B.S. Dhillon, J.
1. This order will dispose of Income-tax Reference No. 11 of 1975 (Punjab State Co-op. Supply and Marketing Federation Ltd. v. Commissioner of Income-tax), Income-tax Reference No. 92 (Punjab State Co-op. Supply & Marketing Federation v. Commissioner of Income-tax) and Income-tax Reference No. 93 of 1978 (Commissioner of Income-tax v. Punjab State Co-op. Supply & Marketing Federation).
2. Income-tax Reference No. 11 of 1975 relates to the assessment year 1963-64, whereas Income-tax References Nos. 92 and 93 of 1978 relates to the assessment year 1965-66.
3. The brief facts giving rise to the references are that the assessee is a co-operative society registered under the Punjab Co-operative Societies Act, 1954 (since repealed) and having its head office at Chandigarh. It is engaged in various activities the income from some of which is taxable while from some others the income is not taxable under the Income-tax Act, 1961 (hereinafter referred to as 'the Act').
4. By an agreement dated 'nil' between the assessee and the Governor of Punjab commencing from April 1, 1960, and effective for five years, the assessee was appointed the sole distributor of fertilizers within the Punjab State. The said agreement is in the following terms:
'This agreement entered into between the Punjab State Co-operative Supply and Marketing Federation Limited, Chandigarh, a body corporate registered under the Co-operative Societies Act, 1954, and having its head office at Chandigarh (hereinafter referred to as the Federation) on the onepart and (2) Governor of Punjab (hereinafter referred to as the Governor) of the other part.
Whereas the Govt. at the request of the Federation have agreed to appoint the Federation as the sole distributors of fertilizers, including such mixtures and manures as the Registrar, Co-operative Societies, Punjab, may decide to distribute (hereinafter referred to as 'fertilizers') within the Punjab State and the Federation has agreed to distribute the fertilizers in the manner and subject to the terms and conditions hereinafter appearing.
Now this agreement witnesseth and the parties hereto hereby agree as follows:
1. This agreement shall remain in force for five years commencing from 1st April, 1960. The Federation shall take delivery of the fertilizers on the advice of Registrar, Co-operative Societies, Punjab (hereinafter called the Registrar) or any officer authorised by him.
2. The Federation shall sell the fertilizers at such places, for such crops and subject to such conditions as may from time to time be specified in writing by the Registrar or by any officers authorised by him.
3. The Federation shall establish/maintain sale depots for the sale of fertilizers at such places situated within the Punjab as may be specified by the Registrar.
4. The Federation shall store the fertilizers at such places and in such manner and quantity as may from time to time be determined by the Registrar.
5. (a) For the sale of nitrogenous fertilizers the Federation shall not charge a price exceeding the pool price plus the distribution margin as laid down in the Schedule to this agreement.
(b) In case of cash sales of nitrogenous fertilizers, the Federation shall credit the amount of pool price in a Govt. Treasury in accordance with the provisions of Clause 14.
The amount specified in the break-up of distribution margin against the head 'Suspense Account' shall be deposited in the account opened by the Federation in accordance with the provisions of Clause 7.
Explanation.--In this Clause the expression 'pool price' shall be considered to be the price which may be fixed from time to time by the Government of India for the purposes of supplies of different kinds of fertilizers F.O.R. at various rail heads in the State of Punjab.
6. (a) For the sale of fertilizers, other than nitrogenous fertilizers, the Federation shall not charge a price exceeding the pool price plus the distribution margin, as laid down in the Schedule to the agreement and plus such amounts as the Govt. may, from time to time, allow for transportand other incidental charges. The break-up of the distribution margin will be the same as in the case of nitrogenous fertilizers.
(b) In case of cash sales of fertilizers other than nitrogenous fertilizers the Federation shall deposit the amount of pool price in a Government Treasury in accordance with the provision of Clause 14 and deposit the balance in 'suspense account' opened in accordance with the provisions of Clause 7 after deducting the amounts admissible to it and its sub-agents in accordance with the break-up of distribution margin given in the Schedule to this agreement.
Explanation.--In this clause as well as in Clause 7 the expression 'pool price' shall be considered to be the price which may be fixed from time to time by the Government of India for ex-factory supplies of fertilizers.
The Federation will open a suspense account with the Punjab State Co-operative Bank Ltd. to which the margin specified against the entry relating to 'suspense account' in the break-up of distribution margin as well as the amount in excess of the pool price and the distribution margin will be credited by the Federation and no other amount will be credited by the Federation to this account. No expenditure will be incurred by the Federation against this account without the prior approval in writing of the Registrar who may issue directions in regard to the manner in which the amount in this account is to be utilized.
8. It will be the liability of the Federation to meet interest charges and the cost of the staff employed in the office of Registrar, and other unforeseen expenses to run the scheme. The Registrar will permit the utilization of the amounts lying in suspense account for the purpose, but in case the amount in the suspense account is not sufficient to cover all these charges then the Federation will meet these charges from its own resources.
