Contract Law

Commissioner of Sales Tax v. Husenali Adamji & Co.

AIR 1959 SC 887; 1959 SCR 702

Facts

Husenali Adamji & Co. dealt in matchwood logs known as “sawar.”
It agreed to supply logs from the Central Provinces to a factory at Ambernath in Bombay State.
The logs had to satisfy specified dimensions and quality requirements.
They were dispatched by rail from stations in the Central Provinces.
Under the contract:
the factory manager would inspect, measure and accept the logs at Ambernath;
rejected logs would not be paid for;
the supplier had to remove rejected material at its own expense.
The tax department argued that property passed when the logs were handed to the railway in the Central Provinces, making the sales taxable there.
The supplier contended that property passed only after inspection and acceptance at Ambernath.

When did property in the unascertained or unapproved logs pass to the buyer?
Whether delivery to the railway amounted to unconditional appropriation under Section 23 of the Sale of Goods Act.

Under Section 23, property in unascertained goods passes when goods of the contractual description are:
unconditionally appropriated to the contract; and
such appropriation receives the assent of both parties.
Delivery to a carrier may ordinarily amount to appropriation.
However, it does not do so where the contract shows that:
inspection and approval remain necessary;
the buyer may reject goods;
the seller retains responsibility for rejected goods.
Intention of the parties, derived from the entire contract, is decisive.

The goods dispatched by rail were not automatically treated as satisfying the contract.
The factory retained a genuine right to:
inspect;
measure;
assess quality;
reject non-conforming logs.
Rejected logs remained at the supplier’s risk and had to be removed by the supplier.
Therefore, dispatch did not finally and unconditionally appropriate each log to the contract.
The relevant appropriation occurred only when the buyer accepted particular logs at Ambernath as conforming to the contractual specifications.
The supplier’s assent to that process was contained in the agreement itself.
The Court rejected the argument that the existence of trees or raw material in the Central Provinces at the time of contracting was enough.
The relevant goods were logs answering the contractual description, not merely unidentified standing or unprocessed timber.
Since property passed only upon acceptance in Bombay State, the sale was not completed in the Central Provinces.

The Supreme Court held that property passed at Ambernath upon inspection and acceptance.
Mere delivery to the railway did not complete the sale.
Use this case for: delivery to a carrier does not transfer property where the contract reserves inspection, acceptance and rejection at destination.