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COMMISSIONER OF INCOME TAX, BIHAR & ORISSA V. M/S.

PATNEY & CO AIR 1959 SC 1070


A CASE COMMENT

Subject: Law of Contracts II

TABLE OF CONTENTS TABLE OF CASES...iii TABLE OF STATUTUES...iii CHAPTER I INTRODUCTION...1 1.1 Definition of Contract...1 1.2 Concept of General Offer...2 1.2.1 Agency ..3 1.2.2 Other Issues.. .3 1.3 Research Methodology. 5 1.4 Research Plan ...5 1.4.1 Aims And Objectives 5 1.4.2 Scope And Limitations.. . 6 1.5 Chapterization ..6 1.6 Mode Of Citation .6 CHAPTER II CASE STUDY..7 2.1 Facts of the case.. .7 2.2 Issues to be Determined... 8 2.3. Arguments on behalf of the Appellant 8 2.4. Arguments on behalf of the Respondent.8 2.5 The Supreme Court Judgement....8 2.6 The points of merit on which the decision was based .......10 CHAPTER III CONCLUSION AND ANALYSIS OF THE RESEARCHER. 12 3.1 No basis to go for an appeal...................16 3.2 Basis on which appeal can be taken...17 BIBLIOGRAPHY...iv
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TABLE OF CASES

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Faulkner v. Lowe .5 Commissioner Of Income Tax, Bihar & Orissa V. M/S. Patney & Co .8 The Commissioner Of Income-Tax vs Messrs Ogale Glass Works Ltd .13 Shri Jagdish Mills Ltd v the Commissioner of Income-Tax................................................17

TABLE OF STATUTES
Indian Contract Act 1872 ................................................................................. 3,5,9,11,12,14,17

CHAPTER I
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INTRODUCTION

One broad classification of law is that into Public and Private. Public Law deals with the constitutional and administrative powers of the State and also certain relations between the State and the individual. Private law, on the other hand, deals with the rights of the subject inter se. The Law of Contracts forms part of the Private Law. We enter into numerous contracts in a day. Thus, the word contract has become an indispensable part of our daily lives. Our economy is based on contracts and the exchange of goods and services. Today the nature of a countrys transactional system is an indicator of its economy whether it is booming, or in recession. The term contract is defined in Section 2(h) of the Indian Contract Act 1872 as follows:An agreement enforceable by law is a contract. Thus, for the formation of a contract, there must be an agreement, and the agreement should be enforceable by law.1 According to Section 2(e), agreement is defined as every promise and every set of promises forming the consideration for each other. A promise is defined as an accepted proposal. Thus, every agreement is the result of a proposal from one side and its acceptance by the other; this agreement is regarded as a contract when it is enforceable by law.2 1.1 Definition of Contract Law aims at the certain and protection of legal rights so as to ensure order, peace and security in the common-wealth and the guarantee of some degree of uniformity in the conduct of human affairs.3 The Law of contracts may be described as the endeavour of public authorityto establish a positive sanction for the expectation of good faith which has grown up in the mutual dealings of men.4 The juristic concept of Contract consists of two constituent elements, viz., Obligation and Agreement. Obligation is understood as a legal tie, which imposes upon a determinate person or persons, the necessity of doing, or abstaining from doing, a definite act or acts. In the Institutes of Justinian, it is defined as the vinculum juris or the bond of legal necessity which binds together two or more determinate individuals. It follows from
1 Avtar Singh, LAW OF CONTRACT AND SPECIFIC RELIEF, 10th ed. 2008, p.3 2 Ibid 3Arthur L. Corbin, Recent Developments in the Law of Contracts, Harvard Law Review, Vol. 50, No. 3 (Jan., 1937), p. 478. 4Sir Fredrick Pollock, POLLOCK ON CONTRACTS, 12th ed. 2001, p.1.