9. The distribution margin as well as the break-up thereof may be reviewed by the Registrar and when necessary under intimation to the Federation but no variation in the commission admissible to the Federation and/or its sub-agents shall be made by the Registrar save after consultation with the Federation.
10. On all sales of fertilizers against taccavi loans, the Govt. shall pay to the Federation its distribution margin plus such amount as may be due to it under Clause 6 on account of transport and other incidental charges. The Federation shall, after retaining the amount due to its sub-agents in accordance with the break-up given in the Schedule, deposit the balance in suspense account opened under Clause 7.
11(a). The Federation shall maintain at its headquarters complete and distinct accounts for each type of fertilizers received and distributed by it. Separate accounts will also be maintained for cash and credit salesin respect of each type of fertilizers apart from maintaining such record as is necessary to claim credit on taccavi sales.
(b) The Federation shall cause to be maintained appropriate accounts showing accurately all transactions on fertilizers which take place within the area of operation of sale depot and in particular;
(i) the opening stock on each day ;
(ii) the quantity received on each day and the name of the consignor from whom received;
(iii) the quantities sold or delivered on each day showing the places of destination and names of the consignees ;
(iv) the closing stock on each day;
(v) value of stock sold separately for cash and credit sales.
12. The Federation shall submit to the Registrar such returns and information as may be called for by him from time to time in connection with the stocks, the sales and supplies of fertilizers, and the operation of the fertilizer distribution scheme in the State.
13. The Federation shall be responsible for any loss or damage caused to fertilizers during storage, transport or any other operation which takes place after the Federation has taken delivery of the fertilizers in question.
14. The Federation shall store and sell the fertilizers on behalf of the Government and deposit out of cash sale proceeds the pool price thereof as defined in Clause 5 or Clause 6, as the case may be, into the Govt. Treasury not later than two months succeeding the month to which the sales relate, failing which an interest at the rate of 6% per annum will be charged from the Federation for the sums not deposited within the aforesaid period from the 1st of the month to which the sales relate to the date of actual deposit.
15. The Federation will credit the amount of pool price of fertilizers as denned in Clause 5 or Clause 6, as the case may be, according to the monthly sale report, irrespective of whether or not it has received the sale proceeds from any of the sub-agents.
16. The Federation shall give all facilities at all reasonable times to any officer authorised by the Registrar for the inspection of its accounts and stock wheresoever these may be kept.
17. The Federation shall take such measures for propagating the use of fertilizers in the State, as may be suggested by the Registrar. The Registrar may in his discretion reimburse the amount incurred by the Federation on publicity from the suspense account.
18. The agreement may be terminated by either party on giving six months' notice in writing to the other.
19. For the earnest performance of its obligation under the scheme for distribution of fertilizers in the State, the Federation shall furnish such security not exceeding rupees three lakhs as may be required by the Registrar.
20. Notwithstanding anything contained in Clauses 1 and 18 of this agreement if the Federation including any of its officials or sub-agents who may reasonably be presumed to have acted on its behalf, be guilty of breach or non-observance of any of the provisions or conditions herein contained and to be observed by the Federation the Registrar shall without prejudice to the other right and remedies available to the Governor, be competent to terminate this agreement without notice and/or to forfeit the whole or a part of the security. The Federation shall also be bound to pay to the Govt. all losses, costs, damages and expenses which Govt. may have incurred or sustained by reason of the breach or non-observance by the Federation of the conditions herein contained and to be observed by the Federation.
21. The Registrar shall have the power to forbid the sale of fertilizer at any sale depot which in his opinion does not function properly.
22. All disputes and differences arising out of or in any way touching or concerning this agreement whatsoever shall be referred to the solearbitration of the Financial Commissioner (Development), Punjab, actingas such at the time of reference. It will be no objection to such appointment that the arbitrator so appointed is a Govt. servant that he had todeal with the matters to which this agreement relates and that in thecourse of his duties as such Govt. servant he had expressed views on all orany of the matters in dispute or difference. The award of such arbitratorshall be final and binding on the parties to this agreement.'
5. The income of the assessee as per its profit and loss account amounted to Rs. 1,18,596 for the assessment year 1963-64. The ITO, vide his order dated March 5, 1968, after allowing proportionate expenses, determined a sum of Rs. 61,631 as net profit taxable.
