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: Not extracted

Decision Date: 17 August 1960

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

Zoraster And Co. versus the Commissioner of Income Tax, Delhi, was decided on 17 August 1960 by the Supreme Court of India. The judgment was delivered by a Bench consisting of Justices J. C. Shah, M. Hidayatullah and S. K. Das, and the opinion of Justice Hidayatullah was recorded as the leading judgment.

The appeal came before this Court by way of special leave, and it challenged the order dated 24 March 1955 issued by the Punjab High Court. In that order the High Court, apparently acting under section 66(4) of the Indian Income‑tax Act, directed the Income‑tax Appellate Tribunal to furnish a supplemental statement of the case. The special leave that this Court granted was expressly limited to the question of whether the Punjab High Court possessed jurisdiction to make such a direction for a supplemental statement.

The assessee in this matter was Messrs S. Zoraster & Co., a partnership firm based in Jaipur. The partnership comprised three partners: two of them were coparceners of a joint Hindu family and the third partner was an outsider to the family. The partnership was formed in June 1940 for the purpose of manufacturing and selling blankets, felts and other woollen articles, and the partners executed a deed of partnership on 16 March 1944 to formalise their arrangement.

The firm entered into contracts with the Government of India for the supply of goods. In the assessment year 1942‑43 the Income‑tax Officer of the Contractor’s Circle in New Delhi assessed the firm’s income at Rs 10,80,658‑0‑0, and in the assessment year 1943‑44 the assessed income was Rs 17,45,336‑0‑0. The supplies to the Government were dispatched from Jaipur, and the payment was made by cheques. These cheques were received in Jaipur and were subsequently endorsed in favour of the joint Hindu family, which functioned as the bank for the partnership. The partnership contended that the income derived from these supplies was received in Jaipur, which lay beyond the taxable territories in force at that time. The Income‑tax Appellate Tribunal in Delhi did not accept this contention.

Consequently, the partnership applied for a reference to the High Court under section 66(1) of the Income‑tax Act. By an order dated 10 December 1952 the Tribunal referred a specific question to the High Court for determination: whether, considering the facts and circumstances of the case, 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 Tribunal’s statement of the case set out that the Government of India had made payment by cheques drawn on the Reserve Bank of India, Bombay Branch, and that those cheques had been received in Jaipur. In the contract of sale between the partnership and the Government, clause 21 prescribed the system of payment, providing that unless otherwise agreed, payment for the delivery of stores would be made by the Chief Auditor of the Indian Stores Department, New Delhi, by cheque on a Government Treasury in India or on a branch of the Imperial Bank of India or the Reserve Bank of India.

The contract of sale between the assessee and the Government of India contained a clause stating that payment for the delivery of stores would be made by the Chief Auditor of the Indian Stores Department in 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 transacting Government Business. When the reference was before the High Court, the Court issued an order under section sixty‑six (4) of the Income‑tax Act directing that the Appellate Tribunal should determine, among other things, whether the cheques were dispatched to the assessee’s firm by post or by hand and what instructions, if any, the firm had given to the Department regarding the manner of delivery. After making this observation, the High Court sent the matter back to the Tribunal, directing it to prepare a supplemental statement of the case in accordance with the lines indicated by the Court. The validity of this remittal was challenged by relying on the authority of the Supreme Court decision in New Jehangir Vakil Mills Ltd. v. The Commissioner of Income‑tax, where it was contended that the case was completely covered by that decision. In New Jehangir Vakil Mills, the Bombay High Court also sought a supplemental statement of the case, and the Supreme Court subsequently held that the High Court had exceeded its jurisdiction by doing so. Before addressing the present question, it was considered necessary to revisit several earlier decisions that have been cited in the present matter, including those decided before the New Jehangir Vakil Mills ruling and the earlier Jagdish Mills Ltd. v. Commissioner of Income‑tax case.

