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PETITIONER: COMMISSIONER OF INCOME-TAX, PUNJAB JAMMU& KASHMIR, HIMACHAL

       Vs.

RESPONDENT: PUNJAB DISTILLING INDUSTRIES LTD.

DATE OF JUDGMENT: 24/03/1964

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1964 AIR 1709            1964 SCR  (7) 447

ACT: Income Tax-Distiller taking deposit refundable on return  of bottles-Balance   of  deposits  after  refund,  if   trading receipt-Indian Income-tax Act, 1922 (11 of 1922), s.10.

HEADNOTE: The assessee, a distiller of country liquor, carried on  the business  of selling liquor to licensed whole  salers.   The assesses  :started  collecting from its customers  from  the year 1945 besides the price of the liquor and the bottles in which  the  liquor was sold a further charge  called  "empty bottles  return security deposit." The entire sum  collected on  this account in respect of any one transaction would  be refunded  in full on return of 90 per cent. of  the  bottles covered  by it.  The question for consideration before  this Court was whether the charge "security deposit" amounted  to a trading receipt assessable to Income Tax. Held:     The amounts paid to the assessee and described  as ’security  deposit’  were  trading  receipts  and  therefore income  of  the assessee assessable to tax.   These  amounts were paid as an integral part of the commercial  transaction of  the sale of liquor in bottles and represented  an  extra price  charged  for  the bottles.  They  were  not  security deposits  as  there was nothing to secure,  there  being  no right  to the return of bottles.  These appeals are  covered by   the  judgment  of  this  Court  in  Punjab   Distilling Industries Ltd. v. Commissioner of Income-tax. Punjab Distilling Industries Ltd. v. Commissioner of Income. tax [1959] Supp. 1 S.C.R. 693, relied on. Davies v. Shell Company of China Ltd. (1951)32 T.C. 133  and K.M.S.  Lakshmanier & Sons v. Commissioner of Incometax  and Excess   Profits   Tax,   Madras   [1953]   S,.C.R.    1057, distingushed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 107-111  of 1963.  Appeals by special leave from the judgment :and order dated March 23, 1961 of the Punjab High Court in  Income-tax Reference No. 14 of 1960.

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R.   Ganapathi Iyer and R.N. Sachthey, for the appellant (in all the appeals). S.T.  Desai, R.K. Gauba, B.P. Singh and Naunit Lal, for  the respondent (in all the appeals). March 24, 1964.  The Judgment of the Court was delivered by SARKAR,  J.-We think that these appeals are covered by  ;the judgment of this Court in Punjab Distilling Industries  Ltd. v. Commissioner of Income-tax(1) and the High Court (1)  [1959] Supp. 1 S.C.R. 693. 448 was  in error in its view that the ratio decidendi  of  that judgment  was not applicable to them.  The earlier case  had arisen out of the assessment of the same assessee but it was concerned  with  the  years 1947-48 and  1948-49  while  the present appeals are concerned with the years 1946-47,  1949- 50,  1950-51,  and 1951-52.  The accounting  period  of  the assessee was from December 1, in one year to November 30  of the following year.  In both the cases the assessments  were for income-tax, excess profits tax and business profits tax. The  point for consideration in respect of all  these  taxes was, however, the same. A full statement of the facts will be found in the  Judgment in  the earlier case and it is unnecessary to state them  at length  over  again.  The assessee who was a  distiller  and seller  of bottled country liquor, started  collecting  from its  customers from the year 1945 besides the price  of  the liquor  and  the  bottles in which the liquor  was  sold,  a further   charge  called  empty  bottles   return   security deposit".  This charge was made at a certain rate per bottle delivered depending on its size on the term that it would be refunded  as  and  when the bottles  were  returned  to  the assessee  and that the entire sum collected on this  account in respect of any one transaction would be refunded in  full on return of 90 per cent of the bottles covered by it.   The question is whether this charge is a trading receipt  asses- sable to tax.  In the earlier case this Court held it to  be assessable.   This  Court  then said (p.  687),  "the  trade consisted  of sale of bottled liquor and  the  consideration for the sale was constituted by several amounts respectively called,  the Price of the liquor, the price of  the  bottles and  the security deposit.  Unless all these sums were  paid the appellant would not have sold the liquor.  So the amount which was called security deposit was actually a part of the consideration for the sale and, therefore part of the  price of what was sold." In respect of the years now under consideration the  Income- tax Officer taxed these charges and on appeal the  Appellate Assistant  Commissioner confirmed the  Income-tax  Officer’s view.   On further appeal, however, the Income-tax  Tribunal reversed  the  decisions of the authorities below  and  held that these charges were loans and not trading receipts.   It may  be stated that all this had happened before the  afore- said  earlier judgment was delivered.  After the  Tribunal’s decision,   the  Commissioner  of  Income-tax   obtained   a reference  of  the  following question to  the  Punjab  High Court:               "Whether 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    income               assessable under Section 10 of the  Income-tax               Act."               449               It  is  of interest to note that  the  earlier               case also concerned -an identical question and