6. The Commissioner of Income-tax examined the record of the case for the assessment year 1963-64, and found that income amounting to Rs. 1,23,824 earned by the assessee by way of commission as a distributing agent of the Punjab Govt. for the supply of fertilizers and insecticides to its members had been wrongly exempted under Section 81(i)(d). The ITO's order dated March 5, 1968, was, therefore, considered erroneous and prejudicial to the interests of the revenue. A notice under Section 263 of the Act dated November 7, 1969, was issued asking the assessee to show cause why the exemption wrongly granted under Section 81(i)(d) for the income amounting to Rs. 1,23,824 should not be withdrawn. It was pleaded by the assessee that the amount in question was earned by the assessees from the businesscarried on by it by making purchase of fertilizers intended for agriculture and supplying the same to its members. Reliance was placed by the assessee on various Clauses of the agreement. The Commissioner did not accept the assessee's contentions. He held that the assessee was only a distributing agent of fertilizers procured by the Punjab Govt. It was found by him that the ownership over the fertilizers purchased at no time vested in the assessee and when the assessee took over the fertilizers for distribution its position was equivalent to that of a bailee. It was, therefore, held that the exemption under Section 81(i)(d) was not available to the assessee. However, the contention of the assessee that the income from supply of fertilizers amounting to Rs. 87,750 (and not Rs. 1,23,824) was accepted. The Commissioner passed an order under Section 263 on February 27, 1970, enhancing the assessment framed by the ITO by Rs. 87,750. It was further held that no proportionate expenditure with regard to this, item of profit was allowable.
7. Being aggrieved by the order of the Commissioner, the assessee filed an appeal before the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal). It was noted by the Tribunal that the true nature of the transaction was to be gathered from the agreement and subsequent conduct of the parties and not from the prior scheme and intentions. So far as the accounts are concerned, it was held that the assessee maintained elaborate registers. The Tribunal had, for instance, seen the following registers:
(a) Indent Register.
(b) Consignment Register.
(c) Stock Register.
(d) Sale and stock Register.
(e) Distribution Margin Register (where credit was taken @ Rs. 30 per ton).
(f) Pool Price Deposit Register (this was a quantity plus finance register).
(g) Agent's Register.
8. The Tribunal further noticed that despite the formidable array of registers maintained by the assessee, there was no trading account as such in the financial books. The Tribunal observed that the R. R. would form a link in the chain of events and would certainly be an important material, but it would not be a decisive factor. After elaborate discussion of various clauses of the agreement, the Tribunal found the following facts in favour and against the assessee :
'A. In favour of the assessee :
(i) The assessee was the consignee.
(ii) Interest ran from the date of the consignment.
The first suggests 'delivery' and the second suggests a relationship between debtor and the creditor.'
'B. Against the assesses:
(i) The commission was fixed and there was no element of risk whatsoever in the transaction. The essential element of trade was lacking.
(ii) There were no trading accounts in the books of the Federation,
(iii) There were severe restrictions on the terms of trade.
(iv) Even the surplus of Rs. 30 had to be deposited with the bank and spent in a certain pre-determined way under the instructions of the Registrar of Co-operative Societies, Punjab.
(v) Clause 14 of the agreement.'
9. The Tribunal placed considerable reliance on Clause 14 of the agreement and held that the said clause supported the theory that the assessee's capacity was only that of an agent for and on behalf of the State of Punjab. The assessee had referred us to a letter dated January 29, 1970, from the Registrar, Co-operative Societies, Punjab, which gave some clarifications in the interpretation of the agreement and in terms of actual operational arrangements. The Tribunal did not advert to this letter specifically. The Tribunal recorded a finding that the profit made on the distribution of fertilizers was not exempt under Section 81(i)(d). The Tribunal upheld the order of the Commissioner, vide its order dated July 27, 1971.
10. The assessee made a reference application claiming five questions of law for reference to this court for its opinion. The revenue also prayed for the reference of one question of law. The Tribunal after considering the contentions of both the parties has referred the following questions of law to this court for its opinion:
'(1) Whether, on the facts and in the circumstances of the case, and keeping in view the agreement dated April 1, 1960, the Tribunal was right in law in holding that the transaction in fertilizers was a transaction of agency and not of purchase and sale and that the amount of Rs. 87,750 was not exempt under Section 81(i)(d) of the Income-tax Act, 1961?
(2) Whether the finding of the Tribunal that the transaction in fertilizers was a transaction of agency and not of purchase and sale is vitiated by reason of its being based partly on exclusion of relevant evidence and partly on inadmissible material, surmises and conjectures ?'
11. As regards Income-tax References Nos. 92 and 93 of 1978, which pertain to the assessment year 1965-66, the additional fact recorded in the statement of the case is that the Govt. of Punjab evolved a scheme for the procurement and distribution of chemical fertilizers in the State. A copy of this scheme was forwarded by the Registrar, Co-operative Societies,Punjab, Jullundur, to all the District Assistant Registrars, Co-operative Societies, in the State, vide his letter dated August 16, 1960. In pursuance of this scheme, an agreement dated April 1, 1960, the contents of which have already been reproduced in the earlier part of the judgment, was entered into between the assessee and the State of Punjab. A revised scheme for the distribution of fertilizers was drawn up by the Punjab Govt., copy of which was endorsed to the assessee, vide endorsement dated April 10, 1962. With effect from April 1, 1964, another scheme was drawn up and circulated by the Registrar, Co-operative Societies, Punjab, vide his letter dated April 28, 1964.
