EMIL SAVUNDRANAYAGAM , Appellant , and COMMISSIONER OF INCOME TAX, Respondent

116-NLR-NLR-V-56-EMIL-SAVUNDRANAYAGAM-Appellant-and-COMMISSIONER-OF-INCOME-TAX-Respondent.pdf

GRATIAEN J.—Savundranayagam v. Commissioner of Income Tax
457
1965Present: Gratlaen J. and Sansoni J.
EMTL SAVUNDRANAYAGAM, Appellant, and COMMISSIONEROP INCOME TAX, Respondent
S. C. 323 mid 325—In the matter oj a case stated for the opinion of theSupreme Court under the provisions of Section 74 of the IncomeTax Ordinance (Cap. 88)
Income tux—C.i.f. contract—Payment of purchase price—Void ata initio—Liability ofthe seller or his agent to be taxed in respect of the assumed profits.
When money is paid by A to B under a mutual mistake as to the substance ofthe whole consideration, B is not liable to pay inoome tax in respect of themoney received by him.
In a o.i.f. oon tract for the sale of a large quantity of oil it was stipulated that thepurchase price of the goods should be prid by the buyer’s Bank to thq seller’sagent, S, on the presentation by 3 to the Bank of documents relating to theshipment of the oil. S received payment of the purchase price against certaindocuments but it was subsequently discovered that a person D, who had beenentrusted by S with the matter of shipping the oil, had committed a very seriousfraud ; no oil had in truth been shipped, and every document forwarded by Dto S in proof of the purported shipment was a forgery.
Held, that us S’s mandate was to secure an actual fulfilment of the seller’sobligations and to obtain the purchase price in exchange for genuine dooumonts3 was not Iiuble to pay inoome tax on any money received by him, as commissionor dividend, out of the assumed profits derived by the seller from the contractof sale.
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V-UASE Btateil for the opinion of the Supreme Court under section 74of the Incomo Tax Ordinance.
II. V. Perera, Q.C., with S. Nadesan, Q.C., C. Renyanathan andN. Nadarasa, for the assessee (appellant in No. 323 and respondent inNo. 325).
T. S. Fernando, Q.C., Acting Attorney-General, with M. Tiruchelvam,Deputy Solicitor-General, V. Tennekoon and R. S. Wanasundera,Crown Counsol, for the Commissioner of Income Tax (respondent inNo. 323 and appellant in No. 325).
Cur. adv. vult.
March 4, 1955. Gratiaen J.—
This appeal (No. 323) comes up by way of a case stated for tho opinionof tho Supreme Court under section 74 of the Income Tax Ordinance.
Tho assessee was a director of two private companies called TransworldEnterprises Ltd. (the “ T. W. E. Company ”) and the Eastern TradersLtd. (the “ E. T. Company”). Between August 1950 and October 1950 heentered into negotiations in Colombo with a representative of the HwaShih Company (the “ Chinese Company ”) for the supply of a large
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458 GRATIAEN J.—Savundranayiigam v. Commissioner of Incomt Tn.t
quantity of oil to be shipped direct to them at Tsingtao. Eventually, on23rd October, 1950, he accepted on behalf of the T. W. E. Company anorder to supply 45,000 drums of oil (at various specifications) for 1,230,000dollars c. i.f., stipulating that the purchase price should be assured inadvance by a letter of credit opened in Ceylon, India or Switzerland “ infavour of our subsidiary firm, Messrs. Eastern Enterprises CompanyOn the same day the representative of the Chinese Company “ con-firmed” the contract and on 29th November, 1950, the Chinese Companyarranged for a reputable Bank in Switzerland to open an irrevocableletter of credit A 27 in favour of the Eastern Enterprises Companywhereby the Bank undertook to pay the purchase price against billsdrawn by the Eastern Enterprises Company” accompanied by the followingdocuments : (1) commercial invoice in duplicate, (2) full set clean onboardbills of lading, (3) Lloyd’s survey certificate, (4) analyst's certificate ofquality, (5) Insurance policy
Something must now be stated with regard to the Eastern EnterprisesCompany. The assessee had apparently arranged that, if a contractcould be negotiated for the sale of lubricants to the Chinese Company,the business should be undertaken by a partnership called the EasternEnterprises Company consisting of the T. W. E. Company and the E. T.Company. This partnership in fact came into oxistonco on 27th October,1950, and was registered a few days later. The correspondence makes itclear that it was the partnership which thereafter undertook the responsi-bilities of the seller under the c.i.f. contract and as such becameentitled to receive payment of the purchase price upon the duecompletion of the sale.
On 28th Novomber, 1950, the asBessee, armed with a general powor ofattorney from the partnership, went to Europe in search of someone whowas in a position to supply the oil required for shipment to China. Heeventually contacted a rogue named Pierre Duval who represented thatho was willing and able to ship the entire quantity from Marseilles toTsingtao for 825,552/50 dollars. The arrangement was that Duval,having shipped the oil should send the relative documents to the assesseewho would in turn present them to the Swiss Bank. Having receivedpayment against these documents, the assessee would pay Duval hispurchase price leaving a considerable margin of profit for the partnership.
