The Petlad Turkey Red Dye Works Co. Ltd. vs The Commissioner of Income Tax, Bombay, Ahmedabad

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 158 and 159 of 1962

Decision Date: 2 November 1962

Coram: J.L. Kapur, S.K. Das, A.K. Sarkar, M. Hidayatullah, Raghubar Dayal

In this case the Court noted that the petitioner was The Petlad Turkey Red Dye Works Co. Ltd., and the respondent was the Commissioner of Income‑Tax, Bombay, Ahmedabad. The judgment was delivered on 2 November 1962 by a bench consisting of Justice J. L. Kapur, Justice S. K. Das, Justice A. K. Sarkar, Justice M. Hidayatullah and Justice Raghubar Dayal. The citation of the decision is reported as 1963 AIR 1484, 1963 SCR Supl. (1) 871, with subsequent references in various law reports. The headnote of the decision set out the material facts: the assessee company carried on the business of dyeing and selling dyed yarn under the name Petlad in the former State of Baroda and, for the assessment years in question, was classified as a non‑resident. The company sold yarn to purchasers located in what was then British India, and the sale price was received at Petlad by means of cheques, drafts and hundis that were undeniably sent by post. Those instruments were subsequently returned by the company either to its creditors in British India for the settlement of liabilities or to the credit of its accounts with banks in British India. The assessee argued that because the sale price was received at Petlad, the profits arising from those sales were not taxable in the territories of British India. The Appellate Tribunal, however, held that the cheques and similar instruments, when forwarded to the company’s bankers and creditors, were received by those parties as agents of the assessee; consequently, the profits were deemed to have been received in British India and were therefore taxable. The assessee then made an application under section 66(1) of the Income‑Tax Act, 1922, seeking clarification on whether any part of the profits had been received by or on behalf of the company in British India. The Tribunal referred this question to the High Court. In its statement of the case, the Tribunal pointed out that no earlier inquiry had examined whether the post office acted as an agent of the company or of the buyers. On 23 September 1955 the High Court issued an order calling for a supplemental statement of the case and granting the parties liberty to adduce further evidence. Acting in accordance with that direction, the Tribunal recorded additional evidence and thereafter submitted a supplemental statement in which it found, after considering the circumstances, the evidence and the absence of correspondence, that “in the circumstances of the case and on the evidence and in the absence of correspondence we must necessarily infer an implied request” by the assessee to remit the proceeds by post.

The High Court, on 21 April 1960, answered the reference made by the Income‑tax Appellate Tribunal in the affirmative and against the assessee. The assessee then filed an appeal against that judgment, challenging the legality of the High Court order dated 23 September 1955, which had required a supplemental statement of the case to be prepared after taking further evidence. The assessee argued that the High Court had acted without jurisdiction in directing the additional evidence. The Commissioner of Income‑tax, on the other hand, contended that because no appeal had been lodged against the September 1955 order, the validity of that order could not be raised at a later stage. The Court held that the September 1955 order, which invited the Appellate Tribunal to prepare a supplemental statement, was not a final order nor a judgment within the meanings of sections 66(3) and 66A(2) of the Indian Income‑tax Act, 1922, and therefore it was not appealable. In arriving at this conclusion, the Court relied on the authorities set out in Tata Iron & Steel Co. v. Chief Revenue Authority (1923) L.R. 50 A. 212, Delhi Cloth & General Mills Co. Ltd. v. Income‑tax Commissioner (1927) L.R. 541 A. 421, and Sardar Syedna Paher Saifuddin Sahib v. State of Bombay [1958] S.C.R. 1007. The Court further held that although the High Court possessed the power to direct the preparation of a supplemental statement, it lacked the competence to order the taking of additional evidence. Under section 66 of the Act, when the High Court deems a supplemental statement necessary to answer the legal question raised, it may direct such a statement to be filed with modifications as it sees fit, but the statement must be based solely on facts already recorded. The Court explained that the High Court could not summon new facts, because such facts would not relate to the question arising from the Tribunal’s order and would constitute a statement based on material that was not before the Appellate Tribunal at the time it rendered its appellate order. The decisions in New Jehangir Vakil Mills v. Commissioner of Income‑tax [1960] 1 S.C.R. 249, Mrs. Kusumben D. Mahadevia v. Commissioner of Income‑tax, Bombay [1960] 3 S.C.R. 417, and Zoraster & Co. v. Commissioner of Income‑tax [1961] 1 S.C.R. 210 were consequently followed. The judgment then recorded the civil appellate jurisdiction for Civil Appeals Nos. 158 and 159 of 1962, which were appeals from the Bombay High Court judgment and order dated 21 April 1960 in Income‑tax Reference No. 16 of 1955. Counsel for the appellant comprised legal representatives, while counsel for the respondent also appeared. The judgment was delivered on 2 November 1962 by Justice Kapur, noting that the two appeals, issued under a certificate, arose from the High Court’s decision in the reference, which had answered the Tribunal’s question in the affirmative and against the assessee.