12. For the assessment year 1965-66, the assessee filed a return of income on November 8, 1965, declaring income at Rs. 58,115. A revised return was also filed. In the revised return, a sum of Rs. 70,738 on account of fertilizer commission was shown in Part IV of the return and the said amount was claimed to be non-taxable under Section 81(i)(d). The ITO held that the assessee was only a distributing agent of the Govt. of Punjab in respect of fertilizers and the sum of Rs. 70,738 received as fertilizer commission was its income. The assessee's claim for allowance of appropriate expenses against fertilizer commission was not accepted by the ITO after noticing that in terms of the agreement with the Govt. of Punjab, the assessee was required to open the suspense account with the Punjab State Co-operative Bank Ltd. and any expenses on account of interest, cost of staff employed in the office of the Registrar and any other unforeseen expenses were to be met by the assessee from the amount lying in the suspense account after getting the approval of the Registrar, Co-operative Societies. After allowing certain other allowances, the ITO levied tax on the net taxable income of Rs. 1,55,125.
13. The assessee filed an appeal to the AAC and claimed that the sum of Rs. 70,733 was exempt under Section 81(i)(d) on the ground that the said income was earned from the purchase of fertilizers and supplied to its members. The assessee also claimed that instead of proportionate expenses, it was entitled to the entire expenses being admissible against taxable income. The AAC rejected the contentions of the assessee and, after referring to the terms of the scheme and that of the agreement referred to supra, held that the assessee was only a distributing agent of the Govt. of Punjab. It was, therefore, held that the assessee was not entitled to the benefit under Section 81(i)(d) and the sum of Rs. 70,778 received as commission by the assessee from the distribution of fertilizers was not exempt.
14. During the course of appellate proceedings before him, the AAC noticed an accretion of Rs. 11,78,498 in R.C.S. suspense account. This amount represented part of the commission on sale of fertilizers realised by the assessee. He, therefore, gave a notice of enhancement and askedthe assessee to show cause why this amount should not be treated as its income. It was contended on behalf of the assessee that from this account, the assessee had to meet interest charges and the cost of the staff employed in the office of the Registrar and unforeseen expenses. It was further contended that no expenditure could be incurred from this account unless the approval of the Registrar was obtained, and, as such, it was an account not exigible to tax. The AAC, however, held that the amount was part of the distribution commission which had been deposited in the R.C.S. suspense account and the mere fact that the moneys out of that sum could be spent only with the approval of the Registrar, did not mean that the said credit in that account was not of a taxable nature. It was, therefore, held that a sum of Rs. 11,78,498 credited to the R.C.S. suspense account was the assessee's income and consequently the AAC enhanced the assessment by that amount.
15. In second appeal filed by the assessee before the Tribunal, the assessee, in brief, contended that both the sum of Rs. 70,738 and Rs. 11,78,498 were exempt under Section 81(i)(d). However this contention did not find favour with the Tribunal and the Tribunal held that the agreement was one of agency and the assessee did not purchase fertilizers on its own and, therefore, the exemption under Section 81(i)(d) was not available to the assessee. Regarding the expenses, the Tribunal accepted the contention of the assessee and held that no apportionment of the expenses should be done and the entire expenditure claimed should be allowed against the income determined. The assessee made a reference application against the first portion of the decision of the Tribunal holding that exemption under Section 81(i)(d) was not available to the assessee. The revenue filed a reference application regarding the second portion of the order of the Tribunal accepting the contention of the assessee that no apportionment of the expenses should be done and the entire expenses claimed should be allowed against the income determined.
16. On the quantum of Rs. 70,738 there was no dispute. However, the calculation of the sum of Rs. 11,78,498 was found to be not an exact calculation. This figure had been arrived at after reducing the opening balance of Rs. 9,21,134 from the closing balance of Rs. 20,99,632. The Tribunal found that in terms of the agreement itself, the assessee had to incur expenditure from this account on interest, on the staff of the Registrar's office and other incidental charges. The actual expenditure had not been worked out at any stage by the authorities below. The Tribunal noted that during the course of the assessment for the year 1966-67, there was some remand report called by the AAC from the ITO and certain figures had been taken into consideration. The Tribunal, therefore, while holding that the accretion in the suspense account was in the nature ofincome and, therefore, liable to tax, directed the ITO that the actual income should be worked out after ascertaining the expenditure that the assessee had to incur against the said amount, and that in doing so, the assessee should be given reasonable opportunity of being heard and of leading the evidence regarding the expenditure.
17. In the opinion of the Tribunal, the following question of law arises in so far as the reference has been made by the assessee is concerned:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the agreement dated April 1, 1960, between the assessee and the Government of Punjab was one of agency and the assessee did not purchase fertilizers on its own account and that the sum of Rs. 12,49,236 (Rs. 70,738 + Rs. 11,78,498) was not exempt under Section 81(i)(d) of the Income-tax Act, 1961 ?'
