TMI Blog1980 (2) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... d in various activities-the income from some of which is taxable while from some others the income is not taxable under the Income-tax Act, 1961 (hereinafter referred to as " the Act "). By an agreement dated " nil " between the assessee and the Governor of Punjab commencing from April 1, 1960, and effective for five years, the assessee was appointed the sole distributor of fertilizers within the Punjab State. The said agreement is in the following terms: " This agreement entered into between the Punjab State Co-operative Supply and Marketing Federation Limited, Chandigarh, a body corporate registered under the Co-operative Societies Act, 1954, and having its head office at Chandigarh (hereinafter referred to as the Federation) on the one part and (2) Governor of Punjab (hereinafter referred to as the Governor) of the other part. Whereas the Govt. at the request of the Federation have agreed to appoint the Federation as the sole distributors of fertilizers, including such mixtures and manures as the Registrar, Co-operative Societies' Punjab, may decide to distribute (hereinafter referred to as " fertilizers ") within the Punjab State and the Federation has agreed to distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment Treasury in accordance with the provision of clause 14 and deposit the balance in 'suspense account' opened in accordance with the provisions of clause 7 after deducting the amounts admissible to it and its sub-agents in accordance with the break-up of distribution margin given in the Schedule to this agreement. Explanation.-In this clause as well as in clause 7 the expression 'pool price' shall be considered to be the price which may be fixed from time, to time by the Government of India for ex-factory supplies of fertilizers. The Federation will open a suspense account with the Punjab State Co-operative Bank Ltd. to which the margin specified against the entry relating to 'suspense account' in the break-up of distribution margin as well as the amount in excess of the pool price and the distribution margin will be credited by the Federation and no other amount will be credited by the Federation to this account. No expenditure will be incurred by the Federation against this account without the prior approval in writing of the Registrar who may issue directions in regard to the manner in which the amount in this account is to be utilized. 8. It will be the liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing storage, transport or any other operation which takes place after the Federation has taken delivery of the fertilizers in question. 14. The Federation shall store and sell the fertilizers on behalf of the Government and deposit out of cash sale proceeds the pool price thereof as defined in clause 5 or clause 6, as the case may be, into the Govt. Treasury not later than two months succeeding the month to which the sales relate, failing which an interest at the rate of 6% per annum will be charged from the Federation for the sums not deposited within the aforesaid period from the 1st of the month to which the sales relate to the date of actual deposit. 15. The Federation will credit the amount of pool price of fertilizers as defined in clause 5 or clause 6, as the case may be, according to the monthly sale report, irrespective of whether or not it has received the sale proceeds from any of the sub-agents. 16. The Federation shall give all facilities at all reasonable times to any officer authorised by the Registrar for the inspection of its accounts and stock wheresoever these may be kept. 17. The Federation shall take such measures for propagating the use of fertiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax examined the record of the case for the assessment year 1963-64, and found that income amounting to Rs. 1,23,824 earned by the assessee by way of commission as a distributing agent of the Punjab Govt. for the supply of fertilizers and insecticides to its members had been wrongly exempted under s. 81(i)(d). The ITO's order dated March 5, 1968, was, therefore, considered erroneous and prejudicial to the interests of the revenue. A notice under s. 263 of the Act dated November 7, 1969, was issued asking the assessee to show cause why the exemption wrongly granted under s. 81 (i)(d) for the income amounting to Rs. 1,23,824 should not be withdrawn. It was pleaded by the assessee that the amount in question was earned by the assessees from the business carried on by it by making purchase of fertilizers intended for agriculture and supplying the same to its members. Reliance was placed by the assessee on various clauses of the agreement. The Commissioner did not accept the assessee's contentions. He held that the assessee was only distributing agent of fertilizers procured by the Punjab Govt. It was found by him that the ownership over the fertilizers purchased at no time vested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the terms of trade. (iv) Even the surplus of Rs. 30 had to be deposited with the bank and spent in a certain pre-determined way under the instructions of the Registrar of Co-operative Societies, Punjab. (v) Clause 14 of the agreement." The Tribunal placed considerable reliance on cl. 14 of the agreement and held that the said clause supported the theory that the assessee's capacity was only that of an agent for and on behalf of the State of Punjab. The assessee had referred us to a letter dated January 29, 1970, from the Registrar, Co-operative Societies, Punjab, which gave some clarifications in the interpretation of the agreement and in terms of actual operational arrangements. The Tribunal did not advert to this letter