COMMISSIONER OF INCOME-TAX VS KARAM CHAND THAPAR
1997 P T D 944
[222 I T R 112]
[Supreme Court of India]
Present: B. P. Jeevan Reddy and Suhas C. Sen, JJ
COMMISSIONER OF INCOME TAX
Versus
KARAM CHAND THAPAR and others
Civil Appeals Nos. 4551 to 4558 of 1990, decided on 14/08/1996.
(Appeals from the judgment and order, dated April 5, 1978, of the Calcutta High court in I. T. R. No. 136 of 1970).
(a) Income-tax---
----Income---Agency---Unclaimed balances ---Assessee acting as declared agent of collieries and also as agent of purchasers of coal---Purchasers paying full freight to railway---Amount claimed and received from colliery companies as under charges for under loading of wagons---Payments made therefrom to purchasers as and when claimed---Surplus over amounts claimed by purchasers credited to profit and loss account and assessed as income in earlier years---Amount received in course of business---No existing liability to repay amounts---Amounts not held in trust---Amount assessable as income.--[CIT v. Karam Chand Thapar & Bros. Coal Sales Ltd. (1979) 117 ITR 621 reversed].
The assessee carried on business as del credere agent of collieries and also as agent of the purchasers of coal. The coal sold by the collieries was sent by wagon to various purchasers F.O.R. The purchasers paid for the freight. Even if the wagons were not filled to their full capacity, the practice of the railways was to charge for the full wagon-load. In other words, the purchasers did not get any rebate from the railways for the wagons not being loaded to their full capacity. In such a situation, the assessee used to claim from the colliery companies, what was described as "under-charges". These amounts were realised by the assessee even without any claim being made by the purchaser. As and when demanded by the purchasers, the assessee used to pay off their claims on account of under-loading of wagons out of the moneys obtained from the colliery companies. But every year, there was an excess of receipts over payments which was taken to the profit and loss account. The surplus amount was assessed as the assessee's income, year after year, till the assessment year 1953-54. For the first time, in its assessment for the assessment year 1953-54, the assessee claimed that these amounts of surplus receipts on account of "under-charges" were not its income at all. The income-tax Officer held that the amount was assessable and this was upheld by the Appellate Assistant Commissioner. However, the Tribunal held that the amount did not constitute income. The High Court upheld the order of the Tribunal. On appeal to the Supreme Court:
Held, reversing the decision of the High Court, (i) that the important features in this case were that the assessee collected the amounts of under-charges in advance even before any claim was lodged. It realised the amounts from the colliery company not because any demand was made against it, but possibly, in order to protect itself from the eventuality of any demand being made against it as the del credere agents of the seller. The second important feature was that there was no finding as in the case of Morley (H.M. Inspector of Taxes) v. Tattersall (1938) 22 TC 51; (1939) 7 ITR 316 (CA) that when the assessment was made, there was still art existing liability to pay. The third feature which had not been explained was why the assessee year after year, brought these payments on account of' under-charges into the profit and loss account. The onus lay on the assessee to explain its conduct. Usually what is entered into the profit and loss account is the profit or loss of the business.
(ii) that the money was not received by the assessee by selling properties of the customers. The consignees could not claim that a portion of he sale proceeds in the hands of the collieries was their own money. Till they were paid, the money did not belong to them nor was it held in trust for them. Similarly, when the del credere agent was paid, the consignee s could not claim that the money belonged to them even before making any claim. The plea of trust was not borne out by the assessee's conduct. A trustee normally should not mingle his own money with money held in trust. The conduct of the assessee did not indicate that the assessee was treating the amount as anything but his own. There was no deeming clause or any scheme by which it could be said that the amount was deemed to have been collected, on behalf of the consignees;
(iii) that the assessee in the course of its business collected even year substantial amounts on account of under-charges. The sums so collected were the property of the assessee subject to certain contingencies, They did not cease to be trading receipts because they might or might not have to be debited again. The assessee's account all along showed a steady surplus in this account. The claims made by the consignees were always less than the amounts received by the assessee from the collieries. As and when the consignees made their claims, they were paid. These payments would have to be treated as trading expenses. This was not a transaction on capital account. This was a simple case where trading receipts were more than expenditure. The balance would have to be brought to tax as profits of business. The surplus amount in this case was generated in the course of carrying on business by the assessee. The assessee had not been entrusted with the amount in question by anybody. It claimed and obtained the money from the colliery companies in the usual course of business. This money it obtained not because the consignees had demanded it. Irrespective of any demand by the consignees, it got this money from the colliery companies. If no demand came from any of the consignees, it would have kept the entire amount itself. As a matter of fact, it had been found that only some of the consignees demanded payment and were paid by the assessee. This was the manner in which the assessee conducted its business and the surplus arose in the regular course of business year after year. The conduct of the assessee also showed that the assessee itself did not treat the amount as trust money. The amount was not shown as a liability nor was it kept in a suspense account. It was taken as miscellaneous receipt to the profit and loss account. The amounts received by way of under-charges constituted its trading receipts and could be assessed as the income of the assessee in the years 1953-54, 1956-57, 1957-58, 1958-59, 1959-60, 1960-61, 1961-62 and 1962-63.
