Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 31,695 and Rs. 11,523 cannot be treated as the income of the assessee ?

Counsel Appeared

S.N. Shelat instructed by G.N. Shah of M/s Malvi Ranchhoddas Girish N. Shah & Company, for the Revenue : J.P. Shah, for the Assessee

A.M. AHMADI, J. :

The assessee is carrying on business in the name and style of Spunpipe & Construction Co. (Baroda) (P) Ltd. and had supplied certain items to the Government during the previous year relevant to the asst. yr. 1959-60. The assessee received from the Pay and Accounts Officer, Calcutta, the price of the items so supplied which was in excess to the extent of Rs. 31,695. The assessee placed this amount in the suspense account where it remained till it was brought to the profit and loss a/c in the relevant year, that is, asst. yr. 1971-72. The ITO treated the said amount as the income of the assessee liable to tax in the said assessment year. The AAC also took the same view in appeal. However, the Tribunal, Ahmedabad Bench `A’, took the view that so far as the amount of Rs. 31,695 is concerned, the payment was made to the assessee under mistake and hence such payment could not be treated as a trading receipt. According to the Tribunal the onus was on the Department to show that the said amount acquired the character of a trading receipt before it could be taxed. Since the Department had failed to establish the character of the said amount to be a trading receipt, the same was not liable to tax in the assessment year in question.

2. It further appears that during the previous years relevant to the asst. yrs. 1965-66 and 196667, the assessee sold certain items to the Public Works Dept. of the State Govt. and charged sales tax thereon at the rate of 8 per cent. instead of 2 per cent. chargeable in law. The assessee placed the surplus (differential) amount of Rs. 11,446.28 in the suspense account where it continued till it was brought to the profit and loss account in the asst. yr. 1971-72. The ITO as well as the AAC held that the said income was liable to tax in the asst. yr. 1971-72. The assessee, feeling aggrieved by this order passed in appeal, approached the Tribunal. The Tribunal, relying on the decision of the Supreme Court in Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC), held that the said amount received by the assessee by way of sales tax had the character of a trading receipt, but, since it was received by the assessee partly in the financial year 1964-65 and partly in the next financial year 1965-66, it could not be taxed as income derived during the assessment year in question. In this view that the Tribunal took, it set aside the order passed by the authorities below and allowed the appeal of the assessee.

3. The Department feeling aggrieved by the view expressed by the Tribunal on both the counts, sought a reference to this Court. The Tribunal while drawing up the statement of case on 5th July, 1977, formulated the question for reference as under : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 31,695 and Rs. 11,523 cannot be treated as the income of the assessee ?”

4. Since the relevant year is the asst. yr. 1971-72, the question referred to us must necessarily relate to the said assessment year. Having regard to the nature of the controversy between the assessee and the Department, we think that the formulation would be complete if we reformulate the question by adding the words ” for the asst. yr. 1971-72″ after the word “assessee”. We will take the question as reformulated by us as the one referred to us for our opinion.

5. The facts set out above clearly show that the assessee had a business transaction with the Government. It was in the course of the said business transaction and in connection therewith that the assessee received a certain amount from the Pay and Accounts Officer, Calcutta, towards the price of the goods (items) supplied. It was, therefore, contended on behalf of the Department that the amount which the assessee received from the Pay and Accounts Officer, Calcutta, was towards the price of the goods (items) supplied and was, therefore, a trading receipt. The excess amount of Rs. 31,695 was also forwarded, so far as the Pay and Accounts Officer, Calcutta, was concerned, towards the price of the goods supplied. It, therefore, acquired the character of a trading receipt. It was, therefore, submitted on behalf of the Department that the Tribunal was not right in coming to the conclusion that the amount of Rs. 31,695 received by the assessee from the Pay and Accounts Officer, Calcutta, was not a trading receipt merely because, according to the assessee, it was excess payment and was, therefore, transferred to the suspense account till it was appropriated by a credit entry to the profit and loss account of the assessee, in the assessment year in question. We will assume for the sake of argument that the amount so received by the assessee was by way of a business or trading receipt. We do not consider it necessary to pronounce upon the said question since this reference can be disposed of on an assumption that the said amount was received by the assessee in the course of business and was, therefore, a business/trading receipt.