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             had  been answered both by the High Court  and               this Court in the affirmative. If the judgment in the earlier case covered the present  ap- peals, then the question referred would, of course, have  to be  ,answered in the affirmative.  The High Court,  however, took the view that as a result of the amendment of the rules made  under  the  Punjab Excise Act, 1914  which  came  into effect from April 1, 1948, the charges collected after  that date  were not covered by that judgment.  It held  that  the amended  rule  made  the ratio  decidendi  of  our  judgment inapplicable to the charges collected after that date.   The rule referred to is r. 40(14)(f) and the relevant part of it on which the High Court based its view is as follows:-               (v)   It  is  compulsory for the  licensee  to               return  at least 90 per cent. of  the  bottles               issued to him by the licensed distiller.               (vi)  The licensed distiller may, at the  time               of  issue,  demand security at  the  rates  of               three  rupees,  two rupees or  one  rupee  and               eight  annas  per  dozen quart,  pint  or  nip               bottles respectively upto 10 per cent. of  the               bottles  issued  by  him  and  confiscate  the               security to the extent falling short of the 90               per cent. limit. The licensee referred to in the earlier of the rules  quoted is the wholesaler to whom the distiller sold his liquor.  It is  not very clear what is meant by the words "upto  10  per cent. of the bottles issued" or the words "falling short  of the  90 per cent. limit".  It is not necessary, however,  to pursue  this matter for we shall not be concerned  with  the precise  meaning of these words.  It is not in dispute  that some charge described as a deposit was realised on the  term that it would be refunded in certain eventualities and  that is  enough for our purpose for the only question is  whether this charge was a trading receipt. The  High  Court thought that the earlier judgment  of  this Court  had  been based on three considerations,  namely  (1) that the charge concerned had been made without Government’s sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor; (2) that it could not  be security deposit for the return of the bottles for there was no  right  to their return and (3) that  it  was  refundable under the contract of sale itself.  In the High Court’s view if  these circumstances were not there, our  decision  would have  been  different.  The High Court held that  since  the amended rules came into force, none of these  considerations was available and, therefore, the LP(D) ISCI-15a 450 charges  could  not  be held to be  trading  receipts.   The following  quotation  from the judgment of  the  High  Court fairly summarises its reasoning:-               "The amended rules were given effect from  1st               April,   1948.   To  securities  demanded   in               accordance  with  the above  rules  the  three               considerations  which  prevailed  with   their               Lordships of the Supreme Court and which  have               been  mentioned  above will not apply  to  the               instant case.  It cannot, therefore, be  said,               as  was  the case in the appeal  before  their               Lordships  of  the  Supreme  Court,  that  the               ’additional  amounts  had been  taken  without               Government’s   sanction  and  entirely  as   a               condition imposed by the appellant itself  for               the  sale of its liquor’.  Again it cannot  be

