1. The question referred to this court under Section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act), relates to the taxability of the sum of Rs. 4,042 as the income of the applicant for the assessment year 1959-60, The facts of the case agreed to by both the parties as set out in the statement of the case submitted by the Appellate Tribunal are as follows.

2. The applicant, M/s. Upper India Sugar Exchange Ltd., Kanpur (hereinafter referred to as the assessee or the Exchange), is a public limited company. It manages the business of forward transactions of its constituent members in sugar, etc. Such transactions are carried on through the agency of approved brokers who are registered with the Exchange. The members are not permitted to deal directly with one another in such transactions. For the services rendered the assessee charges from the members commission at prescribed rates. The assessee also realises from its constituents brokerage " for and on behalf of the brokers " besides a small amount as contribution towards dharmada or charitable purposes. The rates are specified ,ih bye-law 130 of the assessee-Exchange which runs as follows :

" The charges of the Exchange on all transactions, registered with the Exchange, shall be Re. 1.10 nP. (half from the buyer and half from the seller) per unit of 30 kilograms as detailed below :

Commission of the Exchange nP.

Brokerage nP.

dharmada nP. "

3. Bye-law 131, which is quoted below, provides for the liability of the assessee for payment of the brokerage received by it from the members to the concerned brokers :

" "Brokerage at the rate of 88 nP. per unit of 30 kilograms shall be paid by the Exchange to a broker for the transaction made through him and registered with the Exchange."

4. The assessee keeps its accounts on mercantile basis and it closes its accounts on the 31st March every year. It maintains a brokerage account which gives all necessary particulars regarding the amounts of brokerage received and paid. For each particular transaction the brokerage account is credited with the amount of brokerage realised and, similarly, payments made to the brokers are debited to the account. The Appellate Tribunal noticed that the brokerage account gives all details including the names of the brokers through whom the transactions have been conducted and the amount of brokerage paid or payable to them. In some years it so happens that the entire amount of brokerage realised is not paid out. The surplus of brokerage received in any particular year over the brokerage paid in that year is carried over to the balance sheet as a liability at the end of its accounting year. It may be mentioned here that, since the inception of the assessee-Exchange, such surplus brokerage had never been treated by the department as a trading receipt of the assessee and assessed to tax. There was, however, a departure from the usual practice during the assessment year under reference 1959-60 and in the preceding assessment year 1958-59. During the accounting year ending on the 31st March, 1958, relevant to the assessment year 1958-69, such surplus amounted to Rs. 12,420 and it was assessed by the Income-tax Officer as the income of the assessee for that year. The Income-tax Officer, however, remarked that if any payment were made to any broker in a subsequent year it would be allowed as a deduction in computing the assessable income for that year. The order of the Income-tax Officer was reversed by the Appellate Assistant Commissioner, who held that such surplus could not be treated as a trading profit in the hands of the assessee but the Appellate Tribunal, on appeal by the department, upheld the order of the Income-tax Officer.

5. As already stated, the present reference relates to the assessment year 1959-60, the corresponding accounting year being the financial year ending on the 31st March, 1959. In this financial year the amount of such surplus brokerage was Rs. 13,350, which was treated by the Income-tax Officer as profit of the assessee for that year. Daring this year, however, the assessee paid a sum of Rs. 9,308 to brokers in respect of last year's transactions, out of the previous surplus amounting to Rs. 12,420 mentioned above. The Income-tax Officer allowed deduction in respect of the payment of Rs. 9,308 against this year's surplus of Rs. 13,350 and added the balance of Rs. 4,042 to the total income of the assessee for the assessment year 1959-60. The assessee again appealed and the addition was knocked off by the Appellate Assistant Commissioner as before, but the Appellate Tribunal again confirmed the action of the Income-tax Officer and sustained the addition.

6. At the instance of the assessee, the following question has been referred to this court for decision :

" Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,042 was rightly treated as the income of the assessee ?"

7. In sustaining the addition of Rs. 4,042 as the income of the assessee for the relevant assessment year 1959-60, the Tribunal adopted the reasons given by it in its order for the earlier assessment year 1958-59. For that year the amount of the surplus, as we have already mentioned, was Rs. 12,420 and this amount had been included by the Income-tax Officer as profit made by the assessee. The Appellate Assistant Commissioner deleting the addition observed as follows:

" The brokerage receipts were not the company's own income, as they were received for and on behalf of brokers. The fact that instead of opening so many accounts in the individual name of brokers only a consolidated account as ' Brokerage account' was kept made no difference."

8. In coming to this conclusion the Appellate Assistant Commissioner followed the principle laid down in the case of Morley v. Tattersall, [1938] 22 T.C. 51 ; [1939] 7 I.T.R. 316 in which it was held that the quality and nature of a receipt is fixed once for all when it is received and no subsequent operation by the assessee would change the character of the receipt.

