Dixit, C.J.
1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, the question which has been referred to this court for decision is:
' Whether, on the facts and in the circumstances of the case, the profit along with interest of Rs. 33,784 and commission of Rs. 19,179 included in the sale proceeds amounting to Rs. 28,93,802 and Rs. 9,31,000 could be said to have been received by the bank on behalf of the assessee in British India so as to attract levy of tax under Section 4(1)(a) of the Indian Income-tax Act, 1922?'
2. The dispute in this reference relates to the assessment year 1949-50, the relevant previous year of which ended on 1st November, 1948. During the relevant previous year, the assessee-firm, M/s. Laxmichand Muchhal, Indore, carried on business at Indore and Ujjain in the sale and export of cloth. These two places were then in non-taxable territory. In that year, there was an all India control over the disposal of cloth. Under the All India Cloth Distribution Scheme, which was then in force, the assessee-firm was appointed as nominee for the United Provinces and certain districts of Punjab for supply of cloth from particular mills in Indore and Ujjain according to the allocations made by the competent Textile Commissioner. When the assessee received allotment orders for supply of cloth to United Provinces and certain districts of Punjab from mills in Indore and Ujjain, it took delivery of the allotted cloth and then despatched the cloth to various destinations in Uttar Pradesh and other places according to the instructions received from time to time from the competent authorities. The goods were stocked by the assessee in godowns until they were actually despatched to the allottees. They were put on rail at Indore and Ujjain and all transport charges were borne by the allottees to whom they were to be despatched in accordance with the instructions of the competent officers, The assessee made out invoices in the name of the parties to whom goods had been allotted, and the invoices along with the railway receipts drawn in the name of self with hundis covering the price and other charges due to the assessee were presented by the assessee at the State Bank of Indore after being endorsed in favour of the bank. In the invoices, besides the price of the cloth, transport charges, commission charges, and interest amount on the price of cloth from the date of taking actual delivery by the assessee of cloth from the mills till the date of despatch of the cloth to the allottees at various destinations were included. The State Bank of Indore discounted the documents presented by the assessee and gave it full credit for the entire amount. The assessee withdrew the amount from the bank soon after it was credited by the bank in its favour after the receipt of the documents. The amount thus collected by the assessee in respect of its business at Indore and Ujjain as nominee for United Provinces and certain districts of Punjab was, during the relevant previous year, Rs. 28,93,802 at Indore and Rs. 9,31,000 at Ujjain.
3. The Income-tax Officer, Indore, taxed the profit made by the assessee as a non-resident on the transactions of supply of cloth taking the view that the proceeds of the transactions were received by the assessee in the taxable territory and not at Indore or Ujjain ; and that the State Bank of Indore had acted as the assessee's collecting banker and carried out the assessee's instructions to collect from the allottees not only the face value of the bills but also the commission and interest. He, therefore, treated the receipt in the taxable territory by the bank of the amounts shown in the bills from various cloth allottees as receipts of the amounts by the assessee itself in the taxable territory. The order of assessment passed by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner.
4. The assessee then appealed to the Income-tax Appellate Tribunal contending that the documents drawn by the assessee were negotiated by the bank; that as the bank credited the entire amount to the account of the assessee, the collection subsequently by the bank of the amounts specified in the invoices and documents was on its own behalf and not on behalf of the assessee ; and that consequently the assessee received the amounts at Indore and Ujjain and not in the taxable territory where the bank recovered the money from various allottees. The assessee relied on the decision of the Punjab High Court in Chiranji Lal Multani Mal v. Commissioner of Income-tax, [1952] 22 I.T.R. 514. On a consideration of the material on record, which consisted of the assessee's account books, bank pass books, and the correspondence that was exchanged between the State Bank of Indore and the Income-tax Officer regarding the course of dealings between the assessee and the bank with respect to these particular transactions, the Tribunal came to theconclusion that the State Bank of Indore actually purchased the documents from the assessee or discounted them, and when it subsequently received the sale proceeds from the allottees, it received the sum for itself and not for the assessee. On this point, the Tribunal expressed its view thus :
' The first point for consideration is whether the assessee had negotiated actually the documents of title and whether the bank had discounted the same. It is found on a perusal of the account books and the bank pass books that the assessee got full credit for the entire amount represented by the bills. The bank had also in the course of the correspondence with the Income-tax Officer confirmed this position. There was an endorsement in favour of the bank at the time of handing over all the documents. The R. Rs. were documents of title to the goods and for all purposes represented the goods : see Commissioner of Income-tax v. Bhopal Textiles Ltd., [1961] 41 I.T.R. 72 (S.C.). Having rega,rd to the fact that the assessee has received full credit for the entire amount in the account on the very date of presentation of the documents and having regard to the course of transactions between the assessee and the bank, we are satisfied that this is a case where the bank has actually purchased the documents or discounted the documents. The bank has also not charged any interest on the amount paid to the assessee between the date of crediting the assessee's account and the date of actual realisation by it. It is stated that the interest, if any, for this period was recovered from the purchasers. We see no reason to disbelieve this statement.'