the definition: firstly, there must be at least two persons the person under an obligation and another entitled to enforce the obligation. No man can be under an obligation to himself. In Faulkner v. Lowe5 where A borrowed money from a joint account of which A and B were owners, the Court held that the obligation was not enforceable since A was both the creditor and the debtor. Secondly, the obligation must be in respect of doing or abstaining from doing definite acts. Otherwise, there may be an uncertainty or indefiniteness about the obligation and it is also possible that if a person is to be under an obligation to do acts or to forbear from doing acts all the twenty-four hours of the day, the obligation may not be distinguishable from slavery. Thirdly, the obligation must relate to legal matters and not to social affairs. An agreement can be analysed into four constituent elements: Several Parties, Identity of Mind, Mutual Communication and Legal Relations. A Contract therefore is an agreement which binds the parties to it.6 Some agreements are not contracts. Although agreement is a basic element of every contract, it should be noted that the agreement is not always of such a kind that it would be so called in popular speech. The courts take an objective, rather than a subjective, view of agreement and if a person has so conducted himself as to give the appearance that he has agreed, then he may be held to have agreed, even thought, in his own mind, he has not. Where one of the parties holds a monopoly position the other party has no real choice and can hardly be said, in a popular sense, to agree. The law sometimes imposes terms upon one or both of the parties. The court shave developed a doctrine of implied terms, holding that a term sometimes exists in a contract even though it has not been expressly stated by the parties. In theory an unexpressed term is only applied by the court where it arises from the presumed intention of the parties. If that is so, then the doctrine of the implied term does not at all conflict with the idea that contract is based on agreement. But there are cases in which the courts seem to be imposing terms rather than merely deriving them from the intention of the parties. An agreement which does not bind the parties an agreement, that is to say, which is not a legal obligation is not a contract. 1.2 Essentials of a Contract The most essential element of a contract is an agreement. Section 10 of the Indian Contract Act 1872 states that:

5(1848) 154 ER 628. 6Robert Upex and Geoffrey Bennett, DAVIES ON CONTRACT, 9th ed. 2004, p. 1.

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when the following conditions are satisfied: 1. There is some consideration for it. [Section 2(d) and Section 25] 2. The parties are competent to contract. [Sections 11 and 12] 3. Their consent is free. [Sections 13-22] 4. Their object is lawful. [Sections 23-30]7 1.3 The Law of Agency The case discussed in the project deals with the aspect of agency i.e. post office as agent of the debtor, and contract; deemed to be performed where at the place of mailing the cheque or at the place of receiving it. Though the Indian Contract Act 1872 does not define agency, as such, its definitions of principal and agent bring out the relationship of agency. The law relating to agency is contained in Chapter X (Sections 182 to 238) of the Indian Contract Act. An agent and principal is defined in Section 182 of the Act, as follows: An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal. 1.4 The other issues involved Place for performance of promise (Section 49 of ICA): where no application to be made and no place fixed for performance. When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. This is the present case, but earlier the scenario was different. Until the middle of the 19th century, the courts applied the lex loci contractus or the law of the place where the contract was made to decide whether the given contract was valid. The apparent advantage of this approach was that the rule was easy to apply with certain and predictable outcomes. Unfortunately, it was also open to abuse, e.g. the place could be selected fraudulently to validate an otherwise invalid contract; it might lead to the application of laws with no real connection with the
7 Ibid p.4

transaction itself, say, because the parties signed the agreement while on holiday; or it might have been difficult to decide where the contract was made, e.g. because it was negotiated and signed on a railway journey through several states. To avoid these difficulties, some courts proposed applying the lex loci solutionis or the law of the place of performance of the contract. This produced difficulties in cases where the contract required each party to perform its obligations in a different country, or where the place of performance was dictated by later circumstances. However, as the public policies driven by the theory of freedom of contract evolved, the Doctrine of Proper Law emerged. Performance in manner or at time prescribed or sanctioned by promisee (Section 50 of ICA): The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. 1.5 Research Methodology The researcher has adopted the doctrinal, analytical and diagnostic form of research in completing this project. As the project is a case study on Commissioner Of Income Tax, Bihar & Orissa V. M/S. Patney & Co8 dealing with the communication of contract, performance of the contract, place of performance and Agency, the doctrinal form of research was found to be most appropriate. The research is also primarily webbased, relying on articles by eminent authors on the subject. It is assured that no part of the project is plagiarised from any other source.

1.6 Research Plan 1.6.1 Aims and Objectives Through this project, the researcher aims to provide the reader with a detailed overview of the sections of the Indian Contract Act 1872, pertaining to the head communication of contracts, performance in manner or at time prescribed or sanctioned by promise, and place of contract as well as a critical analysis of the same by writing a case study which will highlight the facts of the Case, arguments on behalf of the plaintiff, arguments on behalf of the defendant, the decision of the Court and the ratio decidendi, and the grounds on which the aggrieved party could go for an appeal.
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AIR 1959 SC 1070

