent by the company through the Imperial Bank at Bhopal. The Bhopal branch of the bank forwarded the railway receipts to the bank’s branches at Agra, Allahabad and Delhi, where the amounts due from the buyers were collected and then transmitted to the Imperial Bank, Bhopal, where they were credited to the account of the company. On the basis of these facts the Department held that a total sum of Rs 4,40,373 had been received in British India. Of this amount, Rs 29,588 represented receipts for supplies made directly to the Government and was not in dispute; the remaining balance was the sum that formed the subject‑matter of the reference. The usual appeals were taken, and the company’s contention that the money had not been received in British India was rejected by the Tribunal. The Tribunal did not decide on the place of accrual and therefore referred the question quoted above to the High Court. In deciding the reference the High Court examined the passing of property under the Indian Sale of Goods Act, 1930, and concluded that since ownership of the goods had passed to the buyers, the Imperial Bank of India, Bhopal, must be deemed to have received the railway receipts as agents of the buyers. The learned judges further observed that the bank’s branches at Agra, Allahabad and Delhi also acted as agents of the buyers when they collected the money from the buyers and transmitted it to the Bhopal branch. Accordingly, the profits could not be said to have been received by the assessee company in British India; the company received the money only when it reached the Bhopal branch as a credit to its own account, and that receipt did not occur in British India at the material time.

The Tribunal did not base its decision on the accrual of income, profits, or gains to the Company. Instead, it focused on the factual question of where the actual receipt of money occurred, either in British India or in Bhopal. Bhopal at that time lay outside the territories that were deemed taxable under the applicable statute. Consequently, the Court did not need to examine whether the property in the goods passed absolutely to the buyers without any retained right of disposal by the Company. There remained a genuine doubt as to whether the goods were completely at the buyers’ disposal after the railway receipts had been handed over to the Bank. Evidence, which the Income‑Tax Officer highlighted, showed that the Company transmitted the railway receipt to the Imperial Bank at Bhopal together with a covering letter. In that letter, the Company instructed the Bank to deliver both the railway receipt and the accompanying bill to the buyers only upon receipt of the bill amount together with the applicable collection charges. Given these circumstances, although the Court refrained from expressing a final opinion, it expressed doubt that the Company had entirely relinquished its right of disposal. A railway receipt functions as a document of title to the goods and, for all practical purposes, represents the goods themselves. When such a receipt is handed over to the consignee on full payment, ownership of the goods is transferred to the consignee. In the present case, there existed considerable doubt as to whether ownership of the goods could be said to have passed to the buyers merely because the railway receipts bore the consignees’ names, as the High Court had previously held. Because the matter of accrual was not under consideration, the Court did not elaborate further on this point.

Turning to the issue of the location where the money was actually received, the Court found no doubt that the Tribunal’s view was correct. The income in question was received at one of the branches in Agra, Allahabad, or Delhi from the buyers, with the Imperial Bank acting as the Company’s agent. The Company had earlier handed the railway receipts to the Bank and explicitly instructed the Bank not to deliver those receipts to the buyers unless the full payment had been received. These instructions were sufficient to constitute the Bank as an agent of the Company for the purpose of receiving the money. Consequently, the buyers could not have overridden the Company’s directions to the Bank, which they would have been able to do had the Bank acted as their own agent. The principle that such a relationship creates agency was previously laid down by this Court in The Commissioner of Income‑Tax v. P. M. Rathod and Company. Counsel for the respondent argued that the present case should be distinguished because, in the earlier case, the railway receipts were made out ‘to self’, whereas here they were made out in the name of the consignee. The Court observed that this distinction did not affect the outcome, since the document of title to the goods remained the Company’s property until payment was actually received.

The Court held that the decision under review was applicable to the facts of this case. The counsel for the appellant finally argued that the parties had agreed that the goods should be sent to Bhopal and that the price should also be paid there. He further submitted that the transfer of the railway receipts to the Bank at Bhopal was carried out in accordance with that agreement, that the Bank ultimately received the money and then delivered it in Bhopal, and therefore the money ought to be treated as having been received at Bhopal. The Court disagreed with this characterization of the transaction. While it accepted that the contract stipulated payment at Bhopal, the Court observed that the actual conduct departed from that stipulation and followed the usual commercial practice of delivering railway receipts to the seller’s own bankers with an instruction that the bankers should release the receipts to the buyers only upon receipt of payment. The Court reiterated that, as previously explained, the Bank functioned as the agent of the sellers, a principle established in the earlier ruling of this Court. Consequently, the place where payment was made to the agent determines the location where the company can be said to have received the money. The Court found that the payments were made at Agra, Allahabad or Delhi, not at Bhopal. Accordingly, the income, profits or gains should be regarded as having been received in those taxable territories, and the answer to the question posed by the Tribunal must be affirmative. For this reason, the Court allowed the appeal, affirmed the correct answer to the question, and ordered that the appellant be awarded costs both in this proceeding and in the High Court. The appeal was therefore allowed.