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Petitioner: COMMISSIONER OF INCOME TAX VS Respondent: KARAM CHAND THAPAR and others
Court Name: Supreme Court of India Judge(s): B. P. Jeevan Reddy, Suhas C. Sen Title: COMMISSIONER OF INCOME TAX vs KARAM CHAND THAPAR and others Case No.: Civil Appeals Nos. 4551 to 4558 of 1990 Date of Judgment:1996-08-14 Reported As: 1997 PTD 944 Result: Appeal allowed
JUDGMENT
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 loss 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 wagonload. 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 underloading 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 assessm ent for the assessm ent year 1953-54, the assessee claimed that these amounts of surplus
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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 assessm ent 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 underloaded 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 which 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
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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 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.2,08,913.59 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 the ground 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
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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 underloading 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 assessm ent year 1953-54. The departure from the longstanding practice was justified on the ground that the amount received as under-charges from the colleries were held in trust by the assessee for and on 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 underloading. The assessee duly paid these amounts possibly as del credere agent of the collieries. But the fact remains that
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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 underloading 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 assessm ent. 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 underloading 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 not 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.
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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 in 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 Tattersall 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. fattersall'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 say 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 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." Mr. Verma has laid great emphasis on this passage in the judgment of Greene M.R., and has argued that in the instant ease, the money in the hands of the assessee was the clients' money and was not a trading receipt of the assesses. If it was not a trading receipt when it came into the hands of the assesses. 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 hones 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 cast where the finn had an existing obligation to pay. In die instant case, the asses= collected the amounts of undercharges in advance even before
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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 Sc in the case of Tattersall (1939) 7 ITR 316 (CA) that when…
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