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             said  that  the  ’wholesalers  were  under  no               obligation to return the bottles.’ Lastly,  in               view of the statutory rule amended in 1948  it               cannot  be said that the deposit ’was part  of               each trading transaction a)-id was  refundable               under  the terms of the contract  relating  to               trading  transaction under which it  had  been               made." It is not in dispute that if the High Court was in error  in this  reasoning,  the present case will be governed  by  the earlier decision. With  respect  to the learned Judges of the High  Court,  we think  that  the  earlier judgment of this  Court  has  been misunderstood by them.  That judgment had not been based  on the three points mentioned by the High Court and this we now proceed to show.  The first point of distinction between the two  cases was based on the observation in the earlier  case that   the  additional  amounts  had  been   taken   without Government’s sanction and entirely as a condition imposed by the appellant itself for the sale of its liquor’.  The  High Court  apparently  thought that by this observation  it  was suggested   that  if  the  amounts  had  been  taken   under Government’s  sanction,  then  they  would  not  have   been taxable.   We  are  wholly unable to agree that  this  is  a correct   reading  of  that  judgment.    That   observation contained  only  a  recital of fact and  was  made  for  the purpose  of  distinguishing  these amounts  from  the  other amounts charged by the assessee as price of bottles to which we  have  earlier referred.  The other  amount  was  charged under a scheme framed by the Government and called the  "buy back  scheme".  We find nothing in the earlier  judgment  to show  that the conclusion there arrived at was based on  the fact that the charge had not been made with the sanction  of the Government.  That nothing turned on whether a charge was made  under  a Government scheme or purely as  a  matter  of contract would indeed appear to have always been the  common case.  Thus even before the 451 amended  rules  had come into force, the assessee  had  been ’collecting  under the aforesaid "buy scheme" which had  the sanction  of the Government, from its customers as price  of the bottles, a charge which was refundable on the return  of the bottles.  The charge now under consideration is a charge additional to that collected under the ’buy back scheme’ and this  we have earlier said.  It has never been  in  dispute, either in the earlier case or now, that the charge under the ’buy  back  scheme’ which was collected  under  Government’s sanction constituted a taxable income.  This Court had never said,  nor  was  it ever contended by the  assessee  that  a collection would not be taxable if it had been made with the sanction of the Government.  The first point of  distinction sought  to  be  made  by  the  High  Court  is,   therefore, unfounded. The  second  point  made  by the High  Court  was  that  the observation  in the earlier judgment that the  charge  could not be a security for the return of the bottles as there was no  right to such return, was no longer applicable as  under the  amended  rules there was a right to the return  of  the bottles.   We do not agree for reasons to be  stated  later, that  under the amended rules there was such a right but  we will  assume  for  the present that  there  was.   Now,  the argument in connection with which that observation was  made was  that  if  the charges were deposits  for  securing  the return  of the bottles, they were not trading receipts.   By the  aforesaid observation this Court dealt with  the  first

