CHHAGANLAL SAVCHAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under sub -section (1) of section 66 of the Indian Income -tax Act, 1922, at the instance of the assessee, Shri Chhaganlal Savchand of Aden. Mr. Mehta, learned counsel for the assessee, stated that the assessee is dead and his legal representatives, Jayantilal Chhaganlal, his son, and Parvatibai Chhaganlal, his widow, be brought on record. By consent of parties they are brought on record. We would be referring to Shri Chhaganlal Savchand of Aden as the assessee. We are here concerned with the two assessment years 1949 -50 and 1950 -51. In both these years the assessee has been taxed in the status of a non -resident. During the years of assessment the business conducted by the assessee was wholesale business in woollen and cotton cloth.

(2.) THE question that arises is whether any income, in whole or in part, accrued in the taxable territories in respect of certain transactions of purchase of cloth from dealers in foreign countries like Japan and other countries and the sale transactions of that cloth to merchants in Aden. The modus operandi of the assessee in respect of these transactions in the assessment years was that the assessee obtained import licences for importing cloth in Aden from the Aden authorities and secured permits for making remittances of money to India. The assessee transmitted those documents to the firm of Chhaganlal Savchand and Co. in Bombay, hereinafter for brevity's sake referred to as the Bombay firm. The Bombay form after securing permission of the Reserve Bank of India obtained moneys from the assessee from Aden and then credited it with some bank in Bombay. On receiving instructions from the assessee as to the quantity and quality of goods, the Bombay firm placed orders directly with the manufacturers in Japan. Simultaneously, an irrevocable letter of credit was opened by the bank in Bombay with its branches in Japan in favour of the Japanese manufacturers. At times the Bombay firm did not deal directly with the manufacturers in Japan, but negotiated the purchases with the representatives of the Japanese manufacturers in Bombay. These representatives then informed the manufacturers about the supply of goods. In both these cases, however, the manufacturers dispatched the goods in the name of the assessee to his Aden address. The documents, however, such as bill of lading, were sent by the Japanese manufacturers to the Bombay firm through the bank. When these documents were received in Bombay, the Bombay firm released these documents through the bank after making payment to the bank against the letters of credit. The Bombay firm then in certain cases transmitted the documents to the assessee in Aden who then took delivery of the goods and then sold them to persons in Aden. In certain other cases the Bombay firm itself sold the goods to parties in Aden under instructions from the assessee. Now as regards the sales effected by the Bombay firm to parties in Aden, they were effected in the following two ways : An agreement was reached with the representatives of the Aden party in Bombay. In certain cases the documents were transmitted by the Bombay firm the Aden parties and in certain other cases the documents were handed over by the Bombay firm at Bombay to the representatives of the Aden parties. The purchasers falling under both these categories, however, sent the documents to the assessee at Aden for endorsement of particulars of his import licence and also for orders to the effect that the goods be delivered to the purchasers. The transactions thus effected by the assessee by adopting the aforesaid modus operandi have been divided by the Tribunal in paragraph 5 of its order in the following four categories, and it is an admitted position that they have been correctly categorised : (1) Transactions in which purchases are made at Bombay from parties abroad by placing orders directly and sale by the assessee in Aden on receiving the documents therefor. (2) Transactions in which purchases are made by the Bombay firm from foreign representatives of foreign parties in Bombay and sales made by the assessee in Aden. (3) Transactions in which purchases are made by the Bombay firm from foreign parties direct and sale is made by them to Aden parties. (4) Transactions in which purchases are made by the Bombay firm from foreign parties through their Bombay representatives and sales made to Aden parties through their representatives in Bombay.

(3.) WE are not here concerned with transactions falling under categories 1 and 2. In respect of those transactions the Income -tax authorities have held that operations relating to these transactions were partly carried out in India and therefore, profit or loss attributable to them had to be taken into account. The authorities, therefore, have held that 50 per cent. of the profit or loss respect of the said transactions should be taken into account while determining the assessee's total income. As regards transactions falling under categories 3 and 4, the Income -tax Officer held that the mere fact the documents were finally endorsed by the assessee at Aden would not serve to hold that the sale took place there. He held that the endorsement was just a legal formality to which no part of the profits could be attributed. Accordingly the entire profits in respect of the said transactions were held by the Income -tax Officer to arise in India. The assessee preferred an appeal before the Appellate Assistant Commissioner. He held that the sale was the cumulative result of various operations out of which the final endorsement was one of them. According to him the endorsement was legally an important step in the sale transactions, but judging from the various operations involved in the sale only some part of the profit could be attributed to it. He, therefore, held that 90 per cent. of the profits on these transactions arose in India and 10 per cent. arose in Aden. Against this decision of the Appellate Assistant Commissioner both the assessee as well as the department appealed to the Tribunal. The Tribunal upheld the contentions of the department and has held that the entire profits of the transactions falling under categories 3 as well as 4 accrued in India and, therefore, were taxable. The reasons given by the Tribunal are in the following terms : 'As regards the above transactions (falling under categories 3 and 4), no evidence has been brought by the assessee on record to establish as to where the sales actually took place. In the absence of any written agreement between the parties to the transaction of sale, the situs thereof must be determined with reference to the rules laid down in the Indian Sale of Goods Act. According to section 20 of the Indian Sale of Goods Act, where there is an unconditional contract for the sale of specified goods in deliverable state the property in the goods passed to the buyer when the contract is made and it is immaterial whether the time of payment of the price and the time of the delivery of goods are both postponed. It is admitted by the assessee that the contract or agreement for sale was made in Bombay and in the absence of any indication to the contrary it must be held that the agreement or contract for sale was unconditional. The property in the goods must, therefore, be held to pass to the purchaser on the contract being made in Bombay and as such the sale must be held to have taken place in Bombay. The Income -tax Officer was, in the circumstances, justified in holding that in respect of the above transactions the sale took place in Bombay within the taxable territories. The entire profit therefrom is to be subjected to tax.