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Sri Hardeo Bengal Salt Company v. Commissioner Of Income-Tax, Bihar And Orissa
Concise Analytical Summary of the Provided Opinion
Factual and Procedural Background
This opinion concerns two references made by the Commissioner of Income-tax, Bihar and Orissa, under Section 66(3) of the Indian Income-tax Act. The matters are Miscellaneous Judicial Case No. 18 of 1940 (assessment year 1936–37) and Miscellaneous Judicial Case No. 17 of 1940 (assessment year 1937–38). The Court directed the Commissioner to state a case on two questions concerning the assessee's residence and the correctness of taxation under the Indian Income-tax Act.
The assessee is a firm trading as "Sri Hardeo Salt Company" consisting of four brothers—Pearey Lal, Juggernath Prasad, Dwarka Prasad and Srinath Prasad—who resided in Muttra in the United Provinces. The firm's business was selling salt obtained from the Sambhar Lake in Rajputana. The Income-tax authorities assessed income arising from activities at Muzaffarpur (in Bihar) as income made in British India, treating the Muzaffarpur activities as a branch conducting business in that district. The assessee disputed that any business was carried on at Muzaffarpur, asserting that only a canvassing agent was present there and that contracts were concluded in Rajputana.
The Commissioner answered the framed questions in the affirmative. Harries, C.J. delivered the principal opinion, with Fazl Ali, J. concurring.
Legal Issues Presented
- Whether the assessee is resident in British India and carries on business in British India.
- Whether the assessee has been rightly taxed under the Indian Income-tax Act.
Arguments of the Parties
Income-tax Authorities / Commissioner
- The Income-tax authorities asserted that the firm maintained a branch at Muzaffarpur which conducted a business of selling salt to persons in the district; therefore income from the Muzaffarpur business was assessable as income made in Bihar, and hence in British India.
- The Commissioner suggested affirmative answers to both questions posed by the Court and relied on documentary and account evidence indicating branch activity at Muzaffarpur (order forms with Muzaffarpur address, rented premises, a gomasta operating the branch, visits by a partner identified as a managing member, storage of salt in Muzaffarpur, and payments appearing in local merchants' books).
Assessee
- The assessee contended that the firm was resident in Rajputana and that no business was actually conducted at Muzaffarpur; what existed at Muzaffarpur was a canvassing agent who solicited business but did not conclude contracts there.
- Counsel for the assessee relied on Grainger & Son v. Gough (House of Lords, 1896 A.C. 325) to argue that where agents merely forward offers to a foreign principal and contracts and deliveries are completed outside the country, the foreign merchant does not carry on trade in the country where the agents solicit orders.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Grainger & Son v. William Lane Gough, 1896 A.C. 325 | Holds that a foreign merchant who canvasses through agents in the United Kingdom does not exercise a trade in the United Kingdom if the agents merely forward offers and all contracts and deliveries are made in the foreign country. | The Court distinguished Grainger on the facts: in Grainger the agents merely forwarded offers and did not enter into contracts, whereas in the present case the Court found that offers were accepted at Muzaffarpur and contracts were completed there; thus Grainger did not govern the outcome here. |
| Werle & Co. v. Colquhoun, 1888 20 Q.B.D. 753 | Referenced as authority for the proposition that if contracts are made in a country then business is carried on in that country. | Quoted through Lord Watson's observation to support the legal principle that where contracts are made in the country, business will be treated as carried on there; the Court used this principle to argue that completed contracts in Muzaffarpur support a finding of business carried on in British India. |
| Erichsen v. Last, 1881 8 Q.B.D. 414 | Also referenced for the proposition that making contracts in a country constitutes carrying on business there. | Used by the Court as part of the cited authorities supporting the distinction from Grainger and reinforcing the conclusion that contract formation in Muzaffarpur indicated the carrying on of business in British India. |
Court's Reasoning and Analysis
The Court proceeded by examining the factual foundation for the Income-tax authorities' finding and then applying legal principles about where business is deemed to be carried on for taxation.
- On residence: The Court acknowledged that residence is generally a question of fact. It noted there was an admission by one of the partners that the proprietors were the four brothers resident in Muttra, and concluded there was undoubted material to support the finding that the assessee is resident in British India. The Court also observed that some documents relied on by the Income-tax authorities could not properly be admissible against the assessee, but nonetheless the admission and other evidence sufficed.
- On carrying on business: The Commissioner's factual findings were set out: the firm used order forms indicating a Muzaffarpur branch (addressed to Sariyaganj, Muzaffarpur); the premises were rented by the assessee; a gomasta conducted the branch activities; Srinath (a partner and important/possibly managing member) visited Muzaffarpur at intervals; salt was sometimes stored at Muzaffarpur with corresponding entries in other merchants' books; and the assessee's own accounts showed business activity at Muzaffarpur.
- The Court evaluated the legal effect of those facts. While acknowledging that whether an assessee carries on business in British India is mainly a factual question, the Court recognized the legal dimension—specifically whether proof of certain facts suffices to establish that actual business is being conducted within the territory.
