TMI Blog1996 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred by 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, 1960-61, 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 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 other words, the purchasers did not get 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 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 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ---Morley (H. M. Inspector of Taxes) v. Tattersall [1938] 22 TC 51 ; [1939] 7 ITR 316 (CA), Jay's---The Jewellers 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 under-charges 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought 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 foo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 case, the money in the hands of the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ten 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 s. 17 of the said Act, it was provided that a pledge pawned for ten shillings or under, if not redeemed 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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 what 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : " 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. Prices Tailors Ltd. [1963] 1 All ER 231 (Ch D). The facts were that when taking an order f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne. The assessee, in the course of his business collected every year substantial amounts on account of undercharges. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf 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 cases 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 the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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