1. The assessee, a 100 per cent subsidiary of Calico Mills Ltd., is in appeal against the order under Section 263 of the Commissioner, Gujarat-I, Ahmedabad, relating to the assessment year 1975-76. The Commissioner on examining the records noticed that the assessee had deducted the forfeited staff service deposit of Rs. 35,856, and credited the same to profit and loss account while arriving at the taxable income of the company and the ITO had allowed that deduction.
The Commissioner considered the action of the ITO to be erroneous insofar as it was prejudicial to the interest of the revenue for the reason that even though the deposit was not a trading receipt at the time of its receipt, in substance it partook the character of a trading receipt when it was appropriated by transferring the same to general revenue. After hearing the assessee and rejecting the arguments advanced by it, the Commissioner set aside the order of the ITO dated 23-3-1978 and directed him to redo the assessment in accordance with law.
2. We have heard the rival submissions and perused the assessee's reply dated 21-2-1980 addressed to the Commissioner. In the aforementioned letter, the assessee-company stated that it employed qualified graduates and technical staff with the intention that they would remain continuously in employment with it and not leave the job after gaining experience in the organisation and for this purpose a security deposit was taken at the time of appointment for a period of 5 years. It was further stated that as per the provisions of the Companies Act, the deposit was required to be deposited in a separate bank account and could not be used for the purpose of the business 'and the interest earned thereon along with the deposit was paid back to the employees on completion of the stipulated period of 5 years. Further, the amount of deposit was shown as liability in the balance sheet of the company and only if the employee left the services of the company before the completion of the period of 5 years, his deposit was forfeited by the management and in deserving cases some deposits were also returned.
These are basic facts about the nature of the security deposits taken from the employees out of which a sum of Rs. 35,856 was forfeited in the assessment year under consideration.
3. Shri K.C. Patel, the learned counsel of the assessee, firstly challenged the jurisdiction of the Commissioner to act under Section 263 on the ground that the order passed by the ITO was the subject-matter of appeal before the Commissioner (Appeals) who passed his appellate order on 23-1-1980 and, therefore, the ITO's order had already merged in the order of the Commissioner (Appeals). Same argument was advanced by the assessee before the Commissioner who rightly repelled it by pointing out that the point of deduction of forfeited staff service deposit had never been the subject-matter of appeal before the Commissioner (Appeals) and hence there was no merger of the order of the ITO in the order of the Commissioner (Appeals). The view taken by the Commissioner, in our opinion, is correct and is in accordance with the Gujarat High Court judgment in the case of Karsondas Bhagwandas Patel v. G.V. Shah, ITO  98 ITR 255. This contention of Shri Patel fails.
4. However, we find substance in his other contention that the security deposit taken from the employees was not in the nature of a trading receipt and this being so, the order of the Commissioner is not correct. Shri Patel, with the help of the authorities cited by him, contended that the quality and nature of receipt in this case for income-tax purposes was fixed once and for all when it was received and that the amount of security deposit when received was obviously the liability of the company and no subsequent operation or alteration in accounts could turn it into a trading receipt. It is obvious that the security deposit when received was not a trading receipt. The subsequent forfeiture of the amount on. the happening of the prescribed contingency in the facts and circumstances of this case will not convert that receipt into a trading receipt. This is not a case of a deposit received by a businessman which in substance partakes more of the nature of trading receipts than of security deposits. The subsequent forfeiture of the amount of deposit will also not render the security deposit under consideration as a trading receipt as held by the Commissioner. The Commissioner in para 1 accepts the position that the deposit was not a trading receipt at the time it was received. As stated earlier, forfeiture of such an amount of deposit will not change the nature of the deposit and make it taxable trading receipt. It is not the business of the assessee-company to recruit technical staff. On a consideration of the whole issue, we feel that the order of the Commissioner under Section 263 is not sustainable on merits and it is consequently set aside and the order of the ITO is restored.