- The Court examined the Grainger authority relied upon by the assessee and distinguished it: Grainger involved agents who simply forwarded offers to a foreign principal and did not conclude contracts in the forum country; therefore no contracts were completed there. By contrast, in the present case the Court found that orders were accepted at Muzaffarpur and that contracts were concluded there (with execution of delivery necessarily occurring in Rajputana because that is where the salt lake is located).
- The Court further observed that payments being directed to the head office at Sambhar did not undermine the finding of a branch; this is a natural arrangement where the head office executes and receives payment for goods located at the principal place of business. The storage of salt and accounting entries in Muzaffarpur reinforced the conclusion that business activity was being carried on locally.
- On the legal principle that completion of contracts in a territory constitutes carrying on business there, the Court referred to authorities (Werle & Co. and Erichsen) cited in Lord Watson's speech in Grainger, and applied that principle to hold that acceptance and conclusion of contracts at Muzaffarpur meant that the firm carried on business in British India.
Holding and Implications
HOLDING: The Court answered both referred questions in the affirmative: the assessee was resident in British India and carried on business in British India; accordingly, the assessee had been rightly taxed under the Indian Income-tax Act.
Direct consequences as stated in the opinion:
- The assessee should pay the costs of these proceedings.
- Because the point involved was common to both references, there would be a single hearing fee assessed at seven gold mohurs.
- The sums deposited in each case with the Income-tax authorities were to be retained by them.
The opinion does not purport to announce or restate any new legal precedent beyond applying established principles to the facts: it distinguished the Grainger authority on its facts and applied the principle that formation/acceptance of contracts in a jurisdiction supports a finding of carrying on business there.
Disposition
Reference answered in the affirmative. (Harries, C.J.; Fazl Ali, J. concurred.)
Harries, C.J:— These are two references made by the Commissioner of Income-tax, Bihar and Orissa, under Section 66(3), Indian Income-tax Act, Miscellaneous Judicial Case No. 18 of 1940 deals with the assessment year 1936-37, whereas Miscellaneous Judicial. Case No. 17 of 1940 deals with the assessment year 1937-38. The points involved in the two cases are identical, and the two references can be conveniently disposed of in one judgment.
2. By an order of this Court the Income-tax Commissioner was directed to state a case upon the following questions:—
“(1) Whether the assessee is resident in British India and carries on business here, and
(2) Whether the assessee has been rightly taxed under the Indian Income-tax Act.”
3. The Commissioner has suggested that the answers to both these questions should be in the affirmative. The assessee is a firm which owns a business styled as “Sri Hardeo Salt Company”. This firm consists of four brothers who appear to be joint, namely, Pearey Lal, Juggernath Prasad, Dwarka Prasad and Srinath Prasad. These four brothers admittedly reside in Muttra in the United Provinces. The business of the firm is that of selling salt which is obtained from the Sambhar Lake in Rajputana. According to the Income-tax authorities, this firm had a branch at Muzaffarpur, at which a business of selling salt to persons in the district was carried out. Accordingly the Income-tax authorities assessed the income from the Muzaffarpur business as income made by the assessee in Bihar and, therefore, British India.
4. The assessee, on the other hand, contended that the firm was a firm resident in Rajputana and further that no business was conducted by the firm in Muzaffarpur. It was said that all the firm had at Muzaffarpur was convassing agent who did not do any business himself but solicited business on behalf of the firm and that all such business was concluded not at Muzaffarpur but in Rajputana.
5. The Income-tax authorities, however, were satisfied that the assessee firm actually carried on business at Muzaffarpur and the Commissioner when asked to state a case refused on the ground that the points involved raised no question of law but were merely questions of fact. This Court, however, took the view that the Commissioner should be asked to state a case on the two questions which I have set out, and the opinion of the Commissioner is now before us.
