judgement:
Appeals Nos. 396 413 of 1963.
Appeals by special leave from the judgment and order dated October 26, 1961 of the Kerala High Court in Writ Appeals Nos. 104 106, 107, 109, 112, 108, 113, 114, 111, 115, 116, 119, 120, 123, 124 and 122 of 1964.
M. C. Setalvad, J. B. Dadachanji, 0.
C. Mathur and Ravinder Narain, for the appellants (in all the appeals).
V. P. Gopalan Nambiar, Advocate General, Kerala and V. A. Seyid Muhammed, for the respondent (in all the appeals).
April 10, 1964.
The judgment Of GAJENDRAGADKAR, C.J., SHAH AND SIKRI JJ.
was delivered by SHAH J. The dissenting Opinion Of WANCHOO and AYYANGAR JJ. was delivered by AYYANGAR J. SHAH, J. The Sales tax Officer, Special Circle Ernakulam assessed the appellants under the Travancore Cochin General Sales Tax Act XI of 1125 M.E., to pay sales tax on transactions of sale of tea chests at the auctions held at Fort Cochin in the years 1956 57 to 1958 59, rejecting their contention that the sales were exempted from tax by virtue of article 286(1)(b) of the Constitution.
The appellants then petitioned the High Court of Kerala for writs of certiorari quashing the orders of assessment and for writs of prohibition restraining the Sales tax Officer from proceed ing with the collection of tax in pursuance of the orders of assessment.
Vaidialingam J., rejected the petitions and his order was confirmed in appeal by a Division Bench of the High Court of Kerala.
With special leave, the appellants have appealed to this Court.
The transactions of sale sought to be taxed by the Revenue authorities are in tea, which is a controlled commodity.
The Parliament enacted the Tea Act (19 of 1953) to provide for the control by the Union of the tea industry, including the control of cultivation of tea in, and of export of tea from, India and for that purpose to establish a Tea Board and to levy customs duty on tea exported from India.
By section 3(f) "export" is defined as taking out of India by land, sea or air to any place outside India other than a country Or territory notified in that behalf by the Central Government by notification in the Official Gazette. "Export allotment" is defined by section 3(g) as the total quantity of tea which may be exported during any one financial year.
Section 17(1) places an embargo upon exportation of tea unless covered by a licence issued by or on behalf of the Board.
Section 18 provides that no consignment of tea shall be shipped or water borne to be shipped for export or shall be exported until the owner has delivered to the Customs Collector a valid export licence or special export licence or a 709 valid permit issued by or on behalf of the Board or the Central Government as the case may be, coverning the quantity to be shipped.
Section 19 authorises the Central Government to declare export allotments of tea for each financial year, and by section 20 it is provided that any tea estate shall, subject to conditions as may be prescribed, have the right to receive under the Act an export quota for each financial year.
Section 21 provides that the owner of a tea estate to which an export quota has been allotted for any financial year shall have the right to obtain at any time ,export licences during that year to cover the export of tea upto the amount of the unexhausted balance of the quota.
The export quota right is, by cl.
(2) of section 21, transferable, subject to such conditions as may be prescribed and the transferee of such right may again transfer the whole or any part of his right provided that nothing in the sub section shall operate to restrict the issue of licences for the export of tea expressed to be sold with export rights.
The other provisions are not material in deciding this group of appeals.
Trade in tea in the State of Kerala internal as well as export is carried on through certain defined channels.
A manufacturer of tea applies for and obtains from the Tea Board allotment of export quota rights on payment of the necessary licence fee.
The manufactured tea in chests is then sent to M/s. T. Stanes & Company Ltd. who warehouse the chests at Willingdon Island.
Chests of tea are then sold by public auction through brokers at Fort Cochin.
With the chests of tea for which export quota rights are obtained, export quota rights are sold by the auctioneer.
At the auction sale, bids for tea chests with export quota rights are given by the agents or intermediaries in Cochin of foreign buyers.
Tea chests are delivered at the warehouses by M/s. T. Stanes & Company Ltd. to the purchasers whose bids are accepted.
The agents or intermediaries of the foreign buyers then obtain licences from the Central Government for export of tea chests under the export quota rights vested in them under the purchases made at the auction sales.
Tea cannot therefore be exported otherwise than under a licence: such a licence may be issued to a manufacturer or to the purchaser of the quota granted by the Central Gov ernment to the manufacturer when tea is sold with export rights.
When auctions of tea with the export rights are held at Fort Cochin, it is in this group of appeals common ground, sellers on whose behalf the auctioneer acts as the agent know that bids are offered by the buyers of tea for the purpose of export.
It is also known that the bidder is an agent or an intermediary of a foreign buyer.
710 Is the sale by auction to the agent of intermediary of the foreign buyer, in the course of export within the meaning of article 286(1) of the Constitution '? If the sale is in the course of export out of the territory of India.
any State law which imposes or authorises the imposition of a tax on such sale is, because of article 286(1)(b), invalid.
Before the Constitution was amended by the Constitution (Sixth Amendment) Act, 1956, there was no legislative guidance as to what were transactions of sale in the course of export out of the territory of India.
But by the Constitution (Sixth Amendment) Act, cl.
(2) of article 286 was substituted for the original clauses, and thereby the Parliament was authorised to formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in cl (1).
The Parliament has under the Central Sales Tax Act (74 of 1956) enacted by section 5 that "a sale or purchase of goods.
shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.
" This was legislative recognition of what was said by this Court in the State of Travancore Cochin and others vs The Bombay Company Ltd(1) and State of Travancore Cochin and others vs Shanmugha Vilas Cashew Nut Factory and others(2) about the port of the goods out of the territory of India" in article 286(1) (b).A transaction of sale which occasions export, or which is effected by a transfer of documents of title after the goods have crossed the customs frontiers, is therefore exempt from sales tax levied under any State legislation.
The appellants set out in their respective petitions the manner in which sales tax of tea chests were conducted at Fort Cochin and in certain petitions affidavits in reply even were not filed by the State of Kerala.
In the remaining petitions in which affidavits in reply were filed it was contended that the export of goods was made by the purchasers who had taken delivery of the goods from the manufacturers in Travancore Cochin and in pursuance of the export licences obtained by the purchasers goods were exported, but such subsequent export by the purchasers did not affect the character of the sales by the manufacturers to the purchasers.
It is true that there is no finding by the Sales tax authorities that the respective purchasers at the auction were agents of foreign buyers, but the Advocate appearing.
on behalf of the State argued the case before the High Court on the footing that the bids were offered at the auctions by (1) ; (2 ) ; 711 the agents or intermediaries or foreign buyers, and the Court proceeded to dispose of the case before it on that footing.
Vaidialingam J., held that transactions of sale were complete when bids for purchase of tea together with the export quota rights were accepted, and the sellers had no concern with the actual export which was effected by the auction purchasers to their foreign principals.
It could not, therefore, in the view of the learned Judge, be held that the sales in question had as an integral part thereof occasioned export, that is, the sales preceded the export and were not in the course of export.
The High Court in appeal held that the ban imposd by article 286(1)(b) predicated a casual connection between the sale and the export a con nection which is intimate and real.
The sale, it was said, must inextricably be bound up with the export and form an 'integral part thereof, so that without export the sale is not ,effectuated; but as the sale imposed or involved no obligation to export, there was no movement under the contract of sale and exemption claimed was not admissible.
Correctness of this view is challenged in this appeal.
