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Bijli Cotton Mills Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 329 of 1964
Judge
Reported in[1970]76ITR194(All)
ActsIncome Tax Act, 1922 - Sections 4(3), 10(1) and 66(1)
AppellantBijli Cotton Mills Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateC.S. Agarwal and ;V.K. Burman, Advs.
Respondent AdvocateShanti Bhushan, Adv. General and ;R.R. Misra, Adv.
Excerpt:
.....was something like a levy that was imposed by the assessee. the levy that was imposed by the assessee was something like a surcharge on the price or was in the nature of a premium. the assessee had the opportunity to spend the amount for whatever purpose he liked. 9. as already stated, the assessee-company manufactures and deals in yarn as well as in cotton. it is well known that dharmada is a customary levy prevailing in certain parts of the country and where it is paid by customers to a trading concern, the amount is not paid as price for the commodity sold to the customers......dharmada so realised by it in its trading account. it maintained a separate account known as the 'dharmada account' in which realisation on account of dharmada were credited and payment thereout were debited from time to time.3. the company was incorporated in the year 1943, and it had been realising amounts on account of dharmada since its very inception. on january 15, 1955, the directors of the assessee-company made a resolution in one of the meetings of the board stating that it was considered desirable that the amounts realised by the company on account, of dharmada should be treated as a trust fund with lala nawal kishore and lala rain babu lal, directors of the company, as trustees. it was declared that all money realised in future by the company by sale of yarn from the.....
Judgment:

T.P. Mukerjee, J.

1. This is a reference made by the Delhi Bench 'A' of the Appellate Tribunal under Section 66(1) of the Income-tax Act, 1922, hereinafter referred to as 'the Act'. The statement of the case relates to the assessment years 1951-52 and 1952-53, the corresponding previous years being the calendar years 1950 and 1951, respectively.

2. The assessee is a private limited company. It carries on the business of manufacturing and selling yarn. The company used to realise certain amounts on account of dharmada (charity) from its customers on sales of yarn and bales of cotton. The rate was one anna per bundle of 10 lbs. of yarn and two annas per bale of cotton. The company did not, however, credit the amounts of dharmada so realised by it in its trading account. It maintained a separate account known as the 'dharmada account' in which realisation on account of dharmada were credited and payment thereout were debited from time to time.

3. The company was incorporated in the year 1943, and it had been realising amounts on account of dharmada since its very inception. On January 15, 1955, the directors of the assessee-company made a resolution in one of the meetings of the board stating that it was considered desirable that the amounts realised by the company on account, of dharmada should be treated as a trust fund with Lala Nawal Kishore and Lala Rain Babu Lal, directors of the company, as trustees. It was declared that all money realised in future by the company by sale of yarn from the purchasers at 0-1-0 per bundle or such rate as may be decided upon in future, will be handed over to the trustees for being utilised in such altruistic, religious or charitable purposes as may be decided upon by them. Subsequently, in October, 1950, the said directors, viz., Sri Nawal Kishore and Sri Ram Babu Lal, executed a deed of declaration of trust. In this deed it was stated that a sum of Rs. 85,000 had accumulated in the charity fund maintained by the trustees and it was declared that the amount did not belong to any individual but it was trust money of which the executors were the trustees and which would be utilised by them for altruistic, religious or charitable purposes.

4. During the two previous years under reference, the company received Rs. 21,898 and Rs. 17,242 on account of dharmada. The company credited a sum of Rs. 4,010 to the same account in the calendar year, 1951 asinterest. The company also credited another sum of Rs. 904 which was the amount collected from the brokers on account of dharmada,

5. In the assessments of the assessee for the assessment years 1951-52 and 1952-53, the Income-tax Officer added the aforesaid amounts as the income of the assessee. The Income-tax Officer rejected the claim of the assessee that the amounts were held in trust by it and were earmarked for charity and, therefore, they were not its income from business liable to tax The assessee appealed to the Appellate Assistant Commissioner against, such additions, but the appeals were unsuccessful. An appeal to the Tribunal similarly proved futile. It appears that one of the contentions put forward on behalf of the assessee before the Appellate Tribunal was that the amounts in question were held in trust for charitable purposes. It was argued on behalf of the assessee that the constituents of the assessee created a trust by paying the amounts for dharmada and the amounts having been earmarked for being spent for charitable purposes only, they were not the assessee's income liable to tax. The Tribunal, however, repelled the contentions of the assessee and observed as follows:

'The amount that was paid always bore a fixed ratio to the amount of the cost or the price which a constituent had to pay. The amount was something like a levy that was imposed by the assessee. It is clear beyond doubt that the constituents had no option. It is of fundamental importance that a trust should be a voluntary divestment of the property by the settlor. The settlor must of himself do away with, his domain over the property and see that the ownership is vested in the trustee. The levy that was imposed by the assessee was something like a surcharge on the price or was in the nature of a premium. It has the character of a receipt. Though the amount might not have been collected as price of the goods sold, nevertheless its characteristic was that of a premium over the cost price. The domain over the property always remained with the assessee. The assessee had the opportunity to spend the amount for whatever purpose he liked. In the circumstances, it is difficult to say that a valid trust had been created.'