6. So far as the difference in the sales tax amount of Rs. 11,523 is concerned, the Tribunal has taken the view, relying on the decision in Chowringhee Sales Bureau’s case (supra),that the said amount received by the assessee acquires the character of a trading receipt. We have, therefore, to determine whether the said amount, which was received by the assessee in the course of business and was a trading receipt, could be brought to tax in the assessment year in question. The Tribunal has taken the view that since the said amount was received by the assessee partly in the financial year 1964-65 and partly in the subsequent financial year 1965-66, it could not be brought to tax in the asst. yr. 1971-72. If this view taken by the Tribunal in regard to the difference in sales tax amount is found to be legally sustainable in principle, the same view would commend to us so far as the income received by the assessee in the sum of Rs. 31,695 is concerned, since we propose to proceed on the assumption that the said amount was also a business receipt.

The accounting system so far as the assessee is concerned is the mercantile system. In the mercantile system of accounting the accrual of the income is on the date it becomes due regardless of the date of actual receipt. If both these sums of Rs. 31,695 and Rs. 11,523 acquire the character of trading receipts, the assessee would be liable to pay tax thereon on the date the said amount became due. In the instant case, the said amounts became due as well as were received by the assessee on the same date and, therefore, the system of accounting recedes to the background so far as the present reference is concerned.

Mr. Shelat, the learned counsel for the Department, however, placed strong reliance on three decisions of the Allahabad High Court which lay down that the income could be brought to tax in the assessment year (relevant to the year) in which the same was carried to the profit and loss account of the assessee. In Pioneer Consolidated Co. of India Ltd. vs. CIT (1972) 85 ITR 410 (All), money due by the assessee-company to its constituents, not claimed by the constituents, came to be transferred to the profit and loss account of the assessee-company and was treated as the income of the assessee in the accounting year in which it was so transferred. The facts of the case, however, reveal that the assessee in the course of its business received various amounts from its constituents for incurring expenses for and on behalf of the constituents, and towards the commission of the company for services rendered to the constituents. The assessee-company was carrying on business of clearing and forwarding agents, selling agents and commission agents. From the various amounts received by the assessee from its different constituents, a total sum of Rs. 29,643 was lying to the credit of the constituents in its account books up to 1960-61. Those amounts were not claimed by the respective constituents and, therefore, during the relevant accounting year, the assessee transferred the said amounts to the credit of its profit and loss account. The ITO treated this amount as income of the assessee during the accounting year 196162. The AAC as well as the Tribunal rejected the assessee’s contention to the contrary. The assessee, therefore, sought a reference and the question which was considered by the High Court was whether the Tribunal was justified in holding that the said amount being the credit balance written off was income of the assessee chargeable to income-tax. The High Court observed that the assessee itself had credited the said amount to its profit and loss account. There was no indication that it was in the nature of a capital receipt. So long as those sums represented deposits in favour of the constituents it could not be treated as income of the assessee but when the assessee transferred it to the profit and loss account during the relevant accounting year, it assumed the character of income of the assessee and was, therefore, liable to tax. In this view that the High Court took, the contention of the assessee was negatived. Relying on the said judgment, the High Court of Allahabad in a subsequent decision between the same parties, in Pioneer Consolidated Co. of India Ltd. vs. CIT (supra), reiterated the same view. In that case also an amount of Rs. 18,295 which was not income when it was realised was transferred by the assessee to its profit and loss account in the previous year relevant to the asst. yr. 1957-58. It was held that the assessee became liable to tax in the year in which the said amount was transferred to its profit and loss account.