The appellant in both appeals was the assessee company, while the Commissioner of Income‑Tax was the respondent. The company had been registered in the former Baroda State and, for the assessment years 1941‑42 and 1942‑43, its status was that of a non‑resident. The relevant assessment years corresponded to the calendar years 1940 and 1941 respectively. The company carried on the business of dyeing and selling dyed yarn. In the year preceding the assessment year 1941‑42 it realised sales of dyed yarn amounting to Rs 14,22,996, and in the year preceding the assessment year 1942‑43 it realised sales of Rs 19,22,107. These sales were made to purchasers both in the Indian princely states and in British India. For the year preceding 1941‑42, out of the total sales of Rs 14,22,996, Rs 11,88,063 were sold to merchants in British India; some of those sales were to Calcutta merchants, which were not contested, while the remaining amount of Rs 9,53,304 was sold to purchasers in other parts of British India, and the assessment of profit on that portion was in dispute. Similarly, for the year preceding 1942‑43, a sum of Rs 6,04,588 represented sales made to purchasers in British India, and the assessment of profit on that sum was also contested. The Income‑Tax Officer found that the sale proceeds were received by the assessee at Petlad in the former Baroda State by means of cheques, drafts and hundis, which were transmitted by post. It was not contested that these instruments were sent by post, and that they were subsequently returned by the assessee either to its creditors in British India for the settlement of its liabilities or to the credit of its accounts with its bankers in British India. The company contended that because the sums were received at Petlad in the former Baroda State, the profits arising from those sales were not taxable in the British Indian territories, as the receipts were made in an Indian State. The matter was appealed to the Appellate Assistant Commissioner and then to the Income‑Tax Appellate Tribunal. The Tribunal held that the cheques and hundis sent by the assessee to its bankers and creditors were received by those parties in their capacity as agents of the assessee, and consequently the profits were deemed to have been received in British India and were liable to tax. Dissatisfied with that decision, the assessee applied under section 66 of the Income‑Tax Act for a statement of the case to the High Court. On 21 February 1955, the Appellate Tribunal referred to the High Court the specific question whether the proportionate profits on the sale proceeds aggregating Rs 9,53,304 for the assessment year 1941‑42 and Rs 6,04,588 for the assessment year 1942‑43, or any part thereof, were received by or on behalf of the assessee company in British India.

In the statement of the case the Appellate Tribunal recorded the question whether the proceeds in question were received “by or on behalf of the assessee company in British India”. The Tribunal noted that, at an earlier stage, no inquiry had been made to determine whether the post office acted as the agent of the assessee company or of the buyers. Subsequently, on 23 September 1955 the High Court issued an order directing that a supplemental statement of the case be prepared. The Court’s order stated that the same question arose in the present reference and that it required a supplemental statement on the same lines as had been indicated in the previous reference. The Court further limited the supplemental statement to the two sums specifically mentioned in the reference, namely Rs 9,53,304 for the assessment year 1941‑42 and Rs 6,04,585 for the assessment year 1942‑43. By virtue of that order the parties were permitted to adduce further evidence. The matter was then returned to the Appellate Tribunal for the purpose of preparing the supplemental statement, and the Tribunal, after recording evidence as directed by the High Court, rendered its findings. The Tribunal concluded that, given the circumstances of the case, the evidence, and the absence of any correspondence, it was necessary to infer an implied request by the assessee to remit the payments by post, noting that the parties had adopted the normal commercial practice for making payments in such cases.

The High Court, on 21 April 1960, answered the reference question in the affirmative and against the assessee. In its reasoning the Court observed that the mode of payment accepted by the assessee company required that cheques, drafts and hundi instruments be sent by post from British India. The Court further held that it could not be said that there was no evidence before the Appellate Tribunal to support the finding of an implied request by the assessee to the buyer to send the instruments by post. Against that judgment and order two appeals were filed under a certificate issued by the High Court. The appellant advanced two principal contentions: first, that the High Court order dated 23 September 1955— which called for a supplemental statement and permitted additional evidence— was made without jurisdiction; and second, that the answer to the question posed in the statement of the case should have been negative, thereby favoring the assessee. A third question was raised by counsel for the respondent, the Commissioner of Income‑Tax, who argued that, because no objection had been made to the direction to obtain a supplemental statement and because that order had not been contested, the issue of whether the High Court possessed jurisdiction to issue such an order could not be raised at this stage. The Court indicated that it would first address the preliminary objection raised on behalf of the Commissioner, as it related to jurisdiction, before turning to the substantive matters. The Court also noted that the scope and extent of the High Court’s jurisdiction in income‑tax matters are defined by the provisions of the Income‑Tax Act.

