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Commissioner of Income-tax, Andhra Pradesh Vs. Andhra General Finance Corporation - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberR.C. No. 280 of 1978
Judge
Reported in(1985)49CTR(AP)66; [1985]156ITR386(AP)
ActsIncome Tax Act, 1961 - Sections 28 and 41(1)
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentAndhra General Finance Corporation
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateA. Satyanarayana, Adv.
Excerpt:
direct taxation - trading receipt - sections 28 and 41 (1) of income tax act, 1961 - assessee carried on business as financiers under hire purchase agreement - assessee collected excess amount from its customers towards premia on account of accident insurance policies - at end of accounting year said sum transferred to profit and loss account - assessee did not refund excess amount - whether said excess amount was trading receipt - assessee contended that excess amount was returnable to concerned parties as and when claimed by them and that mere transfer to profit and loss account did not make it its income for purposes of taxation - court held excess collections in fiduciary capacity for specific capacity for specific purpose of payment of premia of insurance if collections are to.....ramanujulu naidu, j.1. this is a reference made to this court under s. 256(1) of the i.t. act, 1961, ('the act'), by the income-tax appellate tribunal, hyderabad. 2. it is stated by the tribunal that the assessee is a registered firm carrying on business as financiers under hire purchase agreements. it advances money on hire-purchase agreements to the intending purchasers of motor vehicles against hypothecation of the vehicles. the loans advanced are repayable on instalments together with the stipulated interest thereon. in addition, the assessee also collects from its constituents certain amounts payable by them to the hindustan ideal insurance company towards premia on account of 'accident insurance policies' taken on the vehicles. intially the amounts collected were credited to the.....
Judgment:

Ramanujulu Naidu, J.

1. This is a reference made to this court under s. 256(1) of the I.T. Act, 1961, ('the Act'), by the Income-tax Appellate Tribunal, Hyderabad.

2. It is stated by the Tribunal that the assessee is a registered firm carrying on business as financiers under hire purchase agreements. It advances money on hire-purchase agreements to the intending purchasers of motor vehicles against hypothecation of the vehicles. The loans advanced are repayable on instalments together with the stipulated interest thereon. In addition, the assessee also collects from its constituents certain amounts payable by them to the Hindustan Ideal Insurance Company towards premia on account of 'Accident Insurance Policies' taken on the vehicles. Intially the amounts collected were credited to the accounts of the individual constituents. But subsequently the same were transferred to the account of the Hindustan Ideal Insurance Company. From the said account, regular payments towards premia of insurance were made to the company. After making payments, there was an excess of Rs. 12,370 in the account of insurance company. It was being carried forward from year to year for the last ten years or more prior to the assessment year 1974-75. The amount thus represents the excess of receipts from the constituents of the assessee towards premia of insurance after making the required payments to the insurance-company. The hire-purchase agreements in respect of the vehicles to which the excess of teceipts related, came to an end when the vehicles had been transferred to the purchasers long ago. There was no liability to pay any amounts towards premia of insurance in respect of those vehicles. The sum of Rs. 12,370 was returnable to the constituents from whom its was collected. The assessee did not return it either on the ground that the comstituents were not traceable or they did not come forward to claim refund of the excess amounts paid. The assessee retained the same.

3. At the end of the accounting year, relevant to the assessment year 1974-75, the assessee transferred the said sum of Rs. 12,370 to its profit and loss account by debiting the account of the insurance-company and included the same in the income returned for that year. At the time of assessment, the assessee claimed that the amount was not its income, that it was returnable to the concerned parties as and when claimed by them, that mere transfer of the amount to its profit and loss account did not make it its income for purposes of taxation. It was also contended by the assessee that the amount could not be brought to charge under s. 41(1) of the I.T. Act since the same was not claimed as a deduction in any earlier assessment. The ITO while upholding the contention that the amount could not brought to tax under s. 41(1) of the I.T. Act, however, held that it was in the nature of a trading receipt to the assessee and that since the assessee chose to transfer the same to its profit and loss account in the relevant assessment year, it was liable to tax during the said assessment year. On appeal by the assessee, the AAC agreed with the ITO and observed that 'the collections were made in the course of the business and in the interest of the business'.