18. On the reference application filed by the Commissioner, the Tribunal was of the opinion that the following question of law arises:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that no apportionment of the expenses should be done and the entire expenses claimed by the assessee should be allowed against the income determined in this case ?'
19. Both these questions have been referred to this court for its opinion.
20. The provisions of Section 81 of the Act as they stood during the assessment years under reference in these references were as follows :
'81. Income of co-operative societies.--Income-tax shall not be payable by a co-operative society-
(i) in respect of the profits and gains of business carried on by it, if it is-
(a) a society engaged in carrying on the business of banking or providing credit facilities to its members; or
(b) a society engaged in a cottage industry; or
(c) a society engaged in the marketing of the agricultural produce of its members ; or
(d) a society engaged in the purchase of agricultural implements, seeds, livestock, or other articles intended for agriculture for the purpose of supplying them to its members; or
(e) a society engaged in the processing, without the aid of power, of the agricultural produce of its members; or
(f) a primary society engaged in supplying milk raised by its members to a federal milk co-operative society:
Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothingcontained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees ;
(ii) in respect of so much of the profits and gains of business carried on by it as does not exceed fifteen thousand rupees, if it is a co-operative society other than a co-operative society referred to in Clause (i);
(iii) in respect of any interest and dividends derived from its investments with any other co-operative society;
(iv) in respect of any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities ;
(v) in respect of any interest on securities chargeable under Section 18 or any income from property chargeable under Section 22, where the total income of the co-operative society does not exceed twenty thousand rupees and the society is not a housing society or an urban consu-mer's society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power:
Provided that nothing contained in this section shall apply to a cooperative society carrying on insurance business in respect of the profits and gains of that business computed in accordance with section 44.
Explanation.--For the purposes of this section, 'an urban consumers' co-operative society' means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.'
21. With a view to answer question No. 1 referred to us in both the references, we are called upon to determine whether, in the facts and circumstances of the case, keeping in view the terms of the agreement' entered into between the assessee and the Govt. of Punjab, which agreement has been reproduced in the earlier part of the judgment, the transactions amounted to purchase by the assessee from the Punjab Govt. or whether the assessee was acting as agent of the Punjab Govt. In order to decide this question, the most relevant factor to be taken into consideration is the agreement. It is well settled that while interpreting the terms of the agreement, the court has to look to the substance rather than the form of it. The mere fact that the words 'agent' or 'agency' or 'sole distributor' or the words 'buyers or sellers' are used to describe the status of the parties concerned, is not sufficient to lead to the irresistible inference that the parties in fact intended that such status would be confirmed. Thus, the mere formal description of a person as an 'agent' or 'sole distributor' or 'buyer' is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent.
22. It may also be noticed that the concept of a sale has undergone a revolutionary change, having regard to complexities of the modern times and the expanding needs of the society, and thus bringing any transaction within the fold of a sale will not be barred even though the seller may, by virtue of an agreement, impose a number of restrictions on the buyer, e.g., fixation of price, maintenance of accounts in a particular manner and submission thereof, limiting the area of sale providing for the margin of profit, and consequently the supplying source exercising control over the selling or distributing agency. However, these restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction may, in a given case, still be a sale and subject to all the incidents of a sale. It is well settled that a contract of agency differs essentially from a contract of sale, inasmuch as an agent after taking delivery of the property, does not sell it as his own property, but sells the same as the property of the principal, and under his instructions and directions. On this principle, it follows that since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. In other words, it has to be inferred from the terms and conditions of the agreement whether the transactions concerned amounted to transfer of goods or not. If the title in goods passes, in that case, the transaction in question has to be termed a sale. However, it is always open to the buyer to purchase goods for a limited purpose and, within the field of that limited purpose, the buyer has absolute title to the property once it is delivered to him by the seller. It is also settled that the payment of commission by itself is not conclusive to show that the agreement was one of agency. As already observed, since the concept of sale has undergone a revolutionary change in modern times, most of the agreements executed are likely to contain certain ingredients which may lead to the inference that the relationship between the parties is that of principal and agent, and certain other terms and conditions in the agreement which, on the other hand, point out salient ingredients from which a reasonable inference may be drawn that the transactions in question amounted to a sale. In such cases, the work of the courts becomes more difficult and the conclusion has to be arrived at after weighing the essential features of the agreement and after balancing the positive and negative factors which emerge out of the agreement. In the background of the principles enunciated above, it has to be seen as to what is the sum total of the various clauses of the agreement and the facts so found by the Tribunal. As pointed out earlier, in a case of this nature, no single factor mentioned in the agreement would be conclusive.
