JAGANMOHAN REDDY J. - The Income-tax Appellate Tribunal has referred the following question under section 66(1) of the Indian Income-tax Act, namely, whether on the facts and in the circumstances of the case, the collection as and by way of sales tax was a trading receipts of the assessee liable to tax.
It appears that the assessee is a firm carrying on business as commission agent in rice. For the previous year relevant to the assessment year 1958-59, it collected a sum of Rs. 5,702 towards sales tax and in that relevant to the assessment year 1959-60, it collected a sum of Rs. 21,316. The assessee made these collections on sales made outside the State apprehending that it may be made liable for payment of such sales tax on the imposition of central sales tax on inter-State trading from July 1, 1957. These collection so made from the customers were credited to a separate account called the 'deposit account' and were not treated as part of the sale proceeds. The invoices for sales also showed that the amounts were collected separately as deposit. It was the assessees case that the understanding between it and the customers was that if sales tax was ultimately demanded of the assessee, payment would be made to the Government accordingly, but if it was not so demanded, the amount would be refunded to the customers. It was, therefore, contended on behalf of the assessee that the amount collected as and by way of sales tax did not belong to it, but the assessee was holding that amount as a cestui que trust, as stated in the statement of the case, for its customers. In support of this, the assessee relied upon the invoices, which, as we have already stated, show that the amount was already collected as deposit. This contention was negatived by the Income-tax Officer, who took the view that these collections were trading receipts to be treated as part of the sale proceeds and taxed as income over and above the commission earned on sales. The Income-tax Officer, however, stated that if subsequently the amount was paid to the Government or refunded to the customers, it would be allowed as a deduction in the relevant year. The appeal by the assessee was unsuccessful. So was the appeal to the Tribunal.
Mr. Srinivasa Rao states that the assessee has now received an assessment order for 1957-58 and notice of assessment for 1958-59. Of course, the Income-tax Officer has himself stated in his order that he will give deduction after the tax is paid. But that is a different question. In spite of this, he contends that these amounts cannot be treated as trading receipts.
The learned advocate for the assessee, Mr. Srinivasa Rao, contends that this is a case where the amount received by the assessee was received as a deposit, which was returnable if the Central Government did not levy the tax and, consequently, was in the same category as moneys borrowed from customers. In support of this contention, he has cited several decisions, namely, Morely (Inspector of Taxes) v. Tattersall Lakshmanier & Sons, v. Commissioner of Income-tax, Punjab Distilling Industries Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Punjab Distilling Industries Ltd.
An examination of these cases shows that the principle applicable in the case of deposits or security deposits is that, where it is part of the price or it is part of each transaction, whether the amount is returnable or not, it is deemed to be a trading receipt. But if the amount received has nothing to do with the transactions as such or is no part of the price but is only received for the due performance of an obligation or a service, then it is not considered as a trading receipt but is akin to money borrowed. The point of time at which the character of the transaction is to be determined is at the time when the money is paid or received and not how it is dealt with subsequently. So that the crucial test at any given point of time is : What is the character of the transaction at the time when the payment was made In Morley (Inspector of Taxes) v. Tattersall the Court of Appeal, reversing the decision of Lawrence J., held that the unpaid balances of purchase moneys, which had been accumulated by the firm, were not treated as trading receipts or income. The assessee in that case was a firm of auctioneers, the profits of which mainly consisted of commissions on the sales of horses. One of the conditions of sale was, 'No money paid, or remittance sent by post, without a written order.' During a long period, owing to the fact that several sellers of horses failed to claim the balances of purchase moneys due to them, large unpaid balances had been accumulated by the firm. By a clause in the articles of the existing partnership deed it was provided that all unclaimed balances existing on December 31 in the year of account as first arose six years previously should be transferred to the credit of the partners in the proportions to which in December in the year of account they were entitled. By another clause it was provided that, notwithstanding any transfer of such unclaimed balances, all liability subsisting in reference to the balances should continue to be borne by the partnership. By an additional assessment, the firm was assessed to income-tax in respect of the unclaimed balances transferred to the current account of the partnership in a particular year. The firm contended that the unclaimed balances did not at any time become profits or trading receipts, but were always to be considered as liabilities, for the statute of limitations did not apply to the case. The Court of Appeal held :
'That the quality and nature of a receipt for income-tax purposes were fixed once and for all when the subject of the receipt was received; consequently, as the unclaimed balances, when first received, were obviously liabilities no subsequent operation could turn them into trading receipts. They were not, therefore, assessable to income-tax.'
