The Commissioner Of Income-Tax, Madras v. Mysore Chromite Limited

S.C.R. SUPREME COURT REPORTS Instead of adopting that straightforward course the officers of the State have sought to circumvent the decision of this Court on a flimsy pretext and covertly to challenge its correctness on an obviously untenable plea which has not even the merit of a seeming plausibility. This conduct verges dangerously on a contempt of this Court. We desire to make it quite clear that we view with great disfavour such unworthy attempt to get round the decision of this Court. THE COMMISSIONER OF INCOME-TAX, MADRAS MYSORE CHROMITE LIMITED. [MEHR CHAND MAHAJAN C.J., s. R. DAS, GHl)LAM HASAN, BHAGWATI and VENKATARAMA AYYAR JJ.) Indian Income-tax Act, 1922 (Act XI of 1922), s. 4-Profits derived by the assessee-W hether arose or were 1·eceived in British India in the present case. The assessee con;ipaqy with its registered office in Mysore State and its management vested in Oakley Bowden Co. Ltd., Madras, sold Chrome ore to buyers mostly outside India who were in America and Europe. The sales to the purchasers in Europe were put through in London by Bowden Oakley and Co. Ltd., London, the agent of the assessee company in Europe, the said agent signing the contracts for sale in London. The sales to pur-<. chasers in America were effected through W. R. Grace & Co., New York, who bought for undisclosed principals, the contracts for sale to American purchasers being signed by W. R. Grace & Co., Ltd., New York, in America and by Oakley Bowden & Co. Ltd. (Madras), in Madras. Under both forms of contracts with European pur-chasers and American purchasers the price was f.O.B. Madras. Provision was made for weighment, sampling and assay of goods at destination. The course of dealing between the assessee company and the purchasers was as follows :- Before the goods were actually shipped, the buyers used to open a confirmed irrevocable Bankers' credit with some first class Bank in London. Being informed of the opening of such credit the 1954 The Chamber of Commerce, Ha/UT, and three Others. v. The State of Uttar Pradesh and two Others. 1954 Tht Commissiontr of lnco~·lax, Madrru v. Mysore ·Chromite Limilfd. [1955] 1954 1954 Eastern Bank Ltd., London, sent inti111ation to the Eastern Bank Ltd., Madras, and the latter in its turn used to_ pass on the intima-tion by letter addressed to the assessee company. On receipt of such intimation ·the asscssee company placed the contracted goods on board· the steamer at Madras and obtained a bill of lading in its own name. Thereafter the assessee company used to make out a provisional· invoice on thC basis of the bill of lading \Veight and contract price for 48 percent Cr. 203 and used to draw a bill of exchange on the buyers' Bank, where the letter of credit had been opened, for 90 percent of the amount of the provisional invoice payable at sight in the case of European contracts and 80 percent of the an1ount of the provisional invoice at 90 days' sight in the. case of A1nerican contracts and in either case the bills of exchange used to be dra\vn in favour of the Eastern Bank Ltd., London. The bill of exchange together with the bill of lading endorsed in blank by the assessee company and the provisional invoice \Vas then negotiated \Vith the Eastern Bank Ltd., Madras, the bankers of the assessee con1pany, who used to credit the assessee company \Vith the a1nount of the bill of exchange. The Eastern Bank Ltd., Madras, then forwarded the documents to the Eastern Bank Ltd., London, who used to present the bill of exchange to the buyers' Bank in London, and upon the bill of exchange being accepted the Eastern Bank Ltd., London, used to deliver the bill of lading and the invoice to the buyers' Bank. The buyers' Bank in due course used to pay the amount ~f the bill of exchange to the Eastern Bank Ltd., London. Thereafter, on arrival of the goods and after weighment and assay, the sale price \Vas ascertained and the balance of price after deducting the payments made against the bill of exchange, used to be paid to the Eastern Bank Ltd., London, which was the assessee company's agent and Banker in London. It was common ground between the Income-tax department and assessee company that the incon1e arose at the place v.