23. The agreement in question has been reproduced in the earlier part of the judgment in extenso. In our considered view, the net result whichfollows from the combined reading of the clauses of the agreement afterbalancing all the relevant terms and conditions, is that the agreement inquestion is an agreement between a principal and an agent. The overallreading of the agreement shows that the transactions as reflected in theagreement, cannot be held to be sale and purchase. With a view to find- ing out whether the transactions are sale and purchase, it is fundamentalto determine as to whether the title in the goods passed to the assessee ornot. After reading the terms of the agreement we are of the consideredopinion that at no stage the title to the goods passed to the assessee. In viewof Clause 14 of the agreement, it has clearly been provided that the assesseeshall store and sell the fertilizers on behalf of the Government. The assessee is required under this clause to deposit out of the cash sale proceeds,the pool price of the fertilizers as defined in Clause 5 or cl, 6 of the agreement,into the Govt. Treasury, not later than two months succeeding the monthto which the sales relate, failing which an interest at the rate of 6% perannum will be charged from the assessee for the sums not deposited withinthe aforesaid period from the 1st of the month of the sales, to the date ofactual deposit. No other clause has been brought to our notice in theagreement providing for the payment of the price of the fertilizers supplied to the assessee. It would thus be seen that qua the fertilizers, whichremained with the assessee as unsold, the Government continued to be itsowner till the stocks were lying with the assessee. The moment the assessee sold the fertilizers within two months thereafter the assessee wasenjoined upon to deposit the cash sale price into the Govt. Treasury andIf the same was not deposited within the stipulated time, the assessee wasliable to pay interest at the rate of 6% per annum on the amount whichhad become due. This is the most salient feature of the agreement. Itwould thus be seen that qua the fertilizers which is sold, the assessee hasto deposit the cash price in the Govt. Treasury within two months thereafter and, if the assessee fails to do that, he is liable to pay interest asspecified and as regards the fertilizer, which remained in the godown of theassessee as unsold, no sale price is to be paid at any point of time. The payment of interest after two months is again a clause reflecting the relationship that the agent will pay interest to the principal as the payment having become due from him and having not been paid within the stipulatedperiod, the principal is entitled to charge interest at the rate of 6% on theamount which had become due. Clause 15 of the agreement which enjoinsupon the assessee to credit the amount of pool price of fertilizers irrespective of whether or not the assessee had received the sale proceeds from anyof the sub-agents, is again not a provision which entitles us to draw aninference that the transactions in the agreement result in a sale and purchase. As is clear from the agreement, the assessee who was the agent ofthe Government, had authority to appoint a sub-agent. The provisions that the assessee will be liable to pay the pool price irrespective of the fact whether it received the sale proceeds from its sub-agents, is not subversive to the terms of the agency. As regards Clause 20, it stipulated that the assessee shall be liable to pay all losses, costs, damages and expenses which the Government may have incurred by reason of the breach or non-observance by the assessee of the conditions contained in the agreement, and this clause also nowhere entitles us to draw an inference that the transactions under the agreement were of sale and purchase.
24. It may further be observed that in Clauses 9, 10, 15 and 20 of the agreement, the words 'sub-agents' have been used. The interpretation of the said clauses does go to suggest that the assessee was the agent, who could have sub-agents under him. Clause 1 of the agreement makes it mandatory that the delivery of the fertilizers shall be on the advice of the Registrar. Clause 2 enjoins upon the assessee to sell the fertilisers at such places, for such crops and subject to such conditions as may from time to time be specified in writing by the Registrar or by any officer authorised by him. Under Clause 3 the assessee is enjoined upon to establish/maintain sale depots for the sale of fertilizers at such places situated within the Punjab as may be specified by the Registrar. Under Clause 4, the assessee shall store the fertilizers at such places and in such manner and quantity as may from time to time be determined by the Registrar. Under Clauses 5 and 6 the assessee is enjoined upon not to accept the price exceeding the pool price plus the distribution margin as laid down in these rules. Under clause 7, the assessee is enjoined upon to open a suspense account with the Punjab State Co-operative Bank Ltd. to which the margin specified against the entry relating to the 'suspense account' in the break-up of distribution margin, as well as the amount in excess of the pool price, and the distribution margin will be credited by the assessee. No expenditure will be incurred by the assessee against this account without the prior approval in writing of the Registrar. Under Clause 8, the assessee is enjoined upon to meet the interest charges and the cost of the staff employed in the office of the Registrar and other unforeseen expenses to run the scheme from the suspense account and if the suspense account is not sufficient to cover all these charges then the assessee will meet these charges from its own resources. All these clauses put certain restrictions on the assessee and the entire control regarding all the matters dealt with, rests with the Registrar or his nominee. As regards the meeting of the deficit in the suspense account, if the assessee undertook as an agent to pay something from the money received by him as agent, there is absolutely no bar in law. In Clause 9, a variation in the commission, admissible to the assessee and/or its sub-agents, has to be made by the Registrar in consultation withthe assessee. Clause 10 deals with the sale of fertilizer against taccavi loans. Clause 11 enjoins upon the assessee to maintain complete accounts and to maintain certain registers specified therein. Under clause 12, the assessee shall submit to the Registrar such returns and information as may be called for by him from time to time. Under clause 13, the assessee is responsible for any loss