CIT v. Karam Chand Thapar & Bros. Coal Sales Ltd. (1979) 117 ITR 621 reversed.
(b) Income-tax---
----General principles---Amount initially not received as a trading receipt can become a trading receipt subsequently.
It cannot be laid down that, as a matter of law, any amount which was initially not received as a trading receipt, can never become a trading receipt.
Morley (H. M. Inspector of Taxes) v. Tattesall (1939) 7 ITR316; (1938) 22 TC 51 (CA) distinguished.
Bijli Cotton Mill (P.) Ltd. v. CIT (1971) 81 ITR 400 (All.); CIT v. Sandersons and Morgans (1970) 75 ITR 433 (Cal.); Elson (Inspector of Ties) v, Prices Tailors Ltd. (1963) 1 All ER 231; 40 TC 671 (Ch D.) and Jays The Jewellers Ltd. v. IRC (1947) 29 TC 274; (1947) 2 All ER 762 (KB) ref.
B.B. Ahuja, Senior Advocate (B.S. Ahuja and S.N. Terdol, Advocates with him) for Appellant.
M.L. Verma, Senior Advocate (K.V. Vishwanathan and Darshan Singh, Advocates with him) for Respondents.
JUDGMENT
SUHAS C. SEN, J.---The Income-tax Appellate Tribunal referred the following question of law arising out of its order to the High Court (see (1979) 117 ITR 621) for its opinion (page 625):
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts received by the assessee by way of under-charges do not constitute its trading receipts and that accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be assessed as the income of the assessee to the profit and logs account could be assessed as the income of the assessee in the years 1953-54, 1956-57, 1957-58, 1958-59, 1959-60, 1961-62 and 1962-63?"
At all material times, Karam Chand Thapar and others, the assessee herein, carried on business as del credere agent of collieries and also as agent of purchasers of coal. It acted, so to speak, as a double agent. The coal sold by the collieries was sent by wagon to various purchasers F.O.R. The purchasers paid for the freight. Even if the wagons were not filled to their full capacity, the practice of the railways was to charge for the full wagon load. In other words, the purchasers did not get any rebate from the railways for the wagons not being loaded to its full capacity in such situation, the assessee used to claim from the colliery companies, what was described as "under-charges". These amounts were realised by the assessee even without any claim being made by the purchasers. As and when demanded by the purchasers, the assessee used to pay off their claims on account of under-loading of wagons out of the moneys obtained from the colliery companies. But every year, there was an excess of receipts over payments. The surplus amount was assessed as the assessee's income, year after year, till the assessment year 1953-54. For the first time, in its assessment for the assessment year 1953-54, the assessee claimed that these amounts of surplus receipts on account of "under-charges" were not its income at all. The assessee's contention was dealt with by the Income-tax Officer in the assessment order as under:
"The assessee has claimed exemption in respect of Rs.50,294, Rs.65,994 out of Rs.68,267 unclaimed credit balances written off during the year. In the return exemption was claimed in respect of Rs.53,537 but at the assessment stage, the claim was enhanced to Rs.65,994. This amount of Rs.65,994 consists of credit balances in the names of various parties, Rs.6,625 credit balance in the banks Rs.4,171 and under-charges Rs.55,197. It may be mentioned here that last year exemption in respect of freight of under-charges was not pressed for at the assessment stage nor it was claimed in appeal. The assessee has written that under-charges are in respect of freight of under-loaded wagons which their customers had to pay under the railway rules in spite of the fact that the wagons in question were not loaded to their full-capacity by the various suppliers. These charges it is stated were claimed on behalf of their customers that remained unclaimed with the assessee. No evidence was produced in support of this contention. The under-charges do not stand credited to the account of the customers. In the absence of any evidence it is not proved that these were not in the nature of trading receipt and the contention of the assessee-company fails ..."
The Appellate Assistant Commissioner in appeal upheld the order of the Income-tax Officer with the following observations:
"The appellant claims to act as brokers for supply of coal to the permit-holders by placing orders thereon with the various collieries. The collieries supply the coal directly to the permit- holders with railway freight to pay' at the destination but it raised a debit note against the appellant from the permit-holders. It some times happens, more often than not, that the collieries do not load the wagons to its full carrying capacity but the railways charges the full freight as if the wagon is fully loaded. The appellant immediately prefers a claim with the collieries for the excess freight paid in respect of coal actually not supplied and realised the same. The payments are made to the ultimate buyers from these receipts as and when claims are preferred by them. Transactions of the appellant by way of purchase and sale of coal amount to serveral crores of rupees and the excess freight charged by the railways for the coal actually not supplied by the collieries and realised by the appellant from collieries comes to a very sizeable figure of the order of 1 or 2 lakhs of rupees. The same is paid over to the permit- holder, when a claim is preferred by them and after meeting this claim there is always a sizeable balance left which is transferred to the profit and loss account under the head 'Miscellaneous receipts.
