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Commissioner of Income-tax Vs. Partabmull Rameshwar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 68 of 1968
Judge
Reported in80CWN136,[1977]107ITR526(Cal)
ActsIndian Sale of Goods Act - Sections 61A and 64A; ;Income Tax Act
AppellantCommissioner of Income-tax
RespondentPartabmull Rameshwar
Appellant AdvocateB. Pal and ;A. Sen Gupta, Advs.
Respondent AdvocateD. Pal and ;R.N. Bajoria, Advs.
Cases ReferredDebaprasanna Mukherji v. Commissioner of Income
Excerpt:
- .....of taxes) v. tattersall : [1939]7itr316(cal) for, according to the tribunal, those sums were the trading receipts of the assessee in 2004 and 2005 r.n. years and were not the income of the assessee in 2011 r.n. year.5. the submission of mr. b. l. pal, the learned counsel for the revenue, before us is that those sums were not the income of the assessee in 2004 and 2005 r.n. years, for the assessee did not treat them as its income in those years by keeping them in a separate account and by not bringingthem in its profit and loss account of those years and thereafter by distributing those sums in 2011 r.n. year among its partners has treated those trading receipts as its income for 2011 r.n. year and, therefore, the income-tax officer was justified in including those sums in that year. he.....
Judgment:

Deb, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, we are concerned with the following question of law :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,68,545 being the balance to the credit of the Pakistan duty account can be assessed to tax as the income of the assessment year 1955-56, because of the distribution of this amount among the partners in the relevant previous year ?'

2. This reference relates to the assessment year 1955-56. The relevant previous year is 2011 R. N. ending on March 31, 1955. The assessee is a registered firm and follows the mercantile system of accounting. In R. N.years 2004 and 2005, relevant for the assessment years 1948-49 and 1949-50, the assessee purchased jute in Pakistan and sold them to the merchants in India and abroad. On November 14, 1947, a duty on raw jute exported from Pakistan was imposed by the Government of Pakistan: Accordingly, in those years, the assessee in terms of Section 64-A of the Indian Sale of Goods Act, realised and also paid the prices as increased by such duty on such goods and entered those sums in a separate account named 'Pakistan Duty Account' in which there was a credit balance of Rs. 2,68,543-6-3 at the end of 2005 R. N. year, but the assessee did not bring those sums in its profit and loss account in those years. Some time after 2005 R. N. year the assessee closed its business in Pakistan and thereafter in 2011 R.N. year distributed the said amount among the partners due to the retirement of one of its partners.

3. The Income-tax Officer included the said amount as the income of the assessee in 2011 R.N. year by rejecting the plea of the assessee, namely, that those sums were not its income of that year in the following terms :

'A reference to books and records shows that the assessee realised the so-called duty from foreign buyers on jute consigned to them and hence the the amount forms a part and parcel of the sale proceeds. Keeping the amount in a separate account does not alter its nature. The duty was realised after partition. Admittedly, there has been no claims from the Pakistan Government in respect of the amount till to date. Except for the general circular there was no specific order from the Pakistan Government claiming the amount from the assessee. It is apparent that the liability no longer exists.

The assessee's plea that the amount was adjusted in the partners' accounts because one of the partners left the firm, does not carry much weight, because......the assessee firm has treated the amount as income ofthe year under consideration by transferring it to the partners' accounts.'

4. The first appeal filed by the assessee was dismissed by the Appellate Assistant Commissioner by following the decision of the Judicial Committee of the Privy Council in the case of Commissioner of Income-tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 but the second appeal filed by the assessee was allowed by the Tribunal by following the principles laid down in the case of Morley (Inspector of Taxes) v. Tattersall : [1939]7ITR316(Cal) for, according to the Tribunal, those sums were the trading receipts of the assessee in 2004 and 2005 R.N. years and were not the income of the assessee in 2011 R.N. year.

5. The submission of Mr. B. L. Pal, the learned counsel for the revenue, before us is that those sums were not the income of the assessee in 2004 and 2005 R.N. years, for the assessee did not treat them as its income in those years by keeping them in a separate account and by not bringingthem in its profit and loss account of those years and thereafter by distributing those sums in 2011 R.N. year among its partners has treated those trading receipts as its income for 2011 R.N. year and, therefore, the Income-tax Officer was justified in including those sums in that year. He has also argued that the principles laid down in the case of Morley v. Tattersall : [1939]7ITR316(Cal) have no application in the instant case, for in Morley's case : [1939]7ITR316(Cal) an item of liability of the firm was distributed among its partners whereas the assessee before us had distributed those sums among its partners as its income of the assessment year under consideration.