The researcher has carefully scrutinized the important concepts and provided a brief study of the same. 1.6.2 Scope and Limitations Within the scope of this project, the researcher will analyse the main questions that arise, their answers and the topics under each of the heads. Due to paucity of space and time to some extent, the researcher will be unable to include all the concepts and limit himself to analyzing and discussing only the important ones on the topic. 1.7 Chapterization The researcher has divided the project into nine main chapters: i) The first chapter deals with the introduction of the project. It explains

what the project is about and also gives details of the basic concepts involved in this case. ii) The second chapter starts the facts of the case and procedural history of the case. iii) The third chapter mentions the issues and statutory provisions involved in the case. It also deals with the contentions of the counsels of the plaintiff and the respondents, looks into the observation of the Allahabad High Court while pronouncing the judgement and explains the reasons which the High Court gave for pronouncing the judgement. iv) The fourth chapter concludes the project by analysing the judgement and giving critical comments on it. 1.8 Mode of Citation The researcher has followed a uniform mode of citation throughout the course of the project.

CHAPTER II CASE STUDY 2.1 The Facts of the case The respondents, who were non-residents carrying on business at Secunderabad within the territories of the Nizam of Hyderabad, were acting as agents of two firms in Bombay and Madurai, in British India, for the supply of certain goods to the Nizam's Government. In respect of the Commission due to the respondents by the firms the agreement between the parties was that the amounts were to be paid to the respondents in cash or by cheques at Secunderabad. For these amounts cheques drawn by the firms on the Bombay and Madras branches, respectively, of the Imperial Bank of India, were sent by post at Bombay and Madurai to the respondents at Secunderabad, and when received, they were credited in their books of account, the cheques being sent to their banker there for collecting and crediting to their account. For the assessment year 1945-1946 the Incometax Officer, Berhampur (in British India), assessed these sums as taxable income holding that the amount was received in British India and not at Secunderabad. In pursuance of this agreement the respondents received from M/s. T.V.S. lyengar & Sons, Madura, cheques drawn on the Imperial Bank of India, Madras, amounting to Rs. 35,202 in respect of all goods supplied from -Madura and also from Lucas Indian Services, Bombay, by cheques drawn on Imperial Bank of India, Bombay branch, amounting to Rs. 5,302 in respect of goods supplied by them, thus making a total of Rs. 40,504. These cheques were sent by post and when received by the respondents at Secunderabad were credited in the account books of the respondents and sent to their banker G. Raghunathmal for collecting and crediting to the account of the respondents. As against these sums so deposited the respondents at once drew cheques and thus operated on these amounts deposited. In regard to the commission received from the Bombay firm it was paid into the account on December 22, 1944, but was given credit for only on January 2, 1945. The Income-tax Officer assessed these sums as taxable income holding that the entire amount of Rs. 40,504 was received in British India and not at Secunderabad. To this, an appeal was made by the respondents.

Procedural History of the Case An appeal was taken by the respondents to the Appellate Assistant Commissioner who upheld the order holding that income must be held to have accrued, arisen or received in British India. Against this order the respondents took an appeal to the Income-tax Appellate Tribunal and it was held that the amounts were received by the respondents from Madura and Bombay firms as commission but 871 they were received at Secunderabad. The appeal was therefore allowed. The finding Of the Appellate Tribunal in their own words was:- " The contention of the Appellants is that the cheques being negotiable instruments and the creditor having accepted them and passed through their books, II the receipt must be taken to be receipts in Hyderabad. They agreed with the view submitted by the appellants. In Bhashyam's Negotiable Instruments Act, 8th Edition, Revised, page 556, it is stated that it will be open to a creditor to accept a cheque in absolute payment of money due to him, in which case it will be equivalent to cash payment. That being the position it cannot be said that the income was received in British India ".The Appellate Tribunal had earlier found that all the cheques received at Secunderabad by the respondents were treated by them as payment. The respondents claimed that in view of the agreement between the parties that the amount of commission should be paid at Secunderabad, when the cheques were sent by post, the post office was the agent of the debtor and not of the respondents, that the amount must be treated as having been received when the post office delivered the cheques to the respondents, and that, consequently, the amount cannot be treated as having been received in British India. It was held in the High Court that in the case of payment by cheques sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send a cheque by post the property in the cheque passes to the creditor as soon as it is posted. But where, as in the present case, the agreement was that the amount was to be paid at Secunderabad, outside British India, when the cheques were received by the respondents there the amount must be deemed to have been received at that place, and, therefore, the amount was not liable to be taxed in British India.