•here the sales took place. It was contended on behalf of the department that the sales must be regarded as having taken place in British India because (i) the price and delivery of goods were on F.O.B. terms, (ii) that in ~· the European contracts, the insurance, if any, was to be the concern y of the buyers, (iii) that the payment of the 80 percent or 90 per-cent as the case may be was made in :r...fadras by the Eastern Bank Ltd., Madras, and as on these facts the property passed at Madras, the sales were completed in British India. Held, (repelling the contention) that upon the terms of the con-tracts in question and the course of dealings between, the parties • the property in the goods could not have passed to the buyer ear-lier than the date when the bill of exchange was accepted by the buyers' Bank in London and the documents were delivered by the assessee company's agent, the Eastern Bank Ltd., London, to the buyers' Bank and this admittedly always took place in London and in the premises the sales took place outside British India and ex Held, (repelling the contention) that upon the terms of the con-tracts in question and the course of dealings between, the parties the property in the goods could not have passed to the buyer ear-lier than the date when the bill of exchange was accepted by the buyers' Bank in London and the documents were delivered by the assessee company's agent, the Eastern Bank Ltd., London, to the buyers' Bank and this admittedly always took place in London and in the premises the sales took place outside British India and ex Section: CONCLUSION hypothesi the profits derived from such sales arose outside British India. Held further, that the contention submitted on behalf of the department that irrespective of the place where the sales may have taken place the profits derived from such sales were receiYed in Madras, as after shipment the assessee company, through its managing agents in Madras, prepared 2rovisional invoices and drew bills of exchange for 80 percent or 90 percent as the case may be of the amount of such invoices and handed over the same to the Eastern Bank Ltd., Madras, and received the amount of the bill of exchange from them in Madras and that the receipt of this payment by the assessee company was really the receipt of the price of the goods and amounted to receipt of profits in Madras, was also devoid of force because the price was paid on behalf of the buyers by their respective London Banks in London to the Eastern Bank Ltd., London, which was the agent of the assessee company. The first receipt of the price was by the Eastern Bank Ltd., London, on behalf of the sellers and the balance of the price ascertained after weighment and assay and deducting the amount paid on the bill of exchange was similarly received 111 London by the Eastern Bank Ltd., London, on behalf of the assessee company and sub-sequent adjustment made in the books of Eastern Bank Ltd., London, did not operate as receipt of profits in British India. Promz Adalbert (L.R. [1917] A.C. 586) referred to. CIVIL APPELLATE JmusDICTION : Civil Appeal No. 117 of 1953. Appeal from the Judgment and Order dated the 29th day of March, 1951, of the High Court of Judica-ture at Madras in Case Referred No. 44 of 1948. C. K. Daphtary, Solicitor-General for India ( G. N. Joshi, with him) for the appellant. R. Ganapathy Iyer and M. S. K. Aiyangar for the ' respondent. 1954. November 1. The Judgment of the Court was delivered by DAs J.-This 1s an appeal from the judgment pronounced by the High Court of Judicature at Madras on the 29th March, 1951, on a consolidated reference by the Income-tax Appellate Tribunal under section 66(1) of the Income-tax Act whereby the High Court answered in the affirmative both the referred ques-tions which were expressed in the following terms : 1954 Th• Commission..-of Income-tax, Madras v. Mysore Chromite Limited. 1954 TI~ Commissioner •f Income-ta.-.:, Madras v. Mysurt Cliromite Limittd. Das]. 852 SUPREME COURT REPORTS [19551 (1) Whether on the facts and in the circumstances of the case the profits derived by the assessee company from sales made to European and American buyers arose outside British India ? (2) Whether on the facts and in the circumstances of the case the profits derived by the asscssee company from sales made to European and American buyers were received outside British India ? from sales made to European and American buyers -~ were received outside British India ? The above questions of law arose out of proceedings for the assessment to income-tax of the respondent, Mysore Chromite Ltd. (hereinafter referred to as the assessee company), for the years 1939-40, 1940-1941, 1941-1942 and 1942-1943. The facts leading up to the reference as found by the Income-tax Appellate Tribunal are shortly as follows : The assessee company is a private limited company registered in the Mysore State under the Mysore Com-pany Regulations and has its registered office at Sinduvalli in Mysore State. The management and control of the asscssce con1pa11y was vested in Messrs. Oakley Bowden & Co. (Madras) Ltd., another private limited company incorporated under the Indian Com-panies Act, having its registered office at No. 15, Armenian Street, Madras. The assessee company owns chromite mines in Mysore State. Chrome ores are extracted from the