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part of this argument and said that the assumption that  the charges  were  for securing the return of  the  bottles  was unfounded  for  there was no right to such return.   If  the charges  were  not by way of security deposit  the  argument must,  of  course, fail.  So that was one  answer  that  was given  to the argument.  But this Court did not  stop  there and  proceeded to consider the argument as a whole,  namely, whether if the charges were security deposits, they were not trading receipts. Now,  the  reason why it was said that if the  charges  were security  deposits they were not trading receipts is  to  be found  in  two cases on which the argument was  based.   The first  was  the  case of Davies v. Shall  Company  of  China Ltd.(1). In that case the Company had delivered its  product to certain agents for sale and payment of the sale  proceeds to it.  The Company took money from each agent as deposit to secure itself against the risk of default by him to  account for the sale proceeds.  It was observed by Jenkins L.J.,               "Mr.  Grant described the agents’ deposits  as               part  of the Company’s trading structure,  not               trade  receipts but anterior to the  stage  of               trade  receipts,  and I think that is  a  fair               description of them.  It seems to               (1) (1951) 32 T.C. 133.               LP(D)ISCI--15               452               me  that it would be an abuse of  language  to               describe  one  of these agents, after  he  had               made  a  deposit, as a trade creditor  of  the               Company  in  respect of the  deposit,  not  on               account  of  any goods  supplied  or  services               rendered  by him in the course of  its  trade,               but  simply by virtue of the fact that he  has               been appointed an agent of the Company with  a               view  to him trading on its behalf, and  as  a               condition  of  his appointment  has  deposited               with  or, in other words, lent to the  Company               the amount of his stipulated deposit." That  was  the  kind of security deposit  which  Mr.  Sastri appearing for the assessee on the earlier occasion said  the "empty  bottles  return security deposits" were.   The  real point,  therefore,  in  contending that  the  deposits  were security  deposits was to establish that they were not  part of  the trading transactions at all but related to  a  stage anterior  to the trading transactions.  This contention  was rejected  and  it was held that the  "empty  bottles  return security deposits" were not the kind of deposits  considered in the Shall Company case. The  other case on which Mr. Sastri then relied was K.M.  S. Lakshmanier & Sons v. Commissioner of Income-tax and  Excess Profits  Tax  Madras(1).  That case dealt with  three  trade arrangements.  Mr. Sastri contended that the "empty  bottles return  security deposits" were the kind of  deposits  dealt with  in the third arrangement considered in that  case  but this argument also failed.  Under the third arrangement, the trader  took from its constituent at the commencement of  an expected  series of trading transactions with it  a  deposit and  kept the same till the business connection came  to  an end whereupon the deposit was refundable to the  Constituent with  interest  at  3 per cent  per  annum  after  deduction thereout  of any amount remaining due, from the  constituent on the trading transactions.  The understanding was that the constituent would pay for each purchase made by him from the trader during the continuance of the business connection and it  was  only where he failed to make the payment  that  the

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amount  due became liable to be deducted from  the  deposit. This  deposit was held by this Court to be a loan for  these reasons:  "The amount deposited by a customer was no  longer to have any relation to the price fixed for the goods to  be delivered under a forward contract-either in installment  or otherwise.   Such  price was to be paid by the  customer  in full    against    delivery    in.    respect    of     each contract...............  It  was  only at  the  end  of  the ’business connection’ with the appellants that an adjustment was to be made towards any possible liability arising out (1)  [1953] S.C.R. 1057. 453 of  the customer’s default............ The  transaction  had thus all the essential elements of a contract of loan."  (P. 1063). None  of  these  cases, therefore, was  concerned  with  the question  whether a security deposit was by its very  nature such that it could not be a trading receipt.  The first case dealt  with an actual security deposit but it was held  that that  deposit was not a trading receipt not for  the  reason that  it was a security deposit but for the reason  that  it formed,  the  structure  under  which  trading  transactions producing trading receipts were conducted and was not itself connected with any trading transaction.  In the second  case the  receipt was held to be a loan; that it might be also  a security deposit was not even mentioned.  It was held not to be  a trading receipt because it had no connection with  the trading transactions but related to a stage anterior to  the trading transactions. It is, therefore, clear that the contention that the charges formed  a  security deposit had been advanced only  for  the purpose of showing that they were not a part of the  trading transactions.   The  question  was not  really  whether  the charges were security deposits but whether they were part of the  trading  transactions  or had  been  made  at  anterior stages.   This  Court  decided that they were  part  of  the trading  transactions and were not relatable to an  anterior stage.   That is all that it was called upon to  decide  and did decide. That  on the earlier occasion this Court was  not  concerned with  the  question whether the charges made  were  security deposits or not would appear from the following observations occurring  at  p. 690.  "Mr.  Sanyal was prepared  to  argue that  even if the amounts were securities deposited for  the return of the bottles, they would still be trading receipts, for  they  were  part of the trading  transactions  and  the return of the bottles was necessary to enable the  appellant to  carry on its trade, namely, to sell liquor in them.   As we have held that the amounts had not been paid as  security for  the  return  of  the bottles, we  do  not  consider  it necessary  to pronounce upon this contention."  This  Court, therefore, did not decide that if the deposits bad been made to  secure  the return of the bottles, they could not  be  a trading   receipt.    The  High  Court  was  in   error   in distinguishing the present case from the earlier one on  the basis that this Court had then so decided. We now turn to the question whether under the amended  rules there  was any right in the distiller to the return  of  the bottles.  We think there was not and in this respect the two cases  are  identical;  in none was the  charge  in  fact  a security  deposit.  The reason for that view is  this.   The liquor  passed  through three sales before  it  reached  the consumer; first the distiller sold it to wholesaler then the wholesaler  to  a retailer and lastly, the retailer  to  the consumer, If the

