- (1.) THIS is a reference by the Income-tax Appellate Tribunal, Bombay Bench 'a' under sec. 66 (1) of the Indian Income-tax Act, 1922. The questions referred to us are as follows : - "whether in the facts and circumstances of the case, the assessee was entitled to assessment on concessional rates under Part B States (Taxation Concessions) Order, 1959 in respect of : - (1) the profit relating to sales of Rs. 2,46,000/- held by the Tribunal as accrued and received in Part 'a' States : - (2) 25 percent, of profits relating to sales of Rs. 2,21,658/- held by the Tribunal as the profits which accrued in Part 'a' States on account of merchanting operations. "
(2.) THE material facts out of which this reference arises mat shortly be stated as follows. THE assessee, the Mewar Bone Mill, Gosunda is a registered firm which carries on business in the manufacture and sale of bone meal and fertilisers at Gosunda in District Udaipur. It used to purchase raw bones locally and sell finished products mostly to persons outside the Part B State of Rajasthan as it then was. It was assessed to income-tax for the year 1952-53, the accounting-year being 1. 10. 1950 to 30. 9. 1951. During this period, the assessee made sales to parties in Part A States amounting to a total value of Rs. 4,67,664/2/- out of which a sum of Rs. 2. 46,006/7/6 was received either through cheques or by cash or by bills on customers collected by the assessee's banker, the Bank of Jaipur Ltd. , and the balance of Rs. 2,21,657/10/6 was received in cash or cheques or by Telegraphic Transfers in Part B State of Rajasthan. By virtue of Part B States (Taxation Concessions) Order, 1950 (hereinafter referred to as the Taxation Concessions Order, 1950), the assessee became entitled to a concessional assessment for the year in question on the income that may be held as received and/or accrued and arisen to the assessee in a Part B State. Thus the Income-tax Officer held that the profit on Rs. 2,46,006/7/6 representing the sale proceeds was assessable at the full Indian rate under sec. 4 (1) (a) of the Income-tax Act, and that the remaining sales amounting to Rs. 2,21,657/10/6 were assessable to income-tax under sec. 4 (1) (b) (1) on the footing that the profits accrued and arose in Bombay which was a Part A State and was in the taxable territories. With reference to the second item mentioned above, the Income-tax Officer further held that as part of the profits was attributable to manufacturing operations carried on in a Part B State, only 50 per cent, thereof should be assessed to tax at the full Indian rate. This percentage was eventually reduced to 25 per cent, by the Income-tax Appellate Tribunul on appeal by the assessee but otherwise the appeal was dismissed throughout. THEreupon the assessee applied to the Tribunal for making a reference to this Court on certain questions of law, and that is how the present reference has come up before us. The contention of the assessee before us is that the entire profits amounting to Rs. 4,67. 000/- odd had been received by it in a part B State territory and had also accrued to it therein, and, therefore, it was entitled to assessment on concessional rates under the Taxation Concession Order with respect to his entire profits. The sole question for determination therefore is whether the said entire income, profits and gains were received or should be deemed to be received or accrued or be deemed to have accrued in this case in a Part B State. For, if they are held to have been received or to have accrued in a Part B State, then the assessee would certainly be entitled to the benefit of the Taxation Concession Order, 1950. In order to answer this question, we have to see what was the normal course of the business of the assessee. As found by the Tribunal, it was this. Except for a few local sales, almost the entire sales were made to customers in Bombay and other Part A States on the basis of certain agreements executed between the parties. By the terms of the agreements, goods were to be packed by rail and the purchasers were to send 25 per cent, or such other sum as was agreed between the parties as advance by a certain date before the orders were to be executed. As far the balance, the assessee sent a Railway Receipt through a bank consigned to self and the Railway Receipt was to be endorsed and delivered to the customer concerned in Part A State through the assessee's banker and the latter delivered these documents to the customer against payment. It may also be noted that the goods were to be sent F. O. R. the customer's station in the Part A State. It has also been stated by the Tribunal in its statement of facts accompanying the reference that the agreements of sale were executed on stamp papers purchased in Part A States where the customers were, which fact is questioned before us, but we do not wish to pursue this point, as, in our opinion, it is a question of fact and not of law. It may also be mentioned in this connection that some times wagons were provided by the customers themselves from out of their own wagon allotments when the requirement was urgent. On these facts, we are called upon the answer the two questions which we have set out above. Taking up the first question first, the point is where can the profits relating to sales amounting to Rs. 2,46,000/- be held to have accrued and been received. Let it be remembered that apart from a sum of Rs. 4,604/12/- which was received through cheques on banks in Part A States and another sum of Rs. 6,713/12/- which was actually received in cash therein, the remaining