specifically. The Tribunal recorded a finding that the profit made on the distribution of fertilizers was not exempt under s. 81(i)(d). The Tribunal upheld the order of the Commissioner, vide its order dated July 27, 1971. The assessee made a reference application claiming five questions of law for reference to this court for its opinion. The revenue also prayed for the reference of one question of law. The Tribunal after considering the contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was not accepted by the ITO after noticing that in terms of the agreement with the Govt. of Punjab, the assessee was required to open the suspense account with the Punjab State Co-operative Bank Ltd. and any expenses on account of interest, cost of staff employed in the office of the Registrar and any other unforeseen expenses were to be met by the assessee from the amount lying in the suspense account after getting the approval of the Registrar, Co-operative Societies. After allowing certain other allowances, the ITO levied tax on the net taxable income of Rs. 1,55,125. The assessee filed an appeal to the AAC and claimed that the sum of Rs. 70,733 was exempt under s. 81(i)(d) on the ground that the said income was earned from the purchase of fertilizers and supplied to its members. The assessee also claimed that instead of proportionate expenses, it was entitled to the entire expenses being admissible against taxable income. The AAC rejected the contentions of the assessee and, after referring to the terms of the scheme and that of the agreement referred to supra, held that the assessee was only a distributing agent of the Govt. of Punjab. It was, therefore, held that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee that no apportionment of the expenses should be done and the entire expenses claimed should be allowed against the income determined. On the quantum of Rs. 70,738 there was no dispute. However, the calculation of the sum of Rs. 11,78,498 was found to be not an exact calculation. This figure had been arrived at after reducing the opening balance of Rs. 9,21,134 from, the closing balance of Rs. 20,99,632. The Tribunal found that in terms of the agreement itself, the assessee had to incur expenditure from this account on interest, on the staff of the Registrar's office and other incidental charges. The actual expenditure had not been worked out at any stage by the authorities below. The Tribunal noted that during the course of the assessment for the year 1966-67, there was some remand report called by the AAC from the ITO and certain figures had been taken into consideration. The Tribunal, therefore, while holding that the accretion in the suspense account was in the nature of income and, therefore, liable to tax, directed the ITO that the actual income should be worked out after ascertaining the expenditure that the assessee had to incur against the said amount, and that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as exceeds fifteen thousand rupees; (ii) in respect of so much of the profits and gains of business carried on by it as does not exceed fifteen thousand rupees, if it is a co-operative society other than a co-operative society referred to in clause (i); (iii) in respect of any interest and dividends derived from its investments with any other co-operative society; (iv) in respect of any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities; (v) in respect of any interest on securities chargeable under section 18 or any income from property chargeable under section 22, where the total income of the co-operative society does not exceed twenty thousand rupees and the society is not a housing society or an urban consumer's society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power: Provided that nothing contained in this section shall apply to a cooperative society carrying on insurance business in respect of the profits and gains of that business computed in accordance with section 44. Explanation.-For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y from a contract of sale, inasmuch as an agent after taking delivery of the property, does not sell it as his own property, but sells the same as the property of the principal, and under his instructions and directions. On this principle, it follows that since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. In other words, it has to be inferred from the terms and conditions of the agreement whether the transactions concerned amounted to transfer of goods or not. If the title in goods passes, in that case, the transaction in question has to be termed a sale. However, it is always open to the buyer to purchase goods for a limited purpose and, within the field of that limited purpose, the buyer has absolute title to the property once it Is delivered to him by the seller. It is also settled that the payment of commission by itself is not conclusive to show that the agreement was one of agency. As already observed, since the concept of sale has undergone a revolutionary change in modern times, most of the agreements executed are likely to contain certain ingredients which may lead to the inference that the relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that qua the fertilizers, which remained with the assessee as unsold, the Government continued to be its owner till the stocks were lying with the assessee. The moment the assessee sold the fertilizers within two months thereafter the assessee was enjoined upon to deposit the cash sale price into the Govt. Treasury and if the same was not deposited within the stipulated time, the assessee was liable to pay interest at the rate of 6% per annum on the amount which had become due. This is the most salient feature of