SEN - (1.) THE Income-tax Appellate Tribunal referred the following question of law arising out of its order to the High Court for its opinion :- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts received by the assessee by way of undercharges, do not constitute its trading receipts, and that accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be assessed as the income of the assessee in the years 1953-54, 1956-57, 1957-58, 1958-59, 1959-60, 1960-61, 1961-62 and 1962-63?"
(2.) AT all material times, Karam Chand Thapar and others, the assessee herein, carried on business as del credere agent of the collieries and also as agent of the purchasers of coal. It acted, so to speak, as a double agent. The coal sold by the collieries were sent by wagon to various purchasers FOR. The purchasers paid for the freight. Even if the wagons were not filled to its 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-charge". 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 assesee'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 of "under-charges" were not its income at all. The assessee's contention was dealt with by the Income-tax Officer in the assessment order as under :- "The assessee has claimed exemption in respect of Rs.50,294.00, Rs.65,994.00 out of Rs.68,267.00 unclaimed credit balances written off during the year. In the return exemption was claimed in respect of Rs.53,537.00 but at the assessment stage, the claim was enhanced to Rs.65,994.00. This amount of Rs.65,994.00 consists of credit balance in the names of various parties Rs.6,625.00 credit balance in the banks Rs.4,171.00 and under-charges Rs.55,197.00.It may be mentioned here that last year exemption in respect of under-charges was not pressed for at the assessment stage nor it was claimed in appeal. The assessee has written that under-charges are in respect of freight of under-loaded wagons which their customers had to pay under the railway rules in spite of the fact that the wagons in question were not loaded to their full capacity by the various suppliers. These charges it is stated were claimed on behalf of their customers which remained unclaimed with the assessee. No evidence was produced in support of this contention. The under-charges do not stand credited to the account of the customers. In the absence of any evidence it is not proved that these were not in the nature of trading receipt and the contention of the assessee-company fails....". The Appellate Assistant Commissioner in appeal upheld the order of the Income Tax Officer with the following observations :- "The appellant claims to act as brokers for supply of coal to the permit holders by placing orders thereon with the various collieries. The collieries supply the coal directly to the permit holders "with railway freight to pay" at the destination but it raised a debit note against the appellant from the permit holders. It sometimes happens, more often than not, that the collieries do not load the wagons to its full carrying capacity but the railway charges the full freight as if the wagon is fully loaded. The appellant immediately prefers a claim with the collieries for the excess freight paid in respect of coal actually not supplied and realised the same. The payments are made to the ultimate buyers from these receipts as and when claims are preferred by them. Transactions of the appellant by way of purchase and sale of coal amount to several crores 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 ITO 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 Tax Cases 51. Reference was made to this passage "The money which was received was money which had not got any profit-making quality about it; it was money which, in a business was the client's money and nobody else's. It was money for which they were liable to account to the clients, and the fact that they paid it into their own account, do they clearly did, and the fact that it remained in their assets until paid out do not alter that circumstances". In a nutshell his argument was that if the receipt did not partake of the nature of a trading receipt it could not be taxed merely because the appellant treated the same as income in its accounts. 6. I have heard the arguments of the learned Advocate. In my opinion the case does not fall within the ratio of the above decision. First of all the appellant prefers a claim on the collieries and gets it by its own right and what it transmits or pays out to the constituents may form a legitimate item of outgoing, but it cannot be said that the receipt by the appellant was merely a receipt for and on behalf of the third parties. The appellant has not treated these receipts as liabilities in its accounts and in my opinion it was clearly an income receipt arising in the course of appellant's trade. But the same should be taxed in the year of receipt less the outgoings and not in the manner which the ITO has done by taxing them in the year when the assessee has transferred certain portions from the account to the profit and loss account. The amounts received during this year are Rs.208913/59 and the amounts paid are Rs.109049/10. There is thus a net surplus of Rs.99863/11/9 or in round figures Rs.99864.00 which should be taxed as income of this year in the place of Rs.55197.00 which is the amount which has been transferred by the appellant to the profit and loss account and which has been taxed by the ITO. The amount to be taxed is the higher figure of Rs.99864.00 and in that view of the matter there will be an enhancement on this account to the extent of Rs.44667.00". The assessee made a further appeal to Tribunal. The Tribunal after referring to a large number of decisions including three English cases - Morley (H.M. Inspector of Taxes) v. Messrs. Tattersall (1938) 22 Tax Cases 51, Jay's - The Jewellers Ltd. v. Commissioners of Inland Revenue (1947) 29 Tax Cases 274 and Elson (Inspector of Taxes) V. Prices Tailors Ltd. (1963) 1 All ER 231 - concluded that the amounts received by the assessee from the colliery companies on account of under-charges were not its trading receipts. The Tribunal strongly relied on the observations of Calcutta High Court in the case of CIT v. Sandersons and Morgans, 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 :- "... The Solicitor is the agent of the client...We are of opinion that when a solicitor receives money from his client, he does not do so as a trading receipt but he receives the moneys 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 solicitor did not stand in the position of a trustee to the client and since the Limitation Act applied, the remedy of the clients to recover some of the balances may have become barred by limitation. This contention was rejected, their Lordships observing "We do not think that this consideration in any way alters the legal position... Thus even though the remedy of some of the clients may have become barred by limitation, even then the barred debt did not become the income of the assessee". These observations apply with equal force here and make it clear that the transfer of some of the balances to the Profit and Loss Account by the assessee does not convert it into a trading receipt, even if such transfer is based on the ground of limitation. We may only add that, on this aspect of the case, it is true that their Lordships were not asked to consider Jay's case but their decision is binding on us. We see no difference between the character of the assessee's receipts in that case and here except that the amounts involved are larger".
(3.) ON the application of the Department, the aforesaid question of law was referred by the Tribunal to the High Court. The High Court upheld the order of the Tribunal. Hence this appeal to this Court. It has been argued that the character of the trading receipt is finally decided once for all as soon as the amount of money is received by a trader. If the money is received as his trading profit, it is taxable as his income. But, if the amount is received for and on behalf of somebody else, then it does not become a trading receipt. The money in such a case, did not belong to the assessee. In this case the money which was received by the assessee was really for and on behalf of the purchaser of coal and it was being held for and on behalf of the purchasers. It may be that some of the purchasers did not demand their dues as a result of which the assessee was left with a surplus. But, since the true character of the surplus when the amount was received was not trading receipt, it could not be impressed with that character later on merely because some of the purchasers were not paid their dues for one reason or another.;