4. On further appeal by the assessee, the Income-tax Appellate Tribunal opined that the amounts aggregating to Rs. 12,370 were received by the assessee either as voluntary deposits from its constituents towards premia of insurance payable on the vehicles purchased by them under the hire-purchase agreements or as payments on its demand for the aforesaid purpose. In the former case, it was observed by the Tribunal that the assessee was under an obligation to return the excess payments to the concerned parties on expiry of the hire-purchase agreements and that until payment, the assessee would be holding the money for the depositors in a fiduciary capacity. In the latter case, the Tribunal observed that the assessee had every right to appropriate the excess payments as the same formed part and parcel of its business receipts in the year in which the hire-purchase agreements came to an end. The Tribunal, however, found that the amounts in question were received by the assessee from its constituents not as a part of trading receipts along with the amounts of instalments towards repayment of premia of insurance in respect of the vehicles purchased from the constituents. In such circumstances, the Tribunal held that if at the close of the hire-purchase agreements, any excess amounts remained out of the deposit the same could not be treated as part of business receipts of the assessee notwithstanding that the assessee did not return the amounts to the concerned parties but appropriated the same as its own income for either of the two reasons assigned by the assessee. In that view, the Tribunal held that the amount of Rs. 12,370 could not be brought to tax in the assessment year 1974-75. The Tribunal also held that even assuming that the collections made by the assessee initially were not in the nature of deposits but were outright receipts on its demand for payment towards premia of insurance and that the same became part and parcel of its trading receipts, still, the excess collections of Rs. 12,370 could not be treated as income during the assessment year in question and brought to tax for the reason that the assessee became entitled to the excess amount in each case in the year it was determined when the related hire purchase agreement came to an end and that the said excess formed part of the assessee's income of that year and not of any earlier or later year. The Tribunal also observed that the fact that the assessee had chosen to transfer the excess amount to its profit and loss account in the assessment year 1974-75 was irrelevant for the purpose. The crucial test, according to the Tribunal, was as to when the assessee became entitled to the amount though it might not have chosen to appropriate it as its own money until a later date. Viewed from the said angle also, the Tribunal held that the disputed amount could not be bought to tax in the assessment year 1974-75. The Tribunal, however, agreed both with the ITO and the AAC that the amount could not be bought to tax under s. 41(1) of the I.T. Act.

5. On the above facts the following questions of law arising out of the order of the Tribunal, are referred to this court for its opinion under s. 256(1) of the I.T. Act, 1961 :

'1. Whether, on the facts, and the circumstances of the case, the sum of Rs. 12,370 represents a trading receipt of the assessee which is taxable under the Income-tax Act, 1961

2. If the answer to the above is in the affirmative whether on the facts and in the circumstances of the case, the said amount can legitimately may be assessed to tax in the assessment for 1974-75

6. In Morley v. Tattersal [1938] 22 TC 51 the assessee was a firm which carried on business of auctioneers of horses. Considerable sums payable to the clients remained unclaimed. Ultimately accumulations representing unclaimed sums relating to several years were transferred to the credit of the partners of the firm. The amounts so transferred were taxed in the hands of the partners as their income. The firm appealed contending that those unclaimed balances were not at any time profits or trading receipts of the firm, but were its liabilities. The appeal of the firm was allowed by the Special Commissioners, who accepted the contention of the assessee that the unclaimed balances did not represent trading receipts of the firm and that the same were not, therefore, assessable to income-tax. Dissatisfied with the decision, the Crown appealed to the Kings Bench Division of the High Court and the appeal succeeded. Lawrence J., who delivered the judgment of the Bench, observed as follows (p. 59) :

