TaxTMI 
TaxTMI 
1996 (8) TMI 2
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....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 of receipts over payments. The surplus amount was assessed as the assessee's income, year after year, till the assessment year 1953-54. For the first time, in its assessment for the assessment year 1953-54, the assessee claimed that these amounts of surplus receipts on account o....
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....res 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 they did not have the characteristics of income at the time of receipt and reliance was placed on the decision in Morley v. Tattersall [1938] 22 TC 51 ; [1939] 7 ITR 316, 323 (CA). Reference was made to this passage : 'The money which was received was money which had not got an....
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....he 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 does not have any profit-making quality about it when received....The solicitor remains liable to account by this money to his client. We think these observations fully apply to the facts of the present case. It was then contended for the Revenue that since the solici....
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.... 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 between the purchaser and the railways. The onus lies on the assessee to prove facts which will entitle him to claim a deduction. The Tribunal has noted that it is not clear whether the terms of the contract between the colliery and the consignee entitles the consignee ....
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....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 made by the Tribunal in this regard. The first is that the freight charges have to be paid by the consignees and not by the colliery nor by the assessee who was only an agent. The second finding of fact is that the assessee had realised from the colliery company in co....
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..... 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 foot of the printed conditions of the contract, it was stated in bold type "No money paid, or remittance sent by post, without a written order". On a number of occasions, the vendors did not immediately call for payment of their money. Consequently, moneys remained in....
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...., 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 was the client's money and was not a trading receipt of the assessee. If it was not a trading receipt when it came into the hands of the assessee, it could not thereafter change its character and become a trading receipt by some subsequent operation. In our jud....
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....(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. Under the provisions of the Act, the company was able, in cases of pledges exceeding ten shillings but not exceeding forty shillings, to dispose of the property pledged, by public auction. In cases where pledges were sold for more than the amount of the loa....
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....ollowing 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 the commonsense way of dealing with these matters. " Distinguishing Tattersall's case [1939] 7 ITR 316 (CA) on facts, it was stated that : " But here the position is quite different. Here, at the end of three years, the money in question, the three-y....
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....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 for made-to-measure garments the appellants, who carried on business as bespoke and ready-to-wear tailors, recorded a customer's measurements on an order form. The customer would then be asked for a deposit. After the customer had paid the deposit,....
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....ing 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 colliery company actually belonged to the consignees. There is no factual or legal foundation for this proposition. The finding of fact is that as and when the consignees demanded payment on account of underloading, the assessee made such payment....
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....ee'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 of the price was impressed with the character of trust money to be held by the assessee on behalf of the quota holders. The assessee was a cotton mill which manufactured and supplied yarn in the market. Initially supply was through a number of dealers who were granted specific quotas of yarn which they sold. These dealers were known as quota holder....