Section 66 of the Income‑tax Act set out the procedure for referring legal questions from the Appellate Tribunal to the High Court. Sub‑section (1) provided that if a question of law arose from an order of the Tribunal and either the assessee or the Commissioner asked that question to be referred, the Tribunal had to draw up a statement of the case and forward it to the High Court for its opinion. If the Tribunal refused to prepare such a statement, sub‑section (2) allowed the High Court, on an application, to direct the Tribunal to draw up the statement and refer the matter, provided the Court was not satisfied with the Tribunal’s original decision. By way of sub‑section (4), the High Court was authorized, after receiving the statement, to send the case back to the Tribunal for any necessary additions or alterations if the Court found the statement unsatisfactory. Sub‑section (5) required the High Court to finally decide the legal question, to issue a judgment containing the reasons for that decision, and to send a copy of the judgment to the Tribunal, which then had to pass any orders needed to dispose of the case in conformity with the Court’s judgment. These provisions showed that the High Court’s jurisdiction was purely advisory; the Tribunal was bound to act on the Court’s opinion and to assess the tax accordingly. The assessment would be fixed at an amount that conformed with the High Court’s opinion, and only then would the tax liability be definitively determined. The judgment of the High Court did not itself enforce the discharge of that liability. The Privy Council held that a judgment of the High Court under the Income‑tax Act was merely an expression of opinion on whether a particular question of law that arose during assessment should be resolved one way or another, and that the word “judgment” in section 51, now section 66, was not used in its strict legal sense. This view was expressed in Tata Iron & Steel Co. v. Chief Revenue Authority (1) and in Delhi Cloth & General Mills Co. Ltd. v. Income‑tax Commissioner (2). In Tata Iron & Steel Co. case (1) an appeal was taken to the Privy Council against a High Court judgment rendered under section 51(3) of the Income‑tax Act, now section 66(5), on a certificate of the High Court. The Privy Council was confronted with a preliminary objection that the appeal was incompetent because the decision of the High Court, made on a reference by the Chief Revenue Authority under section 51 of the then Act, did not constitute a final judgment within clause 39 of the Letters Patent of the Bombay High Court.

In the matter before the Bombay High Court, the Privy Council held that when a case was stated for the opinion of the High Court under the Income‑tax Act, the judgment that resulted was merely advisory and therefore did not constitute a final judgment within the meaning of clause 39 of the Letters Patent. This observation prompted the legislature to enact what is now section 66A of the Income‑tax Act. The Privy Council further ruled, in the Delhi Cloth & General Mills Co. case (1) [1927] L.R. 54 I.A. 421, that the new provision did not operate retrospectively; consequently it did not apply to judgments made under section 51(3) of the then Income‑tax Act, which later became section 66(5), that had become final at the date the amendment came into force. The Council explained that an appeal against such a judgment was permissible only when the High Court certified the case to be fit for appeal. Section 66A was introduced by section 8 of the Indian Income‑tax (Amendment) Act 24 of 1926 to provide a mechanism for appeals from High Court judgments to the Privy Council, and it was later adapted by the Adaptation Order of 1950 to allow appeals to the Supreme Court. Sub‑section (2) of section 66A specifies that an appeal shall lie to the Supreme Court from any judgment of the High Court delivered on a reference made under section 66, provided that the High Court certifies the case to be fit for appeal to the Supreme Court. No appeal can be entertained by the Supreme Court unless the appeal satisfies the requirements of this provision, one of which is the certificate issued by the High Court. The Court clarified that this discussion did not involve article 136 of the Constitution. Under sub‑section (3) of section 66A, the provisions of the Code of Civil Procedure were made applicable “so far as may be” to appeals under section 66A, thereby limiting the right of appeal under the statute to the cases enumerated in sub‑section (2). Before the enactment of section 66A, there was no competent avenue of appeal against a judgment made under the then‑section 51(3), now section 66(5), of the Income‑tax Act. The term “judgment” in section 51(3) and the present section 66(5) was interpreted to mean the High Court’s decision on the question of law referred to it and the grounds upon which that decision was based, not the strict legal definition of a final judgment. Accordingly, an order directing a party to provide a supplemental statement of the case did not fall within this definition and was therefore not appealable under section 66A(2). The Court also cited the decision in Premchand Satrandas v. The State of Bihar (2), which involved the Bihar Sales Tax Act, to illustrate the principle that a High Court’s refusal to direct the Board of Revenue to state a case and refer it to the High Court was not a final order because the High Court’s jurisdiction in that context was merely consultative.

