Commissioner of Income Tax, Bihar
& Orissa Vs. M/S. Patney & Co  INSC 64 (5 May 1959)
SINHA, BHUVNESHWAR P.
CITATION: 1959 AIR 1070 1959 SCR Supl. (2)
CITATOR INFO :
R 1960 SC 266 (14) RF 1966 SC1466 (10) R 1976
Income-tax - Assessment on
non-resident-Agreement with resident debtor for payment outside British
India-Remittance by cheques Posted in British India--Place of payment-Non-
resident's liability to tax.
The respondents, who were non-residents
carrying on business at Secunderabad within the territories of the Nizam of
Hyderabad, were acting as agents of two firms in Bombay and Madurai, in British
India, for the supply of certain goods to the Nizam's Government. In respect of
the Commission due to the respondents by the firms the agreement between the
parties was that the amounts were to be paid to the respondents in cash or by
cheques at Secunderabad. For these amounts cheques drawn by the firms on the Bombay
and Madras branches, respectively, of the Imperial Bank of India, were sent by
post at Bombay and Madurai to the respondents at Secunderabad, and when
received, they were credited in their books of account, the cheques being sent
to their banker there for collecting and crediting to their account. For the
assessment year 1945-1946 the Income-tax Officer, Berhampur (in British India),
assessed these sums as taxable income holding that the amount was received in
British 869 India and not at Secunderabad. The Appellate Tribunal found that
all the cheques received at Secunderabad by the respondents were treated by
them as payment. The respondents claimed that in view of the agreement between
the parties that the amount of commission should be paid at Secunderabad, when
the cheques were sent by post, the post office was the agent of the debtor and
not of the respondents, that the amount must be treated as having been received
when the post office delivered the cheques to the respondents, and that,
consequently, the amount cannot be treated as having been received in British
India. The Income-tax authorities relied on the decision in Commissioner of
Income-tax v. Ogale Glass Works Ltd.,  I S.C.R. 185.
Held, that in the case of payment by cheques
sent by post the determination of the place of payment would depend upon the
agreement between the parties or the course of conduct of the parties. If it is
shown that the creditor authorised the debtor either expressly or impliedly to
send a cheque by post the property in the cheque passes to the creditor as soon
as it is posted. But where, as in the present case, the agreement was that the
amount was to be paid at Secunderabad, outside British India, when the cheques
were received by the respondents there the amount must be deemed to have been
received at that place, and, therefore, the amount was not liable to be taxed
in British India.
Commissioner of Tncome-tax v. Ogale Glass
Works Ltd.,  1 S.C.R. 185, distinguished.
CIVIL APPELLATE` JURISDICTION: Civil Appeal
No. 326 of 1957.
Appeal by special leave from the judgment and
order dated February 16, 1955, of the Orissa High Court in N. J. C. No. 117 of
C. K. Daphtary, Solicitor-General of India,
K. N. Rajagopal Sastri, R. H. Dhebar and D. Gupta, for the appellants.
Rameshwar Nath, S. N. Andley and J. B.
Dadachanji, for the respondent.
1959. May 5. The Judgment of the Court was
delivered by KAPUR, J.-This appeal pursuant to special leave is brought by the
Commissioner of lncome-tax against the judgment of the High Court of Orissa
holding that the amounts received by the assessees-respondents were not
received in what was British India and 870 therefore not liable to income-tax.
The respondents at all material times were non-residents carrying on business
at Secunderabad which was then in the territories of the Nizam of Hyderabad.
They acted as agents for the supply of gas plants manufactured by Messrs. T. V.