or damage caused to the fertilizers during storage, transport or any other operation which takes place after the assessee has taken the delivery of the fertilizers in question. This clause in no way runs counter to the relationship of principal and agent. This clause in fact reflects the primary responsibility of a bailee of goods. Clause 16 enjoins upon the assessee to give all facilities at all reasonable times to any officer authorised by the Registrar for the inspection of accounts and stock, wheresoever these may be kept. Under clause 17, the assessee is enjoined upon to take such measures for propagating the use of fertilizers as may be suggested by the Registrar. Under clause 21, the Registrar has the power to forbid the sale of fertilizer at any sale depot, which, in his opinion, does not function properly. All the above-mentioned clauses are clauses which put restrictions on the assessee and control in the Registrar. It is no doubt true that in an agreement for sale and purchase, certain restrictions may also exist, but as pointed out earlier, the salient features of the agreement go to show that this agreement is in fact an agreement between the principal and agent and not between a seller and buyer. Under clause 22, all disputes arising out of the agreement are referable to the sole arbitration of the Financial Commissioner (Development), Punjab. Clauses 13 and 14 have already been dealt with in the earlier part of this judgment. The fact that the assessee received the goods as consignee, is again a neutral factor. The liability of the assessee to pay interest from the date of consignment is again a matter of contract between the parties. These factors do not, in any manner, bring out the relationship of buyer and seller. From what has been stated above, in our considered opinion, the Tribunal was right in coming to the conclusion that the relationship of the assessee under the agreement is that of an agent with a principal and not that of a purchaser with a seller.
25. Shri Dastur, the learned counsel for the assessee, places reliance on the decision of their Lordships of the Supreme Court in Bhopal Sugar Industries Ltd. v. Sales Tax Officer  40 STC 42. While coming to the conclusion that the relationship of the assessee in this case is that of an agent, we have kept in view the principles laid down by their Lordships of the Supreme Court in this authority and on the touchstone of the said principles, we have come to the findings so recorded.
26. Shri Dastur relies on the decisions in (1) Daruvala Bros. (P.) Ltd. v. CIT : 80ITR213(Bom) ; (2) Radha Prasad Sah v. State of Bihar : 1977(25)BLJR1 ; (3) Ramchandra Rathore and Bros. v. Commr. of S.T. ; (4) Commr. of S.T. v. Jivan Das and (5) Dy. Commr. of Agrl. IT & Sr v. Alwaye Agencies , with a view to highlight certain principles enunciated in these decisions, which may enable the court to come to the conclusion whether the relationship between the parties in an agreement is that of sale or purchase or not. All these authorities are decided on the facts and circumstances of each case.
27. For the reasons recorded above, question No. 1 in I.T.R. No. 11 of 1975 is answered in the affirmative, i.e., against the assessee and in favour of the revenue.
28. As regards question No. 1 in I.T.Rs. Nos. 92 and 93 of 1978, the first part of this question is concluded by the finding recorded in connection with question No. 1 in I.T.R. No. 11 of 1975. As regards the second part of this question regarding a sum of Rs. 12,49,236, in view of Clause 8 of the agreement, if the money in the suspense account fell deficient to meet the interest charges and cost of the staff employed in the office of the Registrar and other unforeseen expenses, the assessee is enjoined upon to meet these charges from its own-resources. This would also mean that if there is any excess which remains in the suspense account after meeting all the liabilities and after the agreement came to an end, the said amount shall belong to the assessee and in that sense it will be the income of the assessee when it becomes due. As is clear from the various clauses of the agreement, the suspense account is a running account and the assessee is not entitled to draw a single penny out of the same except with the permission of the Registrar. The agreement specifies the purpose for which the money lying in the suspense account can be utilised. Since the assessee is enjoined upon to make good the deficiency in the suspense account, if it falls short of meeting the stipulated expenses, it goes without saying that after the agency is terminated, the amount, if any, in the suspense account, shall vest in the assessee. That stage will only reach when the agreement in question comes to an end, and all the liabilities, which were to be met out of the suspense account under the agreement, have been fully met with. At this stage, we may also point out a letter dated 29th January, 1970, annex. 'H', addressed by the Registrar to the managing director of the assessee-society, wherein it was clearly mentioned that the residual amount after meeting all the liabilities, if any, remained with the assessee as their ultimate fund. The contents of this letter are a necessary corollary from the various terms of the agreement. We are, therefore, inclined to hold that the Tribunal was right in coming to the conclusion that the amount in the suspense account, after the agreement came to anend, became the income of the assessee. The Tribunal held as follows in para. 28 of its order dated 13th October, 1977 :
'28. On the quantum of Rs. 70,738, there is no dispute. The calculation of Rs. 11,78,498 is, however, not an exact calculation of the asses-see's income in this year. This figure has been arrived at after reducing the opening balance of Rs. 9,21,130 from the closing balance of Rs. 20,99,632. In terms of the agreement itself the assessee has to incur expenditure from this account on interest, on the staff of the Registrar's office and other incidental charges. The actual figure of expenditure has not been worked out at any stage. It appears that during the course of 1966-67 assessment, some remand report was called by the Appellate Assistant Commissioner from the Income-tax Officer and he gave some figures after taking into consideration certain expenses. While holding that the accretion in the suspense account is income of the assessee, we direct the Income-tax Officer that the actual income should be determined after ascertaining the actual expenditure that the assessee has to incur against this amount. The assessee should be given a due opportunity for leading evidence regarding expenses.'