amount of Rs. 2,34,687/15/6 was collected on bills sent to customers in Part A States through the assessee's bankers, the Bank of Jaipur Ltd. It may be mentioned here that the bills together with the Railway Receipts etc. were delivered to the Bank of Jaipur at Udaipur who sent them to their branch in Bombay for delivery to customers against payment. It was submitted by learned counsel for the Department that the case was governed by the principle laid down by their Lordships of the Supreme Court in Income-tax Commissioner vs. P. M. Rathod & Co. (1), and which principle was followed by another Bench of this Court in The Mewar Textile Mills Ltd. Bhilwara vs. Commissioner of Income Tax, Delhi and Rajasthan, Delhi (2), and, therefore, we should answer this question against the assessee. Now in the case before the Supreme Court, the facts were like this. The respondents, a registered firm at Ratlam the then Part B State of Madhya Bharat were assessed for | the assessment year 1950-51 at the rate or rates applicable to income, profits and gains arising or accruing in Part A States. The course of their business was this. They sent out agents to various parts of India to canvass orders and sometimes took advance payments in full or in part and after deducting their expenses, remitted the balance to the respondents at Ratlam through bank drafts etc. The goods ordered were sent to the customers either by V. P. P. or by rail. In the latter case, the Railway Receipts in favour of self were sent through a Bank deliverable against payment of the Demand Draft drawn upon the buyers and sent with the Railway Receipts. This price when received by the Bank was sent by the Bank by means of Bank Drafts to the respondents at Ratlam who sent them for being cashed and credited to their account at Bombay. We are not directly concerned with the decision of their Lordships in so far as the goods were sent to customers by the respondents in this case by V. P. P. , and, therefore, we shall confine our attention to their decision pertaining to the goods which were sent by rail under a Railway Receipt. This is how their Lordships dealt with this question: - "now in this case as in the case of goods sent by V. P. P. the Railway Receipts in favour of self could not be delivered to the buyer till the money was paid and although the goods had been handed over to a common carrier, the appropriation to the contract was only conditional and the performance was completed only when the monies were paid and the Railway Receipts delivered. These contracts also must be taken to have been performed in part A or C States and the price paid to the Bank as agent of the seller at the place of payment and delivery of Railway Receipts. The income, profits and gains were therefore received in these States and not at Ratlam. " In this view of the matter, it was held that the respondents were not entitled to a concessional rate of taxation applicable to Part B States. Learned counsel for the petitioner submitted that the principle of this case should not be held to apply to the present case for the following reasons. The first was that the property in the goods railed had unconditionally passed to the purchasers as soon as the goods were railed by the assessee inasmuch as arrangements had been made with the railway authorities concerned that the goods consigned be taken for delivery to the former to a special siding which was called as the Bombay Port Trust Railway Siding, (the goods being required to be shipped over-seas) where the customers had been specially permitted to keep their wagons. (See Annexures B2, B3 and B4 at pages 13 to 16 of the Paper Book in this connection ). It is contended, therefore, that the assessee had no power of disposal left therein after the goods had been railed from their end. The second distinguishing feature is said to be that the assessee had sold the railway receipts or bills for the contracts in question to the Jaipur Bank at Udaipur for money which was consequently credited to it by the said Branch within the territory of a Part B State and so the contracts were wholly performed in the latter area and nothing by way of their completion remained to be done in a Part A State. We have carefully considered these contentions and find no substance in them. So far as the first contention is concerned, we have gone through the correspondence referred to above and it clearly seems to us that its sole object was no more than to obtain and provide certain facilities from the Railway to the parties to the contracts to save time and labour so as to ensure early despatch and prompt delivery, which were indeed matters of some importance to the customers in particular because the goods appear to have been required to be shipped abroad. But this correspondence and the facilities which the assessee or the customers might have obtained in consequence thereof have no bearing on the question as to where the income, gains or profits on the sales in question arose or were received. We should also like to point out in this connection that according to the course of business which governed the dealings between the parties, the customers could not have had any power of unconditional disposal over the goods ; in law until they had taken delivery of the Railway Receipts from the Jaipur Bank at Bombay, and the Bank had instructions not to give delivery of the Railway Receipts and the bills etc. until the payment was made to it. So long as, therefore, the customers did not take delivery of the Railway Receipts for the goods railed by making the payment