Commissioner Of Income Tax v. Karam Chand Thapar And Others

COMMISSIONER OF INCOME TAX v. KARAM CHAND THAPAR AND OTHERS AUGUST 14, 1996 [B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.] Income Tax: Income Tax Act, 1961/Indian Income Tax Act, 1922:-Agency-{Jn-c/aimed Balance.1-Assessee acting as de/ credere agent of collieiies and also C as agent of purchasers of coal-Amount claimed and received from the collie1y as under charges-Payments made therefrom to purchaseiJ as and when c/aimed-Swplus over amounts claimed by purchase!J credited to profit and loss account and assessed as inconie in earlier years---A1nount received during the cozme of business-Held, these payments will have to be treated as trading expenses and the excess brought to tax as profits of business. D Trading receipt-Amount initially not received as a trading receipt can becon1e a trading receipt subsequently. The Respondent-assessee carried on the business as del credere E agent of the purchasers of coal. The coal sold by the collieries was sent by wagon to various purchasers FOR. 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 such circumstances the assessee used to claim from the colliery companies, what was described as under- charges. These amounts were realised by the assessee even without F any claim being made by the purchasers. The assessee used to pay off the claims on account of underloading of wagons out of the money received from the colliery companies as and when demanded by the purchasers. But every year, there used to be an excess of receipts over pa)'Dlents which was taken to the profit and loss accounts. The surplus amount was assessed as the assessee's income, year after year, till the assessment year 1953-54. G 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 its1ncome at all. The Income tax Officer held that the amount was assessable and the view of the Tribunal was upheld by the Appellate Assistant Commissioner. However, the Tribunal held that the H . 651 A amount did not constitute income and this was upheld by the High Court. Hence this appeal by the Revenue. Allowing the appeal, this Court HELD : 1.1. The assessee collected the amounts of under charges in B 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 a~ent of the seller. [663-E] 1.2. Also, there was no finding that when the assessment was made, c there was an existing liability to pay. [663-E] Morely (H.M. Inspector of taxes) v. Messrs Tattersall, (22 Tax Cases 51), referred to. 13. It has not been explained as to why the assessee year after year, D 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 in the profit and loss account is the profit or the loss of the business. (663-F] E 2. The money in question was not received by the assessee l;y selling properties of the customers. The consignees could not claim that a portion of the 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 consig-nees could not claim that the money belonged to them even before making F 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 the money held in trust. The conduct of the assessee did not indicate that the assessee was treating the amount as anything Iiut his own. There was no deeming clause or any scheme by which it could be said that the amount was deemed to G have been collected on behalf of the consignees. [668-G; 669-B; 659-H] 3. The assessee in the course of its 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. They did not cease to be trading receipts because they might or might not have to be H debited again. The assessee's account all along showed a steady surplus in this account. The claim made by the consignees were always than the A amounts received by the assessee from the collieries. As and when the consignees made their claim, 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 B business. The surplus amount in this case was generated in the course of carrying on business by the assessee. The assessee bad 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. C Ifno 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 demandtd 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 asses-see also showed that the assessee itself did not treat the amount as trust D 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 amount received by way of under-charges constituted its trading receipts and could be assessed as the income of the assessee in the year• 1953-54, 1956-57, 1957-58, 1958-59, 1959-60, 1960-61, 1961-62 and E 1962-63. [669-H; 670-A-B; 670-671-G-H; 672-A-B] Bijli Cotton Mill (P.) Ltd. v. Commissio11er of Income Tax, (1971) 81 ITR 400 and Commissioner of lllcome Tax v. Sanderso11s a11d Morgans, (1970) 75 ITR 433, referred to. Jay's-171e Jwel/ers, Ltd. v. Commissio11er of Inland Revenue, (29 Tax Cases 274) and Elson (lnspec:or of Taxes) v. Prices tailors Ltd., [1963] 1 All ER 231, referred to. CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4551-58 G of 1990. From the Judgment and Order dated 5.4.78 of the Calcutta High Court in l.T.R. No. 136 .of 1970. B.B. Ahuja, B.S. Ahuja and S.N. Terdol for the Appellant. SUPREME COURT REPORTS (1996] SUPP. 4 S.C.R. Section: ISSUES A M.L. Verma, K.V. Vishwanathan and Darshan Singh for the Respon-dents. The Judgment of the Court was delivered by SEN, J. The Income Tax Appellate Tribunal referred the following B question of law arising out of its order to the High Court for its opiuion : "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 accounts 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?" At all material times, Karam Chand Thapar & Others, the assessee herein, carried on business as de! credere agent of the collieries and also as agent of the purchasers of coal. It acted, so to speak, as a double agent. The coal sold by the collieries were sent by wagons to various purchasers FOR. The purchasers paid for the freight. Even if the wagons were not filed to its full capacity, the practice of the railways was to charge for the full wagon-load. In other words, the purchasers did not any rebate from the railways for the wagons not being loaded to its 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 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 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 A 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 under charges was not B 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 wagon in question were not loaded to their full capacity by the various suppliers. These charges it is stated were claimed on behalf of their C 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 D 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 E permit holders by placing orders thereon with the various 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 sometimes happens, more often than not, F 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 G preferred by them. Transactions of the appellant by way of pur-chase and sale of coal amount to several 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 H 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 & loss account under the head miscellaneous receipts. The l.T.O. 