Among the earlier authorities, the High Court of Bombay in Keshav Mills Co. Ltd. v. Commissioner of Income‑tax ([1950] 18 I.T.R. 407) had called for a supplemental statement of the case but had expressed the view that if a creditor received a cheque on a British Indian bank and handed the cheque to his own bank for collection, the 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 the money in that territory even though the creditor himself was physically outside it. Similarly, the Punjab High Court in Sir Sobha Singh v. Commissioner of Income‑tax ([1950] 18 I.T.R. 998) held that where cheques were presented to a bank for collection, the receipt of the funds occurred at the location of the bank on which the cheque was drawn. These principles were later reinforced and applied by the Bombay High Court in two further cases: Kirloskar Bros. Ltd. v. Commissioner of Income‑tax ([1952] 21 I.T.R. 82) and Ogale Glass Works Ltd. v. Commissioner of Income‑tax (Tax Reference No. 19 of 1949 of the Bombay High Court, decided on 17 September 1951). In both decisions, the Court ruled 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 the receipt of the cheque’s amount was deemed to occur at the place where the cheque was actually received. In the Kirloskar Bros. case, the Court emphasized that the simple act of posting a cheque in Delhi did not amount to receipt of the cheque in Delhi because the payee had not requested the Government to send the cheque by post.

In the Bombay High Court decision Ogale Glass Works Ltd. (I. Tax Reference No. 19 of 1949, decided on 17 September 1951), the court directed the Tribunal to furnish a supplementary statement indicating whether the assessee had expressly requested that the cheque be sent by post; it then held that, because no such express request existed, the receipt of the money could not be said to have occurred at the place where the cheque was posted but only at the place where the money was actually received. The two subsequent decisions of that High Court were later set aside by this Court, which ruled that a simple intimation to the payer to “remit” the amount by cheque sufficed to nominate the post office as the payee’s agent, as reflected in the judgments Commissioner of Income‑Tax v. Ogale Class Works Ltd. and Commissioner of Income‑Tax v. Kirloskar Bros. Ltd. ([1954] 25 I.T.R. 547). This principle was thereafter broadened in the Jagdish Mills case, where it was held that an endorsement on the bills stating “Government should pay the amount due by cheque,” coupled with the unconditional receipt of the cheques in full satisfaction, amounted to an implied request that fell within the rule articulated in Ogale Glass Works. The Jagdish Mills case and the New Jehangir Vakil Mills case were decided on the same day; in the latter matter the Department was dealing with a non‑resident company that was, at all relevant times, situated in Bhavnagar, a State of India. Cheques for supplies made to the Government were dispatched from British India to Bhavnagar. The Department contended that although the cheques arrived in Bhavnagar, they were actually cashed in British India and, therefore, income could not be deemed received until such encashment, at which point the receipt of income would also be in British India. The Tribunal, however, held that because the cheques were received in Bhavnagar, the income was likewise received there, following the Bombay decision in Kirloskar Brothers Ltd. ([1952] 21 I.T.R. 82). The Tribunal further observed that, had the Bombay view then under appeal not been upheld, an inquiry would be required to determine whether the Mills’ bankers in Ahmedabad acted as the Mills’ agents for collecting the amounts due on the cheques. It noted that the question of whether the posting of the cheques from British India to Bhavnagar, at the mills’ express or implied request, made any difference had never been considered at any stage before the matter reached the Bombay High Court. This Court later expressed this observation directly, stating that “the only ground urged by the Revenue at all material stages was that because the amounts which were received, from the merchants or the Government were …”

In the matter before the Tribunal, it was held that because the cheques were drawn on banks situated in British India and were ultimately encashed in British India, the monies represented by those cheques could not be said to have been received in Bhavnagar even though the physical cheques themselves were actually received at Bhavnagar. The Tribunal postponed consideration of the reference until after the Supreme Court had delivered its decisions in the cases of Ogale Glass Works and Kirloskar Brothers, reported in 1954. Although those two authorities demonstrated that a request for payment by cheques to be sent through the post could be decisive, the Tribunal nevertheless did not incorporate that aspect into either its statement of the case or the question it framed, on the ground that the issue of whether the cheques had been posted at the express or implied request of the mills had never been examined earlier. Consequently, the question that was referred to the Tribunal was narrowly limited to the legal effect of the receipt of the cheques at Bhavnagar, without any reference to the mode of their transmission. The specific question framed was: “Whether the receipt of the cheques in Bhavnagar amounted to receipt of the sale proceeds in Bhavnagar?” This framing and the accompanying statement brought into controversy the sole point that had hitherto been considered by both the Tribunal and the assessing authorities.

