Savundranayagam V. Commissioner Of Income Tax

1955 Present: Gratiaen J. and Sansoni J.

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

S. C. 323 and 325-In the matter of a case stated for the opinion of the Supreme Court
under the provisions of Section 74 of the Income Tax Ordinance (Cap. 88)

Income tax- c.i.f. contract-Payment of purchase price-Void ab initio-Liability of the 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 of the whole consideration, B is not liable to pay income tax in respect of the money received by him.

In a c.i.f. contract for the sale of a large quantity of oil it was stipulated that the purchase price of the goods should be paid by the buyer's Bank to the seller's agent, S, on the presentation by S to the Bank of documents relating to the shipment of the oil. S received payment of the purchase price against certain documents but it was subsequently discovered that a person D, who had been entrusted by S with the matter of shipping the oil, had committed a very serious fraud ; no oil had in truth been shipped, and every document forwarded by D to S in proof of the purported shipment was a forgery.

Held, that as S's mandate was to secure an actual fulfilment of the seller's obligations and to obtain the purchase price in exchange for genuine documents S was not liable to pay income tax on any money received by him, as commission or dividend, out of the assumed profits derived by the seller from the contract of sale.

C ASE stated for the opinion of the Supreme Court under section 74 of the Income Tax Ordinance.

H. V. Perera, Q.C., with S. Nadesan, Q.C., C. Renganathan and N. Nadarasa, for the assessee (appellant in No. 323 and respondent in No. 325).

T. S. Fernando, Q.C., Acting Attorney-General, with M. Tiruchelvam, Deputy Solicitor-General, V. Tennekoon and R. S. Wanasundera, Crown Counsel, for the Commissioner of Income Tax (respondent in No. 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 the opinion of the Supreme Court under section 74 of the Income Tax Ordinance.

The assessee was a director of two private companies called Transworld Enterprises Ltd. (the " T. W. E. Company ") and the Eastern Traders Ltd. (the "E. T. Company"). Between August 1950 and October 1950 he entered into negotiations in Colombo with a representative of the Hwa Shih Company (the " Chinese Company ") for the supply of a large

quantity of oil to be shipped direct to them at Tsingtao. Eventually, on 23rd October, 1950, he accepted on behalf of the T. W. E. Company an order to supply 45,000 drums of oil (at various specifications) for 1,230,000 dollars c.i.f., stipulating that the purchase price should be assured in advance by a letter of credit opened in Ceylon, India or Switzerland " in favour of our subsidiary firm, Messrs. Eastern Enterprise? Company ". On the same day the representative of the Chinese Company " confirmed" the contract and on 29th November, 1950, the Chinese Company arranged for a reputable Bank in Switzerland to open an irrevocable letter of credit A 27 in favour of the Eastern Enterprises Company whereby the Bank undertook to pay the purchase price against bills drawn by the Eastern Enterprises Company" accompanied by the following documents: (1) commercial invoice in duplicate, (2) full set clean on board bills of lading, (3) Lloyd's survey certificate, (4) analyst's certificate of quality, (5) Insurance policy ".

Something must now be stated with regard to the Eastern Enterprises Company. The assessee had apparently arranged that, if a contract could be negotiated for the sale of lubricants to the Chinese Company, the business should be undertaken by a partnership called the Eastern Enterprises Company consisting of the T. W. E. Company

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