The Income-tax Officer taxed the same as the appellant's income from business inasmuch as the same has arisen in the course of the appellant's trading activity and in view of the treatment given by the appellant itself treating these amounts as income in its accounts. At the time of hearing, the learned Advocate contended that these unclaimed balances transferred to the profit and loss account could not be treated as the appellant's income since they did not have the characteristics of income at the time of receipt and reliance was placed on the decision in Morely v. Tattersall (1938) 22 TC 51; (1939) 7 ITR 316, 323 (CA). Reference was made to this passage: "The money which was received was money which had not got any profit-making quality about it, it was money which in a business sense was the client's money and nobody else's. It was money for which they were liable to account to client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out, do not alter that circumstance'. In a nutshell his argument was that if the receipt did not partake of the nature of a trading receipt it could not be taxed merely because the appellant treated the same as income in its accounts.
I have heard the arguments of the learned Advocate. In my opinion, the case does not fall within the ratio of the above decision. First of all the appellant prefers a claim on the collieries and gets it by its own right and what it transmits or pays out to the constituents may for a legitimate item of outgoing, but it cannot be said that the receipt by the appellant was merely a receipt for and on behalf of the third parties. The appellant has not treated these receipts as liabilities in its accounts and in my opinion it was clearly an income receipt arising in the course of the appellant's trade. But the same should be taxed in the year of receipt less than the outgoings and not in the manner which the Income-tax officer has done by taxing them in the year when the assessee has transferred certain portion from this account to the profit and loss account. The amounts received during this year are Rs.2,08,913.55 and the amounts paid are Rs.1,09,049.10. There is thus a net surplus of Rs.99,863-11-9 or in round figures Rs.99,864, which should be taxed as income of this year in the place of Rs.55,197 which is the amount which has been transferred by the appellant to the profit and loss account and which has been taxed by the Income-tax Officer. The amount to be taxed is the higher figure of Rs.99,846 and in that view of the matter there will be an enhancement on this account to the extent of Rs.44,667."
The assessee made a further appeal to the Tribunal. The Tribunal after referring to a large number of decisions including three English cases--- Morley H.M. Inspector of Taxes v. Tattersall (1938) 22 TC 51; (1939) 7 ITR 316 (CA), Jay's--The Juwellers Ltd. v. IRC (1947) 29 TC 274 (KB) and Elson (Inspector of Taxes) v. Prices Tailors Ltd. (1963) 1 All ER 231 (Ch. D)---concluded that the amounts received by the assessee from the colliery companies on account of undercharges were not its trading receipts. The Tribunal strongly relied on the observations of the Calcutta High Court in the case of CIT v. Sandersons and Morgans (1970) 75 ITR 433; AIR 1969 Cal. 211, wherein it was held that the amounts received by a firm of solicitors on behalf of its clients was not its income when it was received and will not be treated as its income later on merely because the amount remained with the firm and was utilised by the firm in its business. The Tribunal strongly relied on the following observations of the Court at page 442 of 75 ITR:
"The solicitor is the agent of the client...We are of the opinion that when a solicitor receives money from his client, he does not do so as a trading receipt but he receives the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The money so received does not have any profit-making quality about it when received ...The solicitor remains liable to account by this money to his client.
We think these observations fully apply to the facts of the present case. It was then contended for the Revenue that since the solicitor did not stand in the position of a trustee to the client and since the Limitation Act applied, the remedy of the clients to recover some of the balances may have become barred by limitation. This contention was rejected, their Lordships observing at page 444: ' We do not think that this consideration in any way alters the legal position ...Thus even though the remedy of some of the clients may have become barred by limitation, even then the barred debt did not become the income of the assessee'. These observations apply with equal force here and make it clear that the transfer of some of the balances to the profit and loss account by the assessee does not convert it into a trading receipt, even if such transfer is based on theground of limitation. We may only add that, on this aspect of the case, it is true that their Lordships were not asked to consider Jay's case (1947) 29 TC 274 (KB) but their decision is binding on us. We see no difference between the character of the assessee's receipts in that case and here except that the amounts involved are larger. "
On the application of the Department, the aforesaid question of law was referred by the Tribunal to the High Court. The High Court upheld the order of the Tribunal. Hence, this appeal to this Court.
It has been argued that the character of the trading receipt is finally decided once for all as soon as the amount of money is received by a trader. If the money is received as his trading profit, it is taxable as his income. But, if the amount is received for and on behalf of somebody else, then it does not become a trading receipt. The money in such a case, did not belong to the assessee. In this case, the money which was received by the assessee was really for and on behalf of the purchasers of coal and it was being held for and on behalf of the purchasers. It may be that some of the purchasers did not demand their dues as a result of which the assessee was left with a surplus. But, since the true character of the surplus when the amount was received was not a trading receipt, it could not be impressed with that character later on merely because some of the purchasers were not paid their dues for one reason or another.