To constitute a sale in the course of export of goods out of the territory of India, common intention of the parties to the transaction to export the goods followed by actual export of the goods, to a foreign destination is necessary.
But intention to export and actual exportation are not sufficient to Constitute a sale in the course of export, for a sale by export "involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to a common carrier or transport out of the country by land or sea.
Such .a sale cannot be dissociated from the export without which it cannot be effectuated, and the sale and resultant export form parts of a single transaction": State of Travancore Cochin and others vs The Bombay Company Ltd.(1).
A sale in the course of export predicates a connection between the sale and export, the two activities being so integrated that the connection between the two cannot be voluntarily interrupted, without a breach of the contract or the compulsion arising from the nature of the transaction.
In this sense to ,constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to export, there must be obligation to export, and there must be an actual export.
The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transaction which links the sale to export.
A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for (1) ; 712 export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export.
And to occasion export there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it.
Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India.
There are a variety of transactions in which the sale of a commodity is followed by export thereof.
At one end are transactions in which there is a sale of goods in India and the purchaser immediate or remote exports the goods out of India for foreign consumption.
For instance, the foreign purchaser either by himself or through his agent purchases goods within the territory of India and exports the goods and even if the seller has the knowledge that the good, , are intended by the purchasers to be exported, such a transaction is not in the course of export, for the seller does not export the goods, and it is not his concern as to how the purchaser deals with the goods.
Such a transaction without more cannot be regarded as one in the course of export because etymologically, "in the course of export", contemplates an integral relation or bond between the sale and the export.
At the other end is a transaction under a contract of sale with a foreign buyer under which the goods may under the contract be delivered by the seller to a common carrier for transporting them to the purchaser.
Such a sale would indisputably be one for export, whether the contract and delivery to the common carrier are effected directly or through agents.
But in between lie a variety of transactions in which the question whether the sale is one for export or is one in the course of export i.e., it is a transaction which has occasioned the export, may have to be determined on a correct appraisal of all the facts.
No single test can be laid as decisive for determining that question.
Each case must depend upon its facts.
But that is not to say that the distinction between transactions which may be called sales for export and sales in the course of export is not real.
In general where the sale is effected by the seller, and he is not connected with the export which actually takes place, it is a sale for export.
Where the export is the result of sale, the export being inextricably linked up with the sale so that the bond cannot be dissociated without a breach of the obligation arising by statute, contract or mutual understanding between the parties arising from the nature of the transaction, the sale is in the course of export.
It may be conceded that when chests of tea out of the export quota are sold together with the export rights, the goods are earmarked for export, and knowledge that the goods were purchased by the bidders for exporting them to.
713 the foreign principals of the bidders must clearly be attri butable to them.
Does the co existence of these circumstances, impress upon the transactions of sale with the character of a transaction in the course of export out of the territory of India '? We are unable to hold that it does.
That the tea chests are sold together with export rights imputes knowledge to the seller that the goods are purchased with the intention of exporting.
But there is nothing in the transaction from which springs a bond between the sale and the intended export linking them up as part of the same transaction.
Knowledge that the goods purchased are intended to be exported does not make the sale and export parts of the same transaction, nor does the sale of the quota with the sale of the goods lead to that result.
There is no statutory obligation upon the purchaser to export the chests of tea purchased by him with the export rights.
The export quota merely enables the purchaser to obtain export licence, which he may or may not obtain.
There is nothing in law or in the contract between the parties, or even in the nature of the transaction which prohibits diversion of the goods for internal consumption.
The sellers have no concern with the actual export of the goods, once the goods are sold.
They have no control over the goods.
There is therefore no direct connection between the sale and export of the goods which would make them parts of an integrated transaction of sale in the course of export.
Decided cases on which reliance was placed at the Bar have mainly been of cases in which the benefit of the exemption of article 286(1)(b) was claimed in respect of sales preceding the export sale.
Such a sale preceding the export could not, it was held, without doing violence to the language of article 286(1)(b), be given the benefit of the exemption from tax imposed by State legislation merely because of its historical connection with the export sale.
In a majority of the cases to be presently referred there were at least two salessale under which goods were procured followed by a sale under which the goods so procured were exported, and the claim of the Revenue to tax the first transaction was upheld.
It may be regarded as therefore settled law that where there are two sales leading to export the first under which goods are procured for sale and the property in the goods passes within the territory of India, and the second by the buyer to a foreign party resulting in export the first cannot be regarded as a sale in the course of export, for a sale in the course of export must be directly and integrally connected with the export.
It cannot also be predicted that every sale which results in export is to be regarded as sale in the course of ex.
We may briefly refer to the cases which have come before this Court.
Justification for citation of the cases is 714 not to evolve a pinciple from the actual decisions, but to highlight the grounds on which the decisions were rendercd.
The first case which came before this Court in which article 286(1)(b) fell to be construed was the State of Travancore Cochin and others vs The Bombay Company Ltd.(1).
The assessee who had exported coir products to foreign purcha sers claimed exemption from sales tax relying upon article 286(1)(b).
The Revenue authorities held that property in the goods having passed within the State, the transactions, were liable to tax.
The High Court disagreed with that view, holding that a sale in the course of export was not merely a sale when the goods had crossed the customs frontiers, but included a transaction which precede export.
This Court agreed with the High Court.
In appeal Patanjali Sastri C.J., speaking for the Court observed that sales which occasioned export were within the scope of the exemption under article 286(1)(b).
But that was a case in which on the facts found there could be no dispute that the sale by the assessee occasioned export, for in pursuance of the contract the assessee had exported the goods sold.
The next case which came before this Court was the State of Travancore Cochin and others vs Shanmugha Vilas Cashew Nut Factory and others(2).
It was held by this Court that purchases in the State made by the exporters for the purpose of export are not within the exemption granted by article 286(1)(b) of the Constitution.
Patanjali Sastri C.J., speaking for the majority of the Court observed: "The word 'course ' etymologically denotes movement from one point to another, and the expression 'in the course of ' not only implies a period of time during which the movement is in progress but postulates also aconnected relation.
* * * * A sale in the course of export out of the country should similarly be understood in the context of clause (1)(b) as meaning a sale taking place not only during the activities directed to the end of exportation of the goods out of the country but also as part of or connected with such activities.
" He further observed that the phrase "integrated activities ' cannot be dissociated from the export without which it cannot be effectuated, and the sale and the resultant export form parts of a single transaction.
It is in that sense that the two activities the sale and the export were said to be integrated.
But a purchase for the purpose of export like production or manufacture for export, being only an act (1) ; (2) ; 715 preparatory to export could not be regarded as an act done "in the course of the export of the goods out of the territory of India".
In the State of Madras vs
Gurviah Naidu and Company Ltd.(1), section R. Das, Actg.
C.J., observed that an assessee who goes about purchasing goods after securing orders from foreign purchasers is not exempt from liability to pay tax by virtue of article 286(1)(b) of the Constitution in respect of the purchases made by him because, those purchases do not themselves occasion the export.
Goods were undoubtedly bought for the purpose of export, but the purchase did not occasion the export within the meaning of article 286(1)(b) of the Constitution.
In State of Mysore and another vs Mysore Shipping and Manufacturing Co. Ltd. and others(2), it was held that where goods were sold to a licenced exporter by the assessee and the licenced exporter sold the goods to a foreign purchaser it could not be said that the first was in the course of ex port.
The licenced exporter was not an agent of the assessee and the two sales could not have both occasioned the export: it was only the second sale which did that, and the assessee not being a party to it either directly or through the exporter or through his agents, the first sale with which alone the assessee was associated did not occasion the export.
