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 17, 2025

A) ABSTRACT / HEADNOTE

The judgment in Commissioner of Income-Tax, Bihar & Orissa v. M/s Patney & Co., delivered by the Hon’ble Supreme Court of India on May 5, 1959, engages with the pivotal issue of situs of income receipt for taxation purposes concerning non-residents under the Income-tax Act. The respondents, non-resident agents based in Secunderabad (then under the Nizam’s dominion), had received commissions from firms based in Bombay and Madurai through cheques mailed from British India. The crux was whether these payments, posted in British India but received and encashed in Secunderabad, constituted income received in taxable territory (British India) under the then-existing income tax regime. The Court decisively held that when the agreement specifies that the payment is to be made at a particular location (Secunderabad), and the creditor receives cheques at that location, the receipt is deemed to occur at that location, not where the cheques were posted. The judgment reinforces that where parties agree to make payment at a place outside taxable territory, and cheques are delivered accordingly, the situs of receipt aligns with the place of delivery, even if the postal transmission originates in taxable territory. The ruling distinguishes and limits the principle in Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185.

Keywords: Income-tax, Non-resident, Place of Receipt, Cheque Payment, Postal Transmission, Ogale Glass Distinction, Situs of Income.

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:
B.P. Sinha, J.L. Kapur and M. Hidayatullah, JJ.

vi) Author:
Justice J.L. Kapur

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

viii) Legal Provisions Involved:

Section 66(1) of the Indian Income-tax Act, 1922
General principles relating to receipt of income for the purpose of taxation under the Income-tax Act

ix) Judgments overruled by the Case (if any):
None explicitly overruled, but Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185, was distinguished.

x) Case is Related to which Law Subjects:
Income-tax Law, Constitutional Law (Federal Structure), Private International Law (Conflict of Jurisdiction in Income Source)

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The judgment arose from an income tax assessment dispute involving a non-resident assessee firm operating from Secunderabad, outside the then British Indian territories. The core issue concerned the taxable situs of income received in the form of commission payments via cheques posted from British India. British India’s tax authorities sought to levy tax on these earnings, alleging they were received within British India. The case originated from an appeal by the Income Tax Department against the decision of the Orissa High Court, which sided with the assessee. The case thus probes the nature of receipt, agency of postal transmission, and contractual intent between creditor and debtor. The ruling was significant for its implications on the extraterritorial applicability of income tax law and clarified legal standards concerning “receipt” of income, especially when mediated through banking and postal mechanisms between jurisdictions.

D) FACTS OF THE CASE

The respondents, M/s Patney & Co., were non-residents based in Secunderabad within the erstwhile dominion of the Nizam of Hyderabad. They functioned as agents for two Indian firms—T.V.S. Iyengar & Sons, Madurai, and Lucas Indian Services, Bombay. These firms contracted with the Nizam’s Government for the supply of gas plants and other equipment. As per the agreement, the agents were to receive commission payments for facilitating such transactions. There existed no formal written contract stipulating terms of payment. However, there was a verbal understanding that payments would be made in Secunderabad, either in cash or through cheques. In line with this understanding, the Indian firms dispatched cheques via post from British Indian cities to Secunderabad.

For the assessment year 1945–46, the respondents received Rs. 35,202 and Rs. 5,302 respectively from Madurai and Bombay, totalling Rs. 40,504. The cheques were received at Secunderabad, credited in the respondents’ books, and deposited with their local bank. The Income-tax Officer assessed the amounts as taxable, contending that the receipt occurred in British India as the cheques originated there. The Tribunal and the High Court ruled otherwise, prompting an appeal by the Commissioner of Income Tax to the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the commission amounts sent by cheques posted from Madras and Bombay and received at Secunderabad constituted income “received in British India” for the purposes of taxation under the Indian Income-tax Act, 1922.