'I have come to the conclusion that tnese balancs, when distributed to the partners, are trading receipts, and that, if and that, if and when any claim is made thereafter, such claim, if successful, should be treated as a proper debit against the profits of the year in which it is made. The balances arise in the course of the business and by reason of the conditions laid down by the partnership. It is to be inferred that they arise annually in many years, if not in every year. No immediate liability is merely contingent..... Once it is conceded, as it must be conceded in view of the authorities, that a receipt in the course of and arising out of trade may be a trading receipt for income-tax purposes, although a contingent liability attaches to it, I can see no reason why the unclaimed balances, which are received in the manner in question in the present case, should not be regarded as trading receipts.'

7. The firm thereupon preferred an appeal before the Court of Appeal.

8. The judgment in that appeal was delivered by Sir Wilfrid Green M. R., who reversed the decision of the King's Bench observing as follows (p. 65) :

'The money which was received was money which had not got any profit-making quality about it; it was money which, in a business sense, was the client's money and nobody else's. It was money for which they were liable to account to the client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out do not alter that circumstance.'

9. The learned judge repelled the argument of Mr. Hills, counsel for the Crown, that even if the receipts were not trading receipt the beginning, they became so on conversion thereof by the partners of the firm. In repelling the contention, the learned judge observed (p.65) :

'Mr. Hills' argument was to the effect that, although they were not trading receipts at the moment of receipt, they had at that moment the potentiality of becoming trading receipts. That proposition involves a view of income-tax in which I can discover no merit except that of novelty. I invited Mr. Hills to point to any authority which in any way supported the proposition that a receipt which at the time of its receipt was not a trading receipt could by some subsequent operation ex post facto be turned into a trading receipt, not, be it observed, as the date of receipt, but as at the date of the subsequent operation. It seems to me, with all respect to that argument, that it is based on complete misapprehension of what is meant by a trading receipt in income-tax law. No case has been cited to us in which anything like that proposition appears. It seems to me that the quality and nature of a receipt for income-tax purposes is fixed once and for all when it is received.'

10. In Davies v. Shell Co. of China Ltd. [1951] 32 TC 133 the assessee, a British company operation in China, required its Chinese agents to deposit with it certain sums in Chinese dollars, which carried interest and were repayable on determination of the agency. The assessee kept the dollar deposits in Shanghai banks. On the outbreak of war, the assessee sold the Chinese dollars for sterling, transferred the sterling to the United kingdom and placed the amount in deposit with its parent company. Subsequently, the agencies were terminated. To repay in Chinese dollars, the deposits to the agents, the assessee repurchased Chinese dollars at a substantial profit due to depreciation of the Chinese dollar and paid off the deposits. The company contended that the deposits received from its agents had been used as fixed capital and not as circulating capital, and that the profit on exchange was a capital profit nor subject to income-tax. For the Crown it was contended that the deposits, to which the company could have recourse in the event of default by the agent, were circulating capital and that the exchange profit made in the course of the company's business must be included in the computation of its profits for income-tax purposes. It was held that the the taking of the deposits was not a trading transaction, and that the profit was not assessable as income but was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade.

11. The case of Punjab Distilling Industries Ltd. v. CIT : [1959]35ITR519(SC) , a decision of the Supreme Court relied upon by the Revenue, was distinguished by the Division Bench. In the said case the assessee carried on business as a distiller of country liquor and sold the same to licensed wholesalers. After the war started, the demand for the country liquor increased. A difficulty was felt in finding bottles in which the liquor was to be sold. The Government, therefore, permitted the distiller to charge a wholesale price for the bottles in which the liquor was supplied. The distiller was bound to repay to the wholesaler the price of the bottles when they returned the same. In addition to the price fixed by the Government, the assessee took from the wholesalers certain further amounts described as security deposits without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. Such additional amounts described as security deposits were also returned as and when ninety per cent. of the bottles were returned. The price of the bottles received by the assessee was entered by it in its general trading account, while the additional sums were entered in a general ledger under the heading 'Empty Bottles Return Security Deposit Account'. The question before the Supreme Court was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds had been made thereout. It was held that, in realising the additional amount described as security deposits, the assessee was really charging an extra price for the bottles and the additional amount was actually a part of the consideration for the sale of the liquor and was part of the price of what was sold and that it did not make any difference that the additional amount was entered in a separate ledger termed 'Empty Bottles Return Security Deposit Account'. In other words, it was found that the additional amounts when they were paid, were the monies of the assessee and, therefore, they were the assessee's trading receipts and, hence, the balance of such additional amounts left after the refunds made thereout, were assessable to tax.