therefor to the Bank, the property in the goods which be it noted were consigned to self still remained in the assessee, and it was only when payment was made that the ownership therein would and did pass to them and such payments were made by the customers in a Part A State. We, therefore, find it extremely difficult to hold that the assessee seller had not reserved its right of disposal in respect of these goods until delivery on full payment. In such circumstances, we are altogether unable to accept that sec. 23 of the Sale of Goods Act on which learned counsel for the assessee relies was attracted. On the other hand, the section that properly applies is sec. 25 of the Act which omitting its immaterial part reads as follows :- - "25 (1) - Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract of appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, notwithstanding the delivery of the goods to a buyer or to a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed of the seller are fulfilled. (The italic is our) The position, therefore, is that in spite of the fact that the goods were delivered to the railway as carriers for the purpose of transmission to the buyers, the property in the goods did not and could not pass to them untill the full payment for them was made as stipulated in the contracts. This argument, therefore, is of no avail to the petitioner and we hereby repel it. As regards the second contention, the stand taken up by learned counsel for the assessee is that it had sold the Railway Receipts or bills to the Bank of Jaipur Ltd. Udaipur Branch soonafter the goods were railed upon which the Bank passed the necessary credits to the assessee in its books and that being so, the assessee had received the entire payment for the goods within a Part B State, and that this position was not adversely affected because the Bank thereafter realised the money which was due to it from the party concerned. We have carefully considered this contention and have not felt impressed by it. At this juncture, it is necessary to refer to the statement of the Manager, Jaipur Bank, Udaipur Branch, Shri M. B. Doshi who was examined before the Income-tax Officer Udaipur. The Manager undoubtedly stated in one part of his statement that his bank had purchased the bills of the assessee. A further question was put to him as to whether the ownership of the goods mentioned in the Railway Receipts thereby passed to the Bank, and whether the Bank became the sole owner of the property to the exclusion of the party to whom the goods were to be delivered as mentioned in the invoice. The Manager returned an affirmative answer to this. Now we fail to understand how the goods which were already intended to be sold to a customer, say A, could be purchased by the Bank. Realising the difficulty of this position, learned counsel conceded before us that the Manager's statement that the Bank had purchased the goods was not correct and that what the Bank had really purchased was the "bills" with respect to those goods. This story of purchase of bills is also falsified because the witness later stated that what he meant by purchase was the purchase of the bills to the extent of the amount paid by the bank. We further find that in the statement of facts accompanying the application asking for this reference, the assessee stated in paragraph four thereof as follows: - ". . . . . Upon presentation of the R. R. the Bank immediately credited the assessee with the whole amount of the Bill, but took out part of the amount in suspense account till payments by the buyers so that only part of the amount was available to the assessee for immediate withdrawal. The balance was available to the assessee after the amount was paid into the Bank by the buyer. " In view of this position, which was taken up by the assessee itself the theory which is now sought to be pressed on its behalf becomes altogether untenable. The mere fact that the Bank gave a formal credit to the assessee with respect to the whole amount of the bill does not amount to a purchase of the bill by the bank much less of goods, and can in no case amount to a sale in favour of the Bank for money paid by it. Again, this seems to us to be a modus operandi adopted by the Bank to accommodate the assessee and no more, and this arrangement has nothing to do with the transfer of the property in the goods sold or the payment of the price to be fetched by them. The Bank was merely an agent of the assessee and the payment for the goods was to be made to it by the customers against the Railway Receipts and these payments were doubtless made in the territory of the Part A State,
(3.) TO sum up the position on this aspect of the case, the price of goods sold could be earned only when the buyer paid the price and till then the seller will have this right of disposal over the goods still reserved to him as delivery of the Railway Receipts was only to be made against payment to the Bank and not otherwise, and as the assessee became entitled to the purchase money only on delivery of goods which did take place in a Part A State, it is there that such income should be held to have both accrued and been received. And so far as the true position of the Bank is concerned, it was essentially that of an agent for the assessee and not of the buyers. See Mysore Glass and Enamel Works Ltd. Vs. Commissioner of Income-tax, Mad. (2) in this connection. When these contentions prove to be of no avail, we have no hesitation in saying that the present case properly falls within the ambit of the principle laid down by their