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2.2 Issues involved i) What is the place for performance of promise, where no application to be made and no place fixed for performance? ii) Whether the money paid via cheque came under the ambit to be taxed by the British Indian government? iii) Apart from place what should be the manner of performance of contract, should it be as expressly asked by the promisee and if he has made no express demand then what should be the manner? iv) What is the liability of a person non-resident in the country to pay the tax of that country?

2.3 Statutory Provisions i) Section 49 of The Indian Contracts Act, 1872.

2.4 Arguments on behalf of the Appellant Learned Counsel for the appellant, submitted that the respondents at all material times were non-residents carrying on business at Secunderabad which was then in the territories of the Nizam of Hyderabad. i) They acted as agents for the supply of gas plants manufactured by Messrs. T. V. S. Iyengar & Sons, Madura, to the Nizam's Government, and also as agents of the Lucas Indian Services, Bombay branch, for the supply of certain goods to that Government. ii) There does not appear to have been any written agreement between the two manufacturers and the respondents but the goods were to be supplied on a commission basis. iii) The post office was acting as an agent of the respondents

2.5 Arguments on behalf of the Respondent i) On behalf of the respondents, it was contended that in the absence of such a request of manner of performance the post office could not be constituted as the agent of the respondents. ii) Infact the post office was the agent of the appellants.

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2.6 Judgement The Supreme Court held, that in the case of payment by cheques sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send a cheque by post the property in the cheque passes to the creditor as soon as it is posted. But where, as in the present case, the agreement was that the amount was to be paid at Secunderabad, outside British India, when the cheques were received by the respondents there the amount must be deemed to have been received at that place, and, therefore, the amount was not liable to be taxed in British India. The points of merit The question is whether the amounts, of commission paid by cheques, drawn respectively on banks at Madras and Bombay and respectively posted from Madura and Bombay, can in the circumstances of this case be held to have been received in what was British India or at Secunderabad If there is an express request by the creditor that the amount be paid by cheques to be sent by post and they are so sent there is no doubt that the payment will be taken to be at the place where the cheque or cheques are posted. The respondents argued that there was an agreement between the Madura and Bombay firms and the respondents that the money would be paid whether in cash or by cheque 'at Secunderabad' and therefore when the cheques were sent by post the post office was the agent of the debtor and not of the respondents. The word or is of essence here. So the post office was an agent of the appellant and not respondents. So the agent came to the territory of Nizams and made the payment. However if the respondents had expressly asked for the payment by cheque via post, the post office would have become the agent of the respondents and then it would have been as if the respondents send their man to Mumbai or British India to get the money and then it would have been amounted as payment in British India.

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In other words In the case of payment by cheques sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties The court also pointed that the single most decisive factor was that in this case there was an express agreement that the payment was to be made at Secunderabad and therefore the matter does not fall within the rule in Ogale Glass Works case9, and no matter whatever may be the position when there is an express or implied request for the cheque for the amount being sent by post or when it can be inferred from the course of conduct of the parties, the appellant in this case expressly required the amount of the commission to be paid at Secunderabad and hence the rule of Ogale Work's case would be inapplicable. Thus the contract would be deemed to be completed at Secunderabad, the payment would be deemed to be made at Secunderabad and hence outside British India and out of purview of British Indian taxes. However if there would have been an express demand by the respondent to make payment by cheque only then the ruling in Ogale Works case would have been followed, and the transaction would have been deemed to be completed in British India only.

The Commissioner Of Income-Tax vs Messrs Ogale Glass Works Ltd, 1954 AIR 429.

