Kapur, J. - (1.) THIS is a reference made by the Income-tax Appellate Tribunal of Delhi by their order dated 20-11-1952 stating a case under Section 66 (2), Indian Income-tax Act.
(2.) THE matter arises out of Income-tax appeals which were directed against the assessments for the years 1947-48 and 1948-49 in respect of the profits and gains of the assessee in the previous years ending with November 1946 and November 1947. Besides this there were Excess Profits Tax appeals against an assessment made in respect of the chargeable accounting period 1-12-1945 to 31-3-1946, and there were two Business Profit Tax appeals against the assessments made in respect of the chargeable accounting periods 1-4-1946 to 30-11-1946 and 1-12-1946 to 30-11-1947. Thus there were five appeals but the point involved in all of them was the same. The assessee company was incorporated in May 1945 and obtained the certificate of commencement on 2-6-1945. In reality it was a reconstructed company which was originally the Amritsar Distillery Company Limited and it had taken over the undertaking of the old company with all its assets and liabilities as from 1-12-1944. For the purposes of Income-tax the accounting year of the old as well as the new company ended with November of every year. The point in dispute relates to the 'Empty Bottles Security Deposit' account which arose in the following circumstances. Before the 2nd World War bottles were cheap but difficulty was anticipated in regard to the supply of these bottles as the War progressed. In January 1940 therefore the Financial Commissioner of Lahore issued a circular in regard to the excise auctions held in that month. Note 2 to Para 6 of this circular was: "At the time of auction it should be explained to the bidders that for every empty quart, pint or nip excise bottle returned to the retailer by the public, the retailer shall be bound to refund -3-, -2-3 or -2- respectively. This has been necessitated by the adoption, for the year 1940-41, of the buy-back system for excise bottles, which has been explained in detail in the annexure to this letter. It will be observed that the retail prices (of liquor in bottle) for the year 1940-41 are slightly higher than those for the year 1939-40. When, however, it is recognised that so far the consumer has either thrown away his empty bottles or has been able to secure at the utmost -/1/6 for every quart (bottle), the buy-back system referred to, by which -/3/- is guaranteed for every quart bottle will actually result in a saving of about -/-/6 on every quart bottle of country spirit purchased in the year 1940-41. Bidders should be informed that retailers will be required to explain the effect of the buy-back system to public in the form of an explanatory notice displayed at the retail premises." The annexure to this note was: "The buy-back system of bottles has had to be adopted to ensure the return of empty excise bottles to the distilleries, under this system, the distillery shall refund 0-4-0, 0-3-0 or 0-2-6 for every empty quart, pint or nip respectively, upto 95 per cent of the number of bottles bearing the distinguishing mark of the distillery issued on or after 1st April, 1940, delivered free at the distillery by the retailer. On the other hand the retailer shall be bound to pay to the consumer 0-3-0, 0-2-3 or 0-2-0 respectively for every quart, pint or nip returned to him. The retailer will thus gain for every empty quart, pint or nip returned to the distillery 0-1-0, 0-0-9 or 0-0-6 respectively. This will compensate the retailer (even after defraying the coat of transporting empty bottles to the distillery) for the small loss he wilt sustain, because of the rise in issue price of plain spirit to the extent of 0-0-6, 0-0-3 or 0-0-1 per quart, pint or nip respectively, the increase in the issue price of spiced spirit being negligible as explained in the statement below...." The effect of this was that the distillers were to pay for the empty bottles of various sizes varying prices but it does not appear from this that the distillers were authorised to charge any monies over and above the inclusive prices for the liquor in the bottles whether by way of security or otherwise. But it appears that the predecessors of the assessee company collected what In the statement of the case is described as "so-called security deposits" (that is, in addition to the price of bottles and liquor which was duly credited to the trading account) and thus they obtained in the years 1940 to 1944 large sums of money although in 1941 and 1944 they got nothing. And although in the years 1940, 1942 and 1943 large sums were taken as security deposits no empty bottles seem to have been returned or refund of security deposits claimed. In February 1943 the Financial Commissioner, Lahore, issued another circular by which he raised the prices of the bottles payable by the distillers as also the prices which were to be paid by licensed retailers to the consumers.