6. The Commissioner has answered the first question, namely, whether the assessee is resident in British India and carries on business here, in the affirmative. The learned Commissioner appears to have thought that the first portion of this question, namely whether the assessee is resident in British India, was a question that this Court should not have asked. At first sight this would appear to be a pure question of fact; but this Court asked the question because it was not clear as to the evidence upon which the Income-tax authorities had arrived at their findings. That evidence is clearly set out, and there is undoubted material to support the finding that the assessee is resident in British India. I must, however, point out that the Income-tax authorities and the Commissioner have referred to a large number of documents which cannot possibly be admissible in evidence against the assessee. However, there is a clear admission by one of the partners that the proprietors of the firm were the four brothers here resident in Muttra. The point, however, is not of any importance by reason of the answer to the second part of this question. The answer to the first part would only be of importance if it was found that the assessee did not carry on business in India, and the first portion of the question was asked to meet the contingency of a negative answer being given to the second part of the question. The second part of the question is whether the assessee carries on business in British India and the suggested answer of the Commissioner is that it does. Whether an assessee does or does not carry on business in British India is in the main a question of fact, but, on the other hand, questions of law do arise. It may well be a question of law as to whether the proof of certain facts is sufficient to establish that actual business is being conducted which would make the assessee liable to assessment to tax. The Commissioner in the case has pointed out that though the head-quarters of the firm are at Rajputana the firm has a branch in Muzaffarpur. The order form used by the firm makes it clear that they have a branch at Mazaffarpur, the address of which is Sariyaganj, Muzaffarpur. The Commissioner also points out that this branch is located at a house rented by the assessee and the person carrying on the activities of the branch is a gomasta of the assessee, Further, the Commissioner points out that Srinath, one of the partners, comes to Muzaffarpur at intervals, and it is also pointed out that Srinath is one of the most important, if not the managing member of this firm. Mr. S.K Mazumdar who has argued this case very fully has contended that all that the assessee has at Muzaffarpur is a canvassing agent: but the facts which I have set out strongly suggest that the activity at Muzaffarpur is the activity of a branch of the firm and not the activity of a mere agent soliciting orders. Again the order forms used by the assessee at Muzaffarpur show that orders are accepted at Muzaffarpur and contracts for the sale and delivery of salt concluded there. It is true that these orders are sent to Rajputana, but that is inevitable because they have to be executed at Rajputana, The salt lake is situate there and not at Muzaffarpur, and therefore, the orders must, when accepted, be transferred for execution. Mr. Mazumdar has laid great stress on the fact that payment is made to the head office at Sambhar; but there is nothing strange in that. If the office at Muzaffarpur is only a branch, then it is natural that payment should be made not there but to the head office.
7. Again the Commissioner points out that the salt was frequently stored at Muzaffarpur and payments appear in the books of the other assessees relating to such storage. From the accounts of the assessee itself and the accounts of the other merchants in Muzaffarpur it is clear that a business was being conducted at Muzaffarpur by the assessee.
8. Mr. Majumdar has contended that even accepting the facts as found this Court should not hold that the assessee carried on business at Muzaffarpur. He has relied upon a decision of the House of Lords in Grainger & Son v. William Lane Gough (Surveyor of Taxes) 1896 A.C 325., in which it was held that a foreign merchant, who canvasses through agents in the United Kingdom for orders for the sale of his merchandise to customers in the United Kingdom, does not exercise a trade in the United Kingdom within the meaning of the Income-Tax Acts, so long as all contracts for the sale and all deliveries of the merchtndise to customers are made in a foreign country. Mr. Majumdar has contended that the present case all contracts for the sale of salt and all deliveries of that commodity to the customers are made not in British India but in Rajputana outside the confines of British India. In my view the case of Grainger & Son v. William Lane Gough is clearly distinguishable from the present case. Lord Herschell in his speech at page 333 stresses the fact that the agents in the United Kingdom did not enter into any contract but merely forwarded offers to the foreign merchants) in France. At page 333 he states;—
“Taking the findings together, I think it clear that no contracts to sell wine were ever made by the appellants on behalf of Roederer. All that they did was to transmit to him the orders received, and until he had agreed to comply or complied with them there was no contract. He was under no obligation to the person giving the order to the appellants to execute any one of them.”
9. In short, no contract was completed in England, and all that the agent did was to forward any proposal for business to his principal in France who accepted or rejected offers as he thought proper. The acceptance of a contract occurred in France, and it was from France that the goods were delivered. The facts of the present case, as I have already stated, differ in most material particulars.
10. Lord Watson also observed in the same case that contracts were not made in England, and he pointed out that if contracts were made in England then business would be carried on in the country as held in Werle & Co. v. Colquhoun 1888 20 Q.B.D 753., and Erichsen v. Last 1881 8 Q.B.D 414.. At page 340 Lord Watson observes:—
“There is, in my opinion, a very broad distinction between the case of a foreigner making contracts in England with his English customers for the sale of his wines, either personally or through a representative, and the case of his making similar contracts with these customers in his own country. In the present instance the orders forwarded to Louis Roederer were, in law, nothing more than offers to purchase until the contract between him and each offerer was completed by his acceptance at Reims; and he fulfilled his part of the contract by making delivery of the wine sold to the purchaser, and at his risk, in Reims”.
11. It is true that in the present case the orders are forwarded to Rajputana for execution, but what are forwarded are orders and not the offers. The offers are accepted at Muzaffarpur, and that being so, there is abundant material upon which it can be held that the assessee carries on business in British India. Once that is held, it is obvious that the answer to the second question “whether the assessee has been rightly taxed under the Indian Income-tax Act” must be in the affirmative. For the reasons which I have given, I would answer both the questions in the affirmative. The assessee should, in my view, pay the costs of these proceedings. As the point involved is common to both the references, there will only be one hearing fee which I would assess at seven gold mohurs. The sum deposited in each case with the Income-tax authorities will be retained by them.
Fazl Ali, J.:— I agree.
12. Reference answered in the affirmative.
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