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CHAPTER III CONCLUSION


3.1 No basis to go for an appeal The researcher finds that the decision of the court was correct, well founded and on the lines of justice, rationality, logic and statutory provisions. The researcher is of the view that the verdict of the High Court and Supreme Court is correct. The researcher finds no flaw in the judgement. The fact is that the post office was acting as the agent of the appellant(debtor) and not the respondents (creditor), so it was like the debtor had sent his agent i.e. the post office to Secunderabad to pay the debtor and not that the debtor had sent his agent to receive money from the creditors. In Bhashyam's Negotiable Instruments Act, 8th Edition, Revised, page 556, it is stated that it will be open to a creditor to accept a cheque in absolute payment of money due to him, in which case it will be equivalent to cash payment. That being the position it cannot be said that the income was received in British India The real question in all such cases is not merely whether the cheques were drawn on a bank in British India, and sent for collection to that bank. The question is whether when the cheques were received by the assessee having his place of business outside British India; those cheques were in fact received as absolute and final payments by way of unconditional discharge or whether they were received as mere conditional payments on realisation. The fact that cheques were drawn on a bank in British India or that they were sent for collection through a Secunderabad banker of the assesse though relevant, are not conclusive. The question is whether the amounts, of commission paid by cheques, drawn respectively on banks at Madras and Bombay and respectively posted from Madurai and Bombay, can in the circumstances of this case be held to have been received in what was British India or at Secunderabad? Place is of the essence here, and that place is Secunderabad, the deemed and correct place of payment and not Bombay or Madurai. 3.2 Basis to go for an appeal However how much may be the evidence on one side, the field of Law is such that you can always bring out the provisions and logic supporting the other side as well. It is
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on the balance of these two opposite probability that the court decides in which way the case should go. The one case law which supports a different view then the one take in the present case is Commissioner of Income-tax v. Ogale Glass Works Ltd10 and to some extent Shri Jagdish Mills Ltd v the Commissioner of Income-Tax11. In both the cases it was held that the contract was deemed to be concluded in British India although the place of receiving the payment was outside it. In Ogale works case it was held, that according to the course of business usage in general the parties must have intended that cheques should be sent by post and therefore the posting of cheques in Delhi amounted to payment in Delhi to the post-office which was constituted the agent of the assesses. So in the Patney Messrs case also this principle could be put into effect. The researcher would have challenged the decision of the case on this very principle. The only difference in Ogale Works case and the present Patney Messrs case is that in former they had expressly asked cheque as the mode of payment but in latter they had given them two options. So what, if the respondent had given them the option of payment via cheque or cash? The point is it means the respondents were ready and equally consenting for both the options, and since either of the options made no difference to them i.e. they were willing for payment in either of the modes, they should be ready and willing to face the consequences of them also. So payment in cash would have meant that they would have escaped British-Indian tax as then the payment would have meant payment at Secunderabad only (outside British India) but the payment in cheque would have meant payment within British India and under the ambit of the taxes. In the end they got money via cheque only but they escaped the taxes of British India since the court deemed it to be payment outside British India only for the single reason that the respondent had given the appellants an option to not to pay by cheque. But the correct reasoning is that giving of options should be seen as a person equally comfortable with both the options, and in such a case of being equally comfortable with the options the promisee should be equally ready to face the consequences of those options too. Also it is the duty of the promisee, in this case the respondents to fix the place of receiving, as per Section $9 of the Indian Contract act which says: Place for performance of promise, where no application to be made and no place fixed for performance - When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise,
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[1955] 1 S.C.R. 185 [1959] INSC 81

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and to perform it at such place. So they gave the appellants an option and the appellants complied so the respondents cannot escape the taxes

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BIBLIOGRAPHY Books Referred: Avtar Singh, CONTRACT AND SPECIFIC RELIEF, 10th Edition, 10thed 2008, Eastern Book Company, Lucknow. G.H. Treitel, AN OUTLINE OF THE LAW OF CONTRACT, 3rd ed. 1984, Butterworths& Co., London. G.H. Treitel, THE LAW OF CONTRACT, 9th ed. 1995, Sweet & Maxwell, London. Valera Grapp, HANDBOOK FOR CONTRACT LITIATION, 1st ed. 1988, Prentice Hall, New Jersey. NilimaBhadbhade, INDIAN CONTRACT & SPECIFIC RELIEF ACT, Vol. II, 12th ed. 2001, Butterworths, New Delhi. Sir GuenterTrietel, SOME LANDMARKS OF TWENTIETH CENTURY CONTRACT LAW, 1st ed. 2002, Clarendon Press, Oxford. Robert Upex& Geoffrey Bennett, DAVIES ON CONTRACT,9th ed. 2004, Sweet & Maxwell, London. T.S. VenkatesaIyer, THE LAW OF CONTRACTS & TENDERS, Vol. I, 7th ed. 1999, S. Gogia& Company, Hyderabad. T.K. Mukherjee, LAW OF CONTRACTS, Vol. I, 2nd ed. 2008, Premium Publications Co., Allahabad. P.C. Markanda, THE LAW OF CONTRACT, Vol. II, 2nd ed. 2008, Wadhwa& Company, Nagpur. Ewan Mckendrick, CONTRACT LAW, 1st ed. 2003, Oxford University Press, New York. NilimaBhadbhade, POLLOCK & MULLA INDIAN CONTRACT & SPECIFIC RELIEF ACT, Vol. II, 12th ed. 2001, ButterworthsTripathi Publications, Delhi. Websites Referred: www.jstor.org www.manupatra.com www.westlaw.com

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