If it did not, then it hardly matters whether the goods were exported through the instrumentality of the exporter or not, because all sales that precede the one that occasioned the export were taxable.
In this case the Court expressed the opinion that for the sale to be one which occasions the export it must directly concern the assessee as an exporter.
In East India Tobacco Company vs The State of Andhra Pradesh and another (3) this Court held that only the sale under which the export is made that is protected by article 286(1)(b) of the Constitution and a purchase made locally by a firm doing business of exporting tobacco, which preceded the export sale did not fall within its purview though it is made for the purpose of or with a view to export.
One more judgment of this Court may be noticed: B. K. Wadeyar vs M/s. Daulatram Rameshwarlal(4).
The assessees in that case sold goods to an Indian purchaser, who had agreed to sell them to a foreign buyer.
The sales by the assessees "were on F.O.B. contracts under which they (1) A.I.R. (1956) S.C. 158.
(2) A.I.R. (1958) S.C. 1002.
(3) ; (4) ; 716 continued to be the owners" till the goods crossed the cus toms barrier, and entered the export stream.
It was held by this Court that since the goods remained the property of the assessees till they reached the export stream, the sales were exempt from tax imposed by a State under article 286(1)(a).
This was undoubtedly a case of two sales resulting in export, and the first sale was held immune from State taxation: but that was so because the property in the goods had passed to the Indian purchaser when the goods were in the export stream.
The first sale itself was so inextricably connected with the export that it was regarded as a sale in the course of export.
Mr. Setalvad on behalf of the appellants placed strong reliance upon the judgment of the Madras High Court in of Madras(1).
That was a case in which a dealer in the Stater of Madras in hides and skins after purchasing raw hides tanned them and sent them to Kovai Tanned Leather Co. Madras who acted as the dealer 's agent for sale.
Kovai Tanned Leather Company sold the goods to Dharamsee Parpia who acted as an agent of Srivan Brothers (Eastern) Ltd., London.
There was another transaction between Kovai Tanned Leather Co. and Gordon Woodroffe and Company Ltd. who acted as agents for a foreign principal.
The Salestax Tribunal refused to accept the transaction to Dharamsi Parpia as an export sale on the ground that Kovai Tanned Leather Company delivered the goods to the exporter Dharamsi Parpia and thereafter the exporter obtained the bills of lading, and that the sale became complete in the Madras State before shipment, and it was on that account not a sale in the course of export.
The High Court disagreed with that view.
Jagadisan J., speaking for the Court observed: Where there is privity of contract between the foreign buyer and the seller in the taxing territory and the concluded sale between them occasions the export even if the property in the goods sold passes within the territory the transaction is nevertheless one in respect of which Article 286 imposes a ban on the State to levy tax.
" We are not concerned to decide whether there was evidence in that case on which the High Court could come to the conclusion that the sale occasioned the export.
But Mr. Setalvad relied upon the observation in support of the pro position that in all cases where there is a contract for purchase of goods in the taxing territory, between a local merchant and a foreign buyer acting through his agent, and the (7)13 S.T.C. 629.
717 goods are after purchasing the same exported by the agent, the transaction must be deemed to be one in the course of export.
We are unable to accept that contention.
We do not read the judgment as laying down any such proposition, and none such is legitimately deducible.
The second transaction in favour of Gordon Woodroffe & Co. was found to be one in which property in the goods passed beyond the customs frontier.
Such a transaction would indisputably be a sale in the course of export.
In our view the transactions of sale in the present case did not occasion the export of the goods, even though the appellants knew that the buyers in offering the bids for chests of tea and the export quotas were acting on behalf of foreign principals, and that the buyers intended to export the goods.
There was between the sale and the export no such bond as would justify the inference that the sale and the export formed parts of a single transaction or that the sale and export were integrally connected.
The appellants were not concerned with the actual exportation of the goods, and the sales were intended to be complete without the ex port, and as such it cannot be said that the said sales occasioned export.
The sales were therefore for export, and not in the course of export.
The appeals therefore fail and are dismissed with costs.
One hearing fee.
AYYANGAR, J. We regret our inability to concur in the order that these appeals should be dismissed.
We are clearly of the opinion that the appeals should be allowed.
This batch of 18 appeals which have been heard together are directed against a common judgment of the High Court of Kerala and are before this Court by virtue of special leave granted to the appellants.
The appellants filed writ petitions in the High Court which were dismissed by the learned Single Judge whose judgment was affirmed on appeal by a Bench of the High Court.
It is from this judgment that these appeals have been brought.
The appellants are 18 tea estates which tire carrying on the business of growing and manufacturing tea in their estates.
Their claim is that the teas grown by them have been sold by them "in the course of the export of goods out of the territory of India" within article 286(1)(b) of the Consti tution and they, therefore, claim that the State of Travan core Cochin in which these sales took place was not entitled to impose sales tax upon these sales.
The question for consideration is whether these sales effected by the appellants are, as they claim, sales "in the course of export".
It is common ground that the tea sold 718 under the transactions involved in these appeals was actual ly exported out of the territory of India.
Doubtless, this circumstance would not per se render the sales which preceded the export "sales in the course of export" but the argument submitted to us is that these exports are so directly and immediately linked up with the sales effected by the appellants and so integrated with them that the two form part of the same transaction as to render the sales "sales in the course of export".
It was presented in this form, relying on the decision of this Court in State of Travancore Cochin vs Shanmugha Vilas Nut Factory(1) where the learned Chief Justice observed: "The word 'course ' etymologically denotes movement from one point to another and the expression 'in the course of ' not only implies a period of time during which the movement is in progress but postulates also a connected relation. .
A sale in the course of export out of the country should be understood in the context of article 286(1)(b) as meaning a sale taking place ,not only during the activities directed to the end of exportation of the goods out of the country, but also as part of or connected with. . emphasised the integral relation between the two where the contract of sale itself occasioned the export as the ground for holding that such a sale was one taking place in the course of export.
" It is this integrality that is involved in the concept which is expressed by the words that "the sale that occasions the export" is "a sale in the course of export".
The details of the sales on which tax is sought to be levied by the respondent, together with the facts relating thereto, as well as the several contentions urged before us and the decisions on which reliance is placed on either side have all been narrated in the judgment just now pronounced and we do not think it necessary to restate them.
Similarly, the provisions of the and the rules framed thereunder so far they are relevant for the decision of the question involved in these appeals have also been set out and so we are not repeating them either.
We shall confine ourselves to the very restricted area of our disagreement with our learned brethren which has occasioned this separate judgment.
(1) [1954] S.C.R.53 719 As preliminary to the discussion of the question involved, we shall put aside certain types of transactions as regards which there is no dispute that they clearly fall on one side of the line of the other.
On the one side of the line would be the case where a seller in pursuance of a contract of sale with a foreign buyer puts the goods sold on board a ship bound for a foreign destination.
Such a sale would be an "export sale" which would undoubtedly be within the con stitutional protection of article 286(1)(b).
In regard to this type, however, we would make this observation.
In such a case we consider that it would be immaterial whether or not with reference to the provisions of the Sale of Goods Act, read in conjunction with the terms and stipulations of any particular contract, the property in the goods passes to the buyer on the Indian side of the customs frontier or beyond it.
In either event the sale would have occasioned the export, for the sale and the export form one continuous series of transactions, the one leading to the other not merely in point of time but integrated by reason of a common intention which is given effect to.