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 & 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 (22 Tax Cases page 51). 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 was the client's money and nobody else's. It was money for which they were liable to account to the clients, and the fact that they paid it into their own account, do they clearly did, and the fact that it remained in their assets until paid out do not alter that circumstances". In a nutshell his argument was that if the receipt did not partake of the natue of a lading receipt it could not be taxed merely because the appellant treated the same as income in its accounts. 6. I have heard the arguments of the learned Advocate. In my opinion the ease 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 form 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 appellant's trade. But the same should be taxed in the year of receipt less the outgoings and not in the manner which the I.T.O. has done by taxing them in the year when the assessee has trans-ferred certain portions from this account to the profit and loss account. The amounts received during this year are Rs. 208913/59 and the amounts paid are Rs. 109049/10. There is thus a net surplus of Rs. 99863/11/9 or in round figures Rs. 99864 which should be A taxed as income of this year in the place of Rs. 55197 which is the amount which has been transferred by the appellant to the profit and loss account and which has been taxed by the l.T.O. The amount to be taxed is the higher figure of Rs. 99864 and in that view of the matter there will be an enhancement on this account B to the extent of Rs. 44667." The assessee made a further appeal to the tribunal. The tribunal after referring to a large number of decisions including three English cases -Morely (H.M. Inspector of Taxes) v. Messrs. Tattersall (22 Tax Cases 51), Jay's - I7ie Jewelle!> Ltd. v. Commissioners of Inland Revenue, (29 Tax C Cases 274) and Elson (Inspector of Taxes) v. P1ices Tailors Ltd., (1963) 1 A.E.R. 231 - concluded that the amounts received by the assessee from the colliery companies on account of under-charges were not its trading receipts. The tribunal strongly relied on the observations of Calcutta High Court in the case of C.l. T v. Sandersons & Morgans, AIR (1969) Cal. 211 D 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 : " ...... The Solicitor is the agent of the client... ... We are of opinion that when a solicitor receives money from his client, he does not do so as a trading receipt but he receives the moneys 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 G since the Limitation Act applied, the remedy of the . clients to recover some of the balances may have become barred by limita-tion. This contention was rejected, their Lordships observing. "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 H 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 & 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 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 arg:;ed that the character of the trading receipt is finally D 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, it 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 E 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 trading receipt, it could not be impressed with that character later on merely because some of the purchasers were F 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 ihe assessee for and on behalf of the their customers. Even before the customers made G 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 H because of the colliery's negligence i11 loading the wagon to full capacity. It is not also clear whether in the absence of a contract to that effect, the A colliery will have 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 B 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 C 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 D on account of under-charges. For example, the Appellate Assistant Com-missioner has noted that during the year under appeal, the assassee realised Rs. 208913/59 as under-charges but paid out only Rs. 109049/10. The assessee was left with a surplus of Rs. 99863/11/9. The surplus amount was ultimately taken to assessee's profit and loss account as miscellaneous receipt. The assessee did not contest assessment of these amounts as profits E from its agency business till the assessment year 1953-54. The departure from the long standing 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 on behalf of the purchasers of coal. Mr. Verma, appearing on behalf of the assessee, has contended that the assessee may have F 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 G of trust is not borne out by the assessee's conduct. The a[sessee 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. H A 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 B account of underloading. The assessee duly paid these amounts possibly as de! 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, 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 c money in trust. Even if a purchaser demands reimbursement for under-loading of coal, any payment by the assessee will be its business expendi-ture for which the assessee will be entitled to usual deduction.