12. In Upper India Sugar Exchange Ltd. v. CIT : [1969]72ITR331(All) , the assessee-company managed the business of forward transactions of its constituent members in sugar, etc. Such transactions were carried on through the agency of approved brokers who were registered with the assessee-company. For the services rendered, the assessee collected, under its bye-laws, in addition to commission and dharmada, brokerage at a certain rate and this brokerage was payable to the concerned brokers. Receipts and disbursements for brokerage were entered in a brokerage account. Any brokerage not paid out by the assessee in any year was carried over as a liability. In the assessment for the assessment year 1959-60, the ITO added the balance of Rs. 4,042 in the surplus brokerage account to the income of the assessee, overruling the assessee's objection that it was not the income of the assessee. That order was set aside by the AAC but restored by the Appellate Tribunal. On a reference to the High Court of Allahabad, it was held by a Division Bench of the High Court that the amounts initially received by the assessee were its trading liabilities and, therefore,the amounts in question were not liable to be assessed as the income of the assessee. It was observed by the Division Bench that the taxability of such unclaimed balances would depend on the nature and character of the character of trading receipts, that if the amounts initially received partook of the character of trading receipts, the unclaimed accumulations of such receipts would necessarily be taxable as such and that if, however, the amounts were initially the trading liability of the assessee, the unclaimed balances could not be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit.

13. Reliance was placed upon an earlier decision of the said High Court in Agra Bullion Exchange Ltd. v. CIT : [1961]41ITR472(All) . In the said case the assessee-company maintained a trading hall where licensed members did business in bullion through licensed members did business in bullion through licensed brokers. The assessee-company realised from the members the following amounts as charges of the exchange :

Rs. As.

Commission 0 4 0

Dalali (brokerage) 0 15 0

Dharmada (charity) 0 1 0

14. per parcha on purchase and sale. The assessee-company was entitled to retain for itself only the commission while the brokerage was passed on to the brokers through whom transactions were entered into and the amount of difference was passed on to the trading party entitled thereto. The amount received on account of charity had to be spent in accordance with the rules of business of the company on account of charity was the company's income taxable in its hands. It was held that, on the facts of the case, the amount was not received by the company as its income and that the payment on account of charity made by a trading member was not payment for the company but one for charity and it was only entrusted to the company for the purpose of disbursement. Delivering the judgment of the Bench, Upadhya J. observed as follows (p. 480) :

'In the instant case, the amount earmarked for charity by the trading members of the assessee-company never accrued as an item of income to the assessee at all. The amounts were given for charity and the assessee company may be likened to conduit pipe through whom the amounts passed...... The amounts claimed to be exempt were not parts of the assessee's profits; nor does the company contend that the amounts cannot be taxed because they have been spent on charity by the assessee out of its own profits. As mentioned above, the dispute relates to the initial character of the receipt itself as it is to whether the amount paid by the trading members earmarked for charity was the assessee's income at all.'