5. According to the Tribunal, the principle laid down by the Punjab High Court in Chiranji Lal Multani Mal's case, [1952] 22 I.T.R. 514 governed the present case, and consequently it could not be held that the assessee received the proceeds of the Indore-Ujjain cloth transactions in the taxable territory so as to justify assessment of the profit in those transactions under Section 4(1)(a) of the Indian Income-tax Act, 1922.
6. Shri Adhikari, learned Advocate-General appearing for the department, contended that in the present case the State Bank of Indore had neither discounted nor purchased the drafts or hundis drawn by the assessee ; and that the bank had merely acted as the assessee's agent for collection of the amounts due from the allottees and recover from the allottees not only the face value of the bills but also commission and interest. It was said that if the bank had purchased the bills and had become owner thereof, then it could not claim to recover any collection charges from the allottees; that the bank had no doubt given credit to the assessee after receiving the documents but that was by way of an overdraft; and that if the bank had purchased the bills or documents, then the assessee, without asking the bank to give it overdraft facility, would havebeen entitled to get the valuable consideration paid for the discounting of the drafts or hundis. It was said that crediting the assessee's account by the bank did not, therefore, alter the position of the bank from that of agent for collection to that of holder for value. Learned Advocate-General proceeded to say that the finding recorded by the Tribunal that the State Bank of Indore was a holder in due course of the drafts and hundis and not a collecting agent of the assessee was contrary to the evidence on record and was vitiated ; that if the bank was merely a collecting agent of the assessee, then the amounts received by it from allottees in the taxable territory was on behalf of the assessee ; and that, therefore, the profits of the cloth transactions were received by the assessee in the taxable territory within the meaning of Section 4(1)(a).
7. Shri Chitale, learned counsel for the assessee, argued that the State Bank of Indore, in whose favour hundis and drafts were drawn by the assessee, was a holder in due course ; that the drawing of the drafts or the handing over of the drafts by the assessee in favour of the bank was not conditional; that the assessee finally parted with the documents at the time it handed over them to the bank and the bank in its turn allowed credit to the assessee on receipt of the documents ; and that thus the bank, after becoming a holder in due course of hundis and drafts, collected the amounts from the allottees in the taxable territory on its own account and not as collecting agent of the assessee. Learned counsel emphasised the fact that the bank gave immediate credit to the assessee at the time it purchased the documents and much before the realisation of the amounts from allottees in the taxable territory. He relied on Chiranji Lal Multani Mal's case, [1952] 22 I.T.R. 514.
8. The main question raised in this reference is whether the State Bank of Indore received payments of the various instruments drawn by the assessee on the allottees in Uttar Pradesh and certain districts of Punjab for the assessee. If it did receive the payment for the assessee, then it is obvious that the proceeds of the cloth transactions were received by the assessee in the taxable territory where the bank collected for the assessee the amount of instruments from the allottees in Uttar Pradesh and certain districts of Punjab. It cannot be disputed that if a bank, after purchasing or discounting an instrument from a customer, credits the customer with the amount of the instrument and allows him to draw against the amount so credited before the bill or instrument is cleared, then the bank would be collecting the money not for the customer but chiefly for itself. In such a case, the bank does not act as a mere conduit pipe for conveying the instrument to the person on whom it is drawn and receiving the money from him for its customer, and the position of the bank as a holder for value of the instrument is not converted into one as an agent for collection on behalf of thecustomer merely because in the event of default in payment by the person in whose name the negotiable instrument is drawn the bank is entitled to the statutorily prescribed protection by the customer drawing the instrument.