mines and converted into a merchantable product and then sold to buyers mostly ()utside India. A very small proportion of the total sales is effected in India and for the purposes of this case may be left out of consideration. The sales are mostly to buyers in America and Europe. The sales to the purchasers in Europe are put through in London ' "" by Bowden Oakley & Co. Ltd., London, which is the agent of the assessee company in Europe hokling a power of attorney from the assessee company. The contracts for sale to European purchasers are signed by Bowden Oakley & Co. Ltd., in London. The sales to purchasers in America are effected through Messrs. W. R. Grace & Co., who buy for undisclosed principals. The contracts for sale to American purchasers are signed by W. R. Grace & Co., presumably in America and by Oakley Bowden & Co. (Madras), Lt<l, in Madras. Specimen forms of contracts with Europe;m purchasers and those with American purchasers are set out in the order of the Tribunal dated the 22nd January, 1948, out of \vhich the present reference arises. Under both forms of contracts the price was F.O.B. Madras or Marmagoa. A very small quantity of goods was sold F.O.B. Marmagoa and the same need not be considered here. Provision was made for weighment, sampling and assay of goods at destination. The terms of pay-ment under the European contract were as follows :- "Payment.-Buyers to open a confirmed Irrevo-cable Bankers credit in favour of Messrs. Mysore Chromite Ltd., Madras (to be advised to sellers) through the Eastern Bank Ltd., for 90 per cent. (ninety per cent.) of the Provincial (sic) Invoice against docu-ments. Documents to consist of :-1. Bills of Lading, 2. Provisional Invoice. Provisional invoice to be based on Bill of Lading weight and contract price for 48 per cent. Cr. 203. Balance on ascertainment of weight and analysis to be paid in London to Bowden Oakley & Co., Ltd., within 10 days of the final invoice, based on outturn weights and assays." The corresponding terms of payment under the American contracts were as follows :-"Payment.-Letter of credit for eighty per cent. (80 per cent.) of invoice value to be available against drafts at ninety (90) days' sight with documents attached to be opened immediately in London in favour of the seller. Balance estimated twenty (20 per cent.) of the margin due to be paid by telegraphic transfer duough London on receipt of information as to assay and outturn which should be submitted within a month after the arrival of the steamer at destination. Charges for such telegraphic transfer for account of beneficiary." The European contracts also provided for insurance by buyers but no such provision was made in the American contracts. 1954 The Commissionn of lncom,·llzx, Madras v. Mysore Chromit1 Limited. Das]. !954 The Commissiorur of /nrome-tax, Madras v. Mysore Chromite Limited. Das]. 854 SUPREME COURT REPORTS rI955] The course of dealing as found by the Appellate Tri-bunal was as follows. Before the goods were actually shipped, the buyers used to open a confirmed irrevo-cable Bankers' credit with some first class bank in London. Being informed of the opening of such credit the Eastern Bank Ltd., London, sent intimation to the Eastern Bank Ltd. Madras, and the latter in its turn used to pass on the intimation by letter addressed to the assessee company. A specimen of such letter is also set out in the order of the Appellate Tribunal. In such communication the Eastern Bank Ltd., Madras, informed the assessee company that "in accordance with advices received by letter from our London Office, a confirmed and irrevocable credit has been opened in your favour by Messrs. Morgan Grenfell & Co., Ltd., London, for account of Messrs. W. R. Grace & Co., New York, for a sum not .exceeding £ 7,300 (seven thousand three hundred pounds sterling) in all, available by delivery to us on or before 15th January, 1940, of the following documents .............. " Towards the end of the letter the Eastern Bank Ltd., Madras, used to write that they were "prepared in our option as customary to negotiate drafts drawn in terms of the arrangement provided that the documents as above mentioned appear to us to be in order." The letter concluded with a warning that the advice was "given for your guidance and without involving any responsi-. bility on the part of this Bank." On receipt of such intimation the assessee company placed the contracted goods on board the steamer at Madras and obtained a bill of lading in its own name. As already mentioned, the shipments were made principally at Madras Thereafter the assessee company used to make out a pro-visional invoice on the basis of the bill of lading weight and contract price for 48 per cent. Cr. 203 and used to draw a bill of exchange on the buyers' Bank, where the letter