We are unable to uphold this contention made on behalf of the assessee. First of all, from the facts narrated above, it is difficult to hold that the money on account of under-charges was received by the assessee for and on behalf -of their customers. Even before the customers made any demand the assessee lodged its claim with the colliery companies and received payments. It has been noted in the order of the Tribunal: "It is not clear whether the terms of the contract between the colliery and the consignee entitle the latter to call upon the former to refund to him the excess freight charged on the ground that such excess freight was charged because of the colliery's negligence in loading the wagon to full capacity. It is not also clear whether in the absence of a contract to that effect, the colliery will have a valid defence against such a claim, if made". It has not been established by producing the contract or any other evidence that the colliery was bound to supply coal in such quantity as would load a railway wagon to its full capacity. Freight was payable by the purchaser. That was a matter between the purchaser and the railways. The onus lies on the assessee to prove facts which will entitle him to claim a deduction. The Tribunal has noted that it is not clear whether the terms of the contract between the colliery and the consignee entitles the consignee to call upon the seller colliery company to refund to him the excess freight charged. It is difficult to see how the Tribunal without the facts being clear came to the conclusion that the colliery companies were under legal obligation to reimburse to the consignees for under-loading of the wagons.
In any event, the finding of fact is that only some of the consignees demanded reimbursement of excess freight paid. But even if no specific demand was made, the assessee used to realise large amounts every year on account of under-charges. For example, the Appellate Assistant Commissioner has noted that during the year under appeal, the assessee realised Rs.2,08,913.59 as under-charges but paid out only Rs.1,09,049.10. The assessee was left with a surplus of Rs.99,863-11-9. The surplus amount was ultimately taken to the assessee's profit and loss account as a miscellaneous receipt. The assessee did not contest assessment of these amounts as profits from its agency business till the assessment year 1953-54. The departure from the longstanding practice was justified on the ground that the amount received as under-charges from the collieries were held in trust by the assessee for and oil behalf of the purchasers of coal. Mr. Verma, appearing on behalf of the assessee, has contended that the assessee may have committed breach of trust in treating the amounts as its own but the fact remains that the money was held in trust for the consumers of coal. The character of receipt will not change merely because of the accounting practice of the assessee. As has been noted earlier, the case of the assessee would have been stronger if it could have produced contracts and other evidence in support of its case before the Tribunal. Not only that. The story of trust is not borne out by the assessee's conduct. The assessee has brought the surplus amounts as miscellaneous receipts to its profit and loss account year after year. A trustee normally should not mingle his own money with money held in trust. The conduct of the assessee does not indicate that the assessee was treating the amount as anything but his own. It was using it as part of its profits of business. The natural presumption from such a conduct will be that these amounts were the assessee's own profits from its business of coal agency. The sum and substance of the case is that the assessee without any demand from the purchasers of coal claimed from the colliery companies large amounts of money year after year as under-charges. Some of the purchasers demanded payment on account of under-loading. The assessee duly paid these amounts possibly as del credere agent of the collieries. But the fact remains that this was the mode in which the assessee was doing its business and year after year, a surplus was generated which was taken by the assessee to its profit and loss account. There is nothing to indicate that the assessee was holding the money in trust. Even if a purchaser demands reimbursement for under-loading of coal, any payment by the assessee will be its business expenditure for which the assessee will be entitled to usual deduction. But the facts brought on record and the conduct of the assessee belies the case of any entrustment of money for and on behalf of some purchasers of coal. There are actually four findings of fact made by the Tribunal in this regard. The first is that the freight charges have to be paid by the consignees and not by the colliery nor by the assessee who was only an agent. The second finding of fact is that the assessee had realised from the colliery company in course of its business from time to time various amounts on account of under-charges. The third finding is that only a portion of the amount thus realised by the assessee was utilised to pay the consignees. The fourth fact found by the Tribunal is that the surplus amounts, year after year, had been taken by the assessee to its profit and loss account and had been assessed to tax without contest as its income from business in the earlier years of assessment.
The case of the assessee that it paid the consignees from time to time same amounts on account of under-charges has been accepted by the Tribunal. But there is nothing to indicate that the amounts which the assessee received from the collieries in the usual course of business were not on its own account but on behalf of unspecified consignees who had not even made any claim. The agency contract under which the business was carried on was not produced before the Tribunal. But the Tribunal has recorded the fact that the assessee had a dual role to play in these transactions. He was a del credere agent for the colliery companies. So for as the consignees were concerned, he arranged for delivery of coal F.O.R. There is nothing to indicate that he had guaranteed that the railway wagons would be fully loaded by the colliery companies. The only argument of the assessee was that payment of under-charges by the colliery companies in such case was customary. It may be that the collieries, according to trade practice, had to pay the consignees for under-loading the wagon. But from this it does not follow that what the del credere agent received from his principal in the course of his trade was not his trading receipt. He collected money on account of under-charges not on the basis of any demand made by the purchasers but as a matter of routine irrespective of any demand by the consignees. If and when any purchaser made a demand for payment, some payments were made. The surplus balance was taken to the profit and loss account. It must be presumed that money taken to the profit and loss account of the assessee will be its trading receipt. No fact has been brought on record to the contrary. The amount was not kept in a suspense account or shown as a liability. It should also not be readily inferred that the assessee mingled the monies which he held in trust with his own profits and utilised it as profit of his business. On the contrary, the inference should be that the assessee acted in accordance with law and not contrary to law. Mr. Verma's contention that the assessee may have acted in breach of trust but that will riot alter the character of the receipt cannot be upheld in the facts and circumstances of this case.