F) PETITIONER / APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that

The department’s representative, G.K. Daphtary, Solicitor-General of India, contended that since the cheques originated in British India and were drawn on British Indian banks, the situs of receipt should be considered British India. He relied heavily on the precedent in Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185, where the Supreme Court held that cheques posted in Delhi by the Government of India to Aundh (then outside British India) were deemed to be received in British India due to the mode and manner of transmission and implied authority to use postal services. It was argued that similar facts existed here, thus making the transaction taxable under Indian law.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that

Counsel for the respondents—Rameshwar Nath, S.N. Andley, and J.B. Dadachanji—argued that the commission payments were agreed to be made at Secunderabad. The use of postal services to send cheques was in accordance with this agreement. The post office, they claimed, acted as an agent of the debtor. As such, the income was received at Secunderabad, which lay outside British India and thus could not be taxed under the Income-tax Act. They also submitted that the cheques were treated as final payments upon receipt, as evidenced by accounting entries and immediate operation upon banking. They distinguished Ogale Glass Works, stating that in the present case, there was no implied authority for postal remittance; rather, there was an explicit agreement for payment at Secunderabad.

H) RELATED LEGAL PROVISIONS

i) Section 66(1) of the Indian Income-tax Act, 1922

This section allows the Income-tax Appellate Tribunal to refer questions of law arising from its order to the High Court, which formed the procedural basis of this reference.

ii) General Principles of Contract Law and Negotiable Instruments Act

The judgment considered whether cheques sent by post can be deemed received at the time and place of posting or at the time and place of actual delivery. It examined agency principles concerning postal transmission and the moment when title to negotiable instruments passes.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that when parties agree that payment shall be made at a specific place, and cheques are sent accordingly and received at that place, the receipt occurs at the place of actual delivery.

Justice Kapur, delivering the opinion, clarified that the principle in Ogale Glass Works would only apply where there is an express or implied request by the creditor for the debtor to send cheques by post. In this case, there was a verbal agreement that the payment would be made at Secunderabad, and cheques were treated as absolute payment upon receipt. Thus, the post office acted as the agent of the debtor, and the receipt occurred outside British India. Hence, the income was not taxable under the Indian Income-tax Act.

b. OBITER DICTA

i) The Court discussed that the determination of the place of payment would depend on the contract and course of dealings. It emphasized that usual business practices might create an implied authority to use postal channels, but that presumption can be overridden by express agreements.

c. GUIDELINES

The situs of income receipt depends on the terms of agreement and delivery mode.
Express or implied consent to postal transmission determines the post office’s agency.
If the creditor agrees to receive payment via post, receipt is at the posting location.
If the agreement requires payment at a place outside taxable jurisdiction, and cheques are delivered there, receipt occurs outside that jurisdiction.
An actual receipt of cheque at the agreed place, followed by its treatment as unconditional payment, constitutes full discharge of debt at that place.

J) CONCLUSION & COMMENTS

This landmark ruling underscores the importance of contractual intent and delivery mechanisms in determining the place of income receipt for tax purposes. The Supreme Court appropriately limited the precedent in Ogale Glass Works, thereby creating a nuanced doctrine sensitive to the practicalities of business operations and cross-jurisdictional agency relationships. It fortified the taxpayer’s rights to rely on clear contractual terms for situs of income and restored certainty in determining extraterritorial income receipts. This judgment remains crucial in the realm of international tax law and is regularly cited in cross-border income determination cases. The principle that postal agency shifts based on parties’ intention continues to influence subsequent judicial reasoning in India and abroad.

K) REFERENCES

a. Important Cases Referred

Commissioner of Income-tax v. Ogale Glass Works Ltd., [1955] 1 S.C.R. 185.
https://indiankanoon.org/doc/1582991/
Commissioner of Income-tax, Bihar & Orissa v. M/s Patney & Co., [1959] Supp. 2 S.C.R. 868.
https://indiankanoon.org/doc/1901652/

b. Important Statutes Referred