9. Now, the question as regards the character in which a bank receives payment of a negotiable instrument is a question of fact. In each case, it is a question of fact whether a negotiable instrument is taken by the bank from a customer for collection or as security or discounted for him: M'Lean v. Clydesdale Banking Co., (1883) 9 App. Cas. 95 and Capital and Counties Bank v. Gordon, [1903] A.C. 240. It has been stated in Halsbury's Laws of England (volume 2, 3rd edition), at page 212, that :
' Where bills, notes or cheques pass from a customer to a banker, a question of fact arises whether the banker takes them for collection subject to the lien, or as transferee, so as to become absolute holder for value.'
10. Here, the Tribunal has found as a fact that the State Bank of Indore actually purchased from the assessee the documents or discounted them and the assessee received full credit for the entire amount of the instruments on the very date of their presentation, and the bank collected the amount of the instruments from the allottees on its own behalf and not on behalf of the assessee. On the facts found by the Tribunal that the State Bank of Indore collected the amount from the allottees on its own behalf and not as a collecting agent for the assessee, it must be held that the sale proceeds were received by the assessee at Indore and Ujjain and not at places in the taxable territory where the bank received the amounts from the allottees. Learned Advocate-General no doubt sought to question the validity of this finding of fact reached by the Tribunal. But that finding has to be accepted and must be given effect to when the department never applied to the Tribunal to submit a statement of the case to this court raising a question in regard to the validity of the aforesaid finding of fact reached by the Tribunal.
11. The present case is similar to the case of Chiranji Lal Multani Mal, [1952] 22 I.T.R.514decided by the Punjab High Court. In that case, the assessee-firm receivedat Bhatinda, which was then not a part of British India, cheques from theGovernment of India drawn on the Reserve Bank of India, Delhi, forcertain work done by the assessee-firm. The question was whether theamount was received by the assessee in the taxable territory, that is, BritishIndia. The contention of the assessee was that the amount was receivedat Bhatinda inasmuch as on receiving the cheques at Bhatinda they soldthem to the branch of the Patiala State Bank there and the subsequentpayments made at Delhi to the Patiala State Bank were not payments tothe assessee. The assessee filed a certificate from the Patiala State Bank which stated that all cheques received by the assessee from the Government and passed on to the bank were purchased in demand drafts by the bank at their Bhatinda office and credits to the account of the assessee were given straightaway without waiting for realisation. This certificate was accepted by the Appellate Tribunal. But the Tribunal nevertheless held that the payments must be deemed to have been made at Delhi. The Punjab High Court, however, held that in view of the certificate by the Patiala State Bank, it must be accepted that the endorsements made on the cheques were of the nature contemplated by the substantive part of Section 50 of the Negotiable Instruments Act, 1881; and that being so, when once property in the cheques passed by the endorsements made at Bhatinda, the assessee must be taken to have received the amount at Bhatinda, and the subsequent receipts at Delhi by the bank were receipts by the bank and not by the assessee. Here also the bank, by purchasing the documents from the assessee, became a holder for value and gave immediate credit to the assessee without waiting for realisation of the amount of the instruments from the allottees. It is this material fact which distinguishes the present case from the case of Hira Mills Ltd. v. Commissioner of Income-tax,[1965] 57 I.T.R. 103 on which the learned Advocate-General placed reliance. There the Tribunal found that the bank had neither discounted nor purchased the drafts or hundis nor credited the sale proceeds to the assessee's cash credit account prior to collection. It was on these facts that in the case of Hira Mills Ltd. the Tribunal came to the conclusion that the bank was acting only as a collection agent and collected the amount from various dealers in British India for and on behalf of the assessee and, therefore, the amount of the sale proceeds was received by the assessee in the taxable territory in British India.
12. Before the Tribunal, the department strongly relied on the decision of the Madras High Court in Mysore Glass and Enamel Works Ltd. v. Commissioner of Income-tax, [1963] 47 I.T.R. 841. The Tribunal rightly held that the Madras case was not in point here as it was decided with reference to the place of accrual of profits and the principle laid down there, namely, that if the right of disposal is reserved till the payment is made, the property passes and the sale effected at the place where the payment is made against delivery of goods or documents of title is of no assistance in determining the place of receipt of the profits in circumstances such as those present in the reference before us. In the statement of the case, the Tribunal has mentioned that at no time the department raised any question about the profits having accrued in the taxable territory and the whole case of the department rested on Section 4(1)(a) of the Indian Income-tax Act, 1922, and, therefore, thedepartment's prayer for referring to this court the question whether the profits accrued or arose to the assessee in the taxable territory was refused. For the foregoing reasons, our answer to the question propounded by the Tribunal is in the negative. The assessee shall have costs of this reference. Counsel's fee is fixed at Rs. 200.