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Judgment
A.M. Ahmadi, J.—The assessee is carrying on business in the name and style of Spunpipe & Construction Co. (Baroda) Pvt. Ltd., and had
supplied certain items to the Government during the previous year relevant to the assessment year 1959-60. The assessee received from the Pay
and Accounts Officer, Calcutta, the price of the items so supplied which was in excess to the extent of Rs. 31,695. The assessee placed this
amount in the suspense account where it remained till it was brought to the profit and loss a/c in the relevant year, that is, assessment year 1971-
The ITO treated the said amount as the income of the assessee liable to tax in the said assessment year. The AAC also took the same view in
appeal. However, the Income Tax Appellate Tribunal, Ahmedabad Bench ''A'', took the view that so far as the amount of Rs. 31,695 is
concerned, the payment was made to the assessee under mistake and hence such payment could not be treated as a trading receipt. According to
the Tribunal the onus was on the Department to show that the said amount acquired the character of a trading receipt before it could be taxed.
Since the Department had failed to establish the character of the said amount to be a trading receipt, the same was not liable to tax in the
assessment year in question.
It further appears that during the previous years relevant to the assessment years 1965-66 and 1966-67, the assessee sold certain items to the
Public Works Dept. of the State Govt. and charged sales tax thereon at the rate of 8 1/4 per cent. instead of 2 1/4 per cent. chargeable in law.
The assessee placed the surplus (differential) amount of Rs. 11,446.28 in the suspense account where it continued till it was brought to the profit
and loss account in the assessment year 1971-72. The ITO as well as the AAC held that the said income was liable to tax in the assessment year
1971-72. The assessee, feeling aggrieved by this order passed in appeal, approached the Tribunal. The Tribunal, relying on the decision of the
Supreme Court in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, held that the said amount received by the
assessee by way of sales tax had the character of a trading receipt, but, since it was received by the assessee partly in the financial year 1964-65
and partly in the next financial year 1965-66, it could not be taxed as income derived during the assessment year in question. In this view that the
Tribunal took, is set aside the order passed by the authorities below and allowed the appeal of the assessee.
The department feeling aggrieved by the view expressed by the Tribunal on both the counts, sought a reference to this court. The Tribunal while
drawing up the statement of case on July 5, 1977, formulated the question for reference as under :
Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the amounts of Rs.
31,695 and Rs. 11,523 cannot be treated as the income of the assessee ?
Since the relevant year is the assessment year 1971-72, the question referred to us must necessarily relate to the said assessment year. Having
regard to the nature of the controversy between the assessee and the department, we think that the formulation would be complete if we
reformulate the question by adding the words ""for the assessment year 1971-72"" after the word ""assessee"". We will take the question as
reformulated by us the one referred to us for our opinion.
The facts set out above clearly show that the assessee had a business transaction with the Government. It was in the course of the said business
transaction and in connection therewith that the assessee received a certain amount from the Pay and Accounts Officer, Calcutta, towards the price
of the goods (items) supplied. It was, therefore, contended on behalf of the Department that the amount which the assessee received from the Pay
and Accounts Officer, Calcutta, was towards the price of the goods (items) supplied and was, therefore, a trading receipt. The excess amount of
Rs. 31,695 was also forwarded, so far as the Pay and Accounts Officer, Calcutta, was concerned, towards the price of the goods supplied. It,
therefore, acquired the character of a trading receipt. It was, therefore, submitted on behalf of the Department that the Tribunal was not right in
coming to the conclusion that the amount of Rs. 31,695 received by the assessee from the Pay and Accounts Officer, Calcutta, was not a trading
receipt merely because, according to the assessee, it was excess payment and was, therefore, transferred to the suspense account till it was
appropriated by a credit entry to the profit and loss account of the assessee, in the assessment year in question. We will assume for the sake of
argument that the amount so received by the assessee was by way of a business or trading receipt. We do not consider it necessary to pronounce
upon the said amount was received by the assessee in the course of business and was, therefore, a business/trading receipt.
