This is reference under section 66(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as &quto;the act&quto;). The question of law, referred for the opinion of this court, is :
&quto;Whether, on the facts and circumstances of the case, the profits and gains in respect of the sales made to the Government of India, were received by the assessed in the taxable territories ?&quto;
This reference was made on December 10, 1952, and it was numbered as Civil Reference Case No. 3 of 1953, in the High Court of Judicature for the State of Punjab at Simla. The said reference came up for hearing before a Bench consisting of G. D. Khosla and Harnam Singh JJ. on the March 24, 1955. After hearing the counsel for the parties, their Lordships opined that it would be necessary to call for a supplementary statement under section 66(4) of the Act, as the Tribunal had nto given any finding as to whether the cheques, with which we are concerned in this case, were sent to the assessed by post and whether the assessed had given any directions in that regard to the Government of India. They, accordingly, called for a supplementary statement. The assessed, aggrieved by the order of the High Court, calling for the supplementary statement, took up the matter in appeal to the Supreme Court in Zoraster & Co. v. Commissioner of Income-tax. The Supreme Court dismissed that appeal on August 17, 1960. There after, the Appellate Tribunal submitted the supplementary statement called for, on March, 18, 1961. On receipt of the supplementary statement, the case was numbered as Income-tax Reference No. 7 of 1961.
The facts material for the purpose of answering the question submitted to this court are these : The assessed is a firm consisting of three partners, namely, Sohanmal, Mehtabchand and Allahdin. Sohanmal and Mehtabchand are the two coparceners of a Hindu undivided family. That Hindu undivided family has gto its own business firm, and that firm is also known by name, S. Zoraster & Co. buth the assessed-firm as well as the business concern of the Hindu undivided family are situate in Jaipur. The assessed had certain business dealings with the Government of India. In respect of the same, the Government of India paid large sums of moneys to the assessed by means of cheques. The cheques in question were received at Jaipur. There is no evidence on the record to show as to how these cheques were sent by the Government of India to the assessed. Those cheques were drawn on the Reserve Bank of India at Bombay. On receipt of those cheques the assessed made them over to the Hindu undivided family firm, i.e., S. Zoraster & Co. which was financing its business. That firm sent those cheques to Bombay for collection and the moneys due under those cheques were ultimately realised at Bombay. At the hearing of the reference, as mentioned earlier, the High Court of Punjab thought that, for answering the question referred to it, it was necessary to find out the manner in which the cheques were sent by the Government of India to the assessed and further, whether the assessed had given any directions in that regard to the Government of India. When the matter went back to the Appellate Tribunal, it found that on the material before it, it was nto possible to find out as to how the cheques in question were sent by the Government of India to the assessed.
Dealing with the question, whether the assessed had given any direction as to the mode in which the payments were to be made, the Appellate Tribunal referred to the form in which the bills were drawn. A copy of the form in which the bills were sent is marked as annexure &quto;I&quto; to the supplementary statement. That merely shows that the assessed wanted the payments should be made to it through cheques drawn on the Reserve Bank of India at Bombay. The bills were silent about the place where the payment were to be made or as to the fact as to how the cheques were to be sent.
The facts found by the Tribunal are these :
The goods sent by the assessed to the Government of India were dispatched from Jaipur. The property in those goods passed to the Government of Jaipur. Along with those goods the assessed sent its bills. One of the columns in those bills read as follows :
&quto;(In words) Rupees
Ttoal :.............. (to be made out of the nearest rupee)
One anna receipt stamp on original copy only
Please pay by cheque to
Self
Bank
Bank
Treasury
Received
payment
at
Contractors signature.
Contractors name in full.&quto;
After the receipt of the goods, the Government of India made payments to the assessed by means of cheques. Those cheques were received by the assessed at Jaipur. Those cheques were drawn on the Reserve Bank of India at Bombay. S. Zoraster & Co. collected the moneys due under those cheques at Bombay. It is nto established how those cheques were sent to the assessed by the Government of India. Now, on the basis of these facts we have to see whether the payments in question were received within the taxable territory. Admittedly, at the relevant point of time, Jaipur was outside the taxable territory.
