9911796707
TMI Blog1992 (1) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... includes capital gains and depreciation written back as under Rs. Net profit 27,91,629.58 Less Capital gain 23,26,204.17 Depreciation written back 4,98,521.20 28,24,725.37 Net deficit on regular business 33,095.79 Further in the same report, it is explained as under: Even though the company has not incurred any production loss, it was forced to pay heavy interest on bank advances, hence the poor working result: Rs. Net profit 27,91,629.58 Carry forward from the last year 7,17,067.53 35,08,697.11 This year directors recommend to appropriate as follows Less : Provision for income-tax 3,25,000 Income-tax paid for the earlier years 1,48,520 Capital gain reserve 23,26,204 27,99,724.17 7,08,892.94 Your directors propose to reinvest the entire capital gain of Rs. 23,26,204 earned on disposal of the capital assets of machinery, on capital machines itself within the stipulated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a prototype draw texturising machine from Messrs. Davide Giudici and Figh s. n. c. of Italy to enable us to assemble and manufacture similar machines in India with applying the technology obtained from the foreign manufacturers under a technical collaboration agreement. On the basis of the above and demonstrating the prototype machine, we made a few machines on the above model successfully and supplied them to Indian Textile Goods Manufacturers. When we had assembled and manufactured such machines, we became confident to make such machines without the help of the prototype machine. Since we are not manufacturing textile goods, we decided to sell the imported prototype machine locally. One of the conditions of the import licence was that we should retain the machine for our purpose at least for two years and after that only the machine is to be resold. But, for reselling also, the seller as well as the buyer should g-et prior permission and approval from the Textile Commissioner, Bombay. The machine could not be easily sold due to cost structure and when Messrs. Garware Nylons Ltd. showed some interest in the machine, we offered the same to them. Accordingly, ourselves as seller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale took place on March 1, 1983, and the assessee had only provided guarantee of two years. (iv) The above position has been confirmed by the assessee under its letter dated September 25, 1985, the relevant portion of which is reproduced below 'Usually for machines assembled and manufactured by us, we used to give guarantee for one year for proper performance and we used to rectify the machines. Since this prototype machine was an imported one and maintained by us for manufacture for similar machines and not used for manufacturing textile items, the buyer insisted for two years' guarantee for proper running. . . .' The assessee was also asked to file the following information : (i) When sale proceeds of Rs. 49,50,000 were received. Complete details of payment, mode of payment and receipt to be filed.(ii) Whether any sale price was refunded in the 'guarantee period '. By now it had become clear to the assessee that its attempt to blatantly conceal the income by resorting to gimmicks had failed. So the assessee changed its stand under its letter dated March 4, 1986, and said that the said machine had been given on approval basis and, therefore, it changed hands only on M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee on this sale of machine. (d) That no part of the sale proceeds was refunded by Messrs. Garware Nylons Ltd. 4. In view of the above facts and circumstances, it is clear that capital gains of Rs. 23,26,204 are chargeable to tax in this year. There has been a blatant and wilful attempt by the assessee to evade the said capital gain tax on the sale of this machine. ' The learned Commissioner of Income-tax (Appeals) upheld the finding of the Assessing Officer and the assessee met with failure, hence this appeal, and we have heard the parties at length. The stand of the Revenue is reflected in the reasoning of the learned lower authorities, whereas the stand of the assessee is that the transaction became a sale not in the accounting year relevant to the assessment year under appeal but subsequently when the two years' condition/guarantee period was over, i.e., on March 1, 1985. With the feedback as reproduced above, the only issue which merits adjudication at this level is as to whether there was any sale of the machine in question during the accounting period relevant to the assessment year under appeal as between the assessee as vendor and Messrs. Garware Nylons Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly to give evidence and furnish the necessary information on June 20, 1988. The following information was called for : (i) Fixed assets register of Messrs. Garware Nylons Ltd. for the period 1980 to 1984. (H) Copies of balance-sheets of Messrs. Garware Nylons Ltd. along with depreciation charts for the above period. (iii) Entire correspondence for purchase/sale, lease, etc., on machineries with Messrs. Marchon Textile Industries Pvt. Ltd., or its allied concern, including agreement, if any, for purchase/lease, etc., was re quired to be produced. (iv) Particulars of monies advanced during 1980 to 1984 by way of loan/advances for purchase, etc., to Messrs. Marchon Textile Industries Pvt. Ltd., or its allied concern or its directors for the above three