In such a case it would be seen that there is but one sale to the foreign buyer "which occasions the export", and which is implemented in accordance with the terms of the contract by an actual export which is the sine qua non of "a sale in the course of export".
A case on the other side of the line would be one where the sale is effected to a resident purchaser who effects the export by sale of the goods purchased to a foreign buyer.
Here the first sale to the buyer who enters into the export sale would not be a "sale in the course of export" for it would not be the particular sale which occasions the export, notwithstanding that the purchase might have been made with a view to effect the export sale, or to implement a contract of sale already entered into with a foreign buyer.
That such a sale is not one "in the course of export" has been repeatedly held by this Court (See State of Travancore Cochin vs Shanmugha Vilas Cashew Nut Factory(1), State of Madras vs Gurviah Naidu and Co. Ltd.(2), State of Mysore vs Mysore Spinning and Manufacturing Co. Ltd.(3) and East India Tobacco Co. vs The State of Andhra Pradesh(4).
This second type of case involves two sales one to a resident purchaser who purchases it with a view to effect an export and the second, the export sale or sale in the course of export by the purchaser to a foreign buyer.
The existence of the two sales and the consequent dissociation between the (1) ; (2) A.I.R. 1956 S.C. 158 = 6 S.T.C. 717.
(3)A.I.R. (4) ; 720 first sale and the export causes a hiatus between that sale and the export and destroys the integrality of the two events or transactions viz., the sale and the factual export.
The sales involved in the present appeals are not of the 2nd type for here there is a single sale direct to a foreign buyer, the contract being concluded with and the goods sold delivered to his agent.
It is hardly necessary to add that for purposes relevant to the decision of the question before us there could be no difference in legal effect between a sale to a foreign buyer present in India to take delivery of the goods for transport to his country and a sale to his resident agent for that purpose.
Pausing here we should mention that there is no dispute (1) that the persons who bid at the auction at Fort Cochin and purchased the teas of the assessees were agents of foreign buyers or (2) regarding their having made these purchases under the directions of their foreign principals in order to despatch the goods to the latter a contractual obligation that they admittedly fulfilled.
Under the sales here involved, though to foreign buyers and intended for export, the goods were not under the terms of the contract of sale placed by the seller on board the ship in the course of its outward voyage and that is the only reason why they do not conform strictly to the first type of an export sale which we have described earlier.
But the question is, do not these sales also "occasion the export" and in that sense sales "in the course of export" The test which has been laid down by this Court for deter mining the proximity of the connection between the sale and the export so as to bring the sale within the constitutional exemption in article 286(1)(b) is the integrality of the two events the sale and the export.
The question to be answered is therefore whether the sales now under consideration do not form part and parcel of a single integrated transaction with the export or are they distinct, distant and mediate, the sale and the export being related to each other only in sense of one leading to the other or the one succeeding the other merely in point of time.
If the former, the sales are within article 286(1)(b), but if the connection between the two is as described later, they are outside the exemption.
What then are the facts of the present case.
Before re stating them for their being examined in the light of the criteria we have just specified, it is necessary to emphasise certain matters.
When the assessees sought an opportunity to adduce evidence as to the facts which they offered to prove to establish their claim to the constitutional protection, the assessing authorities accepted their statements as correct and did not desire them to adduce evidence and so 721 no detailed evidence was led.
If therefore on an examination of the legal position it is now found that there is any lacunae in the statement of facts or in the evidence whose existence would have brought the sales within the exemption, it appears to us that the appellant assessees should in fairness be afforded an opportunity to adduce evidence to establish their case.
We say so particularly because it could by no, means be said that the law was clear as to the facts necessary to be proved to claim exemption in the case of sales of the type now before us.
To proceed with the facts, the assessees had applied for and obtained export quotas with a view to effect exports of a quantity of tea grown and processed by them.
The sales at Fort Cochin were effected along with the export rights , ranted to the Appellant estates.
the contract being that the purchaser at the auction would obtain a transfer of the ex port quota right of that estate whose tea he purchased to the extent needed to effect export of the tea purchased.
The purchases were thus made only on the basis that the export rights of the seller would be transferred to the buyer and on the basis of these transfers the purchasers obtained export licences from Government for exporting the tea and effected the exports.
The purchases were made by agents of foreign principals and it was part of the contractual duty Of these agents vis a vis the principals to consign the goods purchased to them without avoidable delay.
There was proof by the certificates produced that these agents had fulfilled their obligations to their principals and had shipped the goods bought as early as practicable to foreign destinations.
The principal contention urged by the learned Advocate General of Kerala to persuade us to hold that the sales did not "occasion the export" was based on two circumstances: (1) that it was not part of the contract between the assessees and their buyers that the goods shall only be ex ported and not sold in the local market.
In other words, it was urged that in the absence of such a specific term of contract it would have been open to the buyers to have diverted the goods from being exported and to have sold them locally.
This was so far as the contractual relationship between the assessee sellers and the buyers from them under the sale was concerned, (2) dealing next with the effect of the provisions of the and the rules framed thereunder on the sales effected by the assessees, the submission was that section 21 and other provisions of the merely enabled an export to be effected and did not require the goods in regard to which they were issued to be exported.
In other words, it was stressed that the did not impose any obligation on the quota holder or his transferee 722 to export the goods covered by the quota and that conse quently the buyer even after taking a transfer of the export quota rights alongwith his purchase was not compelled by law to export and was not precluded from failing to export and selling the goods locally.
On this reasoning the argument was that here was a purchase under which the purchaser was free to export or not to export and the mere fact that he chose to export would not render the sale to him one which occasioned the export or one "in the course of export".
We consider that these arguments do not sufficiently take into account the actualities of the situation, but proceed on investing on formal requirements a significance which is not warranted.
When learned counsel says that there was no term in the contract between the seller and the buyer that the goods purchased were not to be sold locally but have to be export ed, he is right only in the sense that it is not any express term of the contract.
But could it be said that that was not the implicit common understanding on which the entire transaction was concluded.
The buyer was not interested in the purchase except on terms of the export quota rights being transferred to him and that was why the transfer of the export right was effected or contracted to be effected as part and parcel of the sale of the goods.
Again, the buyer was an agent, who as we have stated earlier was not free to deal with the tea purchased by effecting a local sale, but was under an obligation to his foreign principal to export the goods purchased to a foreign destination.
It was with such a buyer that the assessee entered into the transaction of sale.
On these facts we are satisfied that it was part of the understanding between the seller and the buyer, inferable from all the circumstances attendant on the transaction that the buyer was bound to export.
Pausing here, we would add that, we understand that importance is attached in this context to the need of a term in the sate contract laying an obligation on the part of the buyer to export only for the purpose of demonstrating the intimate connection between the sale and the export for establishing that it was the sale that occasioned the export.
If we are right, then what is of significance is the real and common intention of the two parties to the transaction whether they contemplated the goods purchased being sold locally, or whether they intended the goods sold being only exported and not whether there is such a term in the contract between the parties.
Coming next to the contention that the does not compel export of goods covered by the quotas granted, we might mention that no evidence was led as to the prices prevailing in the local market as compared to that in the foreign countries where the principals of the resident buyers rested, which would have disclosed whether a local sale of the tea bought ostensibly for export was in a commercial sense within the bounds of possibility, though if one went by the rationale underlying the provisions of the and in particular sections 17, 21 and 22, one gets the impression that export quota rights were considered to have a considerable value in the market which would be some indication that a buyer with an export quota would never sell in the local market.