Early in January 1951 Duval informed the assessoe that the oil had infact been shipped as arranged, and he furnished the assessee with thedocuments in proof of shipment. These documents were presented by theassessee to the Bank together, with a bill of exchange drawn on theChinese Company. On 17th January, 1951, the Bank made full paymentto the assessee who in turn settled Duval’s account for 804,475 dollars.The balance sum (so it was thought) represented the gross profits earnedby the partnership in this fabulous venture. Out of this amount, thefollowing sums were received by the assessee personally in Ceyloncurrency :— 1
(1)Its. 1,110,204 “as commission earned by him for his part in thetransaction ”;
GUATIAENF J.—Sui’uiulranayngatn u. Oomtniasioner of Income Tux450'
Rs. 180,000 as dividends paid out to him and Ilia wifo (out of tlio
“ profits ” from the same transaction) by the T-. W. E. Company ;
Rs. 5,000 as Director’s fees (also paid out of the same “profits”).
The assessee’s appeal raises the question whether these three paymentsrepresented “ income ” in his hands so as to attract tax under the Ordinance.Before discussing this issue, however, it is necessary to return to thefacts as found by the Board of Review.
After the payments and distributions previously referred to had beenmade it was discovered that Pierre Duval had committed a very soriousfraud. No oil had in truth been shipped to China, and every documentforwarded by him to the assessee in proof of the purported shipmentwas a forgery. In the result, the assesseo (on behalf of the partnership)had forwarded to the Swiss Bank nothing but worthless documents andreceived in exchange for them the purchase price of a non-existent consign-ment of oil. The Board was satisfied, howevor, that at that time theassesseo “ bolieved bona fide that the Bank was making payment ongenuine documents and became aware of the fraud and forgery for thefirst time about the end of March or tho beginning of April 1951 ”.
There was evidence before tho Board to support these findings of fact,and wo have thereforo no option but to accept them as correct for thepurpose of answering the questions of law submitted for our opinion.
The Board decided that tho assossee was liable to pay tax on tho threepayinuntsenumeruted by me because (1) in receiving the purchase price fromthe Bankintermsofthe letter of credit A 27 upon documents bona fide buterroneously believed at that time to be genuine, the partnership “ had doneall that they wuro required to do”, (2) the payments mado to the assesseoby tho partnership out of this sum by way of commission, dividendsand Director’s feos were similarly bona fide recoivod and properly earnodby him.
Air. Perora has submitted that the legal inferences drawn by tho Boardupon the facts as determined by them are insupportable. His argumont isthat the payments of the purchaso price was void ah initio, and that noproperty in any part of the assumed “ purchaso price ” ever passed to thepartnership or thereafter from tho partnership either to the assesseo or (inthe case of the dividends) to the assessee’s wifo. The learned Attorney-General supported the conclusions arrived at by the Board, and argued inthe alternative that, even if money became liable to be refunded by thepartnership upon the discovery of Duval’s fraud, it could not bofollowed in tho hands of the assesseo or his wifo (they having received itinnocently ami for value). I
I must dissociate myself at the outset from the remarkably cynicaltheory that tho partnership had dono “ all that it was required to do ” inordor to “ earn ” the purchase price either under the contract of salo orunder the letter of credit which guaranteed payment upon due compliancewith the conditions theroin stipulated. The documents which form thobasis of the Board’s determination make it clear that the partnership hadassumed in every respect the obligations of a seller, ami that the purchasoprice could only be “ earned ” upon presentation of genuine documents
460
QRATIAEN J.—Savundranayagam v. Commissioner of Income Tax
relating to a genuine shipment. The passing of property in the goods tothe buyers and in the purchase price to the seller were intended to takeplace simultaneously.
I agree with Mr. Perera that in the circumstances of this case the pro-perty in the money did not pass to the partnership. The money was paidby the Bank and received by the assesses on behalf of his partners undera common mistake about a matter which was as fundamental in characteras one can conceive of in relation to a c.i.f. contract and a letter of creditundertaking to pay the purchase price under a c.i.f. contract. The pay-ment was made under “ a mistake or misapprehension as to the substanceof the whole consideration, going as it were to the root of the matter ”.Kennedy v. Panama, New Zealand and Australian Royal Mail Co. 1. Tnthese circumstances, “the mind of the grantor did not go with the trans-action at all; his mind went with another transaction, and he was meaningto give effect to that other transaction, depending upon facts differentfrom thoso which were the true facts”, per Lord Shaw in Jones v.Waring and Oillow -. As Lord Sumner pointed out in tho latter case,
“ tho passing of property is a question of intention, ami just as much so intho case of a payment of money as in the case of the transfer of a chattel ”.
