1. This appeal is by the revenue. The assessee to the appeal is Minerals & Metals Trading Corporationn. of India Ltd., New Delhi (MMTC), a company incorporated under the Companies Act. The year of assessment involved is 1977-78 for which the previous year ended on 31-3-1977.
2. Grounds (ii) and (iii) raised by the revenue are in the following terms : On the facts and in the circumstances of the case, the Commissioner (Appeals) erred in- (ii) allowing a reduction of Rs. 8,76,215 out of the disallowance made by the Income-tax Officer in respect of the assessee's claim for deduction of Rs. 10,51,000 being the contribution towards an approved granting to be administered by the LTC, in spite of the fact that the provisions of Secton 40A(7) were not complied with ; and (iii) directing that the depreciation on 'pay loaders' which is not an item of each moving machinery should be allowed at 30 per cent as against 10 per cent allowed by the Income-tax Officer.
At the hearing it was an admitted position that the factual position regarding these two grounds is similar to that in the appeal of the assessee for the assessment year 1976-77 bearing IT Appeal No. 569 (Delhi) of 1980 decided by us today. The arguments canvassed in this behalf are also on the same lines as were canvassed before the Tribunal in the aforesaid appeal. For the reasons stated therein, with which we agree, we uphold the order of the Commissioner (Appeals) on the points involved in the above two grounds of appeal.
3. The ITO, in the course of assessment proceedings of the assessee for the year under consideration, noticed that in Schedule 12, the foot-note to purchase account reads Rs. 8.65 crores transferred to Central Government/Government Companies out of net surplus. He further noticed that the said amount of Rs. 8.65 crores was composed of the following : (i) Rs. 5.43 crores paid to Coal India Ltd. and (ii) Rs. 3.22 crores paid to the Central Government. The ITO, following his assessment order in the case of the assessee for the earlier year agreed with the assessee that the aforesaid amount of Rs. 5.43 crores paid to Coal India Ltd. was not taxable as its income. Insofar as the other amount of Rs. 3.22 crores is concerned, the ITO noticed that the payment was made by the assessee-corporation to the Central Government out of net surplus on its trading in stainless steel. He went into the facts brought on record by the assessee in respect of the transfer of the aforesaid amount and addressed himself on the question as to whether the said payment was a diversion of income by overriding title as claimed by the corporation or whether it was merely an application of the profits which accrued to the assessee-corporation. For deciding this question, he went into the ratios of the various decisions mentioned at pages 7 to 10 of his order as also the commentary of Palkhivala in his treatise The Law & Practice of Income-tax and on the ratio of those decisions came to the conclusion that the payment in question by the assessee to the Central Government was nothing but merely an application of the profits which accrued to the assessee-corporation and that the present case was not a case of diversion of income by overriding title as claimed by the assessee. He, accordingly, added the sum of Rs. 3,22,27,078 to the total income of the assessee.
4. Aggrieved by the said addition, the assessee brought the matter by way of appeal before the Commissioner (Appeals), who has deleted the above addition, by observing as under : assessee-corporation and is solely entitled to any dividends declared by the assessee out of its profits. If the shareholders of a company decide that a certain share of the profits realised by the company shall be straightaway credited to them-assuming that such a procedure is admissible under the company law-the share of the profits which the company parts with as a result could be considered as distribution of profits to the shareholders, amounting to an application of the income of the company after it is earned. The position here is somewhat different. The Govt., apart from being the sold shareholder in the assessee-corporation, has its own functions to discharge as Government. The regulation of the national economy to ensure that there is no reckless profitering by private parties on articles in short supply and mopping up such profits for public purposes is a Government function. If Government decided to fix the price of stainless steel imported by the assessee it did so, not in its capacity as a shareholder of the assessee-corporation, but in discharge of its other responsibilities. If it was also decided that any surplus realised on the sale of stainless steel items over and above the landed cost and service charges should be directly credited to the Consolidated Fund of India, the decision was taken in the exercise of the eminent domain of the Govt. for the national interest : it will be noticed that the surplus so credited to the Consolidated Fund of India was used by the Government for distribution of subsidies to encourage exports resulting in the earning of valuable foreign exchange for the country. The assessee-corporation had no choice but to part with such surplus in obedience to the orders of the Govt. and the payment was a necessary condition under which it had to carry on its business. The payment has, therefore, to be considered as expenditure laid out for the purpose of the assessee's business which has to be allowed as a deduction. Further, the deduction can be regarded as a kind of cess levied on the assessee to be used for developing the country's foreign trade and regarded in that manner, it has to be allowed. It cannot be considered an application of income for the simple reason that it has to be paid whether the net result of the assessee's business operations yields a profit or not. In other words, like sales tax, interest on borrowings of other expenses, which have to be incurred irrespective of whether the assessee earns income or not, the payment in question cannot be considered an application of income. The claim based on diversion by overriding title has also merit because the Pricing Committee decides on the selling price before the goods arrive and before the actual landed cost is known for certain and when doing so, it directs that the surplus overlanded cost and service charges shall be paid to the Government.