The third decision on which reliance was placed on behalf of the Department, viz., Indian Motor Transport Co. vs. CIT 1978 CTR (All) 301 : (1978) 114 ITR 677 (All), however, stands on a slightly different footing. That was a case in which the assessee, who was carrying on business in road transport, transferred a sum of Rs. 24,869 to its profit and loss account on 31st March, 1970. This amount represented two items, namely, unclaimed wages and deposits standing to the credit of persons who had business dealings with the assessee but who had not come forward to claim the same. The said amount of Rs. 24,869 was brought to tax on the ground that the conduct of the assessee in transferring the amounts from the accounts of the creditors to its profit and loss account showed that the assessee treated these amounts as its income and hence they were liable to tax in the relevant assessment year. The High Court, however, invoked s. 41 of the IT Act, 1961, and came to the conclusion that both the conditions set out in that section were satisfied inasmuch as the amounts were allowed as deduction in the earlier years and during the assessment year in question, the assessee must have received a benefit by way of cessation or remission of liability. In the instant case on behalf of the Department no attempt was made to invoke s. 41 and, in our opinion rightly, because the amounts in question have not been allowed or claimed as deduction in the earlier years. We are, therefore, of the opinion that this decision proceeds on a different footing to the extent it invokes s. 41 of the IT Act and is, therefore, distinguishable.

The ratio which emerges from these three decisions on which reliance was placed on behalf of the Department is that an amount which did not initially partake of the character of a trading receipt could be treated as income of the assessee in the accounting year in which it is brought to its profit and loss account. In the case on hand, the contention of the Department is that both the amounts of Rs. 31,695 and Rs. 11,523 were trading receipts from the very inception and, therefore, the three decisions of the Allahabad High Court on which reliance is placed cannot be pressed into service for the simple reason that in those three cases the amounts were initially deposits and did not bear the stamp of trading receipts.

In Punjab Steel Scrap Merchants’ Association vs. CIT (1961) 43 ITR 164 (Punj), the assesseecompany, which dealt in scrap iron, received from its constituents a deposit as advance payment for the supply of scrap. If the price of scrap delivered was more than the amount so deposited, the assessee recovered the excess from the constituents. Where the price of scrap iron delivered was less than the amount deposited and the surplus remained with the assessee, the constituents did not sometimes claim the amount of excess and that amount remained with the assessee to its credit. Such unclaimed credit balances over three years old, were transferred by the company to its profit and loss account and dividends were declared out of the net profit in the account. The amounts so transferred to the profit and loss account of the previous years relevant to the asst. yrs. 1954-55 to 1956-57 were held to be payments towards the price of scrap iron supplied to the constituents and, therefore, essentially trading receipts and liable to be included in the computation of the assessee’s taxable income. It would appear from this decision that the amounts which the assessee-company had transferred were spread over three years and they were taxed in the relevant year as trading receipts. This decision, therefore, does not advance the submission made on behalf of the Department that the amount could be taxed in the year in which it is transferred to the profit and loss account of the assessee. This decision shows that the balances of over three years were transferred to the profit and loss account of the previous years relevant to the asst. yrs. 1954-55 to 1956-57 and they were taxed in those respective relevant years.

The Supreme Court in Chowringhee Sales Bureau’s case (supra) was concerned with an assessee, who had received a sum, of Rs. 32,986 as sales tax, as an auctioneer. This amount was credited separately in its account books under the head “Sales tax collection account”. The assessee did not pay the amount of sales tax to the actual owners of the goods nor did it deposit the same in the State Exchequer, because it took the position that the statutory provision creating that liability upon it was not valid. The amount was not refunded to the persons from whom it had been collected. In the cash memos issued by the assessee to the purchasers, the assessee was shown as the seller. In these set of circumstances, the Supreme Court held that the amount of Rs. 32,986 realised as sales tax by the assessee as an auctioneer formed part of its trading or business receipts and the fact that the assessee credited the amount received as sales tax under the head “Sales tax collection account” did not make any material difference. It pointed out that the nature and quality of the receipt, and not the head under which it is entered in the account books, would be decisive of the fact whether or not the amount formed part of the trading or business receipt. It emphasized that if a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. Of course, the assessee would be entitled to claim deduction of the amount as and when it is required to pay the same to the State Exchequer. This decision, therefore, clearly establishes that what is relevant is the initial character of the receipt and not the head under which the amount is credited in the account books of the assessee. If the initial character of the receipt was a trading receipt, the fact that it is placed in the suspense account for some time and thereafter brought to the profit and loss account of the assessee would not affect the character of the payment. Similarly, in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363, the Supreme Court had observed that whether an assessee was entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive of the matter.

