1. This is a consolidated reference in respect, of the two following questions arising in relation to the assessments under section 34 of the Income-tax Act of the assessee for the years 1944-45 to 1946-47. The year of account was the previous calendar year.

“(1) Whether on the facts and in the circumstances of the case the assessment under section 34(1) of the Income-tax Act was lawful? and,

(2) Whether on the facts and in the circumstances of the case the assessment on the company on an income of Rs. 40,095, Rs. 20,660 and Rs. 1,28,981, respectively, or any portion thereof was lawful?”

2. The assessee is a public limited company incorporated in the erstwhile Mysore State which during the relevant years did not form part of the taxable territories. The management and control of the company vested in Ogale Glass Works Ltd., which was incorporated in the Aundh State in North Satarah. The business of the assessee consists in the manufacture and sale of glass and enamel articles. During the relevant years sales were effected both inside and outside the Mysore State, the latter being comparatively of a larger extent, No controversy arises in regard to sales within that State as profits therefrom would not be liable to Indian income-tax. In regard to sales in the then British India, the taxability would depend on the fact where the prices were received, accrued or deemed to have been received or accrued. It is necessary, therefore, to ascertain the mode in which the products of the assessee were sold to the customers in the taxable territories.

3. The assessee appointed distributors in various centres. Sales outside Mysore State were exclusively effected through them. They booked orders and forwarded them to the assessee who thereupon despatched the goods to the buyer. Sometimes they themselves collected the price from the buyers and remitted the same to the assessee; on other occasions, the procedure adopted was like this: The assessee used to send, the consignments by rail addressed to self to draw a hundi on the buyer for the price due and to deliver the hundi, and the relative railway receipt to the assessee's banker in accordance with the usual mercantile practice. Credit was obtained from the bank in one of the two ways: (i) By making the bank only the collecting agent, the price being credited to the assessee after realisation from the British Indian buyer on delivery of the railway receipt; (2) By selling the hundi to the banker at a discount at the time of presentation who forthwith credited the price of the hundi to the assessee's account and thereby became the holder in due course of the hundi. The banker then transmitted the hundi and the relative railway receipt to the buyer and collected the, amount due on the hundi from the buyer. In the latter type of transactions, the bank would have, a lien on the railway receipt for the sums that might become due to them in case the hundis were dishonoured. We are concerned in this case only with the second type of the transactions, the question being whether the profits made in such sales should be held to have arisen at Bangalore where the bank paid the purchase price for the hundi or in British Ir.dia where the tuyer obtained title to the goods and paid the price. There were yet another class of sales, namely, those directly effected to the distributors. In addition, the assessee had entered into contracts for the supply of enamel mugs to the military department of the Government of India on tenders which were accepted. The terms of supply were that the goods should be inspected at Bangalore by the officer in charge of the Ordnance Depot who on approval was to issue a certificate and credit note for the goods which were thereafter despatched for a railway station within the Mysore State. In due course the assessee submitted bills to the Government requesting them to pay by cheque on a bank at Bangalore.

4. The Government posted such cheques in British India and the proceeds thereof were realised at the bank at Bangalore. Thus the profits made in respect of transactions with which the present reference is concerned can be classified under the following heads:

1. Collections in India by distributors in the first instance on orders canvassed by them and later remitted by demand drafts or cheques.

2. Documented hundis or bills on British Indian buyers purchased by banks in Bangalore.

3. Direct sales to Indian distributors on account: adjusted in part to commission and balance settled by remittances to Bangalore.

4. Direct sales to Government of India.

5. The assessee was assessed to Mysore income-tax in respect of the foregoing sales as well for all the three years which form the subject of these references. But the assessee did not file any returns under the Indian Income-tax Act for any of the years. The Income-tax Officer, Salem, came to know first of the sales to the Government of India some time during the year 1948. He pursued his enquiries and was satisfied that a part of the income earned by the assessee during certain years has escaped Indian income-tax. After obtaining the appropriate sanction, he initiated proceedings against the assessee under section 34(1)(a) of the Indian Income-tax Act.