9. The Tribunal differed from the view taken by the Appellate Assistant Commissioner. It followed the decision of the Supreme Court in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax, [1959] 35 I.T.R. 519 ; [1959] Supp. 1 S.C.R. 683 and held that the amount of brokerage realised by the assessee was a trading receipt and taxable as such. The Tribunal observed in its order for the assessment year 1958-59, which forms the basis of its order for the year under reference, as follows :

" In the present case before us bye-law 130 clearly lays down that what is described as brokerage is a charge made by the assessee-Exchange on all transactions registered with it... It would thus be seen that unless any constituent makes payment of the entire charges amounting to Rs. 1.10 nP. per unit of 30 kilograms the assessee would not permit the constituents to do business through it. The brokerage credited to the assessee's account is an amount charged by it to its constituents in addition to the commission of the Exchange and as such the brokerage forms part of the trading receipt of the assessee."

10. Sri Shanti Bhushan, the learned standing counsel for the department, adopted the reasons given by the Tribunal and contended that the excess of receipts of brokerage over payments in any particular year was, in fact, the income of the assessee. He referred to bye-law 130 of the Exchange in which all charges in respect of :

Commission of the Exchange @ 20 nP.

Brokerage @ 88 nP. and Dharmada @ nP.

11. per unit of 30 kilograms, have been referred to as " the charges of the Exchange," which meant that all these amounts belonged to the Exchange when paid by the members and the fact that the Exchange subsequently paid out brokerage to the broker concerned at the same rate, namely, 88 nP. per unit, could not change the hature of the charges which were trading receipts of the Exchange. He relied on the decision of the Supreme Court in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax.

12. The arguments of the learned standing counsel, though seemingly plausible, do not bear scrutiny. The provisions of bye-law 130 have to be read with bye-law 131 which says :

"Brokerage at the rate of 88 nP. per unit of 30 kilograms shall be paid by the Exchange to a broker for the transaction made through him and registered with the Exchange."

13. The language of this bye-law makes it compulsory on the Exchange to pay out the entire amount of brokerage to the broker concerned in the particular transaction. It is not open to the assessee to appropriate any amount out of the payments made by the transacting members except its own commission ; the brokerage is payable to the broker and darmada has to be set apart for charity. Direct dealings between the members being prohibited, it is not open to them to pay brokerage to the brokers and, therefore, the members pay the amount of brokerage to the Exchange. As we have pointed out earlier, the agreed statement of the case says that the assessee " realises from the constituents the brokerage for and on behalf of the brokers". Thus, the assessee merely acts as a clearing house or a conduit pipe to pass on the brokerage received from the members to the brokers.

14. In fact, as we have already noticed, the assessee never treated the brokerage as trading receipt in its accounts. The brokerage received by the assessee from its constituents and payments made to brokers were, respectively, credited and debited to a consolidated brokerage account. In this account all particulars relating to the transaction including the names of the brokers and the brokerage payable or paid to them were recorded. Unclaimed balances in this account were carried over to the balance-sheet at the end of the year and shown as a liability. The amounts of brokerage received by the Exchange constituted its liability from the very beginning. In the case of Morley v. Tattersall, to which we have referred above, the assessee was a firm which carried on the business of auctioneers. Considerable sums payable to the clients remained unclaimed. Ultimately, accumulations representing unclaimed sums of several years were transferred to the credit of the partners of the firm. The amounts so transferred were taxed in the hands of the partners as their income. The firm appealed contending that these unclaimed balances were not at any time profits or trading receipts of the firm, but were its liabilities. The appeal of the firm was allowed by the Special Commissioners, who accepted the contention of the assessee that unclaimed balances did not represent trading receipts of the firm and that, therefore, it was not assessable to income-tax. Being dissatisfied with the decision, the Crown appealed to the King's Bench Division of the High Court and there the appeal succeeded. Lawrence J., who delivered the judgment of the Bench, observed as follows :

I have come to the conclusion that these balances, when distributed to the partners, are trading receipts, and that, if and when any claim is made thereafter, such claim, if successful, should be treated as a proper debit against the profits of the year in which it is made. The balances arise in the course of the business, and by reason of the conditions laid down by the partnership. It is to be inferred that they arise annually in many years, if not in every year. No immediate liability to pay exists in respect of the balances ; the liability is merely contingent......Once it is conceded, as it must be conceded in view of the authorities, that a receipt in the course of and arising out of trade may be a trading receipt for income-tax purposes, although a contingent liability attaches to it, I can see no reason why the unclaimed balances, which are received in the manner in question in the present case, should not be regarded as trading receipts.