So far as the difference in the sales tax amount of Rs. 11,523 is concerned, the Tribunal has taken the view, relying on the decision in
Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, that the said amount received by the assessee acquires the
character of a trading receipt. We have, therefore, to determine whether the said amount, which was received by the assessee in the course of
business and was a trading receipt, could be brought to tax in the assessment year in question. The Tribunal has taken the view that since the said
amount was received by the assessee partly in the financial year 1964-65 and partly in the subsequent financial year 1965-66, it could not be
brought to tax in the assessment year 1971-72. If this view taken by the Tribunal in regard to the difference in sales tax amount is found to be
legally sustainable in principle, the same view would commend to us so far as the income received by the assessee in the sum of Rs. 31,695 is
concerned, since we propose to proceed on the assumption that the said amount was also a business receipt.
The accounting system so far as the assessee is concerned is the mercantile system. In the mercantile system of accounting the accrual of the
income is on the date it becomes due regardless of the date of actual receipt. If both these sums of Rs. 31,695 and Rs. 11,523 acquire the
character of trading receipts, the assessee would be liable to pay tax thereon on the date the date the said amount became due. In the instant case,
the said amounts became due as well as were received by the assessee on the same date and, therefore, the system of accounting recedes to the
backgrounds so far as the present reference is concerned.
Mr. Shelat, the learned counsel for the Department, however, placed strong reliance on three decisions of the Allahabad High Court which lay
down that the income could be brought to tax in the assessment year (relevant to the year) in which the same was carried to the profit and loss
account of the assessee. In Pioneer Consolidated Co. of India Ltd. Vs. Commissioner of Income Tax, money due by the assessee-company to its
constituents, not claimed by the constituents, came to be transferred to the profit and loss account of the assessee-company and was treated as the
income of the assessee in the accounting year in which it was so transferred. The facts of the case, however, reveal that the assessee in the course
of its business received various amounts from its constituents for incurring expenses for and on behalf of the constituents. The commission of the
company for services rendered to the constituents. The assessee-company was carrying on business of clearing and forwarding agents, selling
agents and commission agents. From the various amounts received by the assessee from its different constituents, a total sum of Rs. 29,643 was
lying to the credit of the constituents in its account books up to 1960-61. Those amounts were not claimed by the respective constituents and,
therefore, during the relevant accounting year, the assessee transferred the said amounts to the credit of its point and loss account. The ITO treated
this amounts as income of the assessee during the accounting year 1961-62. The AAC as well as the Tribunal rejected the assessee''s contention
to the contrary. The assessee, therefore, sought a reference and the question which was considered by the High Court was whether the Tribunal
was justified in holding that the said amount being the credit balance written off was income of the assessee chargeable to Income Tax. The High
Court observed that the assessee itself had credited the said amount to its profit and loss account. There was no indication that it was in the nature
of a capital receipt. So long as those sums represented deposits in favour of the constituents it could not be treated as income of the assessee but
when the assessee transferred it to the profit and loss account during the relevant accounting year, it assumed the character of income of the
assessee and was, therefore, liable to tax. In this view that the High Court took, the contention of the assessee was negatived.
Relying on the said judgment, the High Court of Allahabad in a subsequent decision between the same parties, in Pioneer Consolidated
Company of India Ltd. Vs. Commissioner of Income Tax, reiterated the same view. In that case also an amount of Rs. 18,295 which was not
income when it was realised was transferred by the assessee to its profit and loss account in the previous year relevant to the assessment year
1957-58. It was held that the assessee became liable to tax in the year in which the said amount was transferred to its profit and loss account.
