PETLAD TURKEY RED DYE WORKS COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX BOMBAY NORTH AHMEDABAD
LAWS(GJH)-1963-9-2
HIGH COURT OF GUJARAT
Decided on September 10,1963

PETLAD TURKEY RED DYE WORKS Appellant
VERSUS
COMMISSIONER OF INCOME TAX,BOMBAY NORTH,AHMEDABAD Respondents

JUDGEMENT

P.N.BHAGWATI, J.M.SHELAT - (1.) This Reference arises out of proceedings for the assessment to income-tax of the assessee for the assessment years 1941-42 and 1942-43. The assessee is a limited liability Company incorporated in the former State of Baroda outside what was then British India. The assessee carried on business of purchasing yarn dyeing it and selling the same at Petlad which was also at the material time situate in the former State of Baroda. The assessee was a non-resident Company for the assessment years in question. During calender year 1940 which was the previous year for assessment year 1941-42 the assessee effected sales of dyed yarn of the total value of Rs. 14 22 995 The dispute between the assessee and the revenue relates to Rs. 9 56 304 in respect of goods sold by the assessee to British Indian buyers. In calendar year 1941 which was the previous year for the assessment year 1942-43 the total sales of the assessee amounted to Rs. 19 22 107 and of that the dispute between the assessee and the revenue is in respect of a sum of Rs. 6 4 588 relating to sales effected to buyers in British India. These amounts which we shall hereafter refer as the disputed amounts were remitted by British Indian buyers to the assessee by posting from British India cheques and hundis drawn on British Indian Banks and shroffs and the cheques and hundis so posted were received by the assessee at Petlad and were sent by the assessee to British Indian Banks for being credited to the accounts of the assessee with those Banks. The assessee being a non-resident Company its liability to British Indian income-tax depended upon its receipt of income within British India. In the course of its assessment proceedings for the assessment years mentioned above the assessee contended that its profits on the sales effected to British Indian buyers accrued and were received in Petlad where it received payment by the receipt of the cheques and hundis and that it was immaterial that the cheques and hundis were sent to British Indian Banks for being credited to the accounts of the assessee with those Banks or that those Banks collected the amounts due on the cheques and hundis from British Indian Banks and shroffs on whom they were drawn in British India. The Income-tax Officer took the view that the assessee received the profits embedded in the disputed amounts in British India inasmuch as the cheques and hundis were drawn on British Indian Banks and shroffs and were cashed in British India by British Indian Banks on behalf of the assessee and accordingly taxed the assessee in respect of such profits under sec. 4(1)(a) of the Income-tax Act. The assessee carried the matter in appeal before the Appellate Assistant Commissioner who accepting the contentions of the assessee held that the proportionate profit embedded in the disputed amounts could not be said to have been received by or on behalf of the assessee in British India so as to attract the applicability of sec.4(1)(a). The Department being aggrieved by the order of the Appellate Assistant Commissioner took the matter in appeal before the Tribunal. Before the Tribunal two contentions were advanced on behalf of the assessee in support of the order of the Appellate Assistant Commissioner. The first contention was that the disputed amounts were received by the assessee in Petlad since the cheques and hundis were received in Petlad and that the profits attributable to the sales represented by the disputed amounts could not therefore be said to have been received by or on behalf of the assessee in British India. The second contention was that in any event the British Indian Banks to whom the cheques and hundis were sent by the assessee were holders in due course of the cheques and hundis and were not collecting agents of the assessee in respect of the cheques and hundis and that the amounts of the cheques and hundis could not therefore be said to have been received in British India by or on behalf of the assessee when they were cashed by the British Indian Banks. Both these contentions were negatived by the Tribunal and the Tribunal by an order dated 11th March 1949 held that the amounts due on the cheques and hundis were collected by the British Indian Banks in British India on behalf of the assessee and not as holders in due course and that the disputed amounts which included proportionate profits were therefore received by or on behalf of the assessee in British India. The Tribunal accordingly decided the appeal in favour of the revenue. It may be pointed out that at no stage in the proceedings including the appeal before the Tribunal was it contended on behalf of the revenue that payments of the disputed amounts were made by British Indian buyers in circumstances constituting the post-office the agent of the assessee for the purpose of receiving payments and that the cheques and hundis by which such payments were made were therefore received by the assessee not at Petlad but in British India where they were posted by British Indian buyers. The only ground urged was that the cheques and hundis though received by the assessee at Petlad were cashed in British India by British Indian Banks on behalf of the assessee and that the disputed amounts were therefore received by or on behalf of the assessee in British India and this ground was accepted by the Tribunal.
