Pathak J. - (1.) AT the instance of the assesses the Income-tax Appellate Tribunal has referred the following question : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 36,318 was income of the assessee liable to be taxed under the Indian Income-tax Act, 1922, in the present assessment year ?"
(2.) THE assessee is a private limited company. THE assessment year is 1953-54, the relevant accounting period being the calendar year 1952. Under the then existing arrangements governing the supply of yarn to the market, a number of dealers were selected and were granted a specific quota of yarn to be supplied by the manufacturers which they sold in the market. These dealers came to be known as "quotaholders". Subsequently, the arrangement was modified. The manufacturers were now required to sell their stocks directly to the wholesale dealers with the result that the quotaholders were excluded altogether. In order to prevent the hardship thus caused to the quotaholders an order dated September 13, 1945, was made by the Textile Commissioner requiring the. manufacturer to recover from the wholesale dealer the wholesale price of the yarn at the controlled rate and to pay to the quotaholders, to whom it would have originally sold the yarn, that part of the sum which represented the excess over the ex-mill price, the sale being "for this purpose deemed to have been" made by the manufacturer on behalf of the quotaholders". The amounts representing the margin of profits due to the quotaholders were credited to an account called the "quotaholders margin account". Whenever amounts from this account were paid to the quotaholders, they were debited to the said account. At the end of 1951 the account showed a balance of Rs. 36,318. On December 21, 1952, the company transferred this balance of Rs. 36,318 to the credit of its profit and loss account for the year 1952. In assessment proceedings for the assessment year 1953-54, the Income-tax Officer treated the amount of Rs. 36,318 as the income of the assessee liable to tax. On appeal, the Appellate Assistant Commissioner deleted the addition and in doing so purported to follow an order of the Income-tax Appellate Tribunal for the earlier assessment years 1948-49 and 1949-50. The case was taken by the Income-tax Officer in appeal to the Income-tax Appellate Tribunal. The Tribunal took a different view now. It noted that the situation had changed since its earlier decision in respect of the assessment years 1948-49 and 1949-50. It pointed out that the quotaholders who could be said to be the beneficiaries in respect of the amounts retained by the assessee had long since "dissolved" and that none of the former quotaholders were forthcoming to claim the amounts. The law of limitation, it was said, made it possible for the assessee not to pay the said amounts. Further, the assessee had treated the entire amount in question as its own and had carried it to the profit and loss account. Accordingly, the Tribunal allowed the appeal. And now this reference has been made.
(3.) IT seems to us clear that, upon the facts of the present case, it cannot be said that the total amount received by the assessee as the wholesale price of the yarn constituted the taxable income of the assessee. The assessee was entitled to the ex-mill price only. But it recovered the wholesale price of the yarn because the order dated September 13, 1945, made by the Commissioner required it to sell the yarn to wholesale dealers and to recover the wholesale price thereon and as the sale was "for this purpose deemed to have been made by the manufacturer on behalf of the quotaholders" it was required to pay to the quotaholders the difference between the wholesale price and the ex-mill price. In other words, although the assessee received the wholesale price, the part representing the ex-mill price alone belonged to it while the balance belonged to the quotaholders. IT was never intended under the arrangement that the quotaholders' margin of profit should ever form a constituent part of the profits accruing to the assessee and that the assessee should have any title thereto at any stage. From the outset, the excess over the ex-mill price was impressed with the character of trust money, to be held by the assessee on behalf of the quotaholders. IT is well-settled that the taxability of a receipt is fixed with reference to its character at the moment it is received and that merely because the recipient treats it subsequently in his own accounts as his own does not alter that character. At this stage, we may refer to the especially pertinent observations made by Greene M. R. in Morley v. Tattersall, 1938 22 TC 51, 65; [1939] 7 I.T.R. 316, 323 (C.A.): "The money which was received was money which had not got any profit making quality about it; it was money which, in a business sense, was the client's money and nobody else's. IT was money for which they were liable to account to the client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out, do not alter that circumstance." The learned Master of the Rolls expressed himself in favour of the principle that "the quality and nature of a receipt for income-tax purposes is fixed once and for all when it is received". Clearly, if at its inception the entire amount of the wholesale price did not represent money belonging to the assessee but a part of it in fact belonged to the quotaholders, the subsequent circumstance that the quotaholders had long since "dissolved" and that none of them were forthcoming to claim the amount due to them could not alter the character of the money received by the assessee. Nor could that character be affected by the circumstance that the assessee treated the amount in question as its own and had carried it to the profit and loss account.;