Mr. Verma strongly relied on the decision in the case of Morley (H. M. Inspector of Taxes) v. Tattersall (1939) 7 ITR 316; (1938) 22 TC 51 (CA) and contended that the unclaimed balances of the assessee in the instant case was of the same nature as unclaimed balances in the case of Tattersall (1939) 7 ITR 316 (CA) and could not be treated as revenue receipts for the purpose of taxation. Tattersall were auctioneers who sold horses on behalf of their clients. From the purchase price, they deducted commission and other expenses. The balance amount was payable to the, vendors on the Monday week following the sale. At the foot of the printed conditions of the contract, it was stated in bold type "No money paid, or remittance sent by post, without a written order". On a number of occasions, the vendors did not immediately call for payment of their money. Consequently, moneys remained in the hands of the firm to the credit of the vendors. Many of these balances remained unclaimed for a considerable number of years but the position to law admitted by the Revenue was that the vendors were entitled to claim the payment of money at any time unaffected by the statute of limitation because of the absence of a written order as required by the conditions of sale for making payment. The Court pointed out that "we are dealing, therefore, with obligations which, as a matter of law, are existing obligations which the firm can be called upon to perform at any moment. That is a matter not without importance in the examination of this case".
The other important feature of Tattersall's case (1939) 7 ITR 316 (CA) was that the unclaimed balance was never taken to the profit and loss account. The business was initially carried on by Tattersah alone. He took a partner on February 23, 1992. Thereafter, a third partner was taken on March 23, 1936. When the first partner was taken to the partnership, the unclaimed balance which was shown under the heading "Auction Sales Suspense Account" in the books of the firm was transferred to E.S. Tattersall's capital account. When the third partner, Mr. Needham was brought into the partnership, out of the unclaimed balance, some amount was transferred to the personal current account of Tattersall and some to the personal account of Mr. Deane, the other partner. The partnership deed provided that such liabilities as subsisted in respect of the unclaimed balances should be assumed by the partnership and any payments actually made in respect thereof should be borne by the partners in proportion to their shares of profits at the time when the payment was made. In view of the said facts, it could not be argued that the receipts arising out of the sale of horses belonging to the clients were trading receipts of the firm of auctioneers. In fact, it was recorded in the judgment by Sir Wilfrid Greene M.R., that at page 323 of 7 ITR and at page 65 of 22 TC:
"Both arguments proceeded on the footing that it was impossible to sq that the sums when received were trade receipts ...It might, I think, be more convenient to deal with Mr. Hill's argument first, because that is the one which starts off with this perfectly clear admission, that the money when received from the purchasers was not a trade receipt. That proposition, I should have thought, in any case, was quite incontestable I invited Mr. Hills 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 try far 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 any 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."
Mr. Verma has laid great emphasis on this passage in the judgment of Greene KR., and has argued that in the instant case, the money in the hands of the assessee was the clients' money and was not a trading receipt of the assessee. If it was not a trading receipt when it came into the hands of the assessee, it could not thereafter change its character and become a trading receipt by some subsequent operation.
In our judgment, the observations made by Greene M.R., will have to be understood in the special facts of that case and nothing more should be read into them than what has been laid down. Tattersall sold horses on behalf of his clients. He was an auctioneer. The money arising out of the sale of the horses was of his clients. Although the amount remained for a considerable period with the firm, the claim was not barred by limitation because no money was payable by Tattersall without a written order. Greene M.R., emphasised that he was dealing with a case where the firm had an, existing obligation to pay.
In the instant case, the assessee collected the amounts of under charges in advance even before any claim was lodged. He realised the amounts from the colliery company not because any demand was made against him, but possibly, in order to protect himself from the eventuality of any demand being made against him as the del credere agent of the seller. The second important feature is that there is no finding as in the case of Tattersall (1939) 7 ITR 316 (CA) that when the assessment was made, there was still an existing liability to pay. Greene M.R., has emphasised that this was an important feature in Tattersall's case (1939) 7 ITR 316 that this was an important feature in Tatersall's case (1939) 7 ITR 316 (CA). The third feature which has not been explained is why the assessee year after year, brought these payments on account of under-charges into the profit and loss account. The onus lies on the assessee to explain his conduct. Usually what is entered into the profit and loss account is the profit or loss of the business. The assessee usually will not enter into its profit and loss account something which is not profit or loss of his business at all.
The other contention of Mr. Verma is that an amount which is not initially received as a trading receipt, cannot become a trading receipt by influx of time. This proposition which was stated in Tattersall's case (1939) 7 ITR 316 (CA) has to be read in the context of the facts of that case. It cannot be laid down that, as a matter of law, any amount which was initially not received as a trading receipt can never become a trading receipt. There are two English decisions after Tattersall's case (1939) 7 ITR 316 (CA) in which amounts which were not received initially as trading receipts were eventually regarded as business income.
In Jay's--The Jewellers Ltd. v. IRC (1947) 29 TC 274 (KB),' the assessee-company carried on business of jewellers and pawnbrokers. In the course of its business of pawnbroking it sold unredeemed pledges. The company used to make loans to pawners of three classes---(a) pledges pawned for a sum of ten shillings or under; (b) pledges pawned for a sum exceeding was shillings and not exceeding ten pounds and (c) pledges pawned for a sum exceeding ten pounds. The business of pawnbroking was controlled by the Pawnbrokers Act, 1872. Under section 17 of the said Act, it was provided that a pledge pawned for ten shilling or under, if not rendeemed within the year of redemption and days of grace shall, at the end of the days of grace, become the pawnbroker's absolute property. There was no dispute about the assessability of the same realised on sale, of pledges under class (a). The company admitted that any profit realised by it on sale of pledged property was a taxable receipt of its trade.