6. To bring this case within the principles laid down by the Judicial Committee in the case of Commissioner of Income-tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 it has been submitted by him that the assessee did not disclose its 'Pakistan Duty Account' in the assessment years relating to R.N. 2004 and 2005, but we are not impressed by it, for no such finding has been made either by the Appellate Assistant Commissioner or by the Tribunal.

7. In the Privy Council case [1933] 1 ITR 94 the assessee was a money-lender and kept his books on a hybrid system. His practice was to enter all sums received by him from his debtors in a deposit register without allocating them either to interest or to principal and thereafter in the subsequent years, by treating certain portions of those sums as his income, he used to apportion them towards interest and the balance towards principal. In those circumstances it was held by the Judicial Committee that the sums appropriated towards interest by the assessee were rightly treated as the income of the assessment year, at page 101 of the report, in the following terms;

'What the officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it.'

8. In the Privy Council case the assessee received those amounts in a lump sum as a creditor from his debtors who did not make any appropriation of those sums towards principal or interest at the time of making those payments and, therefore, the assessee was entitled to appropriate those sums firstly, towards interest and then the balance sum towards principal. He maintained a hybrid system of accounting which is not the case before us. The principles laid down by the Judicial Committee have no application in the instant case before us because there is no relationship as creditor and debtor between the assessee and its customers and further the assessee had received those sums as the increased price of those goods from its customers and in its hands those sums were its trading receipts of 2004 and 2005 R.N. years.

9. That apart, in the case of Debaprasanna Mukherji v. Commissioner of Income-tax : [1951]20ITR293(Cal) the assessee, a money-lender, prior to 1930 realised interest from his debtor but did not include them in his returns of income on the ground that these sums were not taxable as he had kept those interest in a suspense account due to a pending suit with his debtor relating to that money-lending transaction. In 1939 that suit was settled and in terms of the consent decree the assessee received a promissory note from his debtor in full discharge of all outstanding liabilities of the debtor. In 1943, the income-tax authorities sought to reassess, under Section 34 of the Indian Income-tax Act, 1922, those interests as his income of the assessment year 1939-40 and strong reliance was placed on behalf of the revenue authorities on the case of Commissioner of Income-tax v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 in support of such reassessment, but Harries C.J. at page 304 of : [1951]20ITR293(Cal) of the report overruled such contention in the following terms :

'In the Privy Council case their Lordships laid down if money is paid by a debtor to a creditor on account without any appropriation towards principal or interest, the creditor can appropriate and if he does appropriate in a particular year then he cannot complain that the amount so appropriated in that year as interest is assessable to income-tax in that year. Further, their Lordships held that if there is no appropriation the income-tax authorities can properly appropriate the amount paid if less than the amount due for interest. The facts of the present case are entirely different. The three payments of interest to which I have referred were payments of interest as such......and......no book-keeping can ever alter the nature ofthat payment.'

10. The assessee before us was not the creditor of his customers and as already stated it had received those sums as its trading receipts in those earlier years. Hence, those trading receipts were not the income of the assessee in the assessment year. Therefore, it is no longer open to the revenue authorities to include those sums as the income of the assessee in the assessment year under consideration. Further, by keeping those sums in its 'Pakistan Duty Account' and outside its profit and loss account of those earlier years and thereafter by distributing them to its partners the assessee cannot alter the nature and the quality of those receipts, for in Debaprasanna's case : [1951]20ITR293(Cal) of the report, the learned Chief Justice has said that the assessee had no powers to change the nature of those receipts 'by treating them as being payments into a suspense account...... He had received these amounts--all of them--by4th January, 1930, and they should have been assessed in the years in which they were received'.