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454 rules created an obligation on the wholesaler to return  the bottles to the distiller, then the rules would provide for a return of the bottles to the wholesaler by the retailer  and to the retailer by the consumer; without such rules it would be  idle to require the wholesaler to return the bottles  to the  distiller.  We have not been shown anything creating  a right  in  the  wholesaler or the retailer to  a  return  of bottles.  Clearly, the consumers were under no obligation to return the bottles in which they bought liquor.   Sub-clause (v)  of  the  rule on which the  High  Court  based  itself, referred  to the return of the bottles in which  liquor  was sold.   In  the absence of P. right in the wholesaler  to  a return  of  the  bottles  from the  retailer,  it  would  be insensible to read that provision as creating an  obligation on  the wholesaler to return the bottles.  He had  no  means under  the  rules to perform that  obligation.   That  rule, therefore,  must be read as intending only to lay down  that if the wholesaler could not return the bottles, his  deposit was liable to be confiscated under sub-cl. (vi).  Again, the rules  do not lay down any procedure by which the  distiller might  enforce the return of the bottles to him, which  they would have undoubtedly done if it was intended to give him a right to the return of the bottles.  Indeed there is nothing to  show  that  he can obtain such a  return.   Whether  the wholesaler  would be liable to punishment under the Act  for breach of his obligation to return the bottles or not is  to no  purpose, for we are now concerned with the right of  the distiller to obtain a return of the bottles.  It seems to us that the only reason why the rules required a wholesaler  to return  the  bottles to the distiller was to  authorise  the imposition  of a term of the sale upon the breach of  which, the  charges  made  for  the  bottles  would  cease  to   be refundable. We  now  come to the last point of distinction made  by  the High  Court.   On the earlier occasion this Court  had  said that the amount deposited was refundable under the terms  of the  contract constituting the trading transaction and  was, therefore,  a  trading receipt.  The learned Judges  of  the High Court seem to ’have been of the opinion that since  the rule was amended, the deposits had to be made under it  and, therefore,  were not thereafter received under the  contract or  as  part of the trading transaction constituted  by  it. With  great respect to the learned Judges, there appears  to be some confusion here.  The rule by its own force does  not compel  a  deposit to be made.  The terms of the  rule  make this  perfectly  clear.  All that it does is  to  empower  a distiller to take a deposit.  But the deposit must be  taken under a contract in regard to it; it is not taken under  the rule  itself.  In other words, all that the rule does is  to authorise the making of a contract concerning the deposit on the terms mentioned in it, the object apparently 455 being  to  avoid  any question as to  its  validity  arising later.   We may here point out that the trade in  liquor  is largely  control-( led by Government regulations.  It  must, therefore, be held that the deposit was actually taken under a contract; it was none the less so though the contract  was authorised  by  the stationery rules.  The  third  point  of distinction  on which the High Court relied was,  therefore, also  without foundation.  Whether if the deposits had  been made  without a contract and Indirectly under the rules  and in respect of a trading transaction made by a contract  they would  have been trading receipts or not, is not a  question that  arises in the present appeals and on that question  we

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express no opinion now. For these reasons we think that these appeals are completely governed by the earlier judgment of this Court and we answer the  question referred in the affirmative.  We should  state that even according to the High Court the amounts  collected as "empty bottles return security deposit" prior to April 1, 1948, were chargeable to tax. The  appeals  are allowed and the respondent  will  pay  the costs here and below. There will be one set of costs allowed as hearing fee. Appeals allowed. 456