1961 (3) TMI 126 - HC - Income Tax

Tax Treatment of Security Deposits: High Court Decision on Assessable Income under Income-tax Act

Commissioner of Income-tax Versus Punjab Distilling Industries Ltd.

Commissioner of Income-tax Versus Punjab Distilling Industries Ltd. - [1962] 45 ITR 548 (PUNJ.) Issues Involved:1. Whether the collections by the assessee company described as 'empty bottle return security deposits' were income assessable under section 10 of the Indian Income-tax Act.2. Impact of the amendment in the Punjab Liquor Licence Rules effective from 1st April, 1948, on the assessability of the security deposits.Detailed Analysis:1. Assessability of 'Empty Bottle Return Security Deposits' Under Section 10 of the Indian Income-tax Act:The primary issue was whether the collections by the assessee company, described as 'empty bottle return security deposits,' constituted income assessable under section 10 of the Indian Income-tax Act. The assessee, Punjab Distilling Industries Limited, Khasa, engaged in the manufacture and supply of liquor, required wholesalers to make additional payments as security deposits for empty bottles, beyond the price fixed under the Government's buy-back scheme.The Supreme Court had previously addressed this issue, affirming that these amounts were trading receipts with a profit-making quality. The Court emphasized three key points:- The additional amounts were taken without Government's sanction and imposed by the appellant as a condition for the sale of liquor.- The wholesalers were under no obligation to return the bottles, which negated the argument that these were security deposits.- The deposits were part of each trading transaction and refundable under the terms of the contract, thus qualifying as trading receipts.The High Court, agreeing with the Supreme Court's reasoning, held that the amounts received as security deposits were indeed trading receipts and should be treated as such for the relevant assessment years before the amendment in 1948.2. Impact of the Amendment in the Punjab Liquor Licence Rules Effective from 1st April, 1948:The assessee argued that new facts had emerged post-1948, altering the considerations that governed the Supreme Court's decision. The Punjab Liquor Licence Rules were amended, giving statutory recognition to the practice of demanding security deposits. The amended rules stipulated:- The licensee must sell country spirit at rates fixed by the Excise and Taxation Commissioner.- Specific amounts must be paid for empty bottles returned.- Wholesalers were required to return at least 90% of the bottles issued.- Distillers could demand security up to 10% of the bottles issued and confiscate it if the return rate fell below 90%.The High Court noted that these statutory changes meant that the conditions which led the Supreme Court to classify the deposits as trading receipts no longer applied. Post-amendment, the deposits were sanctioned by the Government, wholesalers were obligated to return bottles, and the deposits were not part of each trading transaction but were governed by the statutory rules.Judgment:The High Court concluded that for deposits made after 1st April, 1948, and within the limits specified by the amended rules, the collections described as 'empty bottle return security deposits' were not assessable as income under section 10 of the Income-tax Act. However, for deposits received prior to this date or in excess of the permissible limit, the Supreme Court's decision still applied, and such deposits were assessable as income.Final Answer:'On the facts and circumstances of the case, the collections by the assessee company described in its accounts as 'empty bottle return security deposits' were not income assessable under section 10 of the Income-tax Act in so far as the collections have been made after 1st April, 1948, and to the extent allowable under rule 40, sub-rule (14), clause (f) of the Punjab Liquor Licence Rules as amended.'Costs:The High Court decided that each party should bear its own costs for this reference.