S. Iyengar & Sons, Madura, to the Nizam's Government, and also as agents of
the Lucas Indian Services, Bombay branch, for the supply of certain goods to
that Government. The year of assessment is 1945-46. There does not appear to
have been any written agreement between the two manufacturers and the
respondents but the goods were to be supplied on a commission basis. In
pursuance of this agreement the respondents received from M/s. T.V.S. lyengar
& Sons, Madura, cheques drawn on the Imperial Bank of India, Madras,
amounting to Rs. 35,202 in respect of all goods supplied from -Madura and also
from Lucas Indian Services, Bombay, by cheques drawn on Imperial Bank of India,
Bombay branch, amounting to Rs. 5,302 in respect of goods supplied by them,
thus making a total of Rs. 40,504. These cheques were sent by post and when
received by the respondents at Secunderabad were credited in the account books
of the respondents and sent to their banker G. Raghunathmal for collecting and
crediting to the account of the respondents. As against these sums so deposited
the respondents at once drew cheques and thus operated on these amounts
deposited. In regard to the commission received from the Bombay firm it was
paid into the account on December 22, 1944, but was given credit for only on
January 2, 1945. The Income-tax Officer assessed these sums as taxable income holding
that the entire amount of Rs. 40,504 was received in British India and not at
Secunderabad. An appeal was taken by the respondents to the Appellate Assistant
Commissioner who upheld the order holding that income must be held to have
accrued, arisen or received in British India. Against this order the
respondents took an appeal to the Income-tax Appellate Tribunal and it was held
that the amounts were received by the respondents from Madura and Bombay firms
as commission but 871 they were received at Secunderabad. The appeal was
therefore allowed. The finding Of the Appellate Tribunal in their own words
was:- " The contention of the Appellants is that the cheques being
negotiable instruments and the creditor having accepted them and passed through
their books, II the receipt must be taken to be receipts in Hyderabad. We agree
with the view submitted by the appellants. In Bhashyam's Negotiable Instruments
Act, 8th Edition, Revised, page 556, it is stated that it will be open to a
creditor to accept a cheque in absolute payment of money due to him, in which
case it will be equivalent to cash payment. That being the position it cannot
be said that the income was received in British India ".
At the instance of the Commissioner a
reference under s. 66(1) of the Act was made to the High Court of Orissa for
their opinion on the following question :- " Whether in the circumstances
of the case, the sums of Rs. 35,202 and Rs. 5,302 received as commission from
T. V. S. lyengar & Sons Ltd., and Lucas Indian Services Ltd., respectively
were income that accrued, arose or were received in British India ".
The High Court found that the statement of
case was imperfect and that the real question was different. It said :- "
The real question in all such cases is not merely whether the cheques were
drawn on a bank in British India, and sent for collection to that bank. The
question is whether when the cheques were received by the assessee having his
place of business outside British India, those cheques were in fact received as
absolute and final payments by way of unconditional discharge or whether they
were received as mere conditional payments on realisation. The fact that
cheques were drawn on a bank in British India or that they were sent for
collection through a Secunderabad banker of the assessee though relevant, are
not conclusive ".
It therefore remitted the case to the
Appellate Tribunal for submission of supplementary statement of case.
It appears that at that stage the controversy
was 872 confined to the question whether the cheques having been sent to
Secunderabad and having been realised in British India would amount to a final
discharge or an unconditional one. The Tribunal in its supplementary statement
found that the course of conduct followed by the parties showed that the
cheques were received from the Bombay and Madura firms in full satisfaction of
the commission ascertained from time to time and due on such date. It said:
" The facts that such entries were made
in the assessee's books, that the cheques were put into the bank immediately,
that the bank at once gave credit to the assessee for these sums after charging
discount thereon and immediately allowed the assessee to operate on those sums
are significant ".
Therefore the finding of fact by the Tribunal
although not specific was that the receipt of the cheque by the respondents
operated as full discharge of the debt due on account of commission from these
The matter was decided by the High Court
against the appellant and in the meanwhile this Court had given a judgment in
Commissioner of Income-tax v. Ogale Glass Works Ltd (1). Even after considering
the decision of that case the High Court was of the opinion that the income of
the respondents was not received in British India and answered the question
against the Revenue. The High Court refused to give leave to appeal to this
Court and it was this Court which gave special leave to appeal.