In a sense, therefore, it can be said that the liability to pay out the surplus came into existence before the sales are effected and formed a prior charge on the sale price itself. It is not necessary to discuss this point further because I have held earlier that the payment of the surplus to the Consolidated Fund of India amounts to a kind of cess paid for the benefit of the trade as a whole and as a condition of the business carried on by the assessee and as such should be allowed as business expenditure.
5. In the appeal before the Tribunal, the departmental representative has urged that on the facts and circumstances of the case the Commissioner (Appeals) erred in directing the deduction of Rs. 3,22,27,078 on account of payment made by the assessee to Central Government out of net surplus on the trading in stainless steel which was rightly disallowed by the ITO. In support of his arguments, the departmental representative took us only through the various decisions cited by the ITO in the assess- merit order but also through the following decisions to urged that the present case is a case of mere application of the profits which accrued to the assessee MMTC ; the present case is not a case of diversion of income by overriding title as claimed by the assessee-CIT v. Dr. P.N. Awasthi  105 ITR 320 (All.), Life Insurance Corporation of India v. CIT  119 ITR 900 (Bom.) and CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd.  127 ITR 467 (Mad.). In this connection, the departmental representative highlighted the facts that the Government of India was allotting diverse market quotas in various fields and these import quotas are allotted not only to public sector undertakings but in the private sector. The fact that the assessee imported the stainless steel under the direction of the Government of India is thus of no consequence more so when the price at which the imported stainless steel was to be sold was fixed by the Pricing Committee appointed by the Central Government in this behalf and at the time of the import, the extent of the profit, if any, was unknown. It was quite possible that the sale of the imported stainless steel may or may not have resulted in any profit. The profit, if any, to be earned was variable.
6. These arguments of the departmental representative are controverted by the learned counsel for the assessee, Mr. O.C. Tandon, who, in support of the order of the Commissioner (Appeals), has relied on the ratio of the following decisions : CIT v. S. Arumugham Pillai  73 ITR 382 (Mad.), CIT v. Travancore Sugars & Chemicals Ltd.  90 ITR 307 (Ker.), CIT v. Tollygunge Club Ltd.  107 ITR 776 (SC) and Udayan Chinubhai v. CIT 111 ITR 584 (Guj.).
7. We have given consideration to the above arguments. Admittedly, the assessee-corporation is fully owned by the Government of India dealing in minerals and metals. It is also well known that the Government of India imports minerals and metals with the help of diverse canalising agencies which are primarily the public undertaking including the assessee-corporation for the actual users of various minerals and metals. These canalising agencies play not only role of business undertakings but also that of a establishing influence in the market in respect of various commodities which are in short supply. In order to effectively control and to prevent either a scarcity or a glut, the prices of various commodities to be so imported are fixed through the agency of the Government in the form of a Pricing Committee. The Pricing Committee at its various meetings, which are held periodically, reviews the prices of various commodites in general and stainless steel in particular which is involved in the present case. After looking through the data furnished by the assessee-corporation in respect of various levies and charges and also looking to the domestic production of the stainless steel and the international market situation, the Pricing Committee fixes the prices for the various gauges of stainless steel.