years were called for. (v) They were also required to furnish the details of orders placed with Messrs. Marchon Textiles or its allied concern for the above period for purchase of machinery. (vi) The copy of account of Messrs. Marclion Textiles in the books of Messrs. Garner Nylons Ltd., for the above period was also called for. (4) A copy of the summons was sent to Mr. T. R. Kapur/Mr. K. G. Menon of Messrs. Marchon Texti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed the proposal of Mr. Kapur. Here, 1 would like to know that did you ever impress on Mr. Kapur for such a proposal or it came from him suo motu? A. : The conditions of this letter were discussed ( i.e., the Government letter dated January 21, 1983 ), soon after its receipt with Mr. Kapur of Marchon, when clause No. 3 mentioned therein was high lighted in these discussions ; as at the time of making the application to the authorities, such a clause was not envisaged by either, therefore, a suggestion under the circumstances, after receipt of Government letter emanated from Marchon, as mentioned in their letter of February 24, 1983. As can be seen, the discussions took place on more than one occasion with intervals of several days. Marchon's letter dated February 24, 1983, symbolises these discussions and the accord reached. Therefore, it is not correct also to state that the letter dated February 24, 1983, from Marchon is suo motu. (6) From the records, it is seen that in all, Messrs. Garware Nylons purchased five machines from Messrs. Marchon Textiles. The first three machines, i.e., Machines Nos. 19, 20 and 21 of the fixed assets register were capitalised in the year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Nylons Ltd. and sale of the same to Garware Nylons Ltd. Q. : You got this machine transported from Messrs. Marchon Textiles Ltd. premises or they arranged the same, when it was delivered to you in October, 1981 ? A. : To the best of my knowledge, the machine was transferred from the premises of Nirlon Synthetics, Goregaon. 1 do not know whether it came directly from Nirlon's premises or from Marchon. Whether the transportation was arranged by Marchon or Garware, I do not recollect. Incidentally, letter dated October 5, 1981, referred to above does request Garware to arrange the transport. Q. : How long was the machine with you for demonstration ? A. : Soon after October, 1981, Garware Nylon and Marchon both applied to the authorities for sale of the machine to Garware Nylons. This permission was eventually received in January, 1983. The machine was in the premises of Garner Nylon in this period for demonstration/ testing. Q. : When was the purchase order placed with Marchon Textile and what is the date of their sale bill? A. : The written date of the purchase order is March 14, 1983,. and the date of their bill is March 1, 1983. However, it was orally decided to purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otu ? A. : The conditions of this letter were discussed (the Government letter dated January 12, 1983 ) soon after its receipt with Mr. Kapur of Marchon, when the clause No. 3 mentioned therein was highlighted in these discussions as at the time of making the application to authorities such a clause was not envisaged by either. Therefore, a suggestion under the circumstances after receipt of Government letter emanated from Marchon, as mentioned in their letter of February 24, 1983. As can be seen, the discussion took place on more than one occasion with interval for several days. The Marchon letter dated February 24, 1983, symbolised these discussions and the accord reached. Therefore, it is not correct also to state that the letter dated February 24, 1983, from Marclion is suo motu. Q. When did you start making payment for this purchase? A. From the records, 1 find that the first payment was made on October 3, 1981, for this machine. This payment was in the form of a deposit. Thereafter, the next payment as evident from records was on December 17, 1981, and so on, as is clear from the chart filed. (Sd.) A. K. Gautam/27-6-1988Deputy Commissioner, Assessment Range III-13, Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd report as also the statement of Shri Ashok Garware and the comparative chart of six machines sold by the assessee to Messrs. Garwares, the following facts have emerged : (i) That the purchase order for the machine in question is dated March 14, 1983, whereas the invoice of the assessee as seller is dated March 1, 1983 (ii) That, from the records of Messrs. Garware Nylons produced by Shri Ashok Garware in his capacity as joint managing director of the said Messrs. Garwares, it is revealed that five machines have been purchased by Messrs. Garwares from the assessee. The first three machines were capitalised in the fixed assets register of Messrs. Garwares in the year 1981-82, while two were capitalised in the year 1983-84. The machine in question was capitalised in March, 1984, since, according to Messrs. Garwares, the date of installation of the said machine is March 1, 1984 ; (iii) That, in respect of the machine in question, which has not been capitalised and not taken into the fixed assets register of Messrs. Garwares, in relation to the accounting period relevant to the assessment year under appeal, depreciation has also not been claimed because Messrs. did not claim th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. " Section 11 deals with conditions and warranties