Under the provisions of the Act, the company was able, in cases of pledges exceeding ten shillings but not exceeding forty shillings, to dispose of the property pledged, by public auction. In cases where pledges were sold for more than the amount of the loan and interest due at the time of sale, the excess had to be paid to the pawnor on demand provided the demand was made within three years after the sale. In the case of goods pledged for a sum of ten pounds or more in terms of a special contract, the company was entitled to dispose of the property pledged as security either by public auction or private contract and out of the proceeds to pay all expenses of and incidental to such sale and to retain the amount of the said loan and interest. No time-limit was laid down within which the surplus money had to be paid to the pawnor or within which the pawnor might demand from the company to pay the surplus on any sale. Before the Court, two types of cases came up for consideration: (1) where the loan was over ten shillings and the three year period for claim applied, and (2) where the three-year period did not apply and the pledgor's rights were not barred by limitation of six years. The Court noted that fox various reasons, the greater part of the surplus realised by sale of pledges was ever demanded by the pledgers and ultimately became the property of Pawnbrokers. The question was: Where these surplus receipts in the pawnbroker's trade assessable profits and if so, when? The contention of the assessee-company was that it was entitled to leave the surplus out of their trading accounts altogether. There was no doubt that these surpluses were debts owed to the customers and that for three years or six years as the case may be, the company could be called upon to pay the amount to the customers. The whole amount was a legal liability. The Court held that the surpluses were not trading receipts in the year in which they were received. On this aspect of the matter, the case was completely governed by Tattersall's case (1939) 7 ITR 316 (CA).
Atkinson, J., thereafter dealt with the issue thus: "Then comes the more difficult question: can a surplus be treated as a trade receipt of the year in which, it not having been claimed by the pledger, the pawnbroker becomes entitled to retain it as his own?" On the strength of Tattersall, it was argued by the assessee-company that either the receipts were trade receipts or they were not at the time of the receipt. If they were not trade receipts at the time of the receipt nothing that happen afterwards could make them trade receipts. The question was answered in the following manner at page 286:
"The true accountancy view would, I think, demand that these sums should be treated as paid into a suspense account, and should so appear in the balance-sheet. The surpluses should not be brought into the annual trading account as a receipt at the time they are received. Only time will show that their ultimate fate and character will be. After three years that fate is such, as the one class of surplus, that in so far as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes by operation of law a receipt of the company, and ought to be transferred from the suspense account and appear in the profit and loss account for that year as a receipt and profit. That is what it in fact is. In that year Jays become the richer by the amount which automatically becomes theirs, and that asset arises out of an ordinary trade transaction. It seems to me to be the commonsense way of dealing with these matters."
Distinguishing Tattersall's case (1939) 7 ITR 316 (CA) on facts, it was stated that at page 287:
"But here the position is quite different. Here, at the end of three years, the money in question, the three-year-old surplus, did attain a totally different quality; a different quality was imprinted on surpluses three-year-old. I think there was then a definite trade receipt. At the end of the three years, a new asset came into existence, an asset which had arisen out of a trade transaction, and it seems to me that what the Master of the Rolls was dealing within that case was a situation quite different from that which exists here."
It was further pointed out by Atkinson, J., that even in Tattersall's case (1939) 7 ITR 316 (CA), Greene M.R., dealing with the argument that the quality of the transaction had changed, had observed that if this argument was to be made, it was essential that some act which was effected by the turning into a trading asset of something which was not a trading asset, should have taken place within the accounting year. Distinguishing the facts of the Tattersall's case (1939) 7 ITR 316 (CA), Atkinson, J., pointed out at page 287:
"There, no asset was created. A mere change in the method of book keeping created no asset. In this case, a new asset was created automatically by operation of law at the end of the three years, and commonsense would' seem to demand that that should be entered in the profit and loss account for the year and be treated as taxable".
Atkinson, J., pointed out that Tattersall's case (1939) 7 ITR 316 (CA) was distinguishable because in that case there had been no change whatsoever in the character and nature of the money held by the auctioneer. The money was payable only upon instructions of the client. The statute of limitations had not commenced to run and the Court was dealing merely with the effect of a change in the method by which the sums were dealt with in the firm's book. In the case of Jay's--The Jewellers (1947) 29 TC 274 (KB), Atkinson, J., first held that the Commissioners were right in holding that the surplus amount could not be deemed to be the trade receipt of the year in which they were received. However, thereafter, Atkinson, J., went on to say that a surplus could be treated as a trade receipt of the year in which it not having been claimed by pledger, the pawnbroker became entitled to retain it as his own. Atkinson, J., therefore, concluded that after a lapse of the period of three years the debtors lost their right and -the money became the pawnbroker's money. It having been received in the course of the trade will have to be treated as trade receipt after the end of third year of sale and, therefore, should be brought to assessment as such.