8. It appears that the Government of India, Ministry of Commerce, took decision in September/October 1975, to allot Rs. 4 crores of foreign exchange in the year 1975-76 for importing of stainless steel of 22 gauge and above for the manufacture of utensils through the assessee-corpora-tion. After import the assessee-corporation was to release the imported stainless steel in question at the rate of Rs. 65,000 per metric tonne for 22 gauge and suitable extra charge (of about Rs. 1,000 per metric tonne) was to be levied for 24 gauge.
Thereafter, the Development Commissioner, Small Scale Industries [DC(SSI)], was entrusted with the work of distribution amongst various States for allocation to invidi-dual units, etc., in consultation with the State Governments and/or the Director of Industries concerned. On the landed cost of the stainless steel which was to consist, of the cost of stainless steel imported plus opening charges of the letter of credit, interest and other handling charges and incidentals, the assessee-corporation was to charge margin of 4 per cent only. The difference between the release price per metric tonne and the landed cost plus the aforesaid assessee's margin of 4 per cent thereon was to be credited by the assessee-corporation to the Consolidated Fund of India so as to facilitate grant of compensatory cash support for certain export products announced by the Government of India, Ministry of Commerce, in September/October 1975. The facts stated hereinafter in this paragraph are clear from the letter of Government of India, Ministry of Commerce, dated 20-10-1975, addressed to DC(SSI), New Delhi, with a copy of the assessee-corporation besides others. The copy of the said letter is at pages 63 and 64 of the paper book. In the endorsement to the assessee-corporation it is stated that: The MMTC may kindly make necessary application to the Ministry of Finance for release of foreign exchange for Rs. 4.0 crores. As already decided, the MMTC will levy a service charge of only 4 per cent on the landed cost of stainless steel imported under the Scheme. This will include L.C. opening charges, interest and other handling charges and incidentals. The MMTC will also be allowed interest, in addition if the goods are not lifted by the allottees within a period of 21 days. The price of imported stainless steel to be released to the allottees would be Rs. 65,000 per M. tonne for 22 gauge and suitable extra charges (of about Rs. 1,000 per M. tonne) would be levied for 24 gauge.
9. After the receipt of the said letter, the assessee took the steps for the import of requisite quantity of stainless steel sheets for the manufacture of utensils. Further, to give effect to the above direction of the Government of India in the aforesaid letter dated 20-10-1975, the assessee-corporation wrote confidential letters to its Finance and Accounts Manager at Bombay/ Calcutta/Madras dated 21-2-1976 at page 2 of the paper book. Therein, after reference to the decision of the Government of India for import of the aforesaid stainless steel sheets, the letter has made it clear that the margin allowed to the MMTC was only 4 per cent of the landed cost of the stainless steel which was to include c.i f. value plus total import duty (custom duty plus auxiliary duty) plus port charges and interest if goods are not lifted by the allottee within a period of 21 days which was to- be collected from the allottees. Thereafter, the letter states that in view of the position explained above, we will be retaining 4 per cent on the landed cost as our margin and transferring the difference between the sale price and the landed cost reduced by our margin to the Government. The amount payable to the Government will thus be worked out on the quantities of stainless steel from time to time. The procedure is described in subsequent paragraphs as under : 1. MMTC is entitled to & service charge of 4 per cent only of the landed cost. Since MMTC's service charges of 4 per cent are to cover the incidental expenses, such as L/C opening charges, bank charges, interest for the voyage period, transportation charges, handling charges and other incidentals like godown insurance, godown rent, etc., the landed cost for the purpose of calculating MMTC's service charges will comprise of c.i.f value, total import duty and port charges.