The Court held that the order refusing to make a supplemental statement was not a final order within clause 31 of the Letters Patent of the Patna High Court, because the jurisdiction exercised by that High Court was purely advisory and, standing by itself, the order did not bind or affect the rights of the parties. In reaching this conclusion, the Court relied on the decision in Tata Iron & Steel Co’s case (1). At page 805, Justice Fazal Ali observed that “the High Court acquired jurisdiction to deal with the case by virtue of an express provision of the Bihar Sales Tax Act. The crux of the matter therefore is that the jurisdiction of the High Court was only consultative and was neither original nor appellate.” The Court further noted that, even in proceedings under the civil jurisdiction of the courts, an order is regarded as final only when it decides the parties’ rights in the civil suit; if after the order the proceedings must continue and the disputed rights remain to be determined, the order is not final within Article 133, as reflected in Jethanand & Sons v. State of U.P. (3) and Sardar Syedna Taher Saifuddin Sahib v. State of Bombay (4). Considering the legislative history of section 66A of the Income‑Tax Act and the fact that the High Court was exercising its advisory jurisdiction and had issued an interlocutory order calling upon the Tribunal to make a supplemental statement of the case, the Court concluded that such an order could not be described as a judgment against which an appeal was permissible under section 66A(2) of the Income‑Tax Act.

The Court then turned to the question of whether the order directing a supplemental statement of the case, together with a direction to take additional evidence, was permissible to the High Court under section 66(4) of the Income‑Tax Act. It reiterated that the High Court’s jurisdiction is only advisory and is conferred by an express provision of the Income‑Tax Act, limited to answering the specific questions referred to it for the purpose of obtaining its opinion. This limitation is clear from sub‑sections (1) and (2) of section 66, which provide that the only question of law that may be referred to the High Court is any question of law arising out of the Tribunal’s order; consequently, if a question does not arise out of the Tribunal’s order, it cannot be referred to the High Court. For the preparation of the statement of the case, the Tribunal relies on facts that have been admitted or found, and these facts form the foundation of the statement submitted to the High Court. If necessary facts that would underpin the raising of a question of law are absent, there is no basis for referring that question to the High Court, because only facts admitted or found on the record can give rise to a question of law. Thus, a supplemental statement may be directed only when it is based on facts already on the record, and the High Court cannot request the introduction of additional facts that were not before the Appellate Tribunal when it issued its appellate order.

Because a question of law can arise only on the foundation of facts that the Tribunal has either found or admitted, a situation in which such facts are absent provides no basis for referring that question to the High Court. Consequently, a statement of case may be submitted to the High Court only when it is grounded in facts that have been admitted or established on the record. When the stated case reaches the High Court and the Court considers it necessary to obtain a supplemental statement of the case in order to answer the raised question of law, the High Court may direct that such a statement be filed with any additions or alterations it deems appropriate. However, the supplement must inevitably be based on facts already present in the record; the High Court lacks authority to request the introduction of new facts, because new facts would not pertain to a question arising from the Tribunal’s order but would instead relate to matters that were not before the Appellate Tribunal at the time it rendered its decision. Therefore, although the High Court possesses the power to command the preparation of a supplemental statement, it does not have the power to order the taking of additional evidence.

This principle was articulated in the decision of The New Jahangir Vakil Mills v. The Commissioner of Income‑tax (1900) 1 SCR 249. That case was analogous to the present matter, and the issue for determination was whether the sale proceeds had been received at Bhavnagar, given that the cheques and related documents were dispatched to Bhavnagar. The High Court held that the mere receipt of cheques by post at Bhavnagar could not be regarded as conclusive absent a further inquiry into whether the cheques had been sent by post at the request of, expressly by, or impliedly by the assessee. In that instance the High Court sought a supplemental statement of the case and also permitted the admission of additional evidence. The present Court, however, held that Section 66(4) of the Income‑tax Act did not empower the High Court to direct the taking of additional evidence, and that the “additions and alterations” mentioned in that subsection were limited to facts that were already part of the record but had not been incorporated by the Appellate Tribunal in its statement of case.