11. The portion underlined (italicised in print) by me, in our opinion, gives a quietus to the contentions of Mr. Pal founded upon the decision of the Judicial Committee. Now, in the case of Morley v. Tattersall : [1939]7ITR316(Cal) the assessee was a firm of auctioneers and it held certain sums not claimed by its clients in earlier years and then it distributed those sums to its partners in the assessment year. It was contended on behalf of the Crown that those sums became the trading receipts of the assessee in the assessment year due to aforesaid treatment of the assessee and, therefore, those sums were liable to be taxed. It was held by Greene M.R. that those sums were not the trading receipts but were the liabilities of the assessee and what was distributed to its partners was not an item of assets but an item of liability of the firm, (at page 329 of the report). And his Lordship, at page 323 of the report, says this :

'I invited the junior counsel to point to any authority which in any way supported the proposition that a receipt which at the time of its receipt was not a trading receipt could by some subsequent operation, ex post facto be turned into a trading receipt, not, be it observed, as at the date of receipt, but as at the date of the subsequent operation. It seems to me, with all respect to that argument, that it is based on a complete misapprehension of what is meant by a trading receipt in income-tax law. No case has been cited to us in which anything like that proposition appears. It seems to me that the quality and nature of a receipt for income-tax purposes is fixed once and for all when it is received.' (Italics is for emphasis).

12. The case of Lambert Bros. Ltd. v. Inland Revenue Commissioners [1927] 12 TC 1053 was cited in the case of Morley v. Tattersall : [1939]7ITR316(Cal) and it was discussed by Greene M.R., at page 325 of the report, in the following terms:

'That, as a proposition of fact, when the facts of the case are realised, would appear to be incontestable, and the effect of that finding, and, indeed, the effect of the facts set out in the case upon which that finding is based, is that this money was a trading receipt from the moment it was received. That was its quality and it never became anything else. In my judgment, and with all respect to the argument addressed to us, that case appears to me to be as far from the present case as any case can possibly be A trading receipt, in its nature a trading receipt at the moment of receipt, naturally fell to be brought into the accounts for tax purposes. How that can lend any support to the proposition that a receipt which in its nature never was a trading receipt can, years after, by some alteration in theaccounts of people who received it, become a trading receipt, I am quite unable to follow.' (Italics is for emphasis).

13. Where the books are kept on a cash basis the income is assessed on the actual receipts, but where they are kept on a mercantile system the income is assessed at the point of accrual of the income and not when the money is actually received by the assessee. In the absence of a contract to the contrary, the price of goods, under Section 64-A of the Sale of Goods Act, is liable to be increased or decreased according to the duty levied on the goods after the making of the contract. What the seller in such a case receives is the increased price of the goods and not any tax, for he is not a tax collector. The entire sum is a trading receipt in his hands and he cannot split it for the purpose of the Income-tax Act.

14. It is well-established by the decision of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax : [1973]87ITR542(SC) that a trading receipt does not cease to be a trading receipt by keeping it in a separate account. The assessee before the Supreme Court was an auctioneer and it received certain sums of money as sales tax on behalf of its clients and entered those sums separately in its books under the head 'Sales tax collection account'. The assessee did not pay those sums either to the owner of the goods or to the State Exchequer. It was contended before the Supreme Court that those sums were not the trading receipts of the assessee as the assessee was liable to return those sums to the owner of the goods. Further, those sums were not entered in its profit and loss account. And yet it was held by the Supreme Court that those sums were the trading receipts of the assessee and were liable to be assessed under the Income-tax Act.

15. The assessee before us and the assessee before the Supreme Court stand on the same footing. Both the assessees had kept their respective realisations in separate accounts. But keeping the trading receipt in a separate account is of no consequence for the purpose of the Income-tax Act. And this court was also of the same opinion in the case of Debaprasanna Mukherji v. Commissioner of Income-tax : [1951]20ITR293(Cal) . Non-processing of a trading receipt in the profit and loss account cannot alter the nature and the quality of a trading receipt and income does not cease to be an income by the treatment of the assessee nor his volition can alter its legal position.

16. Those sums were the trading receipts of the assessee and their accrual and realisation both took place in 2004 and 2005 R.N. years. It is true that those sums were not taxed in the assessment years of those years, but they cannot be included in the assessment year under reference, for they are not the trading receipts of the assessee in this assessment year. No doubt, those sums have escaped assessment in earlier years but they did notform part of the income of the assessee in the assessment year under consideration and, therefore, the revenue authorities were not entitled to assess those sums as the income of the previous year, namely, 2011 R.N., of the assessee and hence the decision of the Tribunal, in our opinion, is incontestable.

17. In this view of the matter, our answer to the question is in the negative and in favour of the assessed. In the facts and circumstances of the case, we do not make any order as to costs.

R.N. Pyne, J.

18. I agree.


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