Lord Greene, Master of the Rolls, who delivered the leading judgment, observed at page 323 as follows :
'I invited the junior counsel to point to any authority which in any way supported the proposition that a receipt which at the time of its receipts was not a trading receipt could by some subsequent operation, ex post facto be turned into a trading receipt, not, be it observed, as at 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 a 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. What the partners did in this case, as I have said, was to decide among themselves that what they had previously regarded as a liability of the firm they would not, for practical reasons, regard as a liability; but that does not mean that at that moment they received something, nor does it mean that at that moment they imprinted upon some existing asset a quality different from what it had possessed before. There was no existing asset at all at that time. All that they did, as I have already pointed out, was to write down a liability item in their balance-sheet, and how in the world by effecting that operation you can be said to have converted a sum received years and years ago into something which it never was, is a thing which, with all respect, passes my comprehension.'
The case of K.M.S. Lakshmanier and Sons v. Commissioner of Income-tax illustrates the principle which we have adumbrated above, because it deals with two different sets of situations, one in which their Lordships held that it was a trading receipt and the other that it was not. The distinction thus made would indicate the basis upon which the decision has been arrived at.
The assessees were the sole selling agents for yarn manufactured by a textile mill and they distributed yarn to customers under forward contracts in respect of which they obtained from their customers advances of moneys which were adjusted towards the final payment of purchase price at the time of delivery of goods. From 5th May, 1944, the assessees changed this arrangement. They treated the amounts as advance payments in relation to each 'contract number' and kept them under the heading 'contracts advance fixed deposit account'. Under this arrangement a customers had to pay the price of the bales in full and the deposit would be returned to him on the completion of the delivery under the contract. In December, 1944, the assessees changed the heading of the account into 'security deposit' account. From 14th February, 1945, the assessees again modified the arrangement. They demanded from a customer as security deposit a certain sum which was to be held by them as security for the due performance of the contracts by the customer so long as his dealings with them by way of forward contracts continued. The price was to be paid by the customer in full against delivery in respect of each contract without any adjustment out of the deposit which carried an interest of 3 per cent. per annum. During the chargeable accounting period 13th May, 1944, to 12th April, 1945, the question arose whether the amounts received by the assessee constituted 'borrowed money' within the meaning of rule 2A of Schedule II of the Excess Profits Tax Act, 1940. In so far as the period during which the deposit was included in the price of the bales, though returnable, it was held that it was a trading receipt. But in so far as the security deposit is concerned, it was held that it was akin to money borrowed. The learned Chief Justice, who delivered the judgment of their Lordships, dealt with the English decisions referred to by the Attorney-General in Inland Revenue Commissioners v. Port of London Authority and Inland Revenue Commissioners v. Rowntree and Co. Ltd, and distinguished them. The case of Davis v. Shell Company of China was followed. In this case, a British company, which sold petroleum products in China through Chinese agents, required the latter to deposit with the company a sum of money in Chinese dollars to be held as security against possible default by the agents in payment for the products consigned to them and to be repaid when the agency came to an end. These deposits were, during the war, transferred to the United Kingdom for reasons of safety and were there held in sterling and by the time they came to be paid the Chinese dollars were much depreciated and consequently the amounts which were thus saved due to the depreciation were sought to be made liable to tax. But this attempt was negatived. After referring to this case, Patanjali Sastri C.J. concluded at page 211 thus :
'Turning now to the deposits received by the appellants from 5th May, 1944, to 14th February, 1945, we are of opinion that having regard to the terms of the arrangement then in force they partake more of the nature of trading receipts than of security deposits. It will be seen that the amounts received were treated as advance payments in relation to each contract number and though the agreement provided for the payment of the price in full by the customer and for the deposit being returned to him on the completion of delivery under the contract, the transaction is one providing in substance and effect for the adjustment of the mutual obligations on the completion of the contract. We hold accordingly that the sums received during this period cannot be regarded as borrowed money for the purposes of rule 2A.'