(2.) The assessee thereafter applied to the Tribunal to state a case and refer to the High Court the question of law arising out of the order of the Tribunal. The application it seems was not heard for a period of about six years and ultimately when it came to be heard the Tribunal made an order referring the following question of law for the opinion of the High Court of Bombay:- Whether the proportionate profits on the sale proceeds aggregating Rs. 9 53 304 for the assessment year 1941-42 and Rs. 6 4 588 for the assessment year 1942 43 or any part thereof were received by or on behalf of the assessee Company in British India ? The Reference came up for hearing before a Division Bench of the High Court of Bombay consisting of Chagla C. J. and Tendolkar J. on 25th September 1955. By this time the decision of the Supreme Court in Commissioner of Income-tax v. Ogale Glass Works Ltd. (1554) 25 I. T. R. 529 was already given and having regard to that decision it was clearand we shall discuss this aspect of the matter a little later when we deal with the arguments of the parties-that if the cheques and hundis were received by the assessee at Petlad the payment of the disputed amounts must be regarded as having been received by the assessee in Petlad and in that event the profit embedded in the disputed amounts could not be said to have been received by or on behalf of the assessee in British India so as to attract the applicability of section 4(1)(a). This being the legal position as it emerged from the decision of the Supreme Court the High Court felt that the question was not correctly approached by the revenue authorities and that the real question which should have been considered was as to where the cheques and hundis were received by the assessee: were they received in Petlad or in British India ? The High Court therefore remanded the case to the Tribunal. The grounds on which the remand was directed were stated by the High Court in another order of remand passed by the High Court on the same day under identical circumstances in the case of Baroda Spinning and Weaving Co. Ltd. and they were therefore not repeated in the present case but only a reference was made to the judgment of remand in the case of Baroda Spinning and Weaving Co. L/d. In that judgment the learned Chief Justice observed:- The question with regard to the cheques amounting to these two sums Rs. 3 61 997 and Rs. 38 92.201 must be looked at from the point of view of the receipt of these cheques by the assessee and the first question is whether these cheques were received in Baroda or in the taxable territories If the cheques were received in Baroda then the further question that will have to be considered is whether they were received by post or by hand. If they were received by post there is Still a further question to be considered and that is whether the assessee expressly or impliedly requested the merchants to send these cheques by post to Baroda; in other words whether the assessee constituted the post office its agent for the sending of these cheques. If the cheques were sent by hand to Baroda the Tribunal will also consider the machinery adopted by the merchants for sending these cheques by hand to Baroda and the Tribunal will also give a finding whether the messenger who brought the cheques was the agent of the assessee or of the merchants whether the cheques were sent by hand at the request of the assessee and whether they were sent by a messenger of the merchants direct to Baroda or whether they were first sent to Ahmedabad and from Ahmedabad they were sent by some other agents to Baroda. The Tribunal will consider all these matters in the light of the recent judgments so that we will be in a position to decide whether these two amounts were received in Baroda or in the taxable territories. It is only after we have received a supplementary statement of the case from the Tribunal that we will be in a position to decide the question raised on this reference. As neither party applied its mind to this aspect of the matter it will only be fair that they should be allowed to adduce any further evidence as they may desire and if the Tribunal so thinks it may remand the matter to the Income-tax Officer to record further evidence and then arrive at its finding. Pursuant to the order of remand made by the High Court the case came back to the Tribunal and the Tribunal directed the Income-tax Officer to record additional evidence for the purpose of deciding the question as to where the cheques and hundis were received by the assessee. The Income-tax Officer after recording voluminous evidence made his report to the Tribunal and on the strength of such evidence the Tribunal submitted a supplemental Statement of Case to the High Court. The supplemental Statement of Case set out the finding of the Tribunal that the evidence taken on record showed that there was an implied request by assessee to British Indian buyers to remit the sale proceeds by cheques and hundis by post and that the post-office was therefore constituted the agent of the assessee for the purpose of receiving payment of the disputed amounts and that the disputed amounts were therefore received by the assessee in British India where the cheques and hundis were posted by British Indian buyers. When the matter came back before the High Court with the supplemental Statement of Case an objection was sought to be raised on behalf of the assessee that the order of remand made by the High Court was improper since the High Court had no power to call for a supplemental Statement of Case which would involve investigation of further facts after taking of fresh evidence. This