Case: Mahabir Commercial Co. Ltd Vs. Commissioner of Income Tax, West Bengal

place outside British India and ex-hypothesi, the profits derived from such sales arose outside British India. An argument was advanced before the Court that under the provisions in the contract for weighment and assay which was ultimately to fix the price unless the buyer rightly rejected the goods as not being in terms of the contract, the passing of the property in the goods could not take place until the buyer accepted the goods and the price was fully ascertained after weighing and assay. Dealing with this contention S. R. Das, J. (as he then was) speaking for the Court said at p. 135:"It is submitted that that being the position, the property in the goods passed and the sales were concluded outside British India, for the weighment, sampling, assay and the final fixation of the price could only take place under all these contracts outside British India. It is not necessary for us to express any opinion on this extreme contention. Suffice it to say, for the purposes of this case, that in any event upon the terms of the contracts in question and the course of dealings between the parties the property in the goods could not have passed to the buyer earlier than the date when the bill of exchange was accepted by the buyers bank in London and the documents were delivered by the assessee companys agent, the Eastern Bank Ltd., London, to the buyers bank. This admittedly, and as found by the Appellate Tribunal, always took place in London. It must therefore follow that at the earliest the property in the goods passed in London where the bill of lading was handed over to the buyers bank against the acceptance of the relative bill of exchange."It will be observed that the terms of the contract and the course of dealings between the parties is not the same as in his case because in that case the seller clearly retained the property in the goods by having a bill of lading issued in his own name and would only part with the property after the bill of exchange was accepted by the buyers bank in London when the documents would be delivered by him to the companys agent in London and that the fixation of price was dependent on weighment and assay. In the case before us the High Court relied on cls. (7) and 9 (3) of the contract for its conclusions. In our view nothing in those clauses justifies that conclusion. Under cl. (7) where there is a total failure on the part of the buyer to perform the contract, the seller has a right to cancel the contract or treat it as cancelled and resort to the remedies thereunder. But that is a condition where the buyer fails or refuses to perform the contract altogether by not accepting the documents or in not paying against the documents. Even under cl. (9) the condition as to the quality and of excessive moisture is not a condition of the transfer of property. The right of the buyer thereunder is not a right to cancel the contract in toto but only to adjust claims in respect of the quality or moisture for which a remedy has been provided thereunder.There is nothing in the agreement which envisaged the property in the goods being in the seller even after the value of the invoice had been paid by the bank under the letter of credit in Pakistan. It may be further noticed that the bills of lading and/or railway receipts have to be made out to order and endorsed in blank. In all transactions of sale of goods the time and place of appropriation are important elements for determining when the property in the goods passes. It is well settled that an appropriation takes places where the goods are situate at the time of appropriation not where the contract of sale is made. There may be an authority given by one party to the other to appropriate and that appropriation is presumed to be finally made where by the terms of the contract the party so authorised has determined his election by doing such act or thing which cannot be done until the goods are appropriated. Generally, subject to the limitations already discussed a seller appropriates the goods by the delivery of the bill of lading the document giving control of the goods in exchange for payment of the price by which he shows that he does not intend to retain the right of disposal of the property in the goods.13. A consideration of the terms of the contract and the letter of credit make it evident that once the bills of lading and documents contemplated under the contract are handed over to the bank to be delivered to the buyer and the seller receives the value thereof as shown in the invoice and in terms of the contract, he no longer retained the property in the goods. The provision that all drafts drawn under the letter of credit are to be treated as advance bills through their Chittagong office do not in any way affect the nature of the transaction inasmuch as they are intended as advance notice to the buyer who may want to make arrangements regarding the taking of delivery or dealing with the goods etc. In fact under the contract it is provided that immediate notice should be given to the buyer as soon as the seller begins to load the goods. In any case under the letter of credit the bank informs the seller that it "guarantees to protect the drawers, endorses and bona fide holders from any consequences which may arise in the event of the non-acceptance or non-payment of the drafts drawn in accordance with the terms of this credit." This clause in the letter of credit further assures the seller of the performance of the contract and does affect the property in the goods passing to the buyer in Pakistan.14