6. Holding as above, the Tribunal confirmed the assessments made by theIncome-tax Officer.

7. At the instance of the assessee the Tribunal has referred the following questions for the opinion of this court:

'(1) Whether, in the circumstance's of the case, the sum of Rs. 21,898 was the assessee-company's income liable to tax in the assessment year1951-52?

(2) Whether, in the circumstances of the case, the sums of Rs. 17,242, Rs. 4,010 and Rs. 904 were the assessee-company's income liable to tax in the assessment year 1952-53 ?'

8. It appears that the Tribunal rejected the claim of the assessee for exemption on two grounds, firstly, that the amounts in question could not be regarded as having been held or received by the assessee under a trust for charitable purposes, and, secondly, that the realisations partook of the character of trading receipts. It should be noted, however, that though the assessee had contented before the Tribunal that the amounts in question were held in trust and earmarked for charity and were not, therefore, liable to tax, the assessee did not base its claim for exemption specifically under Section 4(3)(i) of the Act, and the questions referred by the Tribunal also do not refer to Section 4(3)(i) of the Act. The broad question which has been referred to this court for opinion is whether the impugned amounts were the assessee-company's income liable to tax in the relevant assessment years.

9. As already stated, the assessee-company manufactures and deals in yarn as well as in cotton. Section 10(1) of the Income-tax Act, 1922, lays down :

'The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.'

10. Under this section only the profits and gains of business of the assessee can be taxed in its hands. Hence, the question for decision before us is whether the amounts under consideration can be regarded as the profits and gains of the business carried on by the assessee. In the case of Agra Bullion Exchange Ltd. v. Commissioner of Income-tax, [1961] 41 I.T.R. 472, 480 a Bench of this court had to decide an identical question in similar circumstances. There, it appears, a sum of Rs. 26,903 was collected by the assessee-company as dharmada for purposes of charity and the amount was taxed by the Income-tax Officer as income of the assessee's business. In that case a claim was put forward on behalf of the assessee-company that the amount was liable to exemption under Section 4(3)(i) of the Act. It was held by this court that Section 4(3)(i) of the Act had no application to the case. The court held that the amount in question which was received by the assessee from its customers on account of dharmada was not its income at all. Dealing with the matter the court observed as follows :

'The amounts claimed to be exempted were not part 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 and is as to whether the amount paid by the trading members earmarked for charity was the assessee's income at all.'

11. That decision was followed by this Bench recently in Upper India Sugar Exchange Ltd. v. Commissioner of Income-tax, [1969] 72 I.T.R. 331. In that case, it was held that the amount of brokerage which had been paid by the customers of the assessee-exchange, along with the commission of the exchange, but remained unclaimed by the brokers concerned, was never the income of the assessee-company liable to tax under Section 10(1). Following the decision of the Court of Appeal in Morley v. Tattersall, this court observed that the amounts of brokerage which had been initially received by the assessee from its customers for payment to brokers, did not partake of the character of a trading receipt and, therefore, the amounts were not liable to be taxed as assessee's income in spite of the fact that the amounts remained unclaimed for years.

12. In the present case, as we have already mentioned, the amounts were paid by the customers of the assessee specifically on account of dharmada or charity, and they were credited in a separate dharmada account. It is true that the assessee used to realise such amounts from its customers on all transactions of yarn and cotton, but the fact that it was a compulsory levy does not, in our opinion, ipso facto, impress the same with the character of a trading receipt. The Tribunal concedes that the assessee used to charge proper price for the commodities, namely, yarn and cotton, sold by it but the Tribunal observed that the levy for dharmada was in the nature of a surcharge on the price charged for the yarn and cotton. We do not think that the Tribunal was correct in taking that view. The amounts realised by the assessee on account of dharmada were never treated as trading receipts or as surcharge on sale price. This is evident from the fact such realisations were never credited to the trading account not shown in the profits and loss statement for any year. Following the decision of this court in the case of Agra Bullion Exchange Ltd. we. hold that the amounts in question were never the income of the assessee at all, and that the assessee was merely acting as a conduit pipe or clearing house for passing on the amounts to the objects of charity.

