MYSORE GLASS AND ENAMEL WORKS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a consolidated reference in respect of the two following questions arising in relation to the assessments under section 34 of the Income-tax Act of the assessee for the years 1944-45 to 1946-47. The year of account was the previous calendar year.

(2.) THE assessee appointed distributors in various centers. Sales outside Mysore State were exclusively effected through them. THEy booked orders and forwarded them to the assessee who there upon dispatched the goods to the buyer. Sometimes they themselves collected the price from the buyers and remitted the same to the assessee; on other occasions, the procedure adopted was like this : THE assessee used to send the consignments by rail addressed to self to draw a hundi on the buyer for the price due and to deliver the hundi and the relative railway receipt to the assessees banker in accordance with the usual mercantile practice. Credit was obtained from the bank in one of the two ways : (1) By making the bank only the collecting agent, the price being credited to the assessee after realization from the British Indian buyer on delivery of the railway receipt; (2) By selling the hundi to the banker at a discount at the time of presentation who forthwith credited the price of the hundi to the assessees account and thereby became the holder in due course of the hundi. THE banker then transmitted the hundi and the relative railway receipt to the buyer and collected the amount due on the hundi from the buyer. In the latter type of transactions, the bank would have a lien on the railway receipt for the sums that might become due to them in case the hundis were dishonoured. We are concerned in this case only with the second type of the transactions, the question being whether the profits made in such sales should be held to have arisen at Bangalore where the bank paid the purchase price for the hundi or in British India where the buyer obtained title to the goods and paid the price. THEre were yet another class of sales, namely, those directly effected to the distributors. In addition, the assessee had entered into contracts for the supply of enamel mugs to the military department of the Government of India on tenders which were accepted. THE terms of supply were that the goods should be inspected at Bangalore by the officer in charge of the Ordinance Depot who on approval was to issue a certificate and credit note for the goods which were thereafter dispatched f.o.r. a railway station within the Mysore State. In due course the assessee submitted bills to the Government requesting them to pay by cheque on a bank at Bangalore.

(3.) THE assessee is sought to be assessed on the profits earned in the sale of manufactured articles. Accrual of income would, therefore, depend on the place of manufacture and the place at which the sale of the assessees goods takes place. THE point for consideration then would be whether the sales coming under the second category took place within the Mysore State or in British India. Profits from the sales would arise only at the moment when the property in the goods passes to the buyer, for then alone the assessee would become entitled to the price. THE point of time at which the property in the goods passes by sale depends on the intention of the parties. Under section 23 of the Indian Sale of Goods Act an uncondition appropriation (in the case of a sale of uncertained goods) to the contract of purchase with the assent of the other party thereto will pass the title to the goods. Has there been such an appropriation in this case ? Admittedly, the seller had reserved a right of disposal over them at the time of their dispatch. It consigned it to "self" and took the railway receipt in its own name; it had further created a security or a lien over the goods in favour of the bank which would be entitled to proceed against them as security for the amount paid for the hundis or bills; it is clear that vesting of title in the buyer would be inconsistent with the banks of rights by way of security. THErefore, till the buyer pays the amount due on the hundi, he can have neither title nor possession. THE appropriation to the contract is thus conditional on the payment of the price by the buyer. Under section 25 of the Sale of Goods Act, it will be competent for a seller to reserve his right of disposal of the goods till specified conditions are fulfilled. Where a seller delivers goods to a carrier addressed to himself and takes the railway receipt in his own name the property in the goods cannot be held to have passed on to the buyer as the seller still has his control over the goods. Again when the seller draws a hundi or a bill of exchange on the buyer and delivers the hundi or the bill of exchange with a relative railway receipt to his own banker for the purpose of delivery of the railway receipt to the buyer on his honoring the hundi, the property in the goods cannot be held to pass to the buyer till he pays the price and takes delivery of the railway receipt from the banker. THE position will be the same even if the buyer negotiates the bill or hundi with his banker and enables the latter to have a lien on the goods till it is honoured by the buyer, for the existence of the lien would be an impediment to the passing of title in the goods to the buyer. That would make the appropriation conditional; in other words, the seller and his banker would each have a right of disposal in accordance with their respective rights. Benjamin on Sale (8th edition) states at page 385 :