The third decision on which reliance was placed on behalf of the Department, viz., Indian Motor Transport Co. v. CIT [1978] 114 ITR 677
however, stands on a slightly different footing. That was a case in which the assessee, who was carrying on business in road transport, transferred
a sum of Rs. 24,869 to its profit and loss account on March 31, 1970. This amount represented two items, namely, unclaimed wages and deposits
standing to the credit of persons who had business dealings with the assessee but who had not come forward to claim the same. The said amount
of Rs. 24,869 was brought to tax on the ground that the conduct of the assessee in transferring the amounts from the accounts of the creditors to
its profit and loss account showed that the assessee treated these amounts as its income and hence they were liable to tax in the relevant
assessment year. The High Court, however, invoked s. 41 of the I.T. Act, 1961, and came to the conclusion that both the conditions set out in that
section were satisfied inasmuch as the amounts were allowed as deduction in the earlier years and during the assessment year in question, the
assessee must have received a benefit by way of cessation or remission of liability. In the instant case on behalf of the Department no attempt was
made to invoke s. 41 and, in our opinion rightly, because the amounts in question have not been allowed or claimed as deduction in the earlier
years. We are, therefore, of the opinion that this decision proceeds on a different footing to the extent it invokes s. 41 of the I.T. Act and is
therefore, distinguishable.
The ratio which emerges from these three decisions on which reliance was placed on behalf of the Department is that an amount which did not
initially partake of the character of a trading receipt could be treated as income of the assessee in the accounting year in which it is brought to its
profit and loss account. In the case on hand, the contention of the Department is that both the amounts of Rs. 31,695 and Rs. 11,523 were trading
receipts from the very inception and, therefore, the three decisions of the Allahabad High Court on which reliance is placed cannot be pressed into
service for the simple reason that in those three cases the amounts were initially deposits and did not bear the stamp of trading receipts.
In PUNJAB STEEL SCRAP MERCHANTS ASSOCIATION LTD. Vs. COMMISSIONER OF Income Tax, PUNJAB., the assessee-
company, which dealt in scrap iron, received from its constituents a deposit as advance payment for the supply of scrap. If the price of scrap
delivered was more than amount so deposited, the assessee recovered the excess from the constituents. Where the price of scrap iron delivered
was less than the amount deposited and the surplus remained with the assessee, the constituents did not sometimes claim the amount of excess and
that amount remained with the assessee, the constituents did not sometimes claim the amount of excess and that amount remained with the assessee
to its credit. Such unclaimed credit balances over three years old, were transferred by the company to its profit and loss account and dividends
were declared out of the net profit in the account. The amounts so transferred to the profit and loss account of the previous years relevant to the
assessment years 1954-55 to 1956-57 were held to be payments towards the price of scrap iron supplied to the constituents and, therefore,
essentially trading receipts and liable to be included in the computation of the assessee''s taxable income. It would appear from this decision that
the amounts which the assessee-company had transferred were spread over three years and they were taxed in the relevant year as trading
receipts. This decision, therefore, does not advance the submission made on behalf of the Department that the amount could be taxed in the year in
which it is transferred to the profit and loss account of the assessee. This decision shows that the balances of over three years were transferred to
the profit and loss account of the previous year relevant to the assessments years 1954-55 to 1956-57 and they were taxed in those respective
relevant years.
The Supreme Court in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, was concerned with an assessee,
who had received a sum, of Rs. 32,986 as sales tax, as an auctioneer. This amount was credited separately in its account books under the head
Sales tax collection account"". The assessee did not pay the amount of sales tax to the actual owners of the goods nor did it deposit the same in the
State Exchequer, because it took the position that the statutory provision creating that liability upon it was not valid. The amount was not refunded
to the person from whom it had been collected. In the cash memos issued by the assessee to the purchasers, the assessee was shown as the seller.
In these set of circumstances, the Supreme Court held that the assessee credited the amount received as sales tax under the head ""Sales tax
collection account"" did not make any material difference. It pointed out that the nature and quality of the receipt, and not the head under which it is
entered in the account books, would be decisive of the fact whether or not the amount formed part of the trading or business receipt. It
emphasized account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. Of course, the assessee
would be entitled to claim deduction of the amount as and when it is required to pay the same to the State Exchequer. This decision, therefore,
clearly establishes that what is relevant is the initial character of the receipt and not the head under which the amount is credited in the account
books of the assessee. If the initial character of the receipt was a trading receipt, the fact that it is placed in the suspense account for some time and
thereafter brought to the profit and loss account of the assessee would not affect the character of the payment.