It will thus be observed that the liability to return the money is not the criterion for determining the question whether the amount received is a trading receipt or not. What is important is whether these amounts are relatable to the trading activities, that is, whether they are part of the price or relatable to the contract. If the amount received has no relation to this, then it cannot be treated as a trading receipts. Even in the earlier English case to which we have made reference, the amounts at the time of receipt did not partake the character of trading receipts and any subsequent dealing with it would not give it that character. Similarly, in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax, in addition to the price fixed under the Government scheme, the assessee took from the wholesalers certain further amounts, described as security deposits, without the Governments sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. This was because it found it difficult to obtain bottles to vend its liquor and to relieve the scarcity the Government devised a scheme whereby the distiller was entitled to charge the wholesaler a price for the bottles in which the liquor was supplied at rates fixed by the Government, which he was bound to repay when the bottles were returned. The moneys described as security deposits were also returned as and when the bottles were returned but in this case the entire sum taken in one transaction was refunded when 90 per cent. of the bottles covered by it were returned. The price of the bottles received by the assessee was entered in the general ledger under the heading 'empty bottles return security deposit account'. The question was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds made thereout. It was held :
'(i) that in realising the additional amount described as security deposit 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; it did not make any difference that the additional amount was entered in a separate ledger termed empty bottles return deposit account, for what was a consideration for the sale did not cease to be so by being written up in the books in a particular manner; nor did the fact that the price of the bottles were repaid as and when the bottles were returned whereas the additional sums were repaid in full when 90 per cent. of the bottles were returned affect the question;
(ii) that as the wholesalers were clearly under no obligation to return the bottles the additional sums taken were not security deposits and the fact that they were described as such was alone not sufficient to create an obligation to return the bottles; there could be no security given for the return of the bottles unless there was a right to their return;
(iii) that as the additional amounts taken were an integral part of the commercial transaction of the sale of liquor in bottles and when they were paid were the moneys of the assessee and remained thereafter the moneys of the assessee, they were the assessees trading receipts; and, therefore, the balance of these additional sums left after the refunds made thereout were assessable to tax.'
In this case also, their Lordships referred to the judgment of Patanjali Sastri C.J. in K.M.S. Lakshmanier & Sons, v. Commissioner of Income-tax, Davies v. Shell Co. of China Ltd. and Imperial Tobacco Company, v. Kelly, and at page 529, Sarkar J. observed thus :
'In the present case, unlike in Lakshmanier and Sons case, the amount paid has a relation to the price of the goods sold; it is part of that price as we have earlier said. It was a condition of each transaction of sale by the appellant. It was refundable to the wholesaler as soon as he returned the bottles in which the liquor had been supplied to him in the transaction in respect of which the deposit had been made. The deposit in the present case was really not a security at all; it did not secure to the appellant anything. Unlike Lakshmanier and Sons case, in the present case a deposit was made every time a transaction took place and it was refundable under the terms of that transaction independently of other deposits under other transactions. In Lakshmanier and Sons case, the deposit was in the nature of the assessees trading structure and anterior to the trading operations, as were the deposits considered in the Shell Company case. In the case in hand the deposit was part of each trading transaction. It was refundable under the terms of the contract relating to a trading transaction under which it had been made; it was not made under an independent contract nor was its refund conditioned by a collateral contract, as happened in Lakshmanier and Sons case.'
The case of Morley v. Tattersall was already referred to and at page 530 it has been laid down :
'All that this case decided was that moneys which were not when received, income - and as to this there was no question - could never later become income. With such a case we are not concerned...... If we are right in our view that the amounts were trading receipts, it follows that they must have a profit-making quality about them.'
The case of Commissioner of Income-tax v. Punjab Distilling Industries Ltd. was cited to suggest that the Supreme Court had laid down a different proposition. But we find that there is nothing in this decision which merits that conclusion. The case that their Lordships were considering was whether the subsequent amendments made in April, 1948, to the Punjab Liquor Licence Rules gave statutory recognition to demand security, by the licensed distiller, up to 10 per cent. of the bottles issued by him and the return of the bottles by the wholesalers was also made obligatory. In those circumstances, it was held :
'That the collections by the assessee described as empty bottle return security deposits were not income assessable under section 10 of the Income-tax Act. The deposits received prior to the amendment, and subsequent to the amendment but in excess of 10 per cent. of the bottles issued, should be treated as trade receipts.'
Even here the principle of the judgment in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax earlier cited was reaffirmed. The only distinction was that, having regard to the statutory obligation to return 10 per cent. of the bottles, the security in respect of those was not treated as trading receipt. That is far from saying that a different view has been taken in this case.
A review of the case law shows that where a deposit has a profit-making character, it is a trading receipt. A reference to the analysis shows that in each transaction a certain amount was taken as deposit which in fact is equal to an amount of sales tax leviable under the Central Sales Tax Act on inter-State trading and consequently it forms part of the price which was charged. How the trader will disburse the amount received from the customer is immaterial, because the price of the goods in so far as the customer is concerned includes all those amounts which he pays. There is in fact in this case no evidence, except the statement of the assessee, to show that he was going to return the amount. But even assuming that it was returnable, it is part of the price and hence a trading receipt. Even though it is shown as a deposit, these amounts are part of every transaction and are consequently trading receipts. We are clear in our mind that the income-tax authorities were right in their conclusions in dealing with these as trading receipts.
Our answer to the reference, therefore, is in the affirmative with costs to the department. Advocates fee, Rs. 200.
Question answered in the affirmative.