In a later authority, Mrs Kummben D. Mahadevia v. Commissioner of Income‑tax, Bombay [1960] 3 SCR 417, the assessee received dividends from the profits of a company whose earnings had accrued partly in British India and partly in Baroda State. The assessee did not bring the income into British India and claimed the benefit under paragraph 4 of the Merged States (Taxation Concessions) Order. The Appellate Tribunal held that the income had not accrued to the assessee in Baroda State, but it did not resolve the question of whether the assessee was entitled to the benefit of the Taxation Concessions Order. The High Court subsequently held that the Taxation Concessions Order did not apply to the assessee, yet it also refrained from deciding the question of whether the income had accrued to the assessee in Baroda State.

The Court noted that the question of whether the income had accrued to the assessee in Baroda State remained undecided by the High Court, so the Appellate Tribunal had raised one legal issue while the High Court had answered another, thereby exceeding its jurisdiction. It held that the High Court had overstepped its authority by departing from the point raised by the Tribunal and by deciding a different question of law. Section 66 of the Income‑tax Act was interpreted to empower the High Court solely to answer a question of law that arises out of the order of the Appellate Tribunal and to confer no jurisdiction to decide any other question of law not emanating from that order. The Court recognized, however, that a single question of law may contain several facets and that the High Court may elaborate those facets provided that the question still originates from the Tribunal’s order; it could not decide an entirely unrelated legal issue. In the later case of Zoraster & Co. v. Commissioner of Income‑tax (1), the assessee supplied certain goods to the Central Government F.O.R. in Jaipur and received payment by cheques that were also collected in Jaipur. The assessee contended that the income was earned in Jaipur, which lay outside the taxable territories, and therefore should not be taxed. The Income‑tax Appellate Tribunal rejected that contention, holding that the income fell within the taxable area. The assessee then invoked section 66(1) of the Income‑tax Act and sought a reference of a legal question to the High Court. The High Court directed the matter back to the Appellate Tribunal, ordering a supplemental statement of case to determine whether the cheques were dispatched by post or by hand and whether any direction was given by the assessee’s firm to the Government department. The Court held that such a supplemental statement could be required, but emphasized that, in the absence of an explicit contrary direction in the High Court’s order, it could not be said that the direction permitted admission of fresh evidence, as prohibited by the New Jehangir Vakil Mill’s case (1). It further observed that the enquiry must examine whether the question decided by the Tribunal permits consideration of a new point as an integral or incidental part of that question, and that any supplemental statement must arise solely from facts already admitted or found by the Tribunal and must not open the door to new evidence. Another decision that clarified the scope of section 66(1) was Commissioner of Income‑tax v. Scindia Steam Navigation Co. Ltd. (2), where it was held that the High Court acted purely in an advisory capacity on a reference properly brought before it under section 66(1). In that case the High Court gave advice to the Appellate Tribunal, but the ultimate responsibility to give effect to that advice rested with the Tribunal itself.

In delivering its advice, the Court examined the meaning of the phrase “any question of law arising out of” that appears in sub‑section (1) of section 66 of the Income‑tax Act. The Court noted that a supplemental statement of the case had also been requested in the case of Commissioner of Income‑tax v. Ogale Glass Works (3), but the order did not require the taking of any additional evidence. The Court observed that in that proceeding no objection was raised against the order directing a supplemental statement. From these observations the Court concluded that the jurisdiction conferred on a High Court by section 66 is purely advisory. According to that provision a party may refer a question of law to the High Court in order to obtain its opinion, but the Court’s jurisdiction is limited to expressing an opinion on that specific question of law that arises from the order of the Appellate Tribunal. The High Court cannot introduce a new question nor answer a question that is different from the one referred. To answer the question that was posed, the High Court may, if it wishes, request a supplemental statement, but such a statement must be limited to facts that are already on the record. The Court emphasized that any alteration or addition permitted in the supplemental statement must also be drawn from the facts already placed before the Tribunal, because the High Court has no power to order the taking of fresh evidence. The Court further explained that when a supplemental statement is directed, it does not constitute a judgment or a final order in the strict legal sense, nor does it constitute a judgment as defined in sections 66(5) or 66A(2) of the Act, which require setting out reasons for the opinion rendered by the High Court. Consequently, the Court was of the view that the High Court lacked authority to direct the Tribunal to submit a supplemental statement after additional evidence had been taken. Following the approach adopted in New Jehangir Vakil Mill’s case (1), the Court ordered that the appeals be allowed and the matters remitted to the High Court so that it may decide the referred question of law in accordance with section 66(5) of the Act. The Court expressly declined to opine on whether the High Court should, in the present circumstances, ask for a supplemental statement limited to the facts already on record, leaving that decision to the High Court. The respondent was ordered to pay the costs of the appellant both in this Court and in the High Court. The appeals were allowed and the cases remitted.