of credit had been opened, for 90 per cent. of the amount of the provisional invoice payable at sight in the case of European contracts and 80 per cent. of the amount of the provisional invoice at 90 days' sight in the case of American contracts and in either case the bills of exchange used to be drawn in favour of the S.C.R. SUPREME COURT REPORTS Eastern Bank Ltd., London. The bill of exchange together with the relative bill of lading endorsed in blank by the assessee company and the provisional in-voice was then negotiated with the Eastern Bank Ltd., Madras, the bankers of the assessee company, who used to credit the assessee company with the amount of the bill of exchange. The Eastern Bank Ltd., Madras, then forwarded the documents to the Eastern Bank Ltd., London, who used to present the bill of exchange to the buyers' Bank in London and upon the bill of , exchange being accepted the Eastern Bank Ltd., London, used to deliver the bill of lading and the invoice to the buyers' Bank. The buyers' Bank in due course used to pay the amount of the bill of exchange to the Eastern Bank Ltd., London. Thereafter, on arrival of the goods and after weighment and assay, the sale price was ascer-tained and the balance of price, after deducting the payments made against the bill of exchange, used to be paid to the Eastern Bank Ltd., London, which was the assessee company's agent and banker m London. On the facts stated above the Income-tax Officer assessed the assessee company on the entire profits in respect of these sales on the footing that they arose and were also received in British India. On appeal, the Appellate Assistant Commissioner confirmed the assess-ment. The assessee company went up on appeal to the Income-tax Appellate Tribunal. The Tribunal, by its order dated the 22nd January, 1948, came to the conclusion that the sales took place outside British India and that the money in respect of mch sales was also received by the agent of the assessee company in London. The Commissioner of Income-tax thereupon applied to the Appellate Tribunal requiring the latter to state a case and refer certain questions of law said to arise out of the order of the Tribunal. The Appellate Tribunal accordingly referred the two questions of law hereinbefore set out. The High Court of Madras in a well reasoned judgment upheld the decision of the Appellate Tribunal and answered the two questions in the affirmative and against the Commissioner of Income-tax. fhe Commissioner of Income-tax has now preferred 1954 The Commissioner of Income-tax, Madras v. J.fysore Chromite Limited. Das]. Tht Commissio11er ef lncome·tax, A1adras v. Mysore Chromite Limited. DasJ. 856 SUPREME COURT REPORTS [1955) this appeal with a certificate of fitness from the High Court. 1954 It appears from the statement of case as also from the order of the Appellate Tribunal that it was agreed between the department and the assessee company that the income arose at the place, wherever that be, where the sales took place. This was not disputed before the High Court or before us although in the appellant's statement of case it was suggested that this was erroneous. The point for determination, therefore, 1s as to where the sales took place. Learned Solicitor-General appearing in support of this appeal contends that having regard to the terms of the contracts the sales must be regarded as having taken place in British India. The facts strongly relied on by him are· (i) that the price and delivery of goods. were on F.O.B. terms, (ii) that in the European contracts the insurance, if any, was to be the concern of the buyers and (iii) that payment of the 80 per cent. or 90• per cent. as the case may be was made in Madras by the Eastern Bank Ltd., Madras, to the assessee company on the delivery of the tlocuments. All these facts taken together indicate, according to his submission, that the· property in the goods passed at Madras and the sales accordingly were completed in British India. We are unable to accept this line of reasoning. According to. section 4 of the Indian Sale of Goods Act a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price and where under a contract of sale the pro-. pcrty in the goods is transferred from the seller to the buyer, the contract is called a sale, hut where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. By sub-section ( 4) of that section an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Section 18 of the Act clearly indicates that in the case of sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained. In 857 857 the present case, the contracts were always for sale of unascertained goods. Skipping over sections 19 to 22 which deal with contract of sale of specific goods we come to section 23 which lays down that where there is a contract for the sa