contention was based on a decision which had in the meantime been given by the Supreme Court in New Jehangir Vakil Mills Limited v. Commissioner of Income-tax (1959) 37 I.T.R. 11. The High Court however took the view that the order of remand already made could not be challenged before it. It was then contended on behalf of the assessee that there was no legal evidence to sustain the finding of the Tribunal that there was an implied request by the assessee to British Indian buyers to remit the sale proceeds by sending cheques and hundis by post. That contention was also negatived by the High Court and on the basis of the finding recorded by the Tribunal the High Court answered the question against the assessee. The assessee thereupon carried the matter in appeal to the Supreme Court. The Supreme Court took the view that the High Court had no jurisdiction to direct the Tribunal to submit a supplemental Statement of Case after taking additional evidence and that the order of remand by the High Court was therefore without jurisdiction. The Supreme Court accordingly allowed the appeal and remitted the matter to the High Court to give its decision on the question referred to it by the Tribunal as required under sec. 66(5). The Supreme Court expressed no opinion on the question whether the High Court should ask for a supplemental Statement of Case confined to the facts already on the record and observed that that was a matter which should be left to the High Court. The Reference thereupon came back to this Court and we are now called upon to answer the question referred to us by the Tribunal. Before we proceed to discuss the question we may state at the outset that no application was made to us on behalf of the Commissioner to ask the Tribunal to submit a supplemental Statement of Case confined to the facts already on the record and the Reference was argued before us on the facts as appearing in the original Statement of Case.
(3.) The case of the revenue before the Tribunal was that though the cheques and hundis were received by the assessee in Petlad the amounts of the cheques and hundis were collected by British Indian Banks on behalf of the assessee from British Indian Banks and shroffs on whom the cheques and hundis were drawn and that the disputed amounts representing the amounts of the cheques and hundis were therefore received by or on behalf of the assessee in British India. This was the only contention pressed before the Tribunal on behalf of the Revenue and it was accepted by the Tribunal. That was at a time when the Supreme Court had not given its decision in Ogale Glass Works Case. The Supreme Court there after decided in Ogale Glass Works Case that where a cheque is received by a creditor from a debtor there may be an express or implied agreement between them that the cheque shall be accepted by the creditor in unconditional discharge of the liability of the debtor in which event the cheque would operate as payment as soon as it is received by the creditor; but even where the cheque is received as conditional payment of the debt if the cheque is not dishonored but is cashed the payment relates back to the date of the receipt of the cheque and in law the date of the payment is the date of the delivery of the cheque so that in this latter case also the cheque would operate as payment on the date when it is received by the creditor. The facts in Ogale Glass Works Case were that the assessee had supplied certain goods to the Government of India and payment for the goods had been made by the Government of India by means of cheques posted from British India to the assessee at Aundh which was an Indian State where the assessee had its registered office and carried on business. The cheques were endorsed by the assessee in favour of the Aundh Bank Ogalewadi Branch which in its turn endorsed them in favour of a Bombay Bank and it was the Bombay Bank which cleared the cheques through the clearing house in Bombay. The argument urged on behalf of the revenue was that the cheques were no doubt received by the assessee in Aundh but they were received conditionally that is subject to realization and no payment could therefore be said to have been received by the mere receipt of the cheques; payment was received only when the cheques were cashed and since that happened in Bombay the receipt of payment by the assessee was in British India. The Supreme Court negatived this argument and found on the facts that the cheques were received by the assessee from the Government of India in complete discharge of the claim for the price of the goods and that payment was therefore received by the assessee on the receipt of the cheques. The Supreme Court also said that even if the facts were not sufficient to raise an implication that the cheques were accepted as unconditioal payment and the cheques were taken by the assessee conditionally the position was no different for the cheques not having been dishonoured but having been cashed the payment related back to the dates of the receipt of the cheque and in law the dates of payment were the dates of the delivery of the cheques. The Supreme Court in taking this view observed that when it is said that a payment by negotiable instrument is a conditional payment what is meant is that such payment is subject to a condition subsequent namely that the negotiable instrument shall be met at the proper date; if the negotiable instrument is honoured on presentation the payment takes effect from the date of the delivery of the negotiable instrument; if on the other hand the negotiable instrument is dishonoured on presentation the creditor may consider it as a waste paper and resort to