When the case was subsequently heard by the High Court, the Court sought to examine the issue from the perspective established in the Kirloskar Brothers and Ogale Glass Works decisions, and therefore called for a supplemental statement of the case. In doing so, the High Court went beyond the scope of the controversy as it had been previously defined, as well as beyond the statement of the case and the question that had been framed. The High Court directed the Tribunal, stating: “On the finding of the Tribunal that all the cheques were received in Bhavnagar, the Tribunal shall determine what portion of these cheques were received by post and whether there was any request by the assessee, express or implied, that the amounts which are the subject matter of these cheques should be remitted to Bhavnagar by post.” When objections were raised that such an enquiry was foreign to the point already decided by the Tribunal and might require fresh evidence, the High Court justified its direction by observing that it could not exclude a necessary inquiry that, from its own point of view, was essential to answer the question raised in the reference. It further relied on section 66(4) of the Income‑Tax Act, asserting that it 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, however, pointed out that the High Court had exceeded the jurisdiction conferred by section 66(4). The Court observed that while the High Court may re‑frame a question if the original reference does not clearly disclose the real issue, section 66(4) does not empower the High Court to introduce a new question of law that does not arise from the Tribunal’s order, nor to direct the Tribunal to investigate additional facts or to submit a supplementary statement of the case. It was further emphasized that only the facts admitted or found by the Tribunal could form the basis of any question of law arising from the Tribunal’s order. Accordingly, the Supreme Court set two limits on the High Court’s jurisdiction under section 66(4): the advisory jurisdiction is confined to (a) the facts recorded on the record or found by the Tribunal, and (b) the question that logically arises from the Tribunal’s order. It was made clear that the High Court could not order a fresh enquiry into matters beyond those parameters.

The Court explained that section 66(4) of the Income‑Tax Act did not give the High Court authority to create a fresh question of law that was unrelated to the order of the Tribunal. The High Court could not command the Tribunal to investigate new or additional facts that were not part of the original reference under section 66(1) or 66(2), nor could it require the Tribunal to file a supplementary statement of the case on such a newly created issue. The Court emphasized that the advisory jurisdiction provided by section 66(4) was strictly limited to two boundaries. First, the High Court could rely only on the facts that the Tribunal had either admitted or found on the record. Second, the legal question that the High Court could refer to the Tribunal had to arise directly from the Tribunal’s own order. Consequently, the High Court was not permitted to launch a fresh inquiry into facts that lay beyond the existing record, nor could it decide a question of law that did not emerge from the Tribunal’s findings. This limitation was illustrated by comparing the question framed by the Tribunal with the question the High Court attempted to decide. The Tribunal had asked whether the receipt of the cheques at Bhavnagar constituted receipt of sale proceeds in Bhavnagar. In contrast, the High Court sought to determine whether the posting of the cheques in British India, at the express or implied request of the appellant, amounted to receipt of sale proceeds in British India. These were two entirely different questions, and the Court held that the High Court could not adjudicate a matter that differed from the one decided by the Tribunal, nor could it summon a statement of the case pertaining to this new issue.

The Court further supported its proposition by referring to the decision in Jehangir Vakil Mill and by citing a more recent case, Kusumben D. Mahadevia v. Commissioner of Income‑Tax, Bombay. In the latter case, the Court observed that the assessee’s objection was well‑founded because the Tribunal had not considered whether the Concessions Order applied to the assessee. Instead, the Tribunal had resolved the issue of assessability on the limited ground that the income arose in British India rather than in Baroda. The Bombay High Court, however, examined the applicability of the Concessions Order—an issue that the Tribunal had never addressed. Although the final assessment outcome was the same, the grounds for the decision were entirely different. This comparison reinforced the principle that section 66 of the Income‑Tax Act only permits the High Court to refer a question of law that originates from the Tribunal’s order. It does not empower the High Court to decide a different legal question that was never before the Tribunal. The Court concluded that any supplemental statement directed to the Tribunal must be based solely on the facts admitted or found by the Tribunal and must not open the way for fresh evidence.