6. The assessee contested them on the ground that no part of its income arose within British India; but the officer held that in regard to sales classified as items Nos. 1 to 4 above, the profits should be held to have been received or accrued or arisen within British India; and that, in any event, as the sales were effected through accredited distributors in British India, the income should be deemed to have accrued therein and would, therefore, be liable to tax. He apportioned the tax leviable in India at 50 per cent, of the total profits earned in respect of the transactions referred to above. There was an appeal against, the order of assessment to the Appellate Assistant Commissioner but the assessee restricted his objections only to the profits earned in transactions set out under categories Nos. 2 and 4. The appellate authority took the view that in respect of the second category the price of the goods de spatched must be taken to have been received or accrued at Bangalore where the banker purchased the hundis. Nevertheless it held that as the profits were earned through a business connection in British India such profits were apportionable under section 42 and he sustained the assessment on that ground. The liability to tax in regard to the other heads of sales was also confirmed. This view was upheld by the Appellate Tribunal. Before us Mr. Swaminathan, appearing for the assessee, did not contest the propriety of the conclusion arrived at by the Tribunal in regard to the first and third categories of sales. Learned counsel contended that the entire profits earned in respect of the second category of transactions should be held to be at Bangalore at the time when the assessee's bank purchased the hundis drawn on the buyer and that in respect of the fourth category also profits arose at the same place where the Government of India's cheques were realised.

7. We shall consider the contentions seriatim. But before-we do so we shall dispose of the first question referred to us.

8. On the admission that there-would be a liability to Indian tax in respect of transactions coming under categories Nos. I and 3 it follows that there was an escapement of income-tax during the relevant years. Admittedly, the assessee did not file any return of income for assessment to British Indian tax. The Income-tax Officer had, therefore, undoubted jurisdiction to initiate-proceedings under section 34(i)(a) of the Act. It was, however, faintly contended by Mr. Swaminathan that, as the assessee had paid tax to the Mysore Government in respect of the entire sales referred to above, the remedy of the Indian Government would be only in recovering its share of the tax from the other

9. Government under the arrangement referred to in rule 19A of the Mysore Income-tax Act Manual. There is, however, no substance in this contention. The liability to Indian tax.is.fixed by the statute; the rates fixed thereunder are also different from those prevailing in the Mysore State. Once the income in India has escaped assessment the provisions of section 34 will apply; it will be no answer to say that by reason of payment of Mysore income-tax, the liability to the Indian tax is satisfied. In such cases, the assessee would only be entitled to relief from double taxation in accordance with the arrangements en tered into between the two Governments. The Income-tax Officer has taken payment to the Mysore Government into consideration and has only levied the tax at the difference in rates between the British Indian and Mysore rates. We answer the first question referred to us in the affirmative and against the assessee.

