1965 (11) TMI 11 - HC - Income Tax

Section 4(1)(a) of the IT Act, 1922 - Whether certain sale proceeds received by the assessee in respect of sales effected to British Indian buyers were received in British India or outside British India - sale proceeds must be held to have been received by the assessee in Wankaner where the cheques were delivered to the assessee

Issues Involved:
1. Whether the sale proceeds received by the assessee from British Indian buyers were received in British India or outside British India.
2. Whether the post office acted as an agent of the assessee or the British Indian buyers in the transmission of cheques.

Detailed Analysis:

Issue 1: Location of Receipt of Sale Proceeds
The primary question was whether the sale proceeds received by the assessee from British Indian buyers were received in British India or outside British India. The determination of this issue was crucial because the assessee was a non-resident during the relevant assessment years (1945-46, 1946-47, 1947-48, and 1948-49), and its liability to British Indian tax depended on its receipt of income within British India under section 4(1)(a) of the Indian Income-tax Act, 1922.

The assessee, a limited liability company owning a textile mill in Wankaner (an Indian State outside British India), sold cloth to quota-holders, including British Indian merchants. The sale proceeds were received by cheques sent by the British Indian buyers by post to the assessee at Wankaner. The revenue contended that the cheques were posted pursuant to the request of the assessee, making the post office the agent of the assessee, thus constituting receipt in British India. The assessee argued that there was an express agreement that the sale proceeds should be paid in Wankaner, making the post office the agent of the British Indian buyers.

Issue 2: Agency of the Post Office
The determination of the agency of the post office was crucial in deciding where the sale proceeds were received. The court had to interpret the terms of the contract between the assessee and the British Indian buyers. The mode of sales involved the assessee sending a letter to each quota-holder, specifying the goods allotted and requesting payment by cheque or cash to be made to the mill at Wankaner.

The Income-tax Officer initially held that the post office was the agent of the assessee, making the receipt of sale proceeds in British India. However, the Appellate Assistant Commissioner disagreed, holding that the post office was the agent of the British Indian buyers, making the receipt in Wankaner. The Tribunal, upon appeal, sided with the Income-tax Officer, stating that the contracts contemplated sending cheques by post, thus constituting receipt in British India.

The court had to consider whether the cheques were received by the assessee unconditionally or conditionally. Referring to the Supreme Court's decision in Ogale Glass Works case, the court noted that payment by cheque is considered received either upon delivery or upon encashment, relating back to the date of delivery if the cheque is honored.

Interpretation of Contract Terms
The court examined the letter sent by the assessee to the quota-holders, particularly clause (2) of the terms of normal procedure, which stated that the cheque or cash consideration was to be paid to the mills at Wankaner. The court translated the relevant portions of the letter and concluded that the verb "bharvano chhe" (is to be paid) governed both cheque and cash payments, indicating that payment was to be made in Wankaner.

The court rejected the revenue's contention that the verb should be interpreted differently for cheques and cash. The court emphasized that the letter's language indicated a specific agreement that the payment, whether by cheque or cash, should be made in Wankaner. This agreement excluded the inference that the post office was the agent of the assessee, even though the cheques were sent by post.

Conclusion
The court concluded that there was a specific agreement between the assessee and the British Indian buyers that the sale proceeds, whether by cheque or cash, should be paid to the assessee in Wankaner. Therefore, the post office was the agent of the British Indian buyers, and the sale proceeds were received by the assessee in Wankaner, outside British India.

Answer to Question No. 1: The profits embedded in the sale proceeds remitted by the merchants in British India by way of cheques were not received by the assessee in the taxable territories under section 4(1)(a) of the Indian Income-tax Act, 1922.

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