Commissioner of Income-tax, Bihar & Orissa v. M/s. Patney & Co.

Case Analysis

Commissioner of Income-tax, Bihar & Orissa v. M/s. Patney & Co.

May 26, 2025

A) ABSTRACT / HEADNOTE

This judgment pertains to a seminal ruling in Indian income tax jurisprudence: Commissioner of Income-tax, Bihar & Orissa v. M/s. Patney & Co., decided on May 5, 1959. The crux of the matter revolved around the liability of a non-resident assessee to Indian income tax based on the situs of receipt of income in the form of cheques sent by post. The Supreme Court of India evaluated whether the income earned by a non-resident from commission on sales, received via cheques posted from British India but delivered and credited in Secunderabad (then part of Hyderabad State), could be deemed to have been received in British India for taxation purposes. The decision has had a lasting impact on the jurisprudence surrounding source of income, place of receipt, and agent-principal relationship in postal transmission. The court interpreted the legal implications of postal remittances, distinguishing the case from the precedent set in Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 SCR 185, by emphasizing that the express agreement for payment at Secunderabad was determinative. This case set out significant guidelines on how express agreements influence the tax situs of income, providing relief to non-residents from unintended tax exposure under Indian law.

Keywords: Income-tax, Place of receipt, Non-resident assessee, Cheque by post, Taxability, Situs of income, Postal agency, Ogale Glass Works, Secunderabad.

B) CASE DETAILS

i) Judgement Cause Title: Commissioner of Income-tax, Bihar & Orissa v. M/s. Patney & Co.

ii) Case Number: Civil Appeal No. 326 of 1957

iii) Judgement Date: May 5, 1959

iv) Court: Supreme Court of India

v) Quorum: Hon’ble Mr. Justice B.P. Sinha, Hon’ble Mr. Justice J.L. Kapur, and Hon’ble Mr. Justice M. Hidayatullah

vi) Author: Justice J.L. Kapur

vii) Citation: [1959] Supp. 2 S.C.R. 868

viii) Legal Provisions Involved: Section 4 and Section 66(1) of the Indian Income-tax Act, 1922

ix) Judgments Overruled by the Case: None

x) Case is Related to which Law Subjects: Taxation Law, Constitutional Law (Federal Structure – non-resident taxation), International Law (territorial jurisdiction of taxation), Private International Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This appeal emerged from an income tax assessment dispute involving the territorial applicability of Indian income tax law to non-resident assessees receiving income via postal cheques. The respondents, M/s. Patney & Co., operated their business from Secunderabad, a territory not within British India during the relevant time. They received commissions from Indian firms based in Bombay and Madurai for acting as agents in the princely state of Hyderabad. The tax department contended that since the cheques were posted in British India, the income must be deemed as received therein and thus taxable under Indian law. The High Court of Orissa ruled in favor of the respondents, stating the place of actual receipt governed taxability. The Income-tax Department, unsatisfied with this verdict, appealed to the Supreme Court. The central issue involved an interpretation of receipt via post and whether the post office acted as agent of the debtor or the creditor, which is pivotal in determining where the income is deemed received.

D) FACTS OF THE CASE

M/s. Patney & Co., the respondents, were non-residents for tax purposes, operating from Secunderabad, then part of the Hyderabad State. They worked as agents for:

T.V.S. Iyengar & Sons Ltd., Madurai; and
Lucas Indian Services Ltd., Bombay.

The firms were situated within British India and commissioned Patney & Co. to supply goods to the Hyderabad government. These arrangements lacked a formal written agreement but were governed by implied contracts based on ongoing business conduct. The commission owed to the respondents was paid through cheques drawn on the Imperial Bank of India in Madras and Bombay, respectively. These cheques, posted to the respondents, were:

Received in Secunderabad.
Credited to the respondents’ account.
Operated upon immediately via further cheques issued by the respondents.

The Income-tax Officer (Berhampur) assessed that the income was received in British India and taxed the sum of Rs. 40,504 under the Income-tax Act, 1922. The respondents challenged this, and ultimately, the Appellate Tribunal ruled in their favor, followed by an affirmation by the Orissa High Court.

E) LEGAL ISSUES RAISED

i) Whether the amount of commission remitted via cheques posted from British India but received and operated upon in Secunderabad was income received in British India under the Indian Income-tax Act, 1922?

ii) Whether posting of cheques by debtors from British India constituted payment in British India when there existed an agreement to make the payment in Secunderabad?

iii) Whether the post office, in this context, acted as the agent of the sender (debtor) or receiver (creditor)?

F) PETITIONER / APPELLANT’S ARGUMENTS

i) The counsel for the Income-tax Department argued that since the cheques were drawn and posted in British India, the act of posting itself amounted to a constructive receipt of income by the assessee in British India.

They heavily relied on the ruling in Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 SCR 185, wherein it was held that the posting of a cheque in response to a request for payment constituted receipt at the place of posting. Therefore, they contended, the entire income ought to be considered received within taxable territory, making it liable under Indian income-tax law. They dismissed the argument of delivery at Secunderabad being determinative, arguing the real transaction concluded with posting.

G) RESPONDENT’S ARGUMENTS

i) The counsel for the respondents contended that the agreement between the parties was explicit — the commission payments were to be received at Secunderabad. This agreement governed the legal situs of the receipt.

They argued that the post office acted as the agent of the sender, not the assessee, and therefore delivery to the post office did not constitute valid receipt by the assessee. The respondents relied on the principle that unless there was express or implied authority from the creditor to receive the payment by post, delivery to the post office does not constitute valid receipt. They cited the absence of such an express request in this case and pointed out that the cheques were credited and operated upon only after delivery in Secunderabad, clearly indicating receipt outside British India.

H) RELATED LEGAL PROVISIONS

i) Section 4 of the Indian Income-tax Act, 1922: Deals with the charge of income tax and stipulates that income received or deemed to be received in British India is taxable.

ii) Section 66(1): Permits a reference to the High Court when a question of law arises out of the Tribunal’s decision.

iii) Negotiable Instruments Act, 1881, specifically Sections 5 and 138, defining cheques and their operation.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that where the creditor has not expressly or impliedly authorized postal transmission, the post office remains the agent of the debtor. Consequently, delivery occurs only when the cheque reaches the creditor. Since the cheques were agreed to be paid and received in Secunderabad, actual receipt occurred there, outside British India, and hence the income was not taxable under Indian law. The Court distinguished this from Ogale Glass Works by noting that in Ogale, the assessee had expressly requested payment via post, which was not the case here.

b. OBITER DICTA

i) The Court emphasized the importance of intent and agreement between parties in determining the place of receipt, which has implications beyond taxation, especially in commercial and contractual disputes.

c. GUIDELINES

The Court laid down clear guidance:

Where there is an express agreement to pay at a specific location, that place determines the receipt of income.
Cheques sent by post do not amount to receipt unless the creditor authorizes postal delivery.
If no such authorization exists, receipt happens upon actual delivery, and the post office is an agent of the sender.

J) CONCLUSION & COMMENTS

This decision remains pivotal in the realm of international and cross-border taxation, especially for non-resident assessees. It reinforces the doctrine that form cannot override substance, and that contractual agreements between parties have overriding effect in determining situs of income. It also curbs the Revenue’s tendency to stretch the meaning of “receipt” to maximize tax jurisdiction. This judgment upholds commercial sanctity by reinforcing that income received outside taxable territory due to a valid agreement cannot be artificially brought within Indian tax net.

K) REFERENCES