The next category of cases were pledges for ten pounds or' more. At the end of sixth. year the customer's remedy became barred by laws of limitation. It was held (at page 287):
"But, from the business point of view, I think, the position ought to be treated as the same. In practice those amounts would be dealt with and properly dealt with by the firm as their own. They could not get into difficulties by so doing; they cannot be called upon to pay, and I do not think any distinction ought to be drawn between the three-yearly surpluses and the six-yearly surpluses .."
The scope of Morley H.M (Inspector of Taxes) v. Tattersall (1939) 7 ITR 316 (CA) was also examined in the case of Elson (Inspector of Taxes) v. Price Tailors Ltd. (1963) 1 All ER 231 (Ch. D.) The facts were that when taking an order for made-to-measure garments the appellants, who carried on business as bespoke and ready-to-wear tailors, recorded a customer's measurements on an order form. The customer would then be asked for a deposit. After the customer had paid the deposit; its amount was recorded on the order form, from which a slip was detached and given to the customer. This slip showed the price, and the balance; the difference bang the amount of the deposit. If, subsequently, the customer declined to take the garment, the appellants refunded his "deposit", but where, as often happened, neither garment, nor "deposit was claimed after several reminders, they transferred the sums to an unclaimed deposits account, from which they made refunds in the event of later claims. They were assessed to income-tax in respect of unclaimed deposits as trading receipts of their business in the year in which they were paid.
It was held by Ungoed-Thomas, J., that the sums called "deposits" were the property of the appellants from the moment of receipt, though subject to certain contingencies; accordingly each deposit was a trading receipt of the year in which it was received by the appellants.
The cases of Tattersall (1939) 7 ITR. 316 (CA) and Jay's--The Jewellers (1947) 29 TC 274 (KB) were distinguished in the following manner at page 235 of (196,3) 1 All ER:
"In Morley v. Tattersall (1938) 22 TC 51; (1939).7 ITS, 316-(CA), the vendors' unclaimed balances, in the hands of .a firm of auctioneers, of proceeds of sale ,of . horses were held not to be trading, receipts; and in Jay's-The Jewellers Ltd. v. IRC,; IRC v. Jay's The. Jewellers Ltd. (1947) 29 TC 274 (KB), a pawnor's unclaimed balance in the hands of a pawnbroker of the proceeds of sale of an unredeemed pledge, after satisfying the amounts due under the pledge, was held not to be a trading receipt until the pawner's claim was statute-barred. In these cases, the, balances in the traders' hands were not theirs at all but were held for others, and this fact is fundamental to the decisions. The traders had no beneficial interest in them at the relevant time, and, although it was because they were traders that they received them, they were not receipts of their trade at all. "
Ultimately, Ungoed-Thomas, J., concluded that the deposits received by the taxpayer were a trading receipt and not the less so because they might or might not have to be debited again..
In the case of Jay's--The Jewellers Ltd. (1947) 29 TC 274 (KB) it has been categorically laid down that the money which belonged to the customers and which arose out of sale of customer's property could become a trading receipt when the customers did not or could not make any claim against that money in law and the amount was taken by the assessee to its profit and loss account. In fact, it was emphasised that that was the correct accounting practice. Atkinson, J., pointed out that a new asset could come into existence automatically by operation of law. When no demand for payment was made commonsense requires that such amount should be entered into the profit and loss account for the year and be treated as taxable.
In the case before us, in the words of Atkinson, J., the money in question arose from trading operations. The surplus had arisen out of trading transactions and taken to the profit and loss account. It had a definite quality of trading receipt. The money was not received by the assessee by selling properties of the customers. There is nothing to show that the money obtained by the assessee in course of his usual course of business from the colliery company actually belonged to the consignees. There is no factual or legal foundation for this proposition. The finding of fact is that as and when the consignees demanded payment of account of under-loading, the assessee made such payments. Such payments must have been on behalf of the collieries. But the assessee had received more than it spent. Neither the colliery nor the assessee had any obligation to seek out the consignees and pay them on account of under-loading of wagons. The amount received by the assessee from the collieries was not on account of any claim actually lodged by the consignees. Mr. Verma strenuously argued that the amount in the hands of the assessee belonged to the consignees. The Tribunal has found that the amount was paid to the agents out of the sale proceeds of the coal. The consignees could not claim that a portion of the sale proceeds in the hands of the collieries were their own money. Till they were paid, the money did not belong to them nor was it held in trust for them. Similarly, when the del credere agent was paid, the consignees could not claim that the money belonged to them even before making any claim. The money was the agent's money till the consignee made his claim. When the consignee was paid, it became his money and the agent's expenditure. The Appellate Assistant Commissioner in his order compiled the following Table to show how the amount was treated in the balance-sheet of the assessee year after year.
| Assessment year | Credit | Debit | Net | Transfer to Profit and loss account |
| | Rs. | Rs. | Rs. | Rs. |
| 1953-54 | 2,08,913 | 1,09,049 | 99,863 | 55,197 |
| 1956-57 | 1,48,927 | 85,898 | 63,029 | 1,06,509 |
| 1957-58 | 1,79,048 | 99,860 | 79,188 | 83,137 |
| 1958-59 | details not available |
| 1959-60 | details not available | 97,551 |
| 1960-61 | details not available | 1,02,832 |
This chart reveals that year after year, large sutras of money were received by the assessee from the collieries credit side. Various sums of moneys were also paid out from time to time to meet the claims of the customers. But the fact remains that every year, the assessee was left with a substantial amount as surplus and that surplus arose every year for the last ten years.