the agreement. It would thus be seen that qua the fertilizers which is sold, the assessee has to deposit the cash price in the Govt. Treasury within two months thereafter and, if the assessee fails to do that, he is liable to pay interest as specified and as regards the fertilizer, which remained in the godown of the assessee as unsold, no sale price is to be paid at any point of time. The payment of interest after two months is again a clause reflecting the relationship that the agent will pay interest to the principal as the payment having become due from him and having not been paid within the stipulated period, the principal is entitled to charge interest at the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eak-up of distribution margin, as well as the amount in excess of the pool price, and the distribution margin will be credited by the assessee. No expenditure will be incurred by the assessee against this account without the prior approval in writing of the Registrar. Under cl. 8, the assessee is enjoined upon to meet the interest charges and the cost of the staff employed in the office of the Registrar and other unforeseen expenses to run the scheme from the suspense account and if the suspense account is not sufficient to cover all these charges then the assessee will meet these charges from its own resources. All these clauses put certain restrictions on the assessee and the entire control regarding all the matters dealt with, rests with the Registrar or his nominee. As regards the meeting of the deficit in the suspense account, if the assessee undertook as an agent to pay something from the money received by him as agent, there is absolutely no bar in law. In cl. 9, a variation in the commission, admissible to the assessee and/or its sub-agents, has to be made by the Registrar in consultation with the assessee. Clause 10 deals with the sale of fertilizer against taccavi loans. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their Lordships of the Supreme Court in Bhopal Sugar Industries Ltd. v. Sales Tax Officer [1977] 40 STC 42. While coming to the conclusion that the relationship of the assessee in this case is that of an agent, we have kept in view the principles laid down by their Lordships of the Supreme Court in this authority and on the touchstone of the said principles, we have come to the findings so recorded. Shri Dastur relies on the decisions in (1) Daruvala Bros. (P.) Ltd. v. CIT [1971] 80 ITR 213 (Bom); (2) Radha Prasad Sah v. State of Bihar [1977] 39 STC 77 (Pat); (3) Ramchandra Rathore and Bros. v. Commr. Of S.T. [1957] 8 STC 845 (MP); (4) Commr. of S.T. v. Jivan Das [1966] 18 STC 264 (All) and (5) Dy. Commr. of Agrl. IT ST v. Alwaye Agencies [1974] 34 STC 467 (Ker), with a view to highlight certain principles enunciated in these decisions, which may enable the court to come to the conclusion whether the relationship between the parties in an agreement is that of sale or purchase or not. All these authorities are decided on the facts and circumstances of each case. For the reasons recorded above, question No. 1 in I.T.R. No. 11 of 1975 is answered in the affirmative, i.e., agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no dispute. The calculation of Rs. 11,78,498 is, however, not an exact calculation of the assessee's income in this year. This figure has been arrived at after reducing the opening balance of Rs. 9,21,130 from the closing balance of Rs. 20,99,632. In terms of the agreement itself the assessee has to incur expenditure from this account on interest, on the staff of the Registrar's office and other incidental charges. The actual figure of expenditure has not been worked out at any stage. It appears that during the course of 1966-67 assessment, some remand report was called by the Appellate Assistant Commissioner from the Income-tax Officer and he gave some figures after taking into consideration certain expenses. While holding that the accretion in the suspense account is income of the assessee, we direct the Income-tax Officer that the actual income should be determined after ascertaining the actual expenditure that the assessee has, to incur against this amount. The assessee should be given a due opportunity for leading evidence regarding expenses." The reading of this paragraph would show that the Tribunal issued direction to the ITO that the actual income should be det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax, the assessee is entitled to proportionate expenses and not the entirety. On the basis of the facts brought on the record of this case, the Tribunal recorded a categorical finding of fact that the entire business of the assessee was indivisible. That being so, the conclusion is obvious that the entire expenditure incurred by the assessee has to be allowed. Reference in this connection may be made to the decision of their Lordships of the Supreme Court in (1) CIT v. C. Parakh Co. (India) Ltd. [1956] 29 ITR 661 (SC), (2) CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC) and (3) CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC). It cannot be disputed that the assessee is entitled to claim expenditure which he incurred wholly or exclusively for the purposes of the business in view of the provisions of s. 37 of the Act. The assessee was pursuing various activities. The income of the assessee in respect of profits and gains of business carried on by the assessee, as specified in s. 81 (i), cls. (a) to (f), is not liable to payment of tax, whereas the income from the other activities pursued by it is liable to tax. Their Lordships of the Supreme Court in the above-mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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