In CIT v. Sandersons and Morgans : [1970]75ITR433(Cal) the assessee, a firm of solicitors, had credited in its profit and loss account, a sum of Rs. 4,078 representing the aggregate of the unclaimed balances in as many as 83 personal ledger accounts of the assessee's clients, who had advanced money to them in connection with cases entrusted with the assessee some years back. Even after final adjustments of bills, small balances continued to be carried forward from year to year till December 31, 1956, when the assessee thought of closing the accounts of the clients and transferred the balances to the profit and loss account. This amount of Rs. 4,078 was ultimately apportioned as between the partners of the assessee in their respective profit-sharing ratio. The ITO added the said amount to the total assessable income of the assessee for the assessment year 1957-58, as being in the nature of professional income. On appeal the AAC deleted the sum of Rs. 4,078 from the total income of the assessee, accepting the assessee's contention that the relationship between solicitors and clients was the relationship between a trustee and a beneficiary and since the Limitation Act did not apply in the matter of recovery of amount deposited by clients, the liability of the assessee continued in spite of the fact that certain unclaimed balances had been written off and transferred to the profit and loss account. On further appeal by the Revenue, the Tribunal held that the unclaimed balances in the clients' accounts were 'obvious liabilities' of the assessee-firm when first received and no subsequent operations could turn them into 'professional receipts', and dismissed the appeal. On a reference to the High Court of Calcutta, a Division Bench of the High Court held that the sum of Rs. 4,078 was not a revenue receipt liable to income-tax. The Division Bench observed (headnote) :

'When a solicitor receives money from his client, he does not do so as a trading receipt but he receives the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The money thus received does not have any profit-making quality about it when received. It remains money received by a solicitor as 'client's money' for being employed in the client's cause. The solicitor remains liable to account for this money to his client.'

15. It was further held (headnote) :

'......that even though the remedy of some of the clients may have become barred by limitation, the barred debt did not become income of the assessee and could not be taxed under the Income-tax Act.'

16. In CIT v. Tanubai D. Desai : [1972]84ITR713(Bom) the assessee was a practising solicitor of the High Court of Bombay. In the course of carrying on his profession, the assessee used to receive moneys from or on behalf of his clients. The moneys so received were deposited by him in a separate current account with the then Imperial Bank of India up to August 13, 1954, On August 13, 1954, the assessee withdrew from that account a sum of RS. 3,25,000 and placed it in a fixed deposit with the Chartered Bank. The assessee, thereafter, renewed from time to time the said deposit together with interest earned thereon; but, whenever necessary, he withdrew from the said current account small amounts, not exceeding three figures, to make up the amount of the fixed deposit to the nearest higher multiple of Rs. 1,000. During the four accounting year relevant to the four assessment years, the assessee in that manner earned interest on the fixed deposits in the amounts of Rs. 11,472, Rs. 15,790, Rs. 23,032 and Rs. 25,328, respectively. The assessee, however, never adjusted the interest so earned by apportioning it to the different clients whose moneys were held in the said current account. The assessee did not show the interest so earned in any of the returns of his personal income by him for the said four years. The assessment was completed on the basis of the returns, but, thereafter, necessary proceedings were taken under s. 34 of the indian I.T. Act, 1922 ('the 1922 Act'), to reopen the assessments for the purpose of including the amounts of the said interest in the relative assessments of the said four years on the ground that such interest had escaped assessment. The ITO and the AAC held that the said amounts were includible in the personal assessment of the assessee. The Tribunal, however, held to the contrary. The Tribunal, after examining the position in law, held that the said amounts held in the assessee's clients' accounts, including the amount of the fixed deposits, were held by the assessee in a fiduciary capacity, that the said amounts of interest earned by the assessee were also held by him in a fiduciary capacity and that even though the assessee had not apportioned the interest so earned between his various clients whose moneys were so held by him, it made no difference to the fiduciary capacity in which the assessee held the said amounts and also the said interest and that, therefore, the said amounts of interest were not includible in the personal assessment of the assessee. On a reference made to the High Court of Bombay, a Division Bench of the High Court held (pp.716, 719) :