Similarly, in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, the Supreme Court had observed
that whether an assessee was entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view
which the assessee might take of his rights ; nor can the existence or absence of entries in his books of account be decisive or conclusive of the
matter.
In Commissioner of Income Tax Vs. Bird and Co. (P.) Ltd., also it was held that the sales tax charged by the dealer from its customer is a part
of the sale price and it is a revenue receipt. In that case also the dealer had collected sales tax from its customers but had paid only a portion
thereof to the Sales Exchequer and the balance was held by it, which was charged to tax. It was pointed out that as and when the balance amount
was subsequently paid by the dealer to the Government, the dealer would be entitled to claim deduction in respect of the said amount.
The question then is, if both the amounts in question were in the nature of business or trading receipts from the very inception, can they become
liable to be taxed in the year in question merely because the assessee has brought the said amounts to its profit and loss account in the said year ?
It is clear from the case law discussed earlier, that once the amounts are received by the assessee as trading receipts, they continue to hold that
character and that character is not affected or altered merely because subsequently the assessee chooses to bring them to its profit and loss
account in the accounting year is question. In the instant case, the contention of the Department is that both these sums were in the hands of the
assessee as trading receipts. The Tribunal has taken the view that the difference in sales tax amount in the hands of the assessee was undoubtedly
in the nature of a business receipt. So far as the amount of Rs. 31,695 is concerned, the Tribunal has taken the view that it was not in the nature of
a trading receipt but, as stated earlier, for the purpose of the nature of a trading receipt but, as stated earlier, for the purpose of deciding this
reference, we assume, with the Department, that it was in the nature of a trading receipt in the hands of the assessee from the very inception. If that
be so, merely because the assessee chooses to place the said amount for some time in the suspense account and thereafter to bring it in the profit
and loss account will not change the character of the payment received by the assessee. The assessee cannot unilaterally towards the price of the
goods supplied. Therefore, once we assume that both these payments were in the nature of business or trading receipts, the question is, whether
they can be assessed to tax in the assessment year 1971-72 merely because they were brought in the profit and loss account in the relevant
accounting year.
A similar question arose before the Madras High Court in Commissioner of Income Tax Vs. Planters Co. (P.) Ltd., . In that case the assessee
had collected sales tax on its sales of tea during the years 1956 to 1959 and had credited the amounts so received under the head ""Sales tax
reserve account"". Payments of sales tax made from time to time were debited to this account. The excess which remained 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 amount as
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 for those years only and hence could not be assessed in
the assessment year 1971-72. On a reference, the High Court held that sales tax collected was in the nature of a trading receipt of the year in
which it was received. The mere 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 could be assessed only in the year in which it was collected. The transfer of the said
amount to the profit and loss account was merely to close the particular account it could not affect the character of the trading receipt. The High
Court held that the omission on the part of the Department to tax them in the relevant earlier years afforded no ground for taxing the same in the
assessment year 1971-72. In the view that the High Court took, the decision of the Tribunal was upheld. We are in respectful agreement with the
new expressed by the Madras High Court.
In the present case also, if the amount of Rs. 31,695 and the amount of Rs. 11,523 were received by the assessee as trading receipts, the
mere fact that the said amounts were transferred to the suspense account for a few years and were later carried to the profit and loss account
could not alter or transmute the character of the receipt which was in the nature of a business or trading receipt. In that case the said amounts could
have been in the relevant assessment years in which they were received by the assessee and the failure on the part of the Department to tax them in
those years cannot give the Department the right to tax the assessee in the assessment year 1971-72 so far as the income therefrom is concerned.
For the above reasons we answer the question reformulated by us in the affirmative. We make no order as to costs.