Sujata V. Manohar J.
1. This is reference under s. 256(1) of the I.T. Act, 1961. It pertains to the assessment year 1969-70. The facts as set out in the statement of the case are as follows :
The assessee is a dealer in machinery. It has been the practice of the assessee-company to take deposits from intending purchasers of machinery, which deposits are later adjusted towards the purchase price of the machinery that is sold. The surplus deposits, if any, are generally refunded to the customers. The assessee is occasionally unable to refund some of the excess deposits because of various reasons such as non-availability of the current address of the customers etc. For the relevant assessment year 1969-70, such excess deposits which the assessee was unable to refund to its customers, amounting to Rs. 17,691, were written off in the books of the assessee-company by transferring them to the profit and loss account.
2. It was the assessee's contention that the amount of Rs. 17,691 does not represent a taxable receipt. The ITO negatived this contention and held that these were trading receipts and were taxable accordingly.
3. In the appeal before AAC, it was held that the amounts in question, having being originally received as deposits, were impressed with the character of trust money and hence they were not taxable as trading receipts.
4. The Department filed an appeal before the Income-tax Appellate Tribunal. The Tribunal upheld the finding given by the AAC. From this decision, at the instance of the Department, the following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 17,691 was rightly held to be not taxable ?'
5. The only facts before us are :
The assessee had taken deposits form intending purchasers, which were later on adjusted towards the purchase price. The surplus deposits have not been refunded. No particulars are set out relating to the exact nature of the contracts entered into between the parties. We have only to consider whether such deposits can be considered as trading receipts, at least when they are brought into the profit and loss account. In the case of K. M. S. Lakshmanier and Sons v. CIT/CEPT : 23ITR202(SC) , the Supreme Court was required to consider a case where the assesses obtained from their customers advance monies which were adjusted towards the final payment of the purchase price at the time of delivery of goods. The Supreme Court was required to consider whether these were 'borrowed moneys' within rule 2A of the Second Schedule to the Excess Profits Tax Rules, 1940. The transactions of the assesses in that case were covered by three different arrangements. Under one arrangement, the assesses had two accounts for each constituent, viz., a contract deposit account and a current yarn account. The advance money received from the customers was first shown in the contract deposit account and was later on transferred to the yarn account in adjustment of the price of the yarn supplied. The amounts so received by the assessee were held by the Supreme Court to be taxable as advance payment of price and not as borrowed money. Under the second arrangement, the advance payments made to the assessee by their constituents were taken as contract advance fixed deposits and these amounts were refunded when the goods were supplied and the price was paid in full. Even in this case the Supreme Court held that these payments were more in the nature of trading receipts than security deposits or borrowed monies in the amounts received were treated as advance payments in relation to each contract. Under the third arrangement, the assesses received from their customers as security deposit a certain sum which was to remain deposited as a security deposit so long as there were dealings between the assessees and their customers. The amount was required to be refunded only after the dealings ceased. The price in respect of each of the contracts was required to be paid in full by the customer without any adjustment out of the deposit. The deposit also carried interest. In this case, the Supreme Court held that the amount deposited had no relation to the price of the goods to be delivered and it was liable to be adjusted against any liabilities only when the business connection came to an end. It, therefore, held that this arrangement was more akin to a contract of loan and should be treated as borrowed money.
6. In the present case, the deposit is in respect of each contract and is adjusted towards the purchase price. In our view, applying the principles laid down by the Supreme Court in the above case, such receipts would be more in the nature of trading receipts, rather than borrowed monies or monies held for the benefit of a third party.
7. In the case of Pioneer Consolidated Company of India Ltd. v. CIT : 104ITR686(All) , the Allahabad High Court was required to consider a case where the assessee transferred an amount of Rs. 18,259 to its profit and loss account. This amount was mainly composed of refunds of customs and other duties paid on behalf of its customers and the surplus remaining after paying transit insurance of the customers. The assessee had collected amounts for the payment of customs and other duties and insurance, and the excess had not been claimed by the customers, who had originally paid them. The Allahabad High Court held that though the amount was not income when it was realised, it became assessable as income when it was not claimed by the customers and the assessee chose to treat these amounts as its income.
8. In the case of CIT v. Motor and General Finance Ltd. : 94ITR582(Delhi) , the Delhi High Court was required to consider a film distribution agreement entered into by the assessee, who were distributors of films, with a sub-distributor. In considering whether certain amounts under these agreements received by the assessee were receipts of a capital nature or revenue receipts, the Delhi High Court, after examining a number of judgments of different High Courts, came to the conclusion that (p. 589) 'receipts of money or deposits for adjustment in the price of goods to be supplied or services to be rendered may be mere advance payments and, therefore, revenue receipts and not borrowed money. They are an integral part of a commercial transaction of sale or service and are related to the price of goods or to the charges for services rendered. They are trade receipts and money of the assessee, and, hence, his revenue or income. The receipts in the nature of deposits for making good the defaults, if any, of the person making the deposit, on the other hand, are simply loans owed by the assessee to such person and they form a part of the assessee's trading structure and not trade receipts.' We are in respectful agreement with these broad principles set out by the Delhi High Court after an analysis of various decisions on the point. On an analysis of the terms of the agreement before the Delhi High Court, it came to the conclusion that the receipts were of a capital nature.
9. It is not necessary to examine all the authorities which were cited before us. Mr. Patil, learned counsel for the respondents, however, strongly relied upon a decision of the Allahabad High Court in the case of Bijli Cotton Mills (P.) Ltd. v. CIT : 81ITR400(All) . In that case, under an order of the Textile Commissioner, manufactures were required to recover from the wholesale dealers the wholesale price of yarn at the controlled rate and to pay to certain quota-holders to whom the manufacturers would have originally sold the yarn that part of the sum which represented the excess over the mill price, the sale being for this purpose deemed to have been made by the manufactures on behalf of the quota-holders. The Allahabad High Court held that the amount which was in the hands of the manufactures was an amount which was held on behalf of the quota-holders. It was required to be paid to them. Such amount which remained in the hands of the manufactures, because the quota-holders could not be not be found, could not be considered as the income of the manufactures. The court observed that the taxability of a receipt is fixed with reference to its character at the moment it is received. Its character is not altered merely because the recipient treats it subsequently in his own accounts as his own.. This judgment, in our view, does not help the respondent, because, looking to the nature of the transaction in question as set out in the statement of the case, we are of the view that the receipt in question cannot be considered as an amount held by the assessee for the benefit of anybody else. Looking to the fact that the deposit is in respect of a specific transaction of sale and is adjusted towards the purchase price of the machinery that is sold, it has a close connection with the transaction of sale. It is more in the nature of a trade receipt, especially when the assessee brings such surplus deposit remaining in its hands to its profit and loss account. Therefore, it can be taxed as trade receipt in the hands of the assessee.
10. The question is, therefore, answered in the negative, that is to say, in favour of the Department and against the assessee. The respondents will pay to the applicant costs of the reference.