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]12. On the facts as found, (1955) 27 ITR 128 (supra) by this Court is clearly distinguishable, because in that case the assessee company which is the seller had shipped the goods under a bill of lading issued in its own name and that under the contract it was not obliged to part with the bill of lading until the bill of exchange drawn by it on the buyers bank where the irrevocable letter of credit was opened was honoured. It is not necessary to relate all the details of the contracts except to say that the contracts of sale of chromite by the Mysore Company to purchasers in Europoe were entered into between the buyers and the assessees agents in London and the contracts of sale to persons in America were signed by the assessees managing agents in Madras and by a company in Amercia who bought for undisclosed principles. Under the contracts the price was F.O.B. Madras. Provision was made for weighment, sampling and assay of goods at destination. Before the goods were actually shipped, the buyers opened a confirmed irrevocable bankers credit with a bank in London. The fact that letters of credit had been opened was communicated by the assessees bankers in London, Eastern Bank Ltd., to their branch in Madras who thereupon wrote to the assessee offering to negotiate the drafts drawn in terms of the contract provided the documents were in order and concluded the letter with a warning that the advance was given for the assessees guidance without involving any responsibility on the part of the bank. On receipt of this intimation the assessee placed the contracted goods on board the steamer at Madras and obtained a bill of lading in its own name. The Court held that upon the terms of the contract and the course of dealings between the parties the property in the goods passed in London where the bill of lading was handed over to the buyers bank against the acceptance of the relative bill of exchange. The sales therefore took place outside British India and ex-hypothesi, the profits derived from such sales arose outside British India. An argument was advanced before the Court that under the provisions in the contract for weighment and assay which was ultimately to fix the price unless the buyer rightly rejected the goods as not being in terms of the contract, the passing of the property in the goods could not take place until the buyer accepted the goods and the price was fully ascertained after weighing and assay. Dealing with this contention S. R. Das, J. (as he then was) speaking for the Court said at p.is submitted that that being the position, the property in the goods passed and the sales were concluded outside British India, for the weighment, sampling, assay and the final fixation of the price could only take place under all these contracts outside British India. It is not necessary for us to express any opinion on this extreme contention. Suffice it to say, for the purposes of this case, that in any event upon the terms of the contracts in question and the course of dealings between the parties the property in the goods could not have passed to the buyer earlier than the date when the bill of exchange was accepted by the buyers bank in London and the documents were delivered by the assessee companys agent, the Eastern Bank Ltd., London, to the buyers bank. This admittedly, and as found by the Appellate Tribunal, always took place in London. It must therefore follow that at the earliest the property in the goods passed in London where the bill of lading was handed over to the buyers bank against the acceptance of the relative bill ofwill be observed that the terms of the contract and the course of dealings between the parties is not the same as in his case because in that case the seller clearly retained the property in the goods by having a bill of lading issued in his own name and would only part with the property after the bill of exchange was accepted by the buyers bank in London when the documents would be delivered by him to the companys agent in London and that the fixation of price was dependent on weighment and assay. In the case before us the High Court relied on cls. (7) and 9 (3) of the contract for its conclusions. In our view nothing in those clauses justifies that conclusion. Under cl. (7) where there is a total failure on the part of the buyer to perform the contract, the seller has a right to cancel the contract or treat it as cancelled and resort to the remedies thereunder. But that is a condition where the buyer fails or refuses to perform the contract altogether by not accepting the documents or in not paying against the documents. Even under cl. (9) the condition as to the quality and of excessive moisture is not a condition of the transfer of property. The right of the buyer thereunder is not a right to cancel the contract in toto but only to adjust claims in respect of the quality or moisture for which a remedy has been provided thereunder.There is nothing in the agreement which envisaged the property in the goods being in the seller even after the value of the invoice had been paid by the bank under the letter of credit in Pakistan. It may be further noticed that the bills of lading and/or railway receipts have to be made out to order and endorsed in blank. In all transactions of sale of goods the time and place of appropriation are important elements for determining when the property in the goods passes. It is well settled that an appropriation takes places where the goods are situate at the time of appropriation not where the contract of sale is made. There may be an authority given by one party to the other to appropriate and that appropriation is presumed to be finally made where by the terms of the contract the party so authorised has determined his election by doing such act or thing which cannot be done until the goods are appropriated. Generally, subject to the limitations already discussed a seller appropriates the goods by the delivery of the bill of lading the document giving control of the goods in exchange for payment of the price by which he shows that he does not intend to retain the right of disposal of the property in the goods.13. A consideration of the terms of the contract and the letter of credit make it evident that once the bills of lading and documents contemplated under the contract are handed over to the bank to be delivered to the buyer and the seller receives the value thereof as shown in the invoice and in terms of the contract, he no longer retained the property in the goods. The provision that all drafts drawn under the letter of credit are to be treated as advance bills through their Chittagong office do not in any way affect the nature of the transaction inasmuch as they are intended as advance notice to the buyer who may want to make arrangements regarding the taking of delivery or dealing with the goods etc. In fact under the contract it is provided that immediate notice should be given to the buyer as soon as the seller begins to load the goods. In any case under the letter of credit the bank informs the seller that it "guarantees to protect the drawers, endorses and bona fide holders from any consequences which may arise in the event of the non-acceptance or non-payment of the drafts drawn in accordance with the terms of this credit." This clause in the letter of credit further assures the seller of the performance of the contract and does affect the property in the goods passing to the buyer in Pakistan.