10. Question No. 2.— This question in form relates to the entire assessment for the years inquestion; but in view of the fact that the assessee does not now contest the propriety of the assessment in regard to profits earned in respect of transactions coming under categories Nos. 1 and 3 the scope of the consideration of the question would be limited to the other categories of income alone, that is, those: coming under categories Nos. 2 and 4. They are: (A). Sales to Indian parties in respect of which hundis were drawn on them and purchased by the banks in Bangalore; (B). Direct sales to the Government of India in respect of tenders made by the assessee for the supply of enamel mugs. We shall consider them separately (A). Sales coming under this head were effected in favour of buyers in the taxable territories who entered into: contracts through the assessee's distributors. The assessee would be liable to pay tax on the profits earned in such transactions only if the income had either accrued or arisen or deemed to have accrued or arisen during the relative year of account within British India. The Appellate Assistant Commissioner was of the opinion that, as the assessee had negotiated the hundis drawn on the British-Indian purchaser with its banker at Bangalore itself, the price should be held to have been received at that place. This.was not the view of the Income-tax Officer who proceeded on the assumption that the hundis, though purchased by the bank, should be held to have been.received by it for collection and that it was only on such collection, price could be said to be realised. The former view was accepted; by the Tribunal. We are of the opinion that neither of the two views is correct. The bank purchased: the hundis at a discount;, thereafter, it became the holder of the hundis and not an agent for collection. At the'samfe time it cannot be held “that what the assessee received from the bank was the price of.the goods sold. We shall presently explain this.” The assessee is sought to be assessed on the profits earned in the sale of manufactured articles. Accrual of income would, therefore, depend on the place of manufacture and the place at which the sale of the assessee's goods takes place. The point for consideration then would be whether the sales coming under the second category took place within the Mysore State or in British India. Profits from/the sales would arise only at the moment when the property in the goods passes to the buyer, for then alone the assessee.would become entitled to the price. The point of time at which the property in the goods passes by sale depends on the intention of the parties. Under section 23 of the Indian Sale of Goods Act an unconditional, appropriation (in the case of a sale of unascertained goods) to the contract of purchase with the assent of the other party thereto will pass the title to the goods. Has there been such an appropriation in this case? Admittedly, the seller had reserved a right of disposal over them at the time of their despatch. It consigned it to “self” and took the railway receipt in its own name; it had further created a security or a lien over the goods in favour of the bank which would be entitled to proceed against them as security for the amount paid for the hundis.or bills; it is clear that vesting of title in the buyer would be inconsistent with the bank's of rights by way of security. Therefore, till the buyer pays the amount due on the hundi, he can have neither title nor possession. The appropriation to the contract is thus conditional on the payment of the price by the buyer.’ Under section 25 of the Sale of Goods Act, it will be competent for a seller to reserve his right of disposal of the goods till specified conditions are fulfilled. Where a seller delivers goods to a carrier’ addressed to himself and takes the railway receipt in his ‘own name the property in the goods cannot be held to have passed on to the buyer as the seller still has his control over the goods. Again when the seller draws a hundi or a bill of exchange on the buyer and delivers the hundi or the bill of exchange with a relative railway receipt to his own banker for the purpose of delivery of the railway receipt to the buyer on his honouring the hundi, the property in the goods cannot be held to pass to the buyer till he pays the price and takes delivery of the railway receipt from the banker. The position will be the same even if the buyer negotiates the bill or hundi with his banker and enables the latter to have a lien on the goods till it is honoured by the buyer, for the existence of the lien would be an impediment to the passing of title in the goods to the buyer. That would make the appropriation conditional; in other words, the seller and his banker would each have a right of disposal in accordance with their respective rights. Benjamin on Sale (8th edition) states at page 385:

“Where the bill of exchange for the price of goods drawn by the seller on the buyer is transmitted to the buyer together with the bill of lading to secure acceptance or payment of the bill of exchange the buyer cannot retain the bill of lading unless he accepts the bill of exchange and if he refused acceptance or payment as the case may be he acquires no right to the bill of lading or the goods of which it is the symbol and the seller may exercise his right of disposal by selling or otherwise disposing of the goods so long at least as the buyer remains in default…

“When the seller deals with the bill of lading only to secure the contract price and not with the intention of entirely withdrawing the goods from the contract as for example by depositing it with the bankers who have discounted the bill of exchange, then the property vests in the buyer upon the payment or tender by him of the contract price.”

11. In Prinz Adalbert1, Lord Sumner observed:

When a shipper takes his draft, not as yet accepted, but accom-, panied by a bill of lading, endorsed in this way, and discounts it with a banker, he makes himself liable on the instrument as drawer, and he further makes the goods, which the bill of lading represents, security for its payment.”

12. Therefore, till the hundi or bill of exchange drawn by the seller is paid by the buyer, the security in favour of the banker over the goods will exist and title thereto will not pass to the buyer. But it is of course not necessary that actual payment by the buyer should take place. The banker might be satisfied with the credit of the buyer and in such a case an acceptance of the hundi or bill by the buyer would be sufficient. This is clear from the subsequent observations of Lord Sumner in the same case:

“If, in turn, the discounting banker surrenders the bill of lading to the acceptor against his acceptance, the inference is that he is satisfied to part with his security in consideration of getting this further party's liability on the bill, and that in so doing he acts with the permission and by the mandate of the shipper and drawer. Possession of the indorsed bill of lading enables the acceptor to get possession of the goods on the ship's arrival. If the shipper, being then owner of the goods, authorises and directs the banker, to whom he is himself liable and whose interest it is to continue to hold the bill of lading till the draft is accepted, to surrender the bill of lading against the acceptance of the draft, it is natural to infer that he intends to transfer the ownership when this is done, but intends also to remain the owner until this has been done… The general law infers under these circumstances that the ownership in the goods is transferred when the draft drawn against them is accepted.”