and, " stipulations as to time ". The said section reads as under : " 1 1. Stipulations as to time. -Unless a different intention appears from the terms of the contract, stipulations as to of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract. Section 12 deals with the topic, " condition and warranty " in the following terms : 12. Condition and warranty. - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a Claim for damages but not to a right to reject the goods an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on sale or return or other similar terms, the property therein passes to the buyer (a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction ; (b) if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and if no time has been fixed, on the expiration, of a reasonable time. In the context of facts which have emerged ( as stand reproduced in paragraph 4 above), when we examine the same in the light of the above sections of the Sale of Goods Act, it has to be held that, whereas the written date of the purchase order is March 14, 1983, the appellantassessee as vendor had made an invoice on March 1, 1983. This belies the date of invoice and that is incorrect because the invoice date could not be prior to the date of the purchase order hence no sale was there on March 1, 1983. The assessee has debited the amount of Rs. 55,20,000 in his accounts to Messrs. Garware Nylons Ltd. but has not been paid the amount, since in the current account as appearing in the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of learned lower authorities stand reversed on the above issue. The next ground of the assessee is about the disallowance of Rs. 30,912, which has been disallowed as being expenditure in the nature of entertainment expenses. The assessee claims it to be wholly and exclusively incurred for the purposes of the business and, alternatively, that the employees of the assessee have partaken in the courtesies, the disallowance has to be reduced accordingly. We will make the disallowance as 50 per cent. in terms of the decisions of the various Benches of the Income-tax Appellate Tribunal as also the Bombay Benches of the Income-tax Appellate Tribunal, since, on identical facts, the Income-tax Appellate Tribunal has been holding that employees of an assessee who have been partaking in the courtesies in terms of refreshments, etc., cannot be the subject-matter of disallowance and in the absence of any evidence for the parties, we will estimate it at 50 per cent. On this issue, the assessee succeeds partially. The third ground relates to disallowance of the amount of Rs. 7,210 claimed by the assessee to be an expenditure incurred on advertisement. The assessee presses into service circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arware Nylons Ltd. up to March, 1983, itself through its running ledger account. Naturally, in its books, the assessee-company first took capital gains of Rs. 23,26,204. However, ultimately, the assessee showed that sum as capital gains reserve. All the same, the assessee-company filed a return of tax and paid tax on the deemed profit under section 41(2) of the Income-tax Act, 1961, which, in effect, provides for taxation of depreciation allowed in preceding years when the machinery is sold at a higher price. It is claimed, on behalf of the assessee, that the sale bill dated March 1, 1983, in respect of prototype imported machine was subject to an agreement between the assessee-seller and Messrs. Garware Nylons Ltd. (as buyers) which is contained in the assessee -'s letter dated February 24, 1983. It is, therefore, claimed that, in the eye of law, the sale had taken place only on March 1, 1985, i.e., after expiry of two years of the date of sale bill of March 1, 1983. It may be further mentioned that the assessee is claiming benefit under section 54E of the Income-tax Act, 1961, on the footing that the sale took place on March 1, 1985, and the capital gains chargeable would be on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of the purchaser, as per the books of account of the assessee. The copy of the account of Messrs. Garware Nylons Ltd. in the books of the assessee, i.e., Messrs. Marchon Textile Industries (Pvt.) Ltd. is enclosed. (kindly see pages 20 and 21 of the compilation) ( emphasis * supplied ). " Note: It may be noted that, on pages 20 and 21 of the compilation is contained the entry-wise summary of the said ledger account for the financial year 1982-83. Further, even in the ground of appeal before the Tribunal, the assessee has stated at SI. No. 7 as follows : 7. That the learned Commissioner of Income-tax, (Appeals) erred in concluding that merely because the amount of Rs. 49,50,000 was received by the appellant in the assessment year 1983-84 and that no part was refunded to Garware Nylons Ltd., the transaction became 'a sale' in the assessment year 1983-84, and he ought to have appreciated that the appellant was liable to refund the said amount if the said machine did not give satisfactory performance. " ( emphasis * supplied ). This also is a clear admission of the fact even by the assessee that the money was received before March 31, 1983, and, in the above-mentioned ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factual background was narrated first by the learned advocate for the assessee and what was, inter alia, stated before us, was to the effect, that the said machine had been shifted to Garware Nylons Ltd. in October, 1981. * Here printed in italics. Then, in this regard, the first two questions and answers in the statement of Shri Ashok Garware dated June 27, 1988, put on page 25 of the assessee's compilation as SI. No. 7 are as follows : " Q. : In the year 1981, you took one n-,,achiiie from Messrs. Marchon Textiles Pvt. Ltd. to which the latter have referred as a prototype. 