Thus it might be that even though the statute does not in terms prohibit internal sale of tea purchased alongwith export quota rights, this could be explained by the circumstance that the right to export tea is considered a privilege which secures economic advantages to the exporter and hence there was no need for any statutory compulsion to do so.
We are making this observation because Parliament and the Central Government are keen on promoting exports and in the case of some commodities like sugar where the external price is lower than the local price, the regulations framed in that behalf require exports to be effected under compulsion.
We consider therefore that the absence of a compulsive provision in the requiring export of the quantity allotted to the estates, is not very material and that Parliament might well have left it optional with the estate owners to export seeing that economic factors provided the requisite compulsion.
If there was a contract or understanding between the buyer and seller by which the latter was to export the goods bought, it is conceded the sale of the assessee did occasion the export and in our view on the facts established, we con sider this condition satisfied.
We would therefore allow the appeals and set aside the assessment in so far as they included the sales involved in these appeals.
ORDER In accordance with the opinion of the majority, the appeals are dismissed with costs.
One hearing fee.
Appeal dismissed.

summary/full:
The appellants were carrying on the business of growing and manufacturing tea in their estates.
The sellers of tea were the appellants; the purchasers were local agents of Foreign buyers.
The sales were by public auction at Fort Cochin.
They were conducted by brokers of tea.
The sales were in conformity with the provisions of Tea Act of 1953.
The Sales tax Officer assessed the appellants to pay sales tax on transactions of sale of tea chests at the auctions held at Fort Cochin in the years 1956 57 to 1958 59.
Against the orders of assessment the appellants filed petitions before the High Court for writs of certiorari and for writs of prohibition re straining the Sales tax Officer from proceeding with the collection of sales tax.
The petitions were dismissed by the High Court.
With special leave the appellants appealed to this Court.
It was the common case of all the appellants that the pur chases by the local agent of foreign buyers were with a view to export the goods to their principals abroad and that the goods were in fact exported out of India.
It was contended on behalf of the appellants that the sales of tea were "in the course of export out of the territory of India", and thus exempt from taxation under article 286(1)(b) ,of the Constitution.
Held: (per Gajendragadkar, C. J., Shah and Sikri, JJ.) (i) A transaction of sale which occasions export, or which is effected by a transfer of documents of title after the goods have crossed the customs frontiers, is exempt under article 286(1)(b) of the Constitution from sales tax levied under any State legislation.
A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export.
Etymological the expression "in the course of export", contemplates an integral relation or bond between the sale and the export.
In general where a sale is effected by the seller, and the seller is not connected with the export which actually takes place, it is a sale for export.
Where the export is the result of sale, the export being inextricably linked up with sale so that the bond cannot be dissociated without a breach of the obligations arising by statute.
contract of mutual understanding between the parties arising from the nature of the transaction the sale is in the course of export.
707 (ii) A sale in the course of export predicates a connection between the sale and export, the two activities being so in tegrated that the connection between the two cannot be voluntarily interrupted, without a breach of the contract or the compulsion arising from the nature of the transaction.
In the present case there was between the sale and the export no such bond as would justify the inference that the sale and the export formed parts of a single transaction or that the sale and export were integrally connected.
The appellants were not concerned with the actual exportation of the goods, and the sales were intended to be complete without the export, and as such it cannot be said that the said sales occasioned export.
The sales were therefore for export and not in the course of export.
Therefore the sales by the appellant to the agents of foreign buyers do not come with the purview of article 286(1)(b) of the Constitution.
State of Travancore Cochin vs Bombay Company Ltd. ; , distinguished.
State of Travancore Cochin V.Shanmugha Vilas Cashew Nut Factory; , , State of Madras vs Gurviah Naidu and Company Ltd. A.I.R. 1956 S.C. 158, State of Mysore vs Mysore Shipping and Manufacturing Co. Ltd. 13 S.T.C. 529 and B.K. Wadear vs M/s. Daulatram Rameshwarlal , relied on.
M. R. K. Abdul Salem and Company vs Government of Madras, 13 S.T.C. 629, explained.
Per Ayyangar, J.
In the present case the sale and the export being related to each other in the sense of one lead .
in. to the other are therefore within article 286(1)(b) of the Constitution.
There could be no difference in legal effect between a sale to a Foreign buyer present in India to take delivery of the goods for transport to his country and a sale to his resident agent for that purpose.
The buyer was an agent, who was not free to deal with the tea purchased by effecting a local sale, but was under an obligation to his Foreign principal to export the goods purchased to a Foreign destination.
The goods purchased were in fact exported from this country.
It was with such a buyer that the appellants entered into the transaction of sale.
In other words it was a part of understanding between the seller and the buyer, inferrable from all the circumstances attendant on these transactions that the buyer was bound to export.
State of Travancore Cochin vs Shanmugha Vilas Cashew ; , State of Madras vs Gurviah Naidu and Co. Ltd. A.I.R. 1956 S.C. 158, State of Mysore vs Mysore Spinning and Manufacturing Co. Ltd. A.I.R. 1958 S.C. 1002 and East India Tobacco Co. vs The State of Andhra Pradesh, [1963]1 S.C.R. 404, referred to.
(ii) Even though the Tea Act does not in terms prohibit in ternal sale of tea 'Purchased alongwith export quota rights, this could be explained by the circumstance that the rights to export tea is considered a privilege which secures an economic advantage to the exporter and hence there was no need for any statutory compulsion to do so.
L/P(D) ISCI 23(a). .


judgement:
Appeal No. 250 of 1963.
Appeal by special leave from the judgment and ,order dated February 2, 1960 of the Madras High Court in Case Referred No. 1 of 1955.
R. Ganapathy Iyer and R. N. Sachthey, for the appellant.
section Narayanaswamy and R. Gopalakrishnan, for respondent nos.
I and 3 6.
April 16, 1964.
SHAH, J. Respondents to this appeal are a firm constituted under a deed dated December 12, 1947.
The firm originally consisted of three partners: K. N. Damodara Mudaliar, A. Krishnaswami Mudaliar and vs Thangaraja Mudaliar.
K.N. Damodara Mudaliar acquired for the firm for Rs. 1,00,000/ the exploitation rights which were to ensure for four years in a cinematograph film "Apoorva Chinthamani" for the North Arcot, the South Arcot and the Chingleput districts and for Pondicherry.
For the period, December 25, 1.947 to August 2, 1948 which was "the previous year" corresponding to the assessment year 1949 50the firm filed a voluntary return declaring that Rs. 28,643/were earned by the exploitation of the film.
In the statement submitted by the firm the total receipts credited in the firm 's books were Rs. 1,46,849/ , and against that amount were debited Rs. 13,206/ as expenses and Rs. 1,00,000/ as the amount disbursed for acquiring the exploitation rights.
Thereby in the computation of the profits of the business, the firm debited the amount paid for acquiring the rights of exploitation of the film, but did not take credit for the value of the unexpired exploitation rights at the end of the "previous year".
On August 15, 1948, a deed of dissolution of the partnership was executed, and Damodara Mudaliar sold with effect from August 6, 1948, his half interest in the assets of the partnership to Krishnaswami Mudaliar for Rs. 2,000/ and retired from the partnership.
On August 27, 1948 a trial balance sheet of the firm 's books of account was prepared showing a cash balance of Rs. 190/12/4, a debit against Krishnaswami Mudatiar for Rs. 2.641/8/8 and credits in favour of Damodara Mudaliar and Thangaraja Mudaliar respectively for Rs. 1,888/2/11 and Rs. 944/2/1.