In CIT vs. Bird & Co. (P) Ltd. (1981) 128 ITR 600 (Cal), also it was held that the sales tax charged by the dealer from its customer is a part of the sale price and it is a revenue receipt. In that case also the dealer had collected sales tax from its customers but had paid only a portion thereof to the State Exchequer and the balance was held by it, which was charged to tax. It was pointed out that as and when the balance amount was subsequently paid by the dealer to the Government, the dealer would be entitled to claim deduction in respect of the said amount.

The question then is, if both the amounts in question were in the nature of business or trading receipts from the very inception, can they become liable to be taxed in the year in question merely because the assessee has brought the said amounts to its profit and loss account in the said year? It is clear from the case law discussed earlier, that once the amounts are received by the assessee as trading receipts, they continue to hold that character and that character is not affected or altered merely because subsequently the assessee chooses to bring them to its profit and loss account in the accounting year in question. In the instant case, the contention of the Department is that both these sums were in the hands of the assessee as trading receipts. The Tribunal has taken the view that the difference in sales tax amount in the hands of the assessee was undoubtedly in the nature of a business receipt. So far as the amount of Rs. 31,695 is concerned, the Tribunal has taken the view that it was not in the nature of a trading receipt but, as stated earlier, for the purpose of deciding this reference, we assume, with the Department, that it was in the nature of a trading receipt in the hands of the assessee from the very inception. If that be so, merely because the assessee chooses to place the said amount for some time in the suspense account and thereafter to bring it in the profit and loss account will not change the character of the payment received by the assessee. The assessee cannot unilaterally change the character of the payment if the payment was initially made towards the price of the goods supplied. Therefore, once we assume that both these payments were in the nature of business or trading receipts, the question is, whether they can be assessed to tax in the asst. yr. 1971-72 merely because they were brought in the profit and loss account in the relevant accounting year.

A similar question arose before the Madras High Court in CIT vs. Planters Co. (P) Ltd. (1980) 15 CTR (Mad) 395 : (1980) 123 ITR 648 (Mad). In that case the assessee had collected sales tax on its sales of tea during the years 1956 to 1959 and had credited the amounts so received under the head “Sales tax, reserve account”. Payments of sales tax made from time to time were debited to this account. The excess which remained in the said account between June 30, 1960, and June 30, 1969, was credited to the profit and loss account as on June 30, 1970. The ITO assessed this amount as income of the asst. yr. 1971-72. This was confirmed by the AAC. The Tribunal, however, held that since the excess sales tax realised related to the asst. yrs. 1954-55 to 1958-59, it could constitute its trading receipt for those years only and hence could not be assessed in the asst. yr. 1971-72. On a reference, the High Court held that the sales tax collected was in the nature of a trading receipt of the year in which it was received. The mere fact that it was credited to a separate account did not in any manner affect its quality or character as a trading receipt. Once the quality of its receipt was determined, it could be assessed only in the year in which it was collected. The transfer of the said amount to the profit and loss account was merely to close the particular account but it could not affect the character of the trading receipt. The High Court held that the omission on the part Of the Department to tax them in the relevant earlier years afforded no ground for taxing the same in the asst. yr. 1971-72. In the view that the High Court took, the decision of the Tribunal was upheld. We are in respectful agreement with the view expressed by the Madras High Court.

18. In the present case also, if the amount of Rs. 31,695 and the amount of Rs. 11,523 were received by the assessee as trading receipts, the mere fact that the said amounts were transferred to the suspense account for a few years and were later carried to the profit and loss account could not alter or transmute the character of the receipt which was in the nature of a business or trading receipt. In that case the said amounts could have been taxed in the relevant assessment years in which they were received by the assessee and the failure on the part of the Department to tax them in those years cannot give the Department the right to tax the assessee in the asst. yr. 197172 so far as the income therefrom is concerned.

For the above reasons we answer the question reformulated by us in the affirmative.

We make no order as to costs.

[Citation : 141 ITR 246]