The Court explained that a High Court may entertain only a question of law that arises from the order of the Tribunal. The High Court does not acquire authority to decide a completely different question of law that the Tribunal never considered. Although the same legal question may admit various approaches, the High Court may broaden its discussion to include all those approaches, but the question must still be the one that was before the Tribunal and that the Tribunal decided. The Court further held that the enquiry must determine whether the question decided by the Tribunal allows the new point to be considered as an essential or even an incidental part of that question. Any supplemental statement that the Tribunal is ordered to file must be based on facts that the Tribunal has admitted or found, and it must not serve as a gateway to fresh evidence. The Court noted that the fact that the Bombay High Court, in the Ogale Glass Works case, had asked for a supplemental statement in a manner similar to the Jehangir Vakil Mills case, and that the Supreme Court had not rejected the new matter in that instance, could not assist the assessee in the present case. This is because the jurisdiction of the High Court was not challenged in the Jehangir case, nor is it challenged here. Consequently, the Court said it had to examine whether, in the present case, the question that was decided and that has been referred to the High Court permits the return of the matter for a supplemental statement in accordance with the High Court’s order on appeal.

The Court then observed a clear difference between the question of law in the present case and the questions in the Ogale Glass Works and Jehangir Vakil Mills cases. In the two earlier cases, the question posed was very broad, whereas in the Jehangir case it was extremely narrow. For illustration, the Court set out the three questions side by side. The Jehangir Vakil Mills question asked whether the receipt of cheques in the Bhavnagar mills case amounted to receipt of the sale proceeds in Bhavnagar. The Ogale Glass Works question asked whether, on the facts of that case, income, profits and gains from 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 asked whether, on the facts and circumstances, the profits and gains from sales made to the Government of India were received by the assessee in taxable territories. The Court concluded that, when framed as above, the question in the present case is plainly distinct and broader than the narrow question in the Jehangir case, and it therefore required analysis under the standard principles governing the High Court’s jurisdiction.

The Court noted that the enquiry must consider whether any request, either express or implied, was made for the amounts shown in the bills to be paid by way of cheques, so that the question could be brought within the principles laid down by this Court in the Ogale Glass Works case and the Jagdish Mills case. It further observed that the first limitation on the jurisdiction of the High Court, as defined by this Court, was not breached when the High Court exercised its powers under section 66(4) of the Income‑tax Act. The Court explained that the issue was sufficiently broad to admit an alternative approach, namely that if a request—express or implied—had been made to remit the dues 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 time the cheques were posted. The next matter for consideration was whether the High Court had exceeded the second limitation implicit in section 66(4), namely that the question must arise from 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 determine, among other things, whether the cheques were sent to the assessee‑firm by post or by hand and what directions, if any, the assessee‑firm had given to the Department regarding that matter.

If the Tribunal were to conduct a fresh enquiry that resulted in the admission of new evidence on the record, the Court held that such a direction would contravene the ruling of this Court in the Jehangir Vakil Mills case. However, if the direction were interpreted to mean that the Tribunal must confine its findings to the facts that were admitted or found by it, then the direction would not be excess of the High Court’s jurisdiction. The Court remarked that it would have been preferable for the High Court to issue directions limited strictly to the record before the Tribunal, but in the absence of any express statement to the contrary, it could not be concluded that the direction would inevitably lead to the admission of fresh evidence. Moreover, the Court observed that, in view of the Jehangir Vakil Mills case, the admission of fresh evidence is now prohibited. Consequently, the Court found that the present matter did not fall within the rule laid down in the Jehangir Vakil Mills case and was therefore distinguishable. In the result, the appeal was dismissed with costs, and the appeal was dismissed.