1 would like to know if there was any correspondence or negotiation preceding this in connection with the said prototype, with any of the Directors of Messrs. Marchon Textiles Pvt. Ltd. ? A. : There were discussions with the late Mr. K. G. Menon and Mr. T. R. Kapur, directors of Messrs. Marchon Textiles regarding the intention to purchase the prototype machine and shifting of the same to Messrs. Garware Nylons Ltd. for denionstration/trial in the intervening periods. This is borne out by Marcho'n's letter No. MTIlWorks1540, dated October 5, 1981, to Garware Nylons Ltd. It was also decided to simultaneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Village, Goregaon (East), Bombay400 063, for a long period and also for about three months at your works for demonstration purpose with the prior permission from the office of the Textile Commissioner, Bombay. " (emphasis * supplied). So, in this letter, the assessee claims that the prototype machine was running for demonstration at Nirlon and also for about three months at the works of Messrs. Garware Nylons Ltd. As per this narration, it would mean that the machine would be running for demonstration at the premises of Garware Nylons Ltd. for about three months prior to the date of that letter February 24, 1983, i.e., at least from November, December, 1982. It has been necessary to highlight this aspect because the fact of the matter is that the prototype machine was shifted to the premises of Garware Nylons Ltd. in or about October, 1981, and it had been there even up to February, March, 1983, for about one year and four months (i.e., October, 1981 to February, 1983) against less than one year at Nirlon (i.e., November, 1982 to October, 1983). Now, we can come to the assessee's arguments which are based almost solely on the assessee's letter dated February 24, 1983, addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import licence to Messrs. Garware Nylons Ltd. Shri Dastur, the learned advocate, for the assessee, then, drew our attention to a part of the remand report dated June 27, 1988, and questions-answers recorded in paragraph 5 thereof. He further emphasised that Messrs. Garware had not capitalised and had not claimed depreciation on that machine up to March 1, 1984. On this basis, he argued that the buyer also had not treated it as its asset up to the end of March, 1983. He drew our attention to the provisions of the Sale of Goods Act of 1930. From section 4(4), he wanted us to infer that, in February/March, 1983, it was merely an agreement to sell and it would become a sale, only after the specific time elapses or the conditions are fulfilled. In this context, he drew our attention also to the final accounts of the assessee-company, in particular, Schedule 8 of the Annual Report (relevant to the financial year 1982-83). He pointed out that from the sale price, the original cost was deducted to arrive at the capital gains at Rs. 23,26,204, which were taken to the capital gain reserve account but the excess of cost of machine Rs. 26,23,796 above the written down value Rs. 21,25,275 came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine being bought by Messrs. Gaiware Nylons had already been reached orally. Our specific attention was drawn to the questions and answers appearing on page 26 of the compilation which is on page 2 of the said statement dated June 27, 1988, of Shri Ashok Garware. They are in the following terms : " Q. : When was the purchase order placed with Marchon Textile and what is the date of their sale bill ? A. : The written date of the purchase order is March 14, 1983, and the date of their bill is March 1, 1983. However, it was orally decided to purchase the machine soon after receipt of permission from the authorities in January, 1983. (emphasis * supplied ). Thus, the discrepancy of dates between the purchase order and the sale bill was put to Mr. Ashok Garware by the departmental authorities and Mr. Ashok Garware stated that the purchase of the machine had already been decided soon after the receipt of permission from the Government in January, 1983, meaning thereby, that much importance need not be attached to the date of purchase order being March 14, 1983, when the sale bill had already been prepared on March 1, 1983. In the context of conditions of two years, we specifically a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been shown by the assessee itself. The learned Departmental Representative also relied on the Kerala High Court decisions in K. N. Narayanan v. ITO [19881 173 ITR 61 and in Neroth Oil Mills Co. Ltd. v. CIT[19871166 ITR 418. In reply, the learned advocate for the assessee tried to distinguish the cases relied on by the Department and pressed his point that, in view of the letter dated February 24, 1983, it was merely an agreement to sell and the sale got actually completed only on March 1, 1985. Thus, there is no doubt that the transaction would be covered by the Sale of Goods Act, 1930. Section 19 thereof needs very careful consideration for application to the facts of this case and the first two subsections thereof are