The question is whether the amounts, of
commission paid by cheques, drawn respectively on banks at Madras and Bombay
and respectively posted from Madura and Bombay, can in the circumstances of
this case be held to have been received in what was British India or at
Secunderabad ? The Appellate Tribunal found that all the cheques whether from
Madura or from Bombay were sent by the two respective firms from Madura or
Bombay and were received by the respondents at Secunderabad and were treated as
payment. The question still remains as to the effect of the sending of the
cheques from Madura or Bombay by post. If there is an express request by the
(1)  1 S. C. R. 185.
873 creditor that the amount be paid by
cheques to be sent by post and they are so sent there is no doubt that the
payment will be taken to be at the place where the cheque or cheques are posted.
The respondents argued that there was an agreement between the Madura and
Bombay firms and the respondents that the money would be paid whether in cash
or by cheque 'at Secunderabad' and therefore when the cheques were sent by post
the post office was the agent of the debtor and not of the respondents. There
is in support of the respondents an affidavit which was filed in the assessment
proceedings and which was relied upon in the High Court. According to this
affidavit it was verbally agreed that the commission would be paid at
Secunderabad in cash or by cheque (as the case may be), the language used in
the affidavit was:
" The above commission was verbally
decided to be paid to Messrs. Patney & Co. Ltd., Secunderabad the Agent
Company in Hyderabad State at Secunderabad in cash or by cheque as the case
might be ".
In the case of payment by cheques sent by
post the determination of the place of payment would depend upon the agreement
between the parties or the course of conduct of the parties. If it is shown
that the creditor authorised the debtor either expressly or impliedly to send a
cheque by post the property in the cheque passes to the creditor as soon as it
is posted. Therefore the post office is an agent of the person to whom the
cheque is posted if there be an express or implied authority to send it by post
(Commissioner of Income-tax v. Ogale Glass Works Ltd. (1)).
In that case there was an express request of
the assessee to remit the amount of the bills outstanding against the debtor,
that is, Government of India by means of cheques.
But it was observed by this Court that
according to the course of business usage in general which has to be considered
as a part of the surrounding circumstances the parties must have intended that
the cheques should be sent by post which is the usual and normal mode of
transmission and therefore the posting of cheques in Delhi amounted to payment
in (1)  1 S.C.R. 185.
110 874 Delhi to the post office which was
constituted the agent of the assessee. But it was argued for the respondents
that in the absence of such a request the post office could not be constituted
as the agent of the creditor and relied on a passage in Ogale's case (1) at p.
204 where it was observed:- " Of course if there be no such request,
express or implied, then the delivery of the letter or the cheque to the post
office is delivery to the agent of the sender himself ".
It was further contended that in this case
there was an express agreement that the payment was to be made at Secunderabad
and therefore the matter does not fall within the rule in Ogale Glass Works
case (1) and the following principle laid down in judgment by Das, J. (as he
then was), is inapplicable :- " Applying the above principles to the facts
found by the Tribunal the position appears to be this. The engagement of the
Government was to make payment by cheques. The cheques were drawn in Delhi and
received by the assessee in Aundh by post. According to the course of business
usage to which, as part of the surrounding circumstances, attention has to be
paid under the authorities cited above, the parties must have intended that the
cheques should be sent by post which is the usual and normal agency for
transmission of such articles and according to the Tribunal's finding they were
in fact received by the assessee by post." In our opinion this contention
is well-founded. Whatever may be the position when there is an express or
implied request for the cheque for the amount being sent by post or when it can
be inferred from the course of conduct of the parties, the appellant in this
case expressly required the amount of the commission to be paid at Secunderabad
and the rule of Ogale Work's case (1) would be inapplicable.
The High Court judgment in our view was
correct and we would therefore dismiss this appeal with costs.
(1)  1 S.C.R. 185.