13. The learned standing counsel relied on a decision of this court in the case of Kanpur Agencies Private Ltd. v. Commissioner of Income-tax It appears that the earlier decision of this court in the case of Agra Bullion Exchange was not cited before the Bench which decided the case now relied on by the standing counsel. In that case, the assessee-company was realising certain amounts from its customers and such amounts were credited in the assessee's books in a separate account styled as Marwari Society Charitable Account. It was claimed that the amounts so collected by the assessee were exempt from tax under Section 4(3)(i) of the Act, The court negatived the claim of the assessee on the ground that the assessee was under no obligation to spend the amount for charitable purposes. In this case,however, we are not considering the applicability of Section 4(3)(i). We have held that the amounts in question are. not assessable as business profits of the assessee under Section 10(1) of the Act,

14. The learned standing counsel then referred to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Thakur Das Bhargava. In that case, the assessee was an advocate who had agreed to defend certain accused persons in a criminal trial on condition that he should be paid the sum of Rs. 40,000 for the creation of a public charitable trust. At the end of the trial the advocate was paid Rs. 32,000 and he created a trust of that amount by means of a trust deed. The assessee then claimed exemption in regard to the sum of Rs. 32,000, The Supreme Court negatived the claim and held that the amount represented the professional income of the assessee. That case was decided on the footing that the desire on the part of the assessee to create a trust out of the moneys paid to him created no trust; nor did it give rise to any legally enforceable obligation. In the present case, as we have noted, we are not concerned with the question as to whether there was a valid trust in respect of the dharmada amounts.

15. The next case cited on behalf of the revenue was a decision of the Bombay High Court, East India Chamber of Commerce Ltd. v. Commissioner of Income-tax. In that case the assessee was a company limited by shares. The bye-laws of the company provided for payment of lagas at certain rates by the members for every transaction of purchase done by them on account of any non-member in respect of specific commodities. A part of the lagas so realised was to be spent under the bye-laws of the company for charitable and philanthrophic purposes. The Income-tax Officer assessed the entire amount of lagas aggregating to Rs. 1,13,254, under Section 10(6) of the Act. One of the questions referred by the Tribunal for the opinion of the court was whether, on the facts and circumstances of the case, the laga receipt of Rs. 1,13,254 was a revenue receipt, and assessable under Section 10(1) of the Indian Income-tax Act. Dealing with this question, Chagla C.J., speaking for the Bench, observed:

'The next question is whether the lagas are liable to tax under Section 10(1) as business income, and the answer given to it by the assessee, and which has been put forward before us by Mr. Palkhivala, is that this is a mutual association and that in the lagas paid by the members the principle of mutuality comes into play and therefore the lagas are not liable to tax.'

16. It would appear that in that case, Mr. Palkhivala had claimed exemption only on the ground that Section 10(6) of the Act was not attracted.No contention was made on the ground that the part of the lagas payableto charity did not constitute the trading receipt of the assessee. That decision does not, therefore, meet the points raised in the present case,

17. The learned standing counsel then referred to the decision of the Privy Council in the case of Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, [1933] 1 I.T.R. 135 (P.C.) and contended that the payment by the assessee towards charity out of the dharmada constituted only an application of the assessee's income and there being no diversion of income by overriding title at source the amounts in question were assessable to tax. In the case before the Privy Council the assessee succeeded to the family ancestral estate on the death of his father. Subsequently, his step-mother brought a suit for maintenance against him in which a consent decree was made directing the assessee to make a monthly payment of a fixed sum to his step-mother. The decree declared that the amount of the maintenance payable to the assessee's step-mother was a charge on the ancestral estate in the hands of the assessee. In computing the assessee's income the assessee claimed that the amounts paid by him to his step-mother in pursuance of the decree were liable to be excluded. The Privy Council accepted the claim of the assessee and held that the sums paid by him to his step-mother were not the income of the assessee at all. The decree of the court by charging the appellant's whole resources with a specific payment to his step-mother had to that extent diverted his income from him. It was not a case of the application by the assessee of a part of his income in a particular way. In the instant case, the assessee does not claim that there was diversion of his income by overriding title. The assessee claims that the money received by it for the purpose of charity from its customers were never his income at all. The customers paid the money to the assessee only for the purpose of charity and the assessee also received the same for such a purpose. It is well known that dharmada is a customary levy prevailing in certain parts of the country and where it is paid by customers to a trading concern, the amount is not paid as price for the commodity sold to the customers. Where there is no such custom, there is no payment for dharmada. It is futile to contend that the amounts paid for dharmada are trading receipts of the trader and payments thereout constituted application of trading profit after it had been earned.

18. As we have already mentioned above, the present case is fully covered by the earlier decision of this court in Agra Bullion Exchange Ltd. v. Commissioner of Income-tax, [1961) 41 I.T.R. 472. We hold, therefore, that the amounts in question do not constitute the income of the assessee at all.

19. Having regard to our findings above we would answer question No. I in the negative and in favour of the assessee. We also answer question No. 2 in the negative and in favour of the assessee.

20. The Commissioner of Income-tax, U.P., will pay Rs. 200 as costs ofthis reference to the assessee.


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