13. It cannot therefore be said that the seller had earned the price till there has been either a payment or acceptance by the buyer of the hundi or the bill drawn by the seller for the price.

14. The same conclusion can be reached on a slightly different line of reasoning. A sale of goods postulates an agreement between the seller and buyer. When a person in the position of the assessee accepts the orders booked by its representatives there is such an agreement between it and the buyer. When goods are delivered to the carrier as in the present case there is a conditional appropriation of the goods to that contract. When next the assessee negotiates the hundi with the banker, the latter does so only as a part of its banking business. The purchase by the banker of the hundi cannot mean that there is a sale of the goods to him. For one thing, there was no agreement between the banker aud the seller for the sale of the goods. Secondly, the banker has only a security over the goods till the price is paid by the buyer. To hold otherwise would mean that the seller committed a breach of contract with the buyer and sold the goods to the banker. That, however, is not the case. The seller only performed his contract with the buyer in accordance with the usual commercial practice. Therefore, the money paid by the banker to the seller as price for the hundi is not the sale price of the goods in any sense; the banker was admittedly not acting as the agent of the buyer. On the other hand, the purchase of the hundi by the banker is only a convenient arrangement between the banker and his own customer, the seller, to avoid freezing of credit of the latter and one done in the course of his banking transactions. Price of goods sold can, therefore, be held to be earned only when the buyer pays the price or enters into an arrangement with the banker, the indorsee of the hundi; for, till then, the latter will have a right of recourse against the seller in case the hundi is dishonoured. In the present case the assessee became entitled to the purchase money only on delivery of the goods in British India and it was, therefore, in British India that such income should be held to have accrued.

15. Learned counsel for the assessee placed considerable reliance on the decision reported in Sir Sobha Singh v. Commissioner of Income-tax, where it was held that if a cheque is given to a bank for the purpose of collection, the receipt of the money is at the place where the bank on which, the cheque is drawn is situate. That was a case where there was no question of sale of goods. A payment was made by the person liable by a cheque. The assessee accepted the cheque and deposited it for collection with his bank which was outside British India. It was held that, where a creditor, who had accepted the cheque as a negotiable instrument, cashed it as such with his banker, the payment should be deemed to have been received by the assessee at the bank where he had negotiated the cheque.

16. But the assessee in the instant case is charged to income-tax not on the receipt of monies sent by cheques, but on the sales effected by it, i.e, on the price paid by the buyer. No cheque had been issued by the buyer. Nor can it be said as we said already that the assessee's banker honoured the hundis as agent of the buyer. The discounting of the hundis was an independent transaction between the bank and the assessee though it was done in connection with the sale of goods. The principle of the decision referred to above cannot, therefore, apply.

17. It is evident that the profits accrued to the assessee only at the place where the sales were effected, that is, in British India, they would be liable to tax under the Income-tax Act. Section 42 of the Act will not in terms apply as the accrual of income is an actual and not a deemed or fictitious one. But as the assessee is both a manufacturer and a seller, manufacture taking place in Mysore State and sales concerned in this reference taking place within the taxable territories, the principle of apportionment of profits recognised in that section will apply. That is laid down by the Supreme Court in Commissioner of Income-tax v. Ahmedbhai Umarbhhai & Co. [1950] 18 I.T.R 472. and Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax [1954] 25 I.T.R 2. The department had held that fifty per cent, of the profits would be the proper apportionment of the profits earned within the taxable territories. No sufficient reason has been advanced before us to show that this apportionment is wrong. (B). The next category of income relates to income earned in respect of a contract entered into by the assessee for the supply of enamel mugs to the military department of the Government of India. The tender of the assessee was admittedly accepted at New Delhi. According to the terms of the tender payment was to be made by the Government of India at a Government Treasury in India or at any branch of the Imperial Bank of India or the Reserve Bank transacting Government business. For the price payable to the assessee, cheques were drawn by the Government of India at New Delhi, i.e, within the taxable territories, and forwarded to the assessee by post. Even earlier the assessee after the delivery of the goods to the carrier appears to have sent its bill with a request to the Government to make payments by cheques on a bank at Bangalore. The Appellate Assistant Commissioner referring to this aspect states:

“In reply to my remand order the Income-tax Officer has reported that, after despatching the goods, the company used to address the Controller of Supply Accounts enclosing a copy of its bill along with the inspection certificate signed by the Inspecting Officer and request the Controller to send the cheque for the bill amount on the Imperial Bank of India, Bangalore. The bill form which is in W.S.B 116 also contains the following superscription which has to be signed by the company. ‘Please pay by cheque to on bank at……’ The Government effected the payments by sending cheques for the amounts by post. In the circumstances the Income-tax Officer argued that the post office was effectively acting as the agent of the company and, therefore, the payment was received in Delhi when the cheques were posted.”

18. The Appellate Assistant Commissioner accepted the report of the Income-tax Officer. The Appellate Tribunal also affirmed it. From the facts found it is clear that there must have been an understanding between the parties that the Government of India was to send cheques for the price of articles supplied by post.

19. There can be no doubt that the issue of a cheque by the Government for the price was equivalent to payment. It may be that it was conditional on the assessee realising the cheque; but there is no dis-; pute that the cheques were duly realised. The question then is only where should such payment by cheque be deemed to be made: (i) was it at New Delhi where it was posted or (2) was it at Bangalore where it was realised. The answer to it will depend on the fact as to whether the post office was acting as the agent of the buyer or the seller. The post office is a recognised machinery for the transmission of letters, articles like cheques, etc. When a person authorises his debtor to send a cheque by post he does undoubtedly constitute the post office as his agent. An authorisation to have that effect need not necessarily be express; it can be implied. On the facts stated above it is clear that the assessee intended that the post office might be used as a means of forwarding cheques to it. So far as the Government is concerned they have done all that they had been required to do with respect to the payment of price when they posted the cheque. If the cheque is miscarried in post the Government would no doubt be liable but that is because payment by cheques is conditional on realisation and not because that post office is not the agent of the seller, who directed it to be sent by post. This question whether the post office can be deemed to be the agent of the seller has been considered by the Supreme Court in three recent cases to which we shall refer presently.

20. In Commissioner of Income-tax v. Ogale Glass Works Ltd. the Supreme Court held that where a debtor's cheque was accepted by his creditor that cheque would be equivalent to cash payment and such income should be held to have been received at the time and place at which the cheque was accepted and where the assessee expressly requested the Government to remit the amounts due, by cheques, it amounted to a request to send cheques by post and when the Government posted such cheques at Delhi the receipt of the amount should be held to have been at that place.

21. In Commissioner of Income-tax v. Patney and Company the same principle was elucidated further and it was held that in the case of payment by cheque sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct attending the transaction; if it were found that the creditor authorised the debtor expressly or impliedly to send cheques by post the property in the cheque would pass to the creditor as soon as it was posted and that in such a case payment would be deemed to have taken place at the place where the cheque was posted.

22. In Shri Jagdish Mills Ltd. v. Commissioner Of Income-Tax, Bombay North the Supreme Court again had occasion to examine how far the post office could be deemed to be an agent of the assessee when cheques were sent by post to him. Their Lordships observed that where there was a mere stipulation in the contract between the parties that payment was to be made by cheques with no further stipulation that such cheques were to be sent by post and there being nothing more to show that sending of cheques by post was authorised by the payee, the post office would not become the agent of the addressee as in that case mere posting of cheque would not operate as delivery of the cheque so as to pass title thereof to the addressee. If, on the other hand, the facts and circumstances of the case disclose an implied request by the creditor to send cheques by post, the post office would be constituted as agent of the addressee for the purpose of receiving payments.

23. There can be little doubt in the present case that there was an implied request by the assessee to the Government of India to send the cheques by post. They were so sent and they were dulya ccepted during all the three years of account. It must, therefore, be held that payments made by the Government of India in respect of articles delivered to the military department under this category should be held to have taken place at New Delhi, that is, within the taxable territories.

24. We, therefore, answer the second question referred to us also in the affirmative and against the assessee. The assessee will pay the costs of the department. Advocate's fee Rs. 250.

25. Questions answered in the affirmative.