29. The reading of this paragraph would show that the Tribunal issued direction to the ITO that the actual income should be determined after ascertaining the actual expenditure that the assessee had incurred against this amount. The contention of the learned counsel for the assessee that the amount of suspense account should be taken to be the income of the assessee after it became due to the assessee, is irrelevant for our purposes as we find that the Tribunal has reopened the matter and the ITO has to quantify the income in accordance with law.
30. For the reasons recorded above, question No. 1 in I.T.Rs. Nos. 92 and 93 of 1978 is answered in the affirmative, i.e., against the assessee and in favour of the revenue.
31. As regards question No. 2 in I.T.R. No. 11 of 1975, the learned counsel for the assessee could not advance any argument worth noticing in support of his case. It was mentioned that the letter of the Registrar dated 29th January, 1970, in which he pointed out that the remnants in the assessee's account belong to the assessee, was not taken into consideration and, therefore, this relevant material has not been considered. It was pointed out that the Tribunal has placed reliance on various provisions of the Scheme which, according to the learned counsel, were not relevant. As regards the letter of the Registrar, it nowhere brought in new material, which could make any difference. As regards the reliance on the scheme, no doubt, the Tribunal has referred to various provisions of the scheme, which were prevalent during the relevant time but it is difficult to hold that the reference to the scheme was irrelevant for the purposes of the decision ofthe question which arose before the Tribunal. Question No. 2 is accordingly replied in the negative, i.e., against the assessee and in favour of the revenue.
32. As regards question 2 in I.T.Rs. Nos. 92 and 93 of 1978, referred at the instance of the revenue, the Tribunal, relying on a judgment of their Lordships of the Supreme Court, recorded a finding that the entire expenses claimed by the assessee should be allowed against the income determined in this case. We have no reason to take a different view from the one taken by the Tribunal. Lengthy arguments were addressed by Shri Awasthy, the learned counsel for the revenue, to contend that proportionate expenses could be allowed in law. The burden of this contention is that taking into consideration the provisions of Sections 66, 81 and 110 of the Act, while calculating the quantum of the tax, the assessee is entitled to proportionate expenses and not the entirety. On the basis of the facts brought on the, record of this case, the Tribunal recorded a categorical finding of fact that the entire business of the assessee was indivisible. That being so, the conclusion is obvious that the entire expenditure incurred by the assessee has to be allowed. Reference in this connection may be made to the decision of their Lordships of the Supreme Court in (1) CIT v. C. Parakh & Co. (India) Ltd. : 29ITR661(SC) , (2) CIT v. Indian Bank Ltd. : 56ITR77(SC) and (3) CIT v. Maharashtra Sugar Mills Ltd. : 82ITR452(SC) . It cannot be disputed that the assessee is entitled to claim expenditure which he incurred wholly or exclusively for the purposes of the business in view of the provisions of Section 37 of the Act. The assessee was pursuing various activities. The income of the assessee in respect of profits and gains of business carried on by the assessee, as specified in Section 81(i), Clauses (a) to (f), is not liable to payment of tax, whereas the income from the other activities pursued by it is liable to tax. Their Lordships of the Supreme Court in the above-mentioned authorities laid down the principle that if the business of the assessee is one and in pursuing various activities if the assessee incurs expenditure, wholly or exclusively for the purpose of the business, irrespective of the fact that the income from one or more parts of the activities was not liable to income tax, the entire expenditure incurred by the assessee in connection with the business, has to be allowed. In this view of the matter, the contention of Shri Awasthy, the learned counsel for the revenue, that proportionate expenditure should be allowed, is without any merit.
33. In all fairness to Shri Awasthy, it may be mentioned that he places reliance on (1) Madras Co-operative Central Land Mortgage Bank Ltd v. CIT : 67ITR89(SC) and (2) CIT v. Sabarkantha Zilla Kharid Vechan SanghLtd. : 107ITR447(Guj) . None of these authorities, in our view, areof any help to us in deciding the question which is before us.
34. For the reasons recorded above, question No. 2 in I.T.Rs. Nos. 92 and 93 of 1978, referred to us at the instance of the revenue, is answered in the affirmative, i.e., in favour of the assessee and against the revenue. However, there will be no order as to costs.