relevant which may be reproduced as follows : " 19. Property passes when intended to pass. - (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at last period, the ownership in that property cannot vest in the assessee as well as the buyer - Messrs. Garware Nylons Ltd. So, the assessee's plea that the property in the goods passed only in March 1, 1985, cannot be supported on this basis. This leaves the period from March 1, 1983, to March 1, 1984. For that, a possible explanation is that Messrs. Garware Nylons Ltd. installed it and used it for production from March 1, 1984, and, for the intervening period of March 1, 1983 to March 1, 1984, they had not treated it as installed. It is not the same thing as to say that the property in the goods had not passed to Messrs. Garware Nylons Ltd. before March 1, 1984. Now, let me have a look at the assessee's main contention based on the letter dated February 24, 1983. It is a letter written by the assessee to Messrs. Garware Nylons Ltd., wherein Messrs. Garware Nylons Ltd. has signed with the following remarks : " We confirm the above proposal. Thus, the contents are proposed by the assessee and confirmed by the buyer - Messrs. Garware Nylons Ltd. This aspect apart, let me now consider the contents. The preamble to that letter is reproduced in paragraph 5.5 on page 33 (supra p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation allowance as installed on March 1, 1984. VII. In its books of account, the assessee, for the period ending March 31, 1983, treats it as a sale, but the excess of sale price realised over cost is not returned for taxation as capital gains, but is taken to the liabilities side of the balance-sheet as capital gains reserve. V111. All the same, in the income-tax return relevant to the assessment for the year ending March 31, 1983, depreciation allowed on this machine in preceding years is offered for taxation under section 41(2), obviously on the footing that sale took place in March, 1983. On the basis of these basic facts and in view of the weakness in the assessee's case even in regard to the reliance on the assessees' letter dated February 24, 1983, it has to be held that the property in the goods had passed certainly in the month of March, 1983. Hence, consequential capital gains had arisen in the previous year ended on March 31, 1983, relevant to the assessment year 1983-84. ORDER OF REFERENCE To THIRD MEMBER The following point of difference emerging from the proposed orders of the Members constituting the Bench in 1. T. A. No. 2866/Bom of 1988 in the case of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the assessee entered into agreements for manufacturing or assembling of similar machines for other users in India. The imported prototype machine was kept for demonstration purposes for about a year in the premises of another company called " Nirlons ". In October/November, 1981,. the prototype machine was apparently shifted to the premises of Messrs. Garware Nylons Ltd. for the purposes of demonstration. Now the dispute is whether Messrs. Garware Nylons Ltd. had purchased the machine and whether the assessee had sold the machine to them on March 1, 1983, or not. Soon after the machine was shifted to the premises of Messrs. Garware Nylons Ltd. ( hereinafter referred to as " buyer " for the sake of convenience ), negotiations started between the assessee and the buyer for the sale of the machine. There was a restriction imposed by the Government that the imported prototype machine would not be sold for a period of two years except with the prior permission obtained from the Government of India. Applications were made to the Government of India for the sale of this machine and it is common ground that the Government of India granted the permission in January, 1983, subject to sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains had been complied with. But these contentions were not accepted by the Assessing Officer. For the reasons given by him in his order, which is very detailed, he came to the conclusion that the sale took place on March 1, 1983, itself and that it was not postponed at all by the stipulation of guarantee given in that letter. He relied upon (a) the raising of the sale bill on March 1, 1983, for the full consideration of the sale price, (b) the delivery of the machine to the buyer, (c) the reference to the sale of the machine by the directors in their report in the accounts for the year under appeal, particularly the mention of the fact in their report that they propose to reinvest the entire capital gains of Rs. 23,26,204, earned on the disposal of the capital asset., on machinery within the stipulated time and reduction of this asset from the block of their assets. He also referred to the fact that, in the profit and loss account prepared by the assessee for this year, the capital gains on the sale of this machinery was disclosed although the same amount was carried to the capital gains reserve account through the profit and loss appropriation account. Referring to the letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... postpone the parting of the title in the machine from March 1, 1983, to March 1, 1985. The learned Accountant Member drew his own inferences and conclusions from the very same material from which the learned judicial Member drew his own conclusions. As it has turned out now, before me, as a third Member, the entire case revolves on the true and correct interpretation