'.......the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients is that of a quasi-trust and he holds such monies in a fiduciary capacity. The case of a solicitor falls, in our opinion, within the provisions of section 94 of the Indian Trusts Act because he has not the whole beneficial interest in such moneys. He must, therefore, hold such moneys for the benefit of the persons having such beneficial interest, such persons beings his clients whose moneys are deposited in the client's account. A solicitor has, therefore, in view of the provisions of the said section 95, to perform the same duties and is subject to the same liabilities and disabilities as if he were a trustee in respect of the said moneys, his clients to whom the said moneys belong being the beneficiaries. The provisions of section 51 of the Indian Trusts Act would apply and a solicitor being a trustee of such a quasi-trust cannot use or deal with the trust property for his own profit or for any other purpose unconnected with the trust. He can deal with them only to the extent provided for under the said rules of this High Court. The corpus, i.e., the moneys credited in the client's account, is held by a solicitor in his fiduciary capacity and the income or interest derived from such corpus is equally held by him subject to such fiduciary relationship existing between the solicitor and his clients ......What the solicitor actually does with the solicitor actually does with the income, i.e., whether he appropriates it to himself or not, is, in our opinion, a matter of no consequence. If he appropriates it to himself, it would simply amount to a breach of his fiduciary relationship and whatever may be the consequences in law, would follow. But his unauthorised act of converting any part of the corpus of even the income derived therefrom which is not in accordance with the provision of the rules of this High Court would not convert those amounts held by him in a fiduciary capacity into moneys held by him beneficially for himself.'

17. In Addl. CIT v. Brijlal Gupta : [1974]94ITR88(All) , the assessee was practising as a senior advocate in the High Court of Allahabad. He returned gross professional income at Rs. 80,745. He claimed that 10% of this amount, namely, Rs. 8,074.50, was received in addition by him for being paid as clerkage to his clerical establishment and was not assessable as his income. The ITO held that the clerkage was received by the assessee and ten paid to the clerks and so it was not a case of diversion at source but appropriation only. The ITO, however, found that out of the sum of Rs. 8,074.50, a sum of Rs. 3,600 was paid by the assessee to his daughter-in-law on the footing that she assisted him in his professional work. This was held not to be a permissible deduction. The balance of Rs. 4,474 was allowed as a valid deduction. The assessee went up in appeal. The AAC held that the clerkage was never received as a part of the income of the assessee, that it was an amount payable to the staff who assisted him in the professional work and that as the said amount did not form part of the total income of the assessee, the question of considering the deductibility of the same from the professional receipts did not arise. In the result, he deleted the addition of Rs. 3,600. The ITO went up in appeal to the Tribunal. The Tribunal upheld the finding that the receipt of Rs. 8,074.50 did not form part of the income of the assessee. At the instance of the Commissioner of Income-tax, the Tribunal made a reference to the High Court of Allahabad. It was held by the High Court (p.92) :

'Since in the present case, on facts, it has not been disputed that the assessee did maintain a clerical establishment and since it is also not disputed that he received the disputed amount as clerkage only, we are not inclined to accept the submission that the receipt of clerkage was illegal or invalid. In our opinion, the view of the Tribunal that this receipt was not part of the professional income of the assessee, on the materials, is eminently justified.'

18. In CIT v. Karam Chand Thapar & Bros. (Coal Sales) Ltd. : [1979]117ITR621(Cal) , the assessee was the del credere agent of collieries and also the agent of the consumers. It collected from the consignees only the sale price of coal which was despatched by the collieries to the consumers, the freight being paid by the consumers to the railways. As the freight was not charged on the actual weight of the coal despatched but on the carrying capacity of the wagon, the assessee claimed from the colliery the extra freight incurred where the freight was charged on a weight more than that of the coal actally despatched. The assessee collected the underloading charges from the colliery, independent and irrespective of any demand from the consignees. There were cases where the consignees demanded the under-charges and the assessee passed on the amounts received by it. But there were also cases where the amounts were not demanded. The collieries had to pay these under-loading charges only out of the price of coal supplied by them as there was no way of their making any recoveries from the railways. On the question, whether the amount collected by way of under-loading charges and remaining with the assessee were assessable in its hands, a Division Bench of the Calcutta High Court held (headnote) :

'.....the amounts collected by way of under-charges had been received by the assessee as an agent and, therefore, in a fiduciary capacity vis-a-vis the consignees. Such amounts did not constitute trading receipts and accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be assessed as income of the assessee.'