his original demand. The Supreme Court thus held that in either view of the matter whether the cheques were received by the assessee unconditionally or conditionally the result was the same namely that payment was received by the assessee on the receipt of the cheques. Having regard to this decision of the Supreme Court the learned Advocate General appearing on behalf of the revenue did not seek to support the decision of the Tribunal on the ground on which it was put by the Tribunal in so far as it related to payments by cheques. He however tried to make a distinction between payment by cheque and payment by hundi and contended that the ratio of this decision of the Supreme Court did not apply to payment by hundi and that when payments were made to the assessee by hundis it could not be said that the assessee received payments as soon as the hundis were delivered to the assessee. According to him the assessee could be said to have received payments only when the hundis were duly met and honoured on presentation by British Indian shroffs on whom they were drawn and the disputed amounts to the extent to which they represented the amounts of the hundis were therefore manifestly received by the assessee in British India. The distinction sought to be made by the learned Advocate General is in our opinion not well-founded and cannot be sustained on any principle of law. On first principle it is difficult to see any basis for this distinction between payment by cheque and payment by hundi. Both cheque and hundi are negotiable instruments and the principle which applies in relation to payment by cheque must equally apply in relation to payment by hundi. Whether the negotiable instrument is a cheque or a hundi it represents moneys worth and the date of receipt of the money which it represents is the date of its receipt. It may be accepted by the creditor in full satisfaction of the debt or it may be accepted conditionally i.e. subject to the condition subsequent that it shall be duly met and honoured on presentation in which event as soon as it is met and honoured the payment related back to the date of its receipt. We cannot therefore assent to the proposition that there is any distinction in principle between the legal effect flowing from payment by cheque and the legal effect flowing from payment by hundi. We may also point out that in enunciating the principle on which it rested its decision in Ogale Glass Works Case the Supreme Court did not make any distinction between payment by cheque and payment by hundi. The principle it laid down was a principle applicable to payment by negotiable instrument and that principle must apply equally to payment by hundi as to payment by cheque. We may in this connection refer to the following observations of S. R. Das C. J. while delivering the judgment of the Supreme Court in that case which clearly show that the principle formulated by the Supreme Court was not a principle applicable exclusively to payment by cheque by reason of some peculiar characteristics of cheque not shared by other negotiable instruments but was a principle applicable to payment by every kind of negotiable instrument including hundi: ... When it is said that a payment by negotiable instrument is a conditional payment what is meant is that such payment is subject to a condition subsequent that if the negotiable instrument is dishonoured on presentation the creditor may consider it as waste paper and resort to his original demand (Stedman v. Gooch). It is said in Benjamin on Sale 8 Edition. page 788:- The payment takes effect from the delivery of the bill but is defeated by the happening of the condition i. e. non-payment at maturity. In Byles on Bills 20 Edition page 23 the position is summarised pithily as follows: A cheque unless dishonoured is payment. To the same effect are the passages to be found in Hart on Banking 4 Edition Volume 1 page 342. In Felix Hadley & Co. v. Hadley Byrne J. expressed the same idea in the following passage in his judgment at page 682:- In this case I think what took place amounted to a conditional payment of the debt; the condition being that the cheque or bill should be duly met or honoured at the proper date. If that be the true view then I think the position is exactly as if an agreement had been expressly made that the bill or cheque should operate as payment unless defeated by dishonour or by not being met; and I think that that agreement is implied from giving and taking the cheques and bills in question. These observations leave no doubt that the principle laid down by the Supreme Court is a general one applicable to all negotiable instruments whether cheques or hundis and it is this namely that when a payment is received by a negotiable instrument the negotiable instrument may be received as unconditional payment or as conditional payment but in either case it operates as payment to the creditor when it is received by the creditor the only condition in the latter case being that it should be paid and honoured on presentation. This principle applies as much to payment by hundi as to payment by cheque and the contention of the learned Advocate General based on the supposed distinction between payment by cheque and payment by hundi cannot therefore be accepted. It must therefore be held that payments received by the assessee whether by cheques or by hundis were received at the time when the cheques and hundis were delivered to the assessee and not when they were encashed and this quite irrespective of the fact whether they were taken by the assessee as unconditional payment or as conditional payment.;


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