On behalf of the assessed, it was urged that the payments in question were received at Jaipur and thereforee, section 4(1) (a) of the Act does nto apply to the facts of the case. As against this, the contention of the revenue is that the payments in question were received either at Bombay, where the Reserve Bank paid the moneys due under those cheques, or that they were received at Delhi where the cheques were posted. According to the revenue, the post office must be considered as the agent of the assessed.
We shall first take up the question as to what is the effect of the Government making payment to the assessed by means of cheques. Did the receipt of the cheques by the assessed amount to receipt of the moneys due or whether the actual payment should be considered to have been made when the money due under those cheques were realised. It is nto the case of the revenue that any of the cheques issued by the Government was dishonoured.
The Appellate Tribunal has taken the view that the assessment must be held to have received the payments in question at Bombay where the cheques were cashed.
A question similar to the one set out above came for consideration before the Supreme Court in Commissioner of Income-tax v. Ogale Glass Works Ltd. In that case an assessed, resident at Aundh, then a native State, supplied certain goods to the Government of India. The assessed had asked the Government to pay their price by means of cheques drawn on the Reserve Bank at Bombay. The assessed-company was resident at Aundh, which was outside the taxable territory. The assessed sent the cheques in question to Bombay for collection. They were cashed at Bombay. The first question that fell for decision by the Supreme court was whether the payment in question should be deemed to have been made at Aundh or at Bombay. The revenues contention in that case, as in this case, was that the moneys due under the cheques were received at Bombay and nto at Aundh. The Supreme Court repelled that contention. It opined that on the facts of the case, it must be held that the receipt of cheques were as good as receiving cash and the fact, the cheques in question were cashed at Bombay, is nto all relevant. Dealing with that aspect, this is what S. R. Das J. (as he then was) observed :
&quto;The assessed contends that on the facts found by the Tribunal, it must be held that it received the cheques in full and unconditional discharge of its claim for the price of goods sold and delivered by it to the Government of and nto conditionally subject to realisation. That a sum of money may be received in more says than one cannto be doubted. It may be received by the transfer of coins or currency ntoices or a negtoiable instrument which represent and produces cash and s treated as such by businessmen. (See per Lord Lindley In Gresham Life Assurance Society v. Bishop). Reference in this connection may also be made to the decisions in Commissioner of Income-tax v. Kameshwar Singh; Raghunandan Prasad v. Commissioner of Income-tax; and Commissioner of Income-tax v. Maheshwari Saran Singh. Learned Solicitor-General does nto dispute this proposition but he argues that, in the absence of any agreement, express or implied, to the contrary, a payment by a negtoiable instrument is always understood to be conditional. He refers us to Benjamin on Sale, 8th edition, page 787, in support of the proposition that the intention to take a bill in absolute payment for goods sold must be clearly shown, and nto deduced from ambiguous expressions, such as that the bill was taken in payment for the goods (Stedman v. Gooch and Maillard v. Duke of Argyle) or in discharge (Kemp v. Watt) or in settlement of the price (In re Romer and Haslam). In addition to the above English cases referred to in Benjamin on Sale the learned Solicitor-General also relies on the case of Palaniappa Chetty v. Arunachalam Chetty) where it was held by the Madras High Court that the execution of a formal receipt for the amount covered by the bill of exchange or hundi was nto sufficient to rebut the general presumption that the delivery of bill of exchange or a hundi for a debt operated only as a conditional discharged of the debt. He insists that on the facts of this case there is ntohing from which an agreement may be implied that the cheques were given and received unconditionally in full discharge of the goods supplied by the assessed. Sri Kolah, on the toher hand, relied on the following facts in answer to the contention of the learned Solicitor-General :
(i) that there was an arrangement by the contract itself for payment by cheque (clause 15),
(ii) that in the bills submitted by him the assessed expressly asked for payment by cheque,
(iii) that the Government sent cheques in payment of the bills,
(iv) that on receipt of the cheques the assessed returned the acknowledgment form duly signed and stamped as a formal receipt,
(v) that the drawer of the cheques was the Government of India and the drawee was the Reserve Bank of India for whose solvency there could be no apprehension at all in the mind of the assessed.