Tho common mistako which the Bank and the assesseo (as attorney ofthe partnership) shared at the time of the payment was of a kind whichin the opinion expressed by Lord Atkin in Bell v. Lever Brothers Lid? ren-dered the transaction and the payment void ab initio, so that the Bank’sconsent to tho transfer of the property in the money was nullified. “ Themistake prevented there being an intention which the common lawregards as essential to the making of an agreement or the transfer of moneyor property”. Nonoich Fire Insurance Ltd. v. Price*.
Both parties were content to argue the appeal before the Board of Re-view on the assumption that the English law applied. In my opinion thisassumption was justified by the provisions of section 58 (2) of the Sale ofGoods Ordinance because the payment was intended to be made as con-sideration under a concluded contract for the sale of goods. The effect ofcommon mistake upon the validity of the transaction is thereforegoverned by the rides of the English taw. But the controversy seems tobe only of academic interest. Even under the Roman-Dutch law, thetrue position was that the common mistake fraudulently induced byDuval vitiated the payment. “ The mere delivery of an article docs nottransfer its ownership, for this takes place only when a sale or someother just cause precedes delivery ”. Digest 41. 1. 31 ; Wessells onContract in S. Africa—vol 2, para 3636. See also Voet 18.1. 5 and 18. 1. 6where a clear distinction is drawn between the kinds of “ error ” whichwould render a contract void and those which render it merely voidable.
I concede that the case for the taxing authority is not necessarily con-cluded by tho circumstance that the money received from tho Banknevor passed into tho ownership of the partnership. If, for instance, ithad been diverted into the hands of a third party who received it in goodfaith and for value, the third party could thereby (under tho English law)
3 (1932) A. G. 161.
•{1934) A. C. 455.
i (1867) 2 Q. D. 580.•(1926) A. C. 670.
<JKATJARN J.—Havundranayag itn v. Commissioner of Income Tax
40 L
claim that the money had now become his own property. The rules of'Uomun-Dutcli law are very similar. Weasells (supra), paras 3712-37Id.The question therefore remains whether all or any of the relevant sumssubsecjuently received by the assessee from the partnership by way ofcommission, dividends and Director’s fees can properly be regarded ashaving become his “ income ” for taxing purposes, although the money(lid not belong to the partnership itself at any time.
Let us first consider the sum of Rs. 1,110,264 appropriated by theassessee on 17th January, 1951, out of the assumed profits of the partner-ship. The Board held that this amount had been “ lawfully earned byhim as commission” and received by him at a time when he “ knew ”(i.o., I presume, “believed”) that the partnership had “ legal title to themoney ”. I find it impossible to adopt this line of reasoning. In myopinion, the determination that the Company and assessee acted bonafide rules out the theory that the assessee could have been intended to“ earn ” his commission merely by obtaining payment for forged docu-ments. His mandate was to secure an actual fulfilment of the seller’sobligations under the contract of sale and to obtain the stipulated purchaseprice in exchange for genuine documents securing for the seller title in thegoods und indemnifying him against risks during shipment. He originallyentertained the belief that he had earned his commission, but the truthis that ho had not. No doubt he received the money bond fide, but notin exchange for anything approximating to the services intended to berendered by him. Accordingly, the ownership in this part of the fundnever passed to him for the same reason that it had previously not passedto the partnership from the Bank.
Similarly with regard to the dividend and the Director’s fees. Ob-viously the intention (to which he was himself privy) was to distributeprofits actually earned by the partnership from this particular venture ;but as no such profits were in fact earned, there w'as no effective transferof money to the assessee.
The documents produced before the Board established that, after £hofundamental error was discovered, the assessee (on behalf of himself antihis principals) undertook to refund to the Chinese Company such partof the purchase price as was still within his control. Whether he fulfilst hat undertaking or not, the fact remains that the money is not (and neverwas) tho property of liimBelf or his principals.
In my opinion, it is unnecessary to give a detailed answer to tho specificquestions submitted for our opinion. I would reduce the assessmentdetermined by the Board by deleting tliesums of Rs. 1,110,264, Rs. 180,000and Rs. 5,000 in respect of which the assessee was not assessable. He isentitled to tho costs of this appeal and to a refund of the sum depositedby him under section 74 (1) of the Ordinance. ..
There remains the Commissioner’s connected appeal (No. 32f>). The-conclusions already arrived at by me leave no room for adopting the argu-ment that the assessment should be increased by the addition of otheritems representing a further distribution of the imagined “ profits ”
2*
'402
./aynsinghe ». BoraffodnwrilTn Cooperative Stores
>of tho partnership. Moreover, the learned Attorney-General very fairlyinformed ns that he could not support that part of the case for theCommissioner, whose appeal must therefore' be dismissed with coats.
.Sansoni J.—I agree.
Appeal No. 323 alloived.
. Appeal No. 323 dismissed.