(Appeal by certificate against the judgment and order, dated September 16, 1980 of the Allahabad High Court in Income Tax Reference No.264 of 1979).

Income-tax--.

----Income---Accrual---Mercantile system of accounting---Tractors imported by S.T.C.---Sale of tractors by assessee under agreement with S.T.C.-- Assessee under agreement not to charge more than ceiling price---Excess amount realised by assessee---Debited to sales account but not refunded during accounting year---No right on part of customer to ask for refund-- Excess amount is income of assessee for that year.

The appellant entered into a contract with the State Trading Corporation for sale of tractors imported by the State Trading Corporation. Under the terms of the contract, the appellant was not to charge from the purchasers more than the approved ceiling price. During the accounting year ending March 31, 1972, relevant to the assessment year 1972-73, the appellant sold a number of tractors realising a sale price in excess of the ceiling fixed by the State Trading Corporation. On August 5, 1971, the State Trading Corporation wrote to the appellant to refund the excess realised from the customers. The refund was not made in that accounting year. At the end of the accounting year, the appellant debited its sales account by a sum of Rs.15,45,504 showing it as an amount required to be refunded to its customers. The appellant approached the Government of India claiming that it was entitled to add the excess amount to the sale price. On August 28, 1973, the Government rejected the claim but permitted the appellant to retain Rs.700 per tractor as assembling charges. The Appellate Tribunal held that, on the basis of the mercantile system of accounting followed by the appellant, the excess amount was not its trading receipt. On a reference, the High Court held that the excess amount charged by the appellant was a part. of the sale price on the following reasoning. There would be a liability to pay back only if, as a result of some statutory provision for contract, the person to whom the refund had to be made could claim it from the appellant as of right. Merely because the appellant charged a price higher than that fixed by the State Trading Corporation, the customers who had agreed to purchase them at a higher price were not entitled to claim refund of the excess; and, on the basis of the letter of the State Trading Corporation, dated August 5, 1971, to the appellant, the purchasers could not enforce the direction contained in it and claim refund. The excess charged by the appellant was part of the sale price of the tractors sold by it and it was under no obligation to refund the same to the customers. On appeal to the Supreme Court:

Held. affirming the decision of the High Court, that there was no infirmity in the judgment of the High Court and the reasoning and conclusion reached were correct.

C.I.T. (Addl.) v. U.P. State Agro Industrial Corporation (1982) 133 ITR 597 affirmed.

O.P. Rana, Senior Advocate (Raja Ramachandran, Advocate with him) for Appellant.

J. Ramamurthy, Senior Advocate (C. Ramesh and P. Parameswaran with him) for Respondent.

JUDGMENT

The question referred to the High Court (see (1982) 133 ITR 597) under section 256(2) of the Income Tax Act, 1961, was as under (at page 599):

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the sums of Rs.12,80,428 and Rs.2,23,480 were not rightly included in the total income of the assessee?"

The High Court answered the question in the negative and against the assessee.

The appellant-assessee (Agro Corporation) entered into a contract with the State Trading Corporation of India (Trading Corporation) for the sale of tractors imported by the Trading Corporation. The Agro Corporation, under the terms of the contract, were not . to charge from the customers/purchasers of the tractors price more than the ceiling price as approved by the Trading Corporation. During the accounting year ending March 31, 1972 relevant for the assessment year 1972-73, the Agro Corporation sold a number of tractors imported through the Trading Corporation. The sale price realised by the Agro Corporation from the sale of such tractors exceeded the total amount, which it was entitled to realise from the customers in accordance with the ceiling fixed by the Trading Corporation. It is not disputed that the excess amount realised by the Agro Corporation for the relevant year was Rs.15,45,504. On August 5, 1971, the Trading Corporation wrote to the Agro Corporation asking it to refund the excess amount realised by them from the customers. It is, however, not disputed that the refund was not made in the relevant year. The Agro Corporation, at the end of the relevant accounting year, debited its sales by a sum of Rs.15,45,504 showing it as an amount which it had been required to refund to its customers. It, however, approached the Government of India claiming that it was entitled to add the excess amount to the sale price. It is not disputed that the Government of India, on August 28, 1973, rejected the request of the Agro Corporation and permitted it to retain Rs.700 per tractor as assembling charges.

In the assessment proceedings, before the Income-tax Officer, the Agro Corporation claimed deduction of the excess amount realised by them. The Income Tax Officer disallowed the deduction and added the same in the income returned by it for the year 1972-73. The appeal filed before the Appellate Assistant Commissioner was dismissed. Further, appeal filed by the Agro Corporation before the Tribunal was, however, allowed on the following reasoning (at page 604):

"After considering the above facts, we hold that on the basis of the mercantile system of accounting followed by the assessee and the contract with the S.T.C. dated 10-9-1970, the sums of Rs.12,80,428 and Rs.2,23,480 were not rightly included as income of the assessee during the year and, therefore, they are deleted."

The Tribunal concluded, that the excess amount charged by the assessee was not its trading receipt. It is on these facts that the reference under section 256(2) came to be made before the High Court for its opinion. The High Court reversed the findings of the Tribunal and came to the conclusion that the Income Tax Officer and the Appellate Assistant Commissioner had rightly disallowed the exemption. This appeal by certificate granted by the High Court is by the Agro Corporation.

Mr. O.P. Rana, learned counsel appearing for tine appellant, has taken us tough the judgment of the Tribunal and also of the High Court. The High Court, in a detailed judgment, has come to the conclusion that there was no statutory or contractual obligation on the part of the Agro Corporation to refund the amount to the purchasers of the tractors. In this view of the matter, the High Court came to the conclusion that the excess amount charged was a part of the sale price. The High Court reached the said conclusion on the following reasoning (at page 610):

"Liability to pay back an amount may either arise under a statute or it may arise as a result of a contract. Such liability to pay back would be there only if as a result of some statutory provision or contract the person to whom the refund is to be made can claim it from the assessee as of right. As already stated, merely because the Agro Corporation charged a price higher than that fixed by the Trading Corporation in derogation of its contract with the Trading Corporation, the purchasers who had agreed to purchase the tractors from the Agro Corporation at a higher price were not entitled to claim refund of the excess price from the Agro Corporation. The letter dated 5th August, 1971, did not improve the situation in favour of the purchasers at all. By the said letter the Trading Corporation merely invited the attention of the Agro Corporation to the fact that it had acted in derogation of the contract entered into with it and called upon the Agro Corporation to refund the excess amount. But then it does not mean that because the Trading Corporation had called upon the Agro Corporation to refund the excess amount, the purchasers could enforce the direction contained in the letter and claim refund of the excess price paid by them. If, to begin with, there was no legal enforceable liability to refund the amount, the same certainly was not created by the letter, dated August 5, 1971. No other material was brought to our notice whereunder such a liability to refund the amount had been created in the year in question."

The High Court, thus, came to the conclusion that the excess amount charged by the Agro Corporation was part of the sale price of the tractors sold by its and it was under no legal or Constitutional obligation to refund the same to the customers.

We see no infirmity in the High Court judgment. We agree with the reasoning and the conclusions reached therein.

The appeal is dismissed. No costs.

M.BA./2460/T Appeal dismissed.