Thereafter Krishnaswami Mudaliar, Thangaraja Muidaliar and V. section Lakshmanan (an outsider) formed themselves into another partnership to exploit the film for the unexpired period.
From this partnership Krishnaswami Mudaliar retired on February 22.
1949 agreeing to receive Rs. 12000/ for his 778 six sixteenth share in the assets of the firm on the date of retirement.
In the assessment of the respondent firm for the year 1949 50 the Second Additional ' income tax Officer, Vellore declined to accept the statement of account that the firm had earned till August 2, 1948, a net profit of only Rs. 28,643/ as truly representing the profits of the firm.
Fie observed that "no stock valuation of the picture has been taken but only the excess collection over purchase value has been returned", indicating thereby that in his view from the statement of account which omitted to include at the close of the year the value of the rights in the film for the unexpired period the profits of the firm could not properly be deduced.
The Income tax Officer estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948 at Rs. 65,000, and computed net profits of the firm as an unregistered firm at Rs. 93,642/and assessed income tax and super tax payable by the firm on that footing.
In appeal by the firm to the Appellate Assistant Com missioner, the correctness of the estimated value of the ex ploitation rights of the film at Rs. 65,000/ was alone chal lenged and it was submitted that the sum of Rs. 4,000/ was the true value of the assets at the end of the previous year.
Damodara Mudaliar the retiring partner having relinquished his rights representing half share for Rs. 2.000/ only.
The Appellate Assistant Commissioner rejected the contention, holding that the valuation of the exploitation rights for the unexpired period in the deed of dissolution dated August 15, 1948 was "dictated by extra commercial considerations".
and confirmed the valuation of Rs. 65,000/ made by the Incometax Officer.
Even in appeal to the Income tax Appellate Tribunal, Madras, the respondent firm merely contended that the valuation of the exploitation rights for the unexpired period was excessive.
The Tribunal partially upheld the plea, and reduced the valuation to Rs. 40.000/ as on August 2, 1948, and directed modification of the assessment on that footing.
Pursuant to an order issued by the High Court of Madras in a petition under section 66(2) the Tribunal stated the case and referred the following question: "Whether on the facts and circumstances of this case the Tribunal was justified in applying the proviso to section 13 of the Income tax Act and in confirming the assessment on a mercantile basis of accounting.
" 779 The High Court held that it was open to the assessee to maintain accounts according to a recognised system of ac counting and the assessee having adopted the cash system of ,accounting, and the Tribunal having assigned no reasons for discarding that system in the computation of the profits the Tribunal was in error in making the assessment on the basis of the mercantile system of accounting.
The High Court observed: "When we reach the position that it was the cash system that the assessee had adopted in this case, and that valuation of the closing stock was not an incident of that system for ascertaining the profits, it should be obvious that the Income tax Officer had no power under the proviso to section 13 to force a different system 'on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock.
" The High Court accordingly answered the question referred in the negative.
Against the order, with special, leave, this appeal is preferred.
The question to be determined in this appeal is whether in the computation of the income of the firm under the head "Profits and gains of business" the Income tax Officer was bound by the method of accounting in which the cost of acquisition of the film of which the exploitation rights were held was debited at the commencement of the year, but the value of the film at the end of the year was ignored.
Section 10 of the Indian Income tax Act, 1922, provides that tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him.
Such profits or gains have to be computed after making the allowances set out in sub section
Section 13 provides that the income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method 'of accounting regularly employed by the assessee, provided that, if no method of accounting has been regularly employed or if the method employed is such that, in the opinion of the Income tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income tax Officer may determine.
It may be recalled that the Income tax Officer had in the order of assessment observed that the firm had not made a stock valuation of the film and had merely taken the excess collection over the purchase value and had submitted its 780 return of income 'on that basis.
No express order was re. corded by the Income tax Officer that in his opinion the in come, profits or gains of the business could not properly be deduced from the method of accounting employed by the firm, but it is implicit in what is stated by him that without valuation of the unexpired exploitation rights the profits of the year of account could not be computed.
With this view.
it appears, the Appellate Assistant Commissioner agreed.
In appeal to the Appellate Tribunal the only plea raised was that the Income tax Officer had erred in estimating the value of the unexpired exploitation rights at Rs. 65,000/ .
That was partially accepted, and the value was reduced to Rs. 40,000/ .
It is difficult to appreciate how any question about the regularity of the proceedings of the Income tax Officer by the adoption of the mercantile system of accounting and by the application of the proviso to section 13 of the Incometax Act arose from the order of the Tribunal.
The High Court has under the Income tax Act power to call upon the Appellate Tribunal to state a case ' only if the High Court is not satisfied about the correctness of the decision of the Tribunal that no question of law arises from the order of them Tribunal.
The grounds of appeal filed before the Tribunal and before the Appellate Assistant Commissioner make it abundantly clear that the question as to the applicability of the proviso to section 13 to the profits disclosed by the respondent firm was never challenged.
Nor can it be said that the Tribunal "forced the x x x firm to adopt for the purpose of computation of its profits" a .system of accounting other than the one adopted by the firm.
In the title of the order by the Income tax Officer it was recited that the, method of accounting adopted by the firm was "mercantile", but that does not amount to saying that he proposed to compute the income on the basis that the accounts should be re written on the mercantile system.
The question referred to the High Court asks for advice on the justification for applying the proviso to section 13, and computation of the income on the basis of the mercantile, system of accounting.
On neither of these two branches there was any argument raised by the firm before the Tribu nal.
But we do not propose to dispose of this appeal on the limited ground that the question as framed did not arise out of the order of the Tribunal and need not be answered.
The grounds given by the High Court in support of their answer, to the question referred raise a matter of principle of some importance in the computation of income of an assessee carrying on a trading venture with the aid of a wasting asset, and we have heard elaborate arguments advanced by counsel at the Bar and we deem it necessary, to express our opinion on the questions debated.
781 It is true that the Revenue authorities and the Tribunal did take into consideration the stock valuation at the end of the year of account, but that was not because in their view the system of accounting adopted was or should be mercan tile: the truth of the matter is that in their view, profits of the firm for the year could not, having regard to the nature of the business, properly be deduced from the accounts, "unless the opening and closing stocks were brought into the picture".
This is made clear by the observations of the Tribunal in paragraph 15 of the statement of the case: "x x x in all trading cases the true profits cannot be deduced from any system of maintaining accounts whether cash or mercantile, unless the opening and closing stocks are brought into the picture at cost or market price whichever is lower; it will not avail an assessee to say that in his cash system, he had not made any profit on his cash sales till all his stock is disposed of.
Income tax is an annual levy and the profits of each year require to be ascertained for that purpose as accurately as circumstances permit.
It therefore, in any system of accounting maintained by the assessee, otherwise acceptable, the stocks are left out of account, the aforesaid proviso, it is humbly submitted, necessarily has to be invoked, even if it were for the sole purpose of adjusting the book figures for the stock figures.
" Correctness of this view especially in the context of a trading venture by the exploitation of a wasting asset, but which is the assessee 's stock in trade, falls to be considered.
Section 13 of the Indian Income tax Act was incorporated for the first time in the Income tax legislation in India by the Income tax Act II of 1922, because in a case decide ' under the Income tax Act, 1918, Wallis, C. J.,, delivering the principal judgment of the Full Bench in Secretary, Board of Revenue, Madras vs Arunachalam Chettiar(1) expressed the view that whatever may be the system of accounting adopted by an assessee, income assessable to tax means the income actually or constructively received and that the words of the charging section placed limits upon the succeeding sections specifying the different classes of income liable to tax.
