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TMI Blog1962 (7) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shipment and the buyers had to open an irrevocable confirmed credit in favour of the assessee in Bombay before the time of shipment. Cotton was, however, not shipped as was contemplated by the said contract. But ultimately on 24th January, 1948, reverse contract was entered into whereunder Raw Cotton Traders Ltd. resold the said 4,000 bales of cotton at ₹ 835 per candy c.i.f. Shanghai. Annexure B , which is a letter written by Raw Cotton Traders Ltd. to the assessee, mentions the following terms: This contract is in settlement of our purchase No. U-13 as we have been unable to obtain the necessary import licence and open irrevocable confirmed credit. As a result of this re-sale, the assessee had to pay ₹ 1,40,000 to the Mills: ₹ 1,05,000 out of ₹ 1,40,000 was paid by the assessee to the China Mills Ltd. and ₹ 35,000 were paid by the assessee to M/s. Lee Hsing Cotton Spinning Weaving Co. Ltd. The payment was made in the following manner: Amount Date Rs. M/s. Volkart Bros. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit and loss account and subjected to an assessment in excess of whatever their actual purchase rates may have been. In other words, the assessees have actually paid tax on the purchase and sale of these 4,000 bales of cotton ready. From the extensive correspondence with the two non-resident Cotton Mills, it is abundantly clear that they also intended actual delivery and that it was with some difficulty that the assessee's brokers. M/s. Raw Cotton Traders Ltd., could arrange that the delivery was not to be given. The reason advanced for the non-delivery was that the export licence could not be arranged in Pakistan from where they were to be shipped. 10. An attempt was made to show that the two cotton Mills obtained delivery from elsewhere. The fact that the assessee paid ₹ 20,000 and ₹ 60,000 ultimately to M/s. Kilachand Devchand Co. and M/s. Volkart Bros. Ltd. who were both shippers of cotton, tend to support the assessee's contention. The importance of looking at the transactions as a whole rather than the isolated transaction of purchase and sale between the assessee and Raw Cotton Traders Ltd. is that this would lead to the inference that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee at profit. The profits made by the China Mills were profits chargeable to tax under the provisions of the Indian Income-tax Act. China Mills were non-residents within the meaning of the Indian Income-tax Act. The assessee, therefore, was liable to pay income- tax on the aforesaid payments made by reason of section 18(3A) of the Act. Mr. Mehta, appearing for the assessee, on the other hand, raised before us three contentions. Firstly, he contends that on the material evidence the Tribunal has found as a fact that the assessee wanted to wriggle out of the contract because the prices were rising at the time. The assessee, therefore, instead of carrying out his part of the contract, had contracted to pay the difference in price to the China Mills because the China Mills at that time were required to purchase cotton from other dealers. The payment made thus, though it was in the form of purchase price for the cotton, was really in the nature of payment of part of the price of cotton which the China Mills were required to purchase on account of the failure on the part of the assessee to perform the contract. There is evidence to support these findings of the Tribunal and this cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary, 1948, written by M/s. Umrigar and Co., the representatives of Raw Cotton Traders, and this letter discloses that the China Mills up to that date had not been able to secure import licence. It further discloses that the assessee had informed them that there was an outbreak of political riots in Karachi and, therefore, the contract should be cancelled. Umrigar and Co., however, after noting the request of the assessee had informed the assessee that they would be soon obtaining the import licence and even if on account of the political riots the shipment is a little bit delayed, it would not matter. The mills would not like the contract to be cancelled. The mills have already sold cloth against their purchase of 4,000 bales and, therefore, the bales should be delivered to them even though shipment may be delayed on account of the political riots in Karachi. This letter further suggests to the assessee that the mills may consider the question of reselling the cotton to the assessee if the assessee so desired and if the terms were found suitable. It further appears that the assessee was directed to give delivery of the cotton bales to Volkart Bros. after they had approved the cott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries the reason given for the transaction of resale is the failure on the part of the China Mills to open credit and consequently the inability on the part of the assessee to continue keeping the cotton in Pakistan. These are all the documents subsequent to the contract of resale and they also go to show that the real reason for the transaction of resale was the failure on the part of the China Mills to obtain import licence and open irrevocable confirmed credit. There is another letter written on 11th February, 1948, by Umrigar Co. to the assessee and that letter shows that even up to that date the mills had not purchased cotton from any other dealer. But negotiation was for purchase of cotton from dealers in Pakistan, who perhaps were in a position to ship cotton to the Mills. This letter, which is on record, clearly shows that at the time of resale the China Mills had not purchased cotton from any other dealer. It necessarily follows that the payment of ₹ 1,40,000 made by the assessee could not be in the nature of part of the price of cotton paid by the assessee to the China Mills on account of their failure to supply the same. Our attention was also drawn by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir business was manufacture of cloth. At the time the China Mills agreed to purchase cotton from the assessee they had the bona fide intention of taking delivery of the cotton. Subsequent thereto, they could not take delivery of the cotton because they could not arrange for import licence and failed to open irrevocable confirmed credit. It is in these circumstances only that they had entered into the transaction of resale. The profit resulting therefrom was only a casual receipt and was not a business receipt and, therefore, no tax was attracted to this receipt. It is indeed true that the normal business of the China Mills was manufacture of cloth and there is evidence on record to show that the mills had the bona fide intention of taking delivery and it appears that till the 12th of January, 1948, the Mills were hopeful of getting a permit and insisting on delivery, but were ultimately unable to get permit and the transaction of resale was therefore entered into. But, for these reasons, it is difficult to hold that the profits earned by the China Mills as a result of the transaction of resale was not a business receipt or was only a casual transaction having no connection wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , liable to tax. It can hardly be said that the cotton purchased by the China Mills in the instant case was an investment of a capital nature. On the other hand, as already stated, it was raw material purchased by the Mills for the purpose of the business of the Mills and the expenditure incurred thereon was of a revenue nature, and consequently, the receipts received by the sale of that material in the course of its business was a revenue receipt arising from the business. A decision in George Thompson Co. Ltd. v. Commissioners of Inland Revenue [1927] 12 Tax Cas. 1091 , would come very near the facts of the present case. The assessee company was carrying on business, inter alia, as ship-owners, merchants, ship-brokers, etc. For the purpose of business it had entered into a contract for purchase of coal. Subsequent thereto some of the company's ships were requisitioned by the Government. This resulted in a surplus of coal in the hands of the assessee company. The assessee company, therefore, sold the benefits of the contract for purchase of coal to another company. The question arose whether the profits resulting from this transaction of sale of the benefits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -resident but on the other hand payments were made to Volkart Bros., Chartered Bank, Khilachand Devchand Co. and Mr. Umrigar, who, at the material time, were all residents. Mr. Mehta, however, did not argue this point in view of the decision of this court in Narsee Nagsee Co. v. Commissioner of Income-tax [1959] 35 I.T.R. 134. He only stated that he would like it to be mentioned that he had raised this point. It is next to be seen whether on the facts of this case section 18(3A) is attracted. That section as it stood then was in the following terms: Any person responsible for...any other sum chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay income-tax thereon as an agent, deduct income-tax at the maximum rate. It is not in dispute that the China Mills, to whom payment was made, are non-residents. On the facts found the amount paid represents the profit made by the Mills on the sale of cotton. As already stated, in our view, the profits made arose from business and tax would, therefore, be chargeable on profits under the Indian Income-tax Act. It is also not in dispute that the assessee was not an agen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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