TMI Blog1982 (5) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ogether invalid, even though the impugned enhancement had been deleted on appeal by the Commissioner of Income-tax (Appeals) ?" It appears that the assessee filed a return disclosing income of Rs. 4,70,830. The ITO forwarded a draft order under s. 144B(1) of the I.T. Act proposing assessment on a total income of Rs. 5,75,656. On receipt of directions, the assessment was completed on an income of Rs. 6,61,561, because while the ITO proposed to allow a deduction of Rs. 3,51,105 under s. 80M the same was reduced to Rs. 2,65,300 under the directions of the IAC, though this matter was not the subject-matter of reference to him. We shall deal with this aspect of the matter a little later. So far as the first question is concerned, it would be necessary to refer to certain basic facts. It appears that though the amount of Rs. 44,937 was credited in the printed accounts as miscellaneous income, it was sought to be claimed that such sum should not be considered as part of the assessee's total income, because this represented surplus of credit balance in the insurance premium account and was not part of its commission accruing on account of business in insurance agency. The assessee acte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit loss account as miscellaneous income. The assessee argues that he did not receive the insurance premium as a trading receipt. That the amount represented liability to the clients which remained unclaimed for years and this liability has been adjusted in accounts this year. That the amount is not taxable as income. The assessee cites the case of Morley v. Tattersall [1938] 22 TC 5[1939] 7 ITR 316 (CA), and says that a receipt which is not in the first instance a trading receipt cannot become a trading receipt by any subsequent process. I do not agree with the assessee. The sums which were being regularly collected from the clients in course of the business were certainly in the nature of trading receipts. It has been held by the Allahabad High Court in the case of Pioneer Consolidated Company of India Lid [1976] 104 ITR 686, that even unclaimed deposits from customers, when treated as income and transferred to the profit loss account by the assessee, was rightly assessed as income by the ITO. The assessee has shown the unclaimed balance of Rs. 44,937 as income without any qualification in his profit loss account. Under the circumstances, and in the light of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a trading receipt? For the purpose of taxation the taxable event occurs on the occasion of the receipt of the money by the assessee. Now, in this case, as we have seen, the assessee was an agent of the insurance company. Indeed, on behalf of the Revenue our attention was drawn to s. 2(10) of the Insurance Act, which stated that " insurance agent " meant an insurance agent licensed under s. 42 of the said Act who received or agreed to receive payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance. If the premium or premia were paid in time, rebates are allowed for such prompt or timely payment. Now, this rebate belonged to the person in whose favour the premium is paid. Therefore, when the assessee who was the agent on behalf of the insurance policyholder was receiving the premium, he was receiving it as an agent for and on account of the principal, the policyholder. He was liable to return the same. The insurance agent, obviously the assessee in this case, did not do so. But the fact that neither the policy-holder nor the insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey clearly did, and the fact that it remained among their assets until paid out do not alter that circumstance. It would have been for Income Tax purposes, in my judgment, entirely improper to have brought those receipts into the account at all for the purpose of ascertaining the balance of profits and gains. Indeed, as I have said, the Crown did not suggest that that would have been proper. But what was said was this : Mr. Hills' argument was to the effect that, although they were not trading receipts at the moment of receipt, they had at that moment the potentiality of becoming trading receipts. That proposition involves a view of Income Tax law in which I can discover no merit except that of novelty. 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 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the assessee continued in spite of the fact that certain unclaimed balances had been written off and transferred to the profit and loss account. On further appeal by the Revenue, the Tribunal held that the unclaimed balance in the clients' accounts were " obviously liabilities " of the assessee-firm when first received and no subsequent operations could turn them into "professional receipts", and dismissed the appeal. On reference to this High Court, it was held that the sum of Rs. 4,078 was not revenue receipt liable to income-tax. When a solicitor received money from his client, he did not do so as a trading receipt, but he received the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The money thus received did not have any profit-making quality about it when received. It remained money received by a solicitor as " client's money " for being employed in the client's cause. The solicitor remained liable to account for this money to his client. The fact that the money was paid to the solicitor by a client would not make any difference, if initially the money was not received as trade receipt. It was further observed that even though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid against the expenditure incurred by them for maintaining the rubber plantations and producing the rubber, the amounts received by the assessees were revenue receipts and, therefore, liable to be included in their assessable income. There, as the narration of the facts would indicate, there was no question involved like the present one with which we are concerned, viz., when an agent received an amount on behalf of the principal in a fiduciary capacity for and on account of the principal. In such a case, the subsequent treatment in the subsequent year by the agent of the amounts so received as his income unilaterally would not transform what was not received as revenue receipt to be an income or a trading receipt. In any event, this could not be receipt in the year-in-question. Reliance, however, had been placed by the Tribunal on certain observations of the Allahabad High Court in the case of Pioneer Consolidated Co. of India Ltd. v. CIT [1972] 85 ITR 410. There it was held that money due by the assessee-company to its constituents, not claimed by them, and transferred to the profit and loss account of the assessee-company was income of the assessee in the accounting year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on its sales of tea during the years 1956 to 1959 was credited to a " sales tax reserve account " and payments of sales tax were debited to the account. The excess which was kept 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 sum as the income of the assessment year 1971-72. This was confirmed by the AAC. The Tribunal however, held that since the excess sales tax realised related to the assessment years 1954-55 to 1958-59, it could constitute its trading receipt only for those years and hence could be assessed in those years and not in 1971-72. On a reference it was held that the sales tax collected was a trading receipt of the year in which it was received. The 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 would have to be assessed only in the year in which it was collected. The assessee would be entitled to claim deduction for the amount paid as sales tax and the deduction would have to be allowed in the year in which the liability was created or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covery of some of the amounts may have expired. Here the assessee is a limited concern, nobody would be individually liable for the excess amounts retained by the assessee and there can be no dispute that these amounts were transferred to the profit and loss account of the assessee. The general principle of law is that even an illegal income which has been pocketed by an assessee can be brought to tax and it is not the case of the assessee that the amounts may have to be refunded to the clients at any later period of time. In view of all these circumstances we are of the opinion that there is no ground for interference with the conclusion arrived at by the Commissioner (Appeals)." In this connection our attention was drawn to the decision of Modi Spinning and Weaving Mills Ltd. [1973] 89 ITR 304 (All) and Elphinstone Spinning and Weaving Mills Co. Ltd. [1975] 100 ITR 139 (Bom). These decisions deal with the purpose of the alterations of the memorandum and articles of association. In the case of CIT v. Modi Spg. Wvg. Mills Co. Ltd., it was held that certain amount paid to a lawyer for advising a company on amendments to the articles of association and for drafting a special reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence an asset of an enduring nature. The purpose and object irrespective of whether it succeeded or not in the instant case appears to us was to alter the framework of the structure under which the assessee was carrying on the business. If that is the true purpose of incurring the expenditure, then in our opinion, it would have affected the very structure of the profit earning machinery and it should, therefore, be considered as an expenditure on the capital side. In that view of the matter we are of the opinion that the Tribunal came to the correct conclusion on this aspect of the matter. Question No. 2 must, therefore, be answered in the affirmative, but we make it clear that this is irrespective of whether the amalgamation took place or not. This question is answered in favour of the Revenue. On the next question the Tribunal observed as follows : " In this case although the difference between the return and the proposed assessment figure was more than Rs. 1 lakh and the assessment order had been passed on 25th February, 1976, i.e., after coming into force of the provisions of section 144B, it was held by the AAC that the assessment proceedings had been validly initiate ..... 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