To our mind, the case is a very simple one. The assessee, in the course of his business collected every year substantial amounts on account of under-charges. The sums so collected were the property of the assessee subject to certain contingencies. It did not cease to be a trading receipt because, in the words of Ungoed-Thomas, J., they might or might not have to be debited again. The assessee's account all along showed a steady surplus in this account. The claims made by the consignees were always less than the amounts received by the assessee from the collieries. As and when the consignees made their claims, they were paid. These payments will have to be treated as trading expenses. We do not see the case as a case of transaction on capital account. On the contrary, this is a simple case where trading receipts were more than expenditure. The balance will have to be brought to tax as profits of business. As pointed out by Atkinson, J. in the case of Jays- The Jewellers (1947) 29 TC 274 (KB), a commonsense view will have to be taken in such case.
We shall now refer to some of the other cases that were cited.
In Bijli Cotton Mill (P.) Ltd. v. CIT (1971) 81 ITR 400 (All.), the finding was that from the outset, the excess of the price was impressed with the character of trust money to be held by the assessee on behalf of the quota- holders. The assessee was a cotton mill which manufactured and supplied yarn in the market. Initially supply was through a number of dealers who were granted specific quotas of yarn which they sold. These dealers were known as quota-holders. Subsequently, the arrangement was modified and the manufacturers could sell the stock directly to the wholesalers with the result that the quota-holders were excluded from the business altogether. In order to prevent the hardship caused to the quota-holders, an order was issued by the Textile Commissioner requiring the manufacturer to recover from the wholesale dealer the wholesale price of the yarn at the controlled rate and pay to the quota-holders that part of the sum which represented the excess over the ex-mill price. The sale was deemed to be by the manufacturer on behalf of the quota-holders. The amounts due to the quota-holders were credited to an account called "quota-holders margin account". The Court found that under the order, dated September 13, 1945, issued by the Textile Commissioner, the sale to the wholesalers were deemed to have been made by the manufacturer on behalf of the quota-holders. In this context of facts, the Court held that if there was any excess left in the account of the quota- holders that could not be treated as income of the assessee. It was held that the amounts standing in the "quota-holders margin account" did not belong to the assessee but to the quota-holders because the sale was deemed to have been made on behalf of the quota-holders.
In the instant case, the assessee had lodged a claim and the colliery company paid the amount claimed in usual course of business. At that stage, none of the consignees had made any claim. There is no deeming clause or any scheme by which it can be said that the amount was deemed to have been collected on behalf of the consignees. The money belonged to the assessee. It arose out of a trading transaction. The entire amount is the assessee's income. If any disbursement has to be made on account of the railway wagon not having been fully loaded, that will be a business expenditure. The expenditure may have to be set off from the receipt but the money had been given in the instant case by the collieries to the assessee as deposit to be held on behalf of the purchasers.
In the case of CIT v. Sandersons and Morgans (1970) 75 ITR 433 (Cal.), it was held that the assessee-firm of solicitors had credited a sum of Rs.4,078 being the aggregate of the unclaimed balances in as many as 83 personal ledger accounts of the assessee's clients, who had advanced money to the assessee in connection with the case conducted by the assessee for a few years. It was held by the Court that the amount was not taxable as the money belonged to the assessee's clients. I do not see how this case helps the respondents in this case. In this case, it was found that the money was entrusted to the assessee by the clients. The money was their money and after deduction of expenses, the balance amount continued to be held by the assessee on behalf of the various parties. Since this money belonged to the clients of the firm of solicitors from the very beginning, it could not be equated with the money of the solicitors in the relevant year of account. Nothing had happened in this particular year to convert the clients' money into income of the solicitors.
The surplus amount in this case was generated in the course of carrying on business by the assessee. The assessee had not been entrusted with the amount in question by anybody. He claimed and obtained money from the colliery companies in the usual course of business. This money he obtained not because the consignees had demanded it. Irrespective of any demand by the consignees, he got this money from the colliery companies. If no demand came from any of the consignees, he would have kept the entire amount himself. As a matter of fact, it has been found that only some of the consignees demanded payment and were paid by the assessees. This was the manner in which the assessee conducted his business and the surplus arose in regular course of business year after year.
The conduct of the assessee also goes to show that the assessee himself did not treat the amount as trust money. The amount was not shown as a liability nor was it kept in a suspense account. It was taken as miscellaneous receipt to the profit and loss account. He mingled the money with his other profits of business and treated the money as his own. There is nothing in the facts of the case to suggest that the money received by the assessee from the colliery companies actually belonged to the consignees and was not the assessee's own money.
We are of the view that the question referred by the Tribunal should have been answered in the negative and in favour of the Revenue and we answer it accordingly. The appeals are allowed. The parties to bear their own costs.
M. B. A./1199/FC Appeals allowed.