Shri Kolah contends that the cumulative effect of these facts is clearly enough to establish that the cheques were received unconditionally as payment. Learned Solicitor-General points out that the assesseds request to pay the amount of the bills by cheques carries the matter no further, for the undertaking to pay by cheque was already there. The point of the request was that the cheque should be issued on some bank in Bombay. The insistence on a stamped receipt in advance of payment was, says the Solicitor-General, in keeping with the usual practice of Government departments. thereforee, we have in this case, according to the learned Solicitor-General, ntohing more than a term in the contract for payment by cheques and the status of the drawer and drawee of the cheques. These two circumstances, so submits the Solicitor-General, are nto sufficient to establish the fact of the acceptance of the cheques as unconditional discharge. He contends that, in the absence of an express agreement, it is only when the creditor elects to take a bill or cheque having it in his power to obtain payment in cash, that is to say, takes a bill or cheque by choice or preference instead of cash that an agreement may be implied that he took it as an unconditional and absolute payment of the debt. (Robinson v. Henry Reid and Anderson v. Hillies). Such cases must be rare, for the creditor is nto ordinarily likely to give up the advantage of having a double remedy, namely, one on the bill or cheque and the toher, on dishonour of the bill or cheque, on the original cause of action. He pointed out that in this case there is no findings of any special agreement in this behalf and, thereforee, submits the learned Solicitor-General, the assessed must be taken to have received the cheque conditionally, i.e., subject to realisation. The learned Solicitor-General concludes that, in the circumstances no payment was received by the mere receipt of the cheques and that payment was received only when the cheques were cashed in Bombay and that such receipt in Bombay became immediately assessable to British Indian tax under section 4(1) (a). The High Court repelled this line of argument and held that the assessed received payment on the dates the cheques were delivered to it. We find ourselves substantially in agreement with this conclusion. It is to be remembered that there are four modes in which a contract may be discharged, namely, (1) by agreement, (2) by performance, (3) by being excused by law from performing it, and (4) by breach. In this case clause 15 of the contact provides how the payment of the price is to be made. In short the contract itself, by that clause prescribed the manner and the time for performance by the Government of its part of the contract and as the Government made the payments in the prescribed manner, i.e., by cheques, it fulfillled its engagement and such payment would, under section 50 of the Indian Contract Act, operate as a discharge of the contract. It should also be remembered that the assessed sent its formal stamped receipts only after the receipt of the cheques and nto along with the bills submitted by it. thereforee, the receipts cannto be regarded as having been sent in advance. The status of the drawer and the drawee of he cheques is also a material consideration. Finally, there is nto suggestion that any of the cheques was dishonoured on representation. We, thereforee, agree with Sri Kolah that the several facts relied on by him and alluded to above, taken cumulatively, must lead us to the conclusion that the cheques were received in complete discharge of the claim for the price of the goods.&quto;
The above observations, substantially, apply to the facts of the present case. It is true that in Ogale Glass Works case the assessed sent that receipt after the receipt of cheques, but in the present case the receipts were incorporated in the bills themselves. In our judgment, that circumstances does nto affect the ratio of the decision in Ogale Glass Works caes, referred to earlier.
Shri D. K. Kapur, learned counsel for the revenue, urged that the observations made by the Supreme Court in Zoraster & Co. v. Commissioner of Income-tax, referred to earlier, should be considered as indicating that the payments with which we are concerned in this case were made within the taxable territories. We are unable to accept that contention. In that case, all that the Supreme Court had to consider was, whether the High Court was justified in calling for a supplementary statement on the facts of the case. It negatived the contention of the assessed that the High Court erred in law in calling for the supplementary statement in the question. For pronouncing on the question before it, it had to go into the facts of the present case as well as on the law bearing on the subject. We do nto think that in that case the Supreme Court, in any manner, different from the views expressed in Ogale Glass Works case.