To supersede this exposition of the law the Legislature while enacting Act 11 of 1922 found it necessary to enact section 13.
The section leaves it to the assessee to adopt any compute of accounting and obliges the Income tax Officer to compute the income, profits and gains for the purposes of sections 10 and 782 12 in accordance with such method of accounting regularly employed, if profits of the business can properly be deduced therefrom.
The Judicial Committee of the privy Council ob served in Commissioner of Income tax, Bombay vs Sarangpur Cotton Manufacturing Company Ltd, Ahmedabad(2): " x x x the section relates to a method of ac counting regularly employed by the assessee for his own purposes x x x and does not relate to a method of making up the statutory return for assessment to income tax.
Secondly, the section clearly makes such a method of ac counting a compulsory basis of computation, unless, in the opinion of the Income tax Officer, the income, profits and gains cannot properly be deduced therefrom.
It may well be that, although the profit brought out in the accounts is not the true figure for income tax purposes, the true figure can be accurately deduced therefrom.
The Board also observed: "It is the duty of the Income tax Officer, where there is such a method of accounting to consider whether the income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question.
" Again as observed by this Court in Commissioner of Income tax vs Mcmillan & Co.(2) the expression "in the opinion of the Income tax Officer" in the proviso to section 13 of the Indian Income tax Act, 1922, does not confer a mere discretionary power; in the context it imposes a statutory duty on the Income tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assesses could properly be deduced therefrom.
But the section only deals with the computation of income, profits and gains for the purposes of sections 10 and 12 and does not purport to enlarge or restrict the content of taxable income, profit and gains under the Act.
Section 2(15) of the Act defines "total income" as meaning total amount of in.
come, profits and gains referred to in sub section
(1) of section 4 computed in the manner laid down in the Act.
Section 4(1) lays down what income shall be included in the total income, and sections 10(2), 12(2), 12B(2), 14, 15A, 15B, 15C and 16 prescribe the manner of computation of income, profits and gains in (1) L.R. 65 I.A. 1.
(2) ; 783 different circumstances, and also prescribe special excep tions.
Section 13 does not directly impinge upon the application of these provisions: it merely prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed.
Where in the opinion of the Income tax Officer the income, profits and gains cannot properly be deduced from the method of ac counting, it is open to the Income tax Officer to compute the income upon such basis in such manner as he may determine.
The section does not compel the Income tax Officer to accept a balance sheet of cash receipts and outgoings prepared from the books of account; he has to compute the income in accordance with the method of accounting regularly employed by the assessee.
The only departure made by section 13 of the Indian Incometax Act from the tax legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income tax Act, prima facie, the Income tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of account ing regularly employed by the assessee.
If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profits may properly be deduced, the Income tax Officer is bound to compute the profits in accordance with the method of accounting.
But where in the opinion of the Income tax Officer the profits cannot properly be deduced from the system accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits.
Among Indian businessmen, as elsewhere, there are current two principal systems of book keeping There is, firstly, the cash system in which a record is maintained of actual receipts and actual disbursements, entries being posted when money or money 's worth as actually received, collected or disbursed.
There is secondly the mercantile system, in which entries are posted in the books of account on the date of the transaction i.e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment.
For example, when goods are sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time.
There may have to be appropriate variations when this system is adopted by an assessee who carries on a profession.
Whereas 784 under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken; according to the mercan tile method actual cash receipts during the year and the actual outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year.
Both the methods are somewhat rough.
In some cases these methods may not give a clear picture of the true profits earned and certainly not of taxable profits.
The quantum of allowances permitted to be deducted under diverse heads under section 10(2) from the income, profits and gains of a business would differ according to the system adopted.
This is made clear by defining in sub section
(5) the word "paid" which is used in several clauses of sub s (2) as meaning actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under section 10.
Again where the cash system as adopted, there is no question of bad debts or outstandings at all: in the case of mercantile system against the book profits some of the bad debts may have to be set off when they are found to be mercantile system, there are in numerable other systems of accounting which may be called hybrid or heterogeneous in which certain elements and inci dents of the cash and mercantile systems are combined.
But whatever method of book keeping is adopted, in the case of a trading venture, for computing the true profits of the year the stock in trade must be taken into account.
If the value of stock in trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock in trade unless the value of the stock in trade remains unchanged at the commencement of the year and at the end of the year.
It must be remembered that under the Income tax Act, tax is levied on income, profits and gains, and not on receipts: taxable profits therefore cannot ordinarily be deduced from cash receipts alone.
If in the computation of profits of a trading venture, only the cash receipts and outgoings are taken into account, in substance emergence of profits would be deferred, till the firm 's capital outlay is completely recouped, thereby transforming what in truth are profits of the business into capital, by book keeping entries.
In this case it is unnecessary to consider whether the method of accounting adopted of ignoring the value of the stock in trade may be regarded as regularly employed by the respondent firm, when it is the first year of account.
It is com 785 mon ground that the method of accounting was not mercantile.
but was wholly or primarily cash.
The Income tax Officer was of the view that in the absence of stock valuation of the film which was a wasting asset of the partnership and which was exploited for earning profits, the income of the firm could not properly be deduced and with that view the Appellate Assistant Commissioner and the Tribunal have agreed.
The High Court, however, held that the maintenance of account on cash basis being a recognised method of accounting, the Income tax Officer was bound by the choice of the assessee who had adopted that system of accounting, and to compute the income in accordance with that method, unless the Income tax Officer was satisfied that the assessee had not regularly adopted that system.
The High Court also observed that what the Department had done was to make the assessment on the basis that the system of accounting adopted by the assessee was mercantile a system which the assessee had never adopted, and thereby computed the profits of the assessee, by taking into consideration valuation of the closing stock which was not an incident of the cash system.
The Income tax Officer had in the view of the High Court no power under the proviso to section 13 "to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock".
In coming to that conclusion, in our judgment, the High Court erred.
Note the facts: an amount of Rs. 1,00,000/ was paid by the firm for acquiring a wasting asset, which was to be exploited for the benefit of the partnership.
The price paid for acquiring the asset was debited as an outgoing.
At the end of the year there was a total, collection of Rs. 1,46,849/ by the exploitation of the asset.
The expenses for carrying on the business amounted to Rs. 18,206 / .
The result according to the respondent firm was a net profit of Rs. 28,647/ .
This was arrived at by posting the outgoing for acquiring its stock in trade as a proper debit, and ignoring the value of that asset at the end of the year altogether.
Under the Income tax Act for the purpose of the assessment each year is a self contained unit, and if out of the receipts the cost of the film was to be deducted in the absence of an entry crediting the value of the asset at the end of the year, for arriving at the income of the profit of the firm would either wholly or substantially be absorbed in the amortization of the capital value of the asset.
The result of the accounting would therefore give a false picture of the partnership, however lucrative the business may in reality be.
The methods of computation of taxable incomes prescribed by the Act of different kinds of income are undoubtedly highly artificial, but the Act does not compel the Income tax Officer to accept a statement of account which is not prepared according to any recognised accounting practice.
786 In Commissioner of Inland Revenue vs Cock Bussell and Co. Ltd.(1).
Croom Johnson J., in dealing with valuation of ' stock in trade for purposes of taxation observed: there is no word in the statutes or rules which deals.
with this question of valuing stock in trade.