Lordships of the Supreme Court in Income-tax Commissioner Vs. P. M. Rathod and Company (Supra ). We hold accordingly. We would, therefore, answer the first question put to us in the negative and against the assessee. This brings us to the second question, the contention under this head being that the assessee was and is entitled to the benefit of the Taxation Concessions Order, 1950, with respect to the entire profits on the sales amounting to Rs. 2,21,657/10/6 and not merely on 25 per cent, thereof inasmuch as these profits which are obviously accepted by the department to have been received in a Part B State wholly accrued there and not in a Part A State. It may be stated that the question of the receipt of these profits in a Part B State or otherwise is not in controversy before us. Now the liability under this head is on the footing of accrual of profits and therefore the question arises where these contracts of sales were completed because it would be at the place of sale that profits would accrue. We have already stated the mode of business pursued by the assessee in connection with its bone business and we need not repeat here what we have said before. It is not disputed before us that the sales were made with buyers in Part A states, and, for substantially the same reasons which we have given above, we hold that the sales were completed in this category of transactions also when the goods were delivered to the customers in the said taxable territories and it must, therefore, follow that profits for which the assessee is being assessed to income-tax accrued there. We hold accordingly. It only remains for us to mention that as a part of the profits could rightly be held attributable to manufacturing operations which were admittedly carried on in a Part B State Sec. 42 of Income Tax Act is attracted and the principle of apportionment enshrined in that section comes into play. Consequently, the Tribunal have held that the assessee should be given the benefit of the Taxation Concession Order 1950 applicable to a part B State to the extent of 75 per cent of the profits and only the balance should be charged at the full Indian rate. No controversy has been raised before us as respects this apportionment of profits in the proportion of 25 per cent and 75 per cent, but the only contention is that the whole of this income was entitled to be charged to income-tax at the concessional rate applicable to Part B States at the time. For the reasons we have stated, we would answer this question also against the assessee. Before concluding, we should like to briefly dispose of a further argument which was addressed to us by learned counsel for the petitioner in the last resort that on the strength of the Bench decision of this Court in the Mewar Textile Mills Ltd. Bhilwara vs. Commissioner of Income Tax, Delhi & Rajasthan, Delhi (Supra) we should hold that to the extent of the payments relating to the first question which were received by the assessee in the Part B State itself, the proportionate profits were received in a Part B State and not in a Part A State and to that extent the assessee should be held entitled to the benefit of the concessional rates applicable to Part B States. The observations on which reliance was placed may be extracted as follows : "now so far as the taxability of the income on the accrual basis is concerned, we entirely agree that the fact that the vendor got hundies discounted outside the taxable tarritories will make no difference in determining the taxability of the sale price on the accrual basis. Can the principle be extended to a case of taxability on receipt basis ?. . . . . . . . . We are of the opinion that in determining liability on the receipt basis considerable emphasis must be laid upon the place where the assessee receives the money and that it will not be proper to take into account consideration as to the passing of the property in the goods sold and the accrual of profits and to arrive at a conclusion of constructive receipt with reference to these considerations. The result of adopting such a course will be that the assessee will be indirectly held responsible on accrual basis without claiming the benefits of apportionment of the profits available under the accrual basis. . . . . . We, therefore, find it. . . . . . difficult to accept that the assessee can be held to have received payment in taxable territories in these cases where the assessee got the hundies discounted at the Bharat Bank, Bhilwara Branch. " Now, in order to appreciate the observations made above, a few facts of that case may be stated. The assessee there delivered the goods to the Railway, having obtained railway receipts in the names of the consignees and drew Hundies upon the latter to recover the price from them. These Hundies were discounted by the Bharat Bank Ltd. Bhilwara and thus it became the holder thereof in due course. The assessee received payment of the Hundies at Bhilwara and thereafter the amounts of the Hundies were released in the Bharat Bank in the taxable territories. It was held that the fact that the Bank was holding the Railway Receipts as an agent of the assessee and that the property in the goods passed only when the Railway Receipts were delivered to the consignees could not have any relevance in determining the receipt of income although they have bearing upon the question of the actual of income, and it was, therefore, held that the assessee should be held to have received payment in a Part B State to the extent that it got the Hundis discounted at the Bharat Bank Bhilwara. ;