19. In CIT v. Paramanand Uttamchand : [1984]146ITR430(Mad) , the assessee therein, a money-lender, received, on the occasion of 'Grahapravesam' of the house constructed by him for his residence, presents from relatives, friends and well-wishers. The ITO considered these presents as income liable to tax. The addition was, however, deleted by a the AAC and the same was confirmed by the Tribunal. On a reference, the High Court of Madras held (headnote) :

'.....the proper approach to the question would be to consider whether taking note of all the facts fairly and objectively, it could be reasonably concluded that what was received by the assessee in the present case on the auspicious occasion of the 'Grahapravesam' was nothing but receipts by him in the course of carrying on of his money-lending business.'

20. So judged the answer to the question was found to be in the negative and the Tribunal was held to be right in directing deletion of the amount received by the assessee.

21. In CIT v. Dr. B. M. Sundaravadanam : [1984]148ITR333(Mad) , one K who was treated in 1958 by the respondent-surgeon was completely cured of his ailment and a sum of Rs. 4,082 was paid by K to the respondent as and by way of professional charges. Subsequently, in the year 1960, K executed a deed of settlement whereunder he gifted an area of 33.38 acres of land specifically mentioning in the deed that the gift was made in order to show his feeling of gratitude to the respondent who showered kindness on him. The ITO included a sum of Rs. 65,000 being the value of the lands gifted as income arising to the respondent out of his profession. The AAC, however, deleted the addition on the ground that it was of a casual and non-recurring nature and the same was upheld by the Tribunal. On a reference to the High Court of Madras, a Division Bench of the High Court (p. 340) :

'.......there is no obligation on the part of the donor to make any payment for the services already rendered by the assessee which had been compensated for and there is no legal right in the assessee to receive any further payment for the professional services rendered earlier. Therefore, it is not possible to hold that merely because the assessee is a medical practitioner, the gift received by him is towards the services rendered especially when the professional services have been suitably compensated earlier'.

22. In the course of their judgment, their Lordships reiterated the principle laid down in S. A. Ramakrishnan v. CIT : [1978]114ITR253(Mad) that 'where a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision, and only where the character of the receipt is established as income, the burden of proof that it is not taxable lies on the assessee'.

23. In Bengal and Assam Investors Ltd. v. CIT : [1983]142ITR156(Cal) , the assessee acted as an insurance agent for several companies in the course of its general insurance agency business and collected amounts towards payment of premia of insurance from its clients and paid the same to the insurance companies. In the process of rendering the said service to the clients, the assessee collected some excess amounts from the clients, over a number of year, which were neither paid to the insurance companies nor refunded to the clients. The clients did not also claim refund of those amounts. the unclaimed amounts stood at Rs. 44,937 at the end of the accounting year relevant to the assessment year 1974-75 and the same was transferred to the credit of the profit and loss account of the assessee as miscellaneous income. The assessee contended before the ITO that it did not receive the amounts as trading receipts from its clients, that the same represented liability to the clients which remained unclaimed for a number of years and that the liability had been adjusted in the accounts of the assessment year in question and that the amounts did not constitute taxable income. The ITO, however, held that the excess amounts of premia were received from the constituents of the assessee because the liability of the constituents was undertaken by the assessee itself and that, therefore, the same constituted income of the assessee. The Commissioner (Appeals) affirmed the order of the ITO. On further appeal, the Tribunal affirmed the order of the Commissioner (Appeals). On a reference, a Division Bench of the High Court of Calcutta held that the assessee received the amounts from its constituents as an agent for and on behalf of the constituents, that the assessee held the amounts in a fiduciary capacity with its constituents, that the assessee in the year of receipt of the sums, did not treat the same as its own income, that at the time of receipt of the amounts the same were not income of the assessee, that the taxability of an amount must be determined on the nature of the receipt and the capacity in which it was received, that subsequent writing off, or subsequent conduct or subsequent entry in the books of account, would not affect the position and that the sum of Rs. 44,937 could not be assessed as income of the assessee during the relevant assessment year.