(3.) THE new company continued to take similar security deposits, THE company managed to get some official recognition to their practice of demanding security. In March 1944, the Financial Commissioner issued the following circular: "(1) Where the licensee for the new year 1944-45 is the same as for the expiring year 1943-44, he should be called upon to supply empty bottles before the first instalment of spirit is issued to Mm from the distillery. (2) THE Amritsar Distillery Company wish to take an undertaking from licensee regarding the return of all their bottles during 1944-45 by which they will render themselves liable to pay a penalty of Rs. 3/-, Rs. 2/- and Re. 1-8-0 per dozen for quarts, pints and nips respectively in addition to the cost of bottles not returned. THE Financial Commissioner has no objection to such an undertaking being demanded by the Amritsar or any other distillery. Yet the authority was only to demand an undertaking that a penalty would be imposed for non-return of bottles, not to demand security in the shape of present payment down of cash. THE only exception was in regard to shops in certain district newly transferred to the zone o the old company, as to which the Financial Commissioner had already issued the following circular in February 1944: X X XX" THE effect of this was that if a licensee in 1944-45 was the same as in 1943-44 he could be called upon to return the bottles before the first instalment of liquor could be issued to him and from others the distillers were allowed to get by way of penalty Rs. 3/-, Rs. 2/- and Rs; 1-8-0 per dozen for quarts, pints and nip bottles and this was to be in addition to the price of the bottles and the liquor sold. It was thus an undertaking from the licensee for the return of bottles, and this was an authority to charge a penalty for the non return of bottles. Thus the licensee was to pay the price of the bottle plus liquor plus some money as penalty for non-return. On 15-3-1345 a circular was issued about Shahpur and Gujrat districts that the retailer of those districts had to pay deposits which were liable to confiscation if bottles were not returned by 15-4-1945. In February 1945 an element of effective compulsion was introduced to make the liquor dealers "Keen to get back empty bottles from consumers to be delivered to distillers." Paragraphs 6 and 8 of this announcement are-important and they were: "6. THE retailers will not be supplied with any liquor unless they return an equivalent number of empty bottles, except in the case of Kangra. district, where only 70 per cent. empty bottles will be accepted. THE initial supply of bottled spirit for the month of April 1545, will be made to the new licensees without the production of bottles bearing the name of the zone distillery. Wholesalers will similarly be required to return the full number of empty bottles to the distillery." "3. THE buy-back system for empty excise bottles which was introduced with effect from 1-4-1940, will be continued in 1945-46. Licensed retailer shall not permit empty excise bottles to pass into the possession of consumers except in return for a bottle or bottles of similar capacity. If a bottle is not provided, they shall be bound to refuse supply unless the consumer produces a container of his own for the liquor. Wholesalers shall pay to the licensed retailer for every empty quart, pint end nip returned to them -/5/6, 0-2-6 and 0-2-3 respectively. THE distilleries are bound to take back from every wholesaler upto the full number o bottles issued to him. THE prices payable by the distillery are 0-6-0, 0-3-3 or 0-2-6 for every empty quart, pint or nip, respectively, delivered at the distillery premises. If the wholesale vendor does not keep a stock of bottled spirit to meet the monthly requirements of retailers his license will be liable to cancellation. If the licensees experience any difficulty in getting buy-back prices for any bottles to which they are entitled they should deposit the rejected bottles with the distillery inspector and the latter will satisfy himself whether they come within the rules or not, and if they do, and the distillery still fails to accept them, he will refer the matter to the Financial Commissioner for his orders. It is expected that the licensees will not experience any difficulty in getting the buy-back prices for bottles returned in good condition. "Buy back prices will be payable in respect of bottles issued on or after the 1st April 1940 and bearing the distinguishing mark of the distillery concerned." This practice was continued by the Excise and Taxation Commissioner of East Punjab after the partition and Liquor Licence Rules were amended in March 1948, but they are not relevant for the purposes of these proceedings. As given In the statement of the case at page 5 (para. 8) the effect of these various notifications was that the assessee company just continued the practice of its predecessor company in the matter of levying and collecting security deposits from the wholesalers but unlike its predecessor it had to refund portions of the security deposits. But there was no evidence to show that any dealer who wanted to buy liquor in bottles was unable to do so on the ground that he had not returned the prescribed percentage of empty bottles. ;