There is nothing in the relevant legislation which indicates that in computing the profits and gains of a commercial concern the stock in trade at the start of the accounting period should be taken in and that the amount of the stock in trade at the end of the period should also be taken in.
It would be fantastic not to do it: it would be utterly impossible accurately to assess profits and gains merely on a statement of receipts and payments or on the basis of turnover.
It has long been recognised that the right method of assessing profits and gains is to, take into account the value of the stock in trade at the beginning and the value of the stock in trade at the end as two of the items in the computation.
I need not cite authority for the general proposition, which is admitted at the Bar, that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes .
" We have already said that in England there is no provision which compels the tax officer to adopt in the computation of income the system of accounting regularly employed by the assessee.
But whatever may be the system whether it is cash or mercantile as observed by Croom Johnson J. in a trading venture it would be impossible accurately to assess the true profits without taking into account the value of the stock in trade at the beginning and at the end of the year.
Reference may also be made to Whimster & Co. vs The Commissioner of Inland Revenue(2) in which Lord President Clyde observed at p. 823: "In computing the balance of profits and gains for the purposes of Income Tax, x x x two general and fundamental commonplaces have always to be kept in mind.
In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts.
In the second place, the (1) (2) T.C. 813.
787 account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income tax Act, or of that Act as modified by the provisions ' and schedules of the Acts regulating Excess Profits Duty as the case may be.
For example the ordinary principles of commercial accounting require that in the profit and loss account a merchant 's or manufacturer 's business the values of the stock intrade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower.
although there is nothing about this in the taxing statutes." Similarly in Commissioner of Income tax and Excess Profits Tax, Madras vs Messrs. Chari and Ram, Madura(1) Rajamannar C.J., observed that stock in trade in hand is an essential item in the computation of the profits for a period.
"Profits" as observed by Fletcher Moulton, L.J., in the Spanish Prospecting Company Ltd. in re.(2).
"implies a comparison between the state of a business at two specific dates usually separated by an interval of a year.
The fundamental meaning is the amount of gains made by the business during the year.
This can only be ascertained by a comparison of the assets of the business at the two dates.
"We start therefore with this fundamental definition of profits, namely, if the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date x x x x represents in strictness the profits of the business during the period in question.
" It is true that in that case Fletcher Moulton, L.J., made the observations not in dealing with a profit and loss account in a case relating to taxation, but with a, balance sheet of a company intended to show the actual financial condition of a business at the end of a year.
The observations however do show that in ascertaining profits what may be regarded as normal book keeping practice has to be observed.
Whether in the case of trading in special classes of assets appropriate adjustments may have to be made it beside the point.
The Income tax Act makes no provision with regard to the valuation of stock.
It charges for payment of tax the income, (1) (2) 788 profits and gains which have to be computed in the manner provided by the Income tax Act.
In the case of a trading venture these profits have to be adjusted in the light of the provisions of the Income tax Act permitting allowances prescribed thereby.
For that purpose it is the duty of the Income tax Officer to find out what profits the business has made according to true Accountancy practise , in the system adopted, and thereafter to make requiste adjustments, and even appropriate modifications on the rule suggested by Fletcher Moulton, L.J. to ascertain the taxable profits.
it is true as observed by Lord Buckmaster in The Naval Colliery Co. Ltd. vs The Commissioner of Inland Revenue(1) that the principle of determining the profits of the trade by valuing everything at the beginning and the end of the accounting period and by finding the difference may not be universally applicable in all cases, and needs material modification.
The formula suggested in the Spanish Prospecting Company 's case(") was sought to be applied to a case in which Excess Profits duty was assessed.
The assessee a mining company was unable to work its colliery on account of a strike.
The assessee sought to introduce into its account which normally ended on June 30, 1921, the estimated expenses for repairing the damage (which though arising in the account period was restored later) on the plea that the expenses were in the nature of liability of business and properly debitable before they were actually incurred.
The House of Lords rejected that contention.
It was in this context that Lord Buckmaster observed that the accountancy rules, applicable to wise and prudent trading could not be used in connection with the working of a mining lease.
These observations do not affect the true character of the profits of a business.
Adjustments may have to be made in the principle having regard to the special character of the assets, the nature of the business and the appropriate allowances permitted, in order to arrive at the taxable profits.
They do not support the proposition that in the case of a trading venture.
you can arrive at the true profits of a year by ignoring altogether the valuation of the stock in trade at the end of the year, while debiting its value at the commencement of the year as an outgoing, for determination of the profits by ignoring the valuation of the stock at the end of the year and debiting the value of the assets at the commencement of the year would not give a true picture of the profit for the year of account.
There is no, warrant in this case for assuming that the Re venue authorities and the Tribunal had sought to displace the method of accountancy adopted by the assessee.
By applying the proviso to section 13, they made the computation upon the basis (1) (2) 789 and in the manner in which in their opinion profits would be properly deduced.
That they were entitled to do.
We are therefore of the view that the High Court was in error in holding that because the assessee had maintained his accounts in the cash system it was not open to the Income tax Officer to add to the receipts from the business the value of the stock in trade at the end of the year for the purpose of properly deducing the profits of the business for the year in question.
The appeal therefore must be allowed and the answer to the question referred to the High Court will be in the affirma tive.
The Commissioner will be entitled to his costs in this Court as well as in the High Court.
Appeal allowed.

dataset_name: IN-Abs

summary/full:
The assessee firm acquired for Rs. 1,00,000/ the exploitation rights of a cinematograph film which were to enure for four years.
For the period, December 25, 1947 to August 2, 1948, which was the previous year corresponding to the assessment year 1949 50 the firm filed a voluntary return declaring that Rs. 28,643/ were earned by the exploitation of the film.
In the statement submitted by the firm the total receipts credited in the firm 's books were Rs. 1,46,849/ and against that amount were debited Rs. 18,206/ as expenditure and Rs. 1,00,000/ as the amount disbursed for acquiring the exploitation rights.
The Income tax Officer was of the view that from the statement of account which omitted to include at the close of the account year the value of the right in the film for the unexpired period, the profits of the firm could not properly be deduced.
Accordingly, he estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948, at Rs. 65,000/ and computed the net profits of the firm as an unregistered firm at Rs. 93,642/ and assessed income tax and super tax payable by the firm on that footing.
In the appeals filed against the order or assessment, only the correctness of the estimated value of the rights of the film at Rs. 65,000/ was challenged, and the Appellate Tribunal reduced the valuation to Rs. 40,000/ .
On reference, the High Court of Madras took the view that it was the cash system that the assessee had adopted.
that valuation of the closing stock was not an incident of that system for ascertaining the profits and that the Incometax Officer had no power under the proviso to section 13 of the Indian Income tax Act, 1922, to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock.
Held: In a trading venture, for computing the true profits of the year, the stock in trade must be taken into account, whatever method of book keeping was adopted; and the High Court was in error in holding that because the assessee had maintained his accounts in the cash system it was not open to the Incometax Officer to add to the receipts from the business the value of the stock in trade at the end of the year for the purpose of properly deducing the profits of the business for the year in question.
There was not warrant in the case of assuming that the income tax Officer sought to displace the method of accountancy adopted by the assessee it " as only by applying the proviso to section 13 of the Indian Income tax Act, 1922, that the Income tax Officer made the computation upon the basis and in the manner in which in his opinion profits could be properly deduced. 777