24. The learned standing counsel for the Revenue very much placed reliance upon the decision in Pioneer Consolidated Co. of India Ltd. v. CIT : [1976]104ITR686(All) wherein it was held by a Division Bench of the Allahabad High Court that even unclaimed deposits from customers, when treated as income and transferred to the profit and loss account by the assessee, were rightly assessed as income by the ITO. In fact, the very same decision was also cited before the Division Bench of the Calcutta High Court and the Division Bench dissented from the said view and observed (p. 166 of 142 ITR) :

'The way the assessee treats an income is quite irrelevant because the nature of the receipt must be judged on the true nature of the receipt, not how the parties treated it.'

25. In support of the principle laid down, the Division Bench adverted to the following observations made by the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT : [1979]116ITR1(SC) :

'But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned Rs. 36 lakhs.....'

26. We are in complete agreement with the view taken by the Division Bench of the Calcutta High Court.

27. In CIT v. Bharat General Reinsurance Co. Ltd. : [1971]81ITR303(Delhi) it was held by a Division Bench of the Delhi High Court (page 307) :

'It is true that the assessee itself had included that dividend income in its return for the year in question but there is no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it is incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to the year'.

28. In R. B. Jessa Ram Fateh Chand v. CIT : [1971]81ITR409(All) the assessee therein filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was urged on behalf of the Revenue that it was not open to the assessee to content that a single assessment under s. 26(1) of the 1922 Act ought to have been made. Repelling the said contention, a Division Bench of the Bombay High Court held that there could be no estoppel against a statute and that if in fact the procedure adopted by the ITO was incorrect, the defect was not cured by the attitude taken up by the assessee. In the instant case, the disputed amount of Rs. 12,370 was treated as a trading receipt both by the ITO and the AAC. The amount represents excess collections made by the assessee from its constituents towards payment of premia of insurance in respect of the vehicles purchased by them. The collections were either in the nature of voluntary deposits made by the constituents of the assessee or were made on demand by the assessee from the constituents for the specific purpose of payment to the Hindustan Ideal Insurance Company towards premia of insurance in respect of the vehicles purchased by them. The amounts collected by the assessee from time to time were initially credited to the individual accounts of the constituents and were later transferred to the account of the Hindustan Ideal Insurance Company. If the collections were in the nature of voluntary deposits, the assessee held the same in a fiduciary capacity for the specific purpose of payment of premia of insurance in respect of the vehicles purchased by the constituents and the assessee was under an obligation to return the excess amounts to the constituents after payment of premia of insurance. The amounts cannot be treated as income of the assessee. The fact that the assessee failed to refund the amounts to its constituents or appropriated them to its profit and loss account subsequently, or misappropriated the same, would not alter the position. If, on the other hand, the collections were made on demand by the assessee from its constituents, the excess amounts after payment of the premia of insurance formed part of the income of that particular year in which the related hire purchase agreements came to an end, when the excess amounts were determined. The fact that the assessee treated the amounts as its income in the assessment year in question is immaterial and irrelevant and not conclusive, for, there is no estoppel against a statute. It is the nature of the receipt that determines its taxability.

29. We are, therefore, of the opinion that, on the facts and circumstances of the case, sum of Rs. 12,370 does not represent trading receipt of the assessee liable to tax under the I.T. Act, 1961, and that the said amount cannot be assessed to tax in the assessment year 1974-75. Both the questions are, accordingly, answered in the negative and against the Revenue. No costs.


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