2. The profit transferable to the Government, after adjustment of MMTC's service charges of 4 per cent of the landed cost, will be transferred by the Regional Offices on a monthly basis to Head Office by debit to 'Purchase' for payment to the Government. The Regional Offices will also forward statement of account in duplicate duly audited by internal audit along with the transfer memo latest by 15th of the following month to which the same relates, in order to facilitate preparation of account statement and certification by internal audit a subsidiary register incorporating all transactions of these imports and sales would be maintained.
3. Since the amount payable to the Government will be reflected in the accounts as 'Purchase' a suitable financial note to the accounts will be appended as in the case of stainless steel/jute barter deal.
The note in question will be given at Head Office and may even be given in the regional balance sheet. However, the total amount debited and transferred to Head Office on this account may be indicated in your covering note to the accounts.
4. Copies of the statement of accounts will also be sent by the Regional Offices to GM (Steel) and CFM (Steel) on a monthly basis.
10. On the above facts, the short point for consideration is as to whether the profit, which has been credited by the assessee-corporation to the Consolidated Fund of India, represented merely an application of profit which accrued to the assessee-corporation or the present case is truly a case of diversion of income by overriding title as claimed by the assessee-corporation. At the bar both the sides have cited catena of cases including the following which appeared in the assessment order and the decisions referred to in the arguments of the parties before|the Tribunal-CIT v. Thakar Das Bhargava  40 ITR 301 (SC), Pondicherry Railway Co. Ltd. v. CIT 5 ITC 363 (PC), P.C. Mullick v. CIT  6 ITR 206 (PC), CIT v. Sitaldas Tirathdas  41 ITR 367 (SC) and Motilal Chhadami Lal Jain v. CIT  106 ITR 909 (All.).
11. On going through these decisions cited by the ITO as also by the parties before us, there is no quarrel regarding the ratio of these decisions. They make it clear that the true test to be considered is whether the amount sought to be deducted in truth never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact.
There is a difference between the amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee.
Where by the obligation, income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely obligation to pay another a portion of one's own income which has been received and is since applied. The first is a case in which the income reaches the assessee who even if he were to collect it does show not as a part of his income, but for on behalf of the person to whom it is payable-Sitaldas (supra). To say, in other words, to earn 'income' there should be a source. If such a source has been provided not by the earner of the income but by others with a contemporaneous stipulation that the source should be used to earn the profits and such earned profits should be shared between the earner and the persons responsible to provide the source, then there is a conceivable nexus between the source and the income, as a result of which the stipulations attendant upon the earning of the profits and the resultant sharing thereof become enforceable in the eye of law including taxing statutes resulting in the diversion of the income earned before it reaches the assessee-S. Arumugham Pillai (supra).
12. Applying the above test to the facts of the present case as brought out in the above paragraphs 8 and 9, the assessee-corporation, as is clear from the said facts, should not have imported the stainless steel unless so permitted by the Government of India, Ministry of Commerce, vide their letter dated 20-10-1975 at pages 63 and 64 of the paper book filed by the assessee. As such the source for making the profit has been provided not by the assessee-corporation but by the Government of India, Ministry of Commerce, with a contemporaneous stipulation that the source of imported stainless steel should be used by the assessee-corporation to earn the profit and that such earned profits should be shared between the assessee-corporation and the Government of India which was responsible to provide the source, in the manner indicated in the said letter dated 20-10-1975. That being the position, the amount of the profit which has been deposited every month by the assessee-corporation into the Consolidated Fund of India in accordance with the aforesaid contemporaneous stipulation in the said letter dated 20-10-1975 cannot be termed to be the application of the portion of the income to discharge the obligation. The present case is a case of the payment of the sum of Rs. 3,22,27,078 by the in the Consolidated Fund of India by virtue of the diversion of the income by overriding title inasmuch as there is a charge on the profit making apparatus for the payment of the said amount. The said amount cannot, therefore, be added to the total income of the assessee as its income as held by the ITO.The order of the Commissioner (Appeals) in this behalf is, therefore, upheld.13. In the result, the appeal by the revenue fails and is hereby dismissed.