of section 24 of the Sale of Goods Act and whether the material on record would support a conclusion of a completed sale or sale on approval. The most important evidence is the letter dated February 24, 1983, a copy of which was faithfully reproduced by the learned judicial Member in his order and the other circumstantial evidence like depositions of the joint managing director of the buyer. I shall first deal with the evidence on record, whether it could be inferred therefrom that the parties intended that the transfer would take place on March 1, 1983, or later. Section 19 of the Sale of Goods Act deals with a contract for the sale of specific or ascertained goods and provides the property in those goods is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Then, sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee for the satisfactory running of the machine for the period of two years, we undertake that we shall refund to you the above sale price of the referred machine and will take back our machine to our factory premises without charging any compensation for the use by you of the referred machine. Hope this is in order and request your goodself to send us the duplicate copy duly signed by you as a token of your acceptance to the above proposal. " This letter clearly proves that the machine was a prototype machine which was used rather loosely for a considerable time for demonstration purposes and which needed the prior permission of the Government (Textile Commissioner) for its sale, and that the buyer insisted upon a guarantee for the satisfactory performance of the machine and that the required guarantee was given. This letter further points out that, if the assessee was unable to fulfil its guarantee obligations, it would undertake to refund the entire sale price of the machine to the buyer and would take back the machine to the assessee's factory premises without charging any compensation for the user of the machine in the meantime. This letter would further show that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc., was normal trade practice, Shri Ashok Garware replied : " We considered putting such condition as reasonable as sale and purchase of imported prototype machine is not a normal trade. " There are some other questions having a bearing on this issue and all of them point to the conclusion that these conditions were agreed upon on the insistence of the buyer, all because the machine sold was an imported prototype machine which had become old on account of continuous user and no one was sure as to its good and satisfactory performance. The suggestion to put this condition came from the engineers. This fact also came out in the statement made by Shri Ashok Garware. So, the letter and the subsequent statement of Shri Ashok Garware seen in the above background point out that the parties intended that the sale should be a sale on approval basis as the machine was old and much used subject to a limitation of time and not a completed sale. Thus, the circumstances of the case also abundantly prove this point. Now, it has to be considered as to what is the effect of raising a sale bill, receiving the payment in full, delivery of the machine and reducing the cost of this machine from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record becomes absolutely inevitable. Therefore, a conclusion cannot be drawn from those circumstances that the sale was complete which would mean ignoring the conditions imposed by the letter. The fact that the buyer-company had not claimed depreciation on the machine as and from March 1, 1983, is also consistent and is in accord with the view that it had not become the owner of the machine so as to claim depreciation with effect from March 1, 1983. 1 can say here that furnishing of a guarantee does not, in my opinion, postpone the date of passing of the title in the goods from the seller to the buyer till the period of guarantee expires. Guarantee given in the Sale of Goods Act is not different from a warranty spoken of in section 12 of the Sale of Goods Act. Section 12 of the Sale of Goods Act is in the words : " 12. Condition and warranty. - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (3) A warranty is a stipulation collateral to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. This clearly shows that, in a case of goods sent on approval or on sale or return basis, there is generally no completed sale until the buyer has either signified his approval either expressly or by dealing with the goods as owner or kept the goods until the lapse of the prescribed or a reasonable time without returning them or made the return impossible by his own act or default. Now, in this case, the letter clearly provided that the machine shall be returned to the seller within a period of two years. Until the period of two years is over, the property therein does not pass to the buyer and the seller remains the owner of the goods although h'e received the sale price in full and parted with the possession of the machine because the section says that, when goods are delivered to the buyer on approval or on "sale or return" basis or other similar terms, the property therein passes to the buyer only when the buyer signifies his approval or acceptance to the seller. So the delivery of the goods to the buyer under a contract of sale on approval or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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