Shri Kapur next placed reliance on a decision of the Supreme Court in Commissioner of Income-tax v. Patney & Co. We fail to see what assistant the revenue can get from the said decision. There in, it was found as a fact that the assessed had required its customers to make all payment at Secunderabad, which was outside the taxable territories. On the basis of that fact, the court came to the conclusion that no income, profit or gain was received within the taxable territories. In the course of the judgment in that case the Supreme Court observed :
&quto;In the case of payment of the cheque sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send a cheque by post the property in the cheque passes to the creditor as soon as it is posted. If there is an express request by the creditor that the amount be paid by cheque to be sent by post and it is so sent, the payment will be taken to be at the place where the cheque is posted.&quto;
About that proposition of law, there is no controversy before us.
The last decision on which Shri Kapur placed reliance in support of the contention that the amount in question were received within the taxable territories, is the decision of the Supreme Court in Shri Jagdish Mills Ltd. v. Commissioner of Income-tax. After examining the facts of that case, the court came to the conclusion that though the assessed was residing outside the taxable territories, the amounts due to him were sent through cheques posted within the taxable territory. On the facts of that case, its further conclusion was that the assessed had impliedly consented to the sending of the cheques through post. This conclusion the court reached because of the fact that the Government of India was consistently sending cheques from Delhi to the assessed. The assessed received them at Baroda and cashed them without objection. From that course of conduct which continued for a consideration time, the court drew the inference that the assessed had impliedly authorised the Government of India to send the cheques in question through post.
It there was a finding by the Tribunal that the Government of India was invariably sending the cheques, referred to earlier, from Delhi to Jaipur through post and that the assessed was receiving those cheques without demur, then we would have found no difficulty in upholding the contention of Shri Kapur that the cause in question were sent to the assessed through post with its implied consent and, that beings to, the post office should be considered as the agent of the assessed. But, as mentioned earlier, in the instance case, there is no evidence to show that those cheque were sent by post. Hence, the question of assesseds consent, implied or toherwise, does nto arise for consideration. For these reasons, we do nto think that the rule laid down by the Supreme Court in Shri Jagdish Mills case has any bearing on the point under consideration.
It may be, or we may go further and say, it is likely that the Government of India was sending cheques to the assessed through post. But the fact remains that there is no such finding by the Tribunal. The revenue has failed to placed any material before the Tribunal to prove that the cheques in question were being sent by the Government through post. The burden of proving that the assessed received any income, gain or profit, within the taxable territories is on the revenue. It cannto ask the court to presume facts and circumstances in its favor. The factum of the cheques having been sent through post must be proved.
The contention of Shri Gopal Singh, learned counsel for the assessed that the circumstances that the cheques were cashed at Bombay is irrelevant, is well founded. The realisation of the cheques at Bombay does nto alter the fact that the payment were made at Jaipur. That conclusion receives support from the decisions in Keshav Mills Ltd. v. Commissioner of Income-tax, Turner Morrison & CO. Ltd. v. Commissioner of Income-tax and Zoraster & Co. v. Commissioner of Income-tax, already referred to.
As seen earlier, the assesseds place of business is at Jaipur. It had asked the Government of India to pay the money due to it by cheques. The law is, that the debtor must find out his creditor and pay his dues. From that, it follows that the Government of India had to pay moneys due from it to the assessed at Jaipur. For these reasons, we have come to the conclusion that payment by cheque are equivalent to cash payments. The cumulative effect of our findings is that the assessed received those payments at Jaipur. If that be so, those payments cannto be taken into consideration in determining the income, gains or profits of the assessed in the taxable territories.
Shri Gopal Singh next contended that, on a proper appreciation of the material before us, it would be seen that the assessed had given specific directions to the Government of India to pay amounts due from it at Jaipur. In the bills to which reference has already been made, all that is stated is that the money should be paid to the assessed by means of cheques. It is nto mentioned therein as to where the payments should be made. That being so, this case does nto fall within the rule laid down by the Supreme Court in Commissioner of Income-tax v. Patney & Co.
For the reasons mentioned above, our answer to the question referred to us is that :
On the facts and circumstances of the case, the profits and gains in respect of the sales, made to the Government of India must be deemed to have been received by the assessed outside the taxable territories.
The assessed is entitled to its costs of this reference. Advocates fee Rs. 250.