15. The firm thereupon preferred an appeal before the Court of Appeal. The judgment in that appeal was delivered by Sir Wilfrid Greene M. R., who reversed the decision of the King's Bench and observed as follows :

" 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."

16. The learned judge repelled the argument of Mr. Hills, counsel for the Crown, that even if the receipts were not trading receipts, at the beginning, they became so on conversion thereof by the partners of the firm. In repelling the contention the learned judge observed :

"Mr. Hills' argument was to the effect that, although they wore not trading receipts at the moment of receipt, they had at that moment the potentiality of becoming trading receipts. That proposition involves a view of income tax law in which I can discover no merit except that of novelty.

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 rase 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. "

17. Turning to the last line of the above quotation it would appear that if an amount is a trading liability at the time of its receipt it will continue to be so at all material times. Even if such unclaimed amounts accumulate year after year they will nevertheless continue to be a liability of the assessee despite the magnitude of the accumulation and eventual conversion thereof by him. As we have already noticed, the amount of brokerage received by the Exchange in the present case was initially a trading liability, as it was received by the Exchange " for and on behalf of the brokers " and, under bye-law 131 quoted above, the Exchange was bound to pay the same to the brokers concerned. The present case evidently falls within the rule laid down in the case of Morley v. Tattersall.

18. The case of Punjab Distilling Industries Lid. v. Commissioner of Income-tax, a decision of the Supreme Court, which was relied upon by the learned standing counsel, is clearly distinguishable. In that case the assessee carried on the business as a distiller of country liquor and sold the same to licensed wholesalers. After the war started the demand for the country liquor increased. A difficulty was felt in finding bottles in which the liquor was to be sold. The Government, therefore, permitted the distiller to charge a wholesaler a price for the bottles in which the liquor was supplied. The distiller was bound to repay to the wholesaler the price of the bottles when they returned the same.

19. In addition to the price fixed by the Government, the assessee took from the wholesalers certain further amounts described as security deposits without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. Such additional amounts described as security deposits were also returned as and when ninety per cent. of the bottles were returned. The price of the bottles received by the assessee was entered by it in its general trading account, while the additional sums were entered in a general ledger under the heading " Empty Bottles Return Security Deposit Account." The question before the Supreme Court was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds had been made thereout. It was held that, in realising the additional amounts described as security deposits, the assessee was really charging an extra price for the bottles and the additional amount was actually a part of the consideration for the sale of the liquor and was part of the price of what was sold. It did not make any difference that the additional amount was entered in a separate ledger termed " Empty Bottles Return Security Deposit Account. " In that case it was found that the additional amounts when they were paid were the, moneys of the assessee and, therefore, they were the assessee's trading receipts and, hence, the balance of such additional amounts left after the refunds made thereout, were assessable to tax. The case of Morley v. Taltersall came in for consideration of their Lordships, but they observed that there was no similarity between that case and the case which their Lordships had to decide. It was observed that in Tattersall's case: it was never contended that the amounts when received as price of the constituent's horses sold were Tatter-sail's income, and the only contention was that they became income upon being transferred to the credit of the partners. In the case before the Supreme Court, however, the moneys when paid were the moneys of the appellant and were, therefore, in no sense, the moneys of the persons who paid them (pages 530-531).

20. The facts of the present case are in pan materia with those in the case of Agra Bullion Exchange Ltd. v. Commissioner of Income-tax, [1961] 41 I.T.R. 472 decided by a Division Bench of this court. In that case the assessee company maintained a trading hall where licensed members did business in bullion through licensed brokers. The assessee company realised from the members the following amounts as charges of the Exchange :

Commission 0-4-0 Dalali (brokerage) 0-15-0 Dharmada (charity) 0-1-0

21. per parcha on purchase and sale. The assessee-company was entitled to retain for itself only the commission while the brokerage was passed on to the brokers through whom transactions were entered into and the amount of difference was passed on to the trading party entitled thereto. The amount received on account of charity had to be spent in accordance with the rules of business of the company. The question was whether the amount received by the company on account of charity was the company's income taxable in its hands. It was held that, on the facts of the case, the amount was not received by the company as its income. The payment on account of charity made by a trading member was not payment for the company but one for charity and it was only entrusted to the company for the purposes of disbursement. Delivering the judgment of the Bench, Upadhya J. observed as follows :

In the instant case the amount earmarked for charity by the trading members of the assessee-company never accrued as an item of income to the assessee at all. The amounts were given for charity and the assessee-company may be likened to a conduit pipe through whom the amounts passed...... The amounts claimed to be exempted were not part of the assessee's profits ; nor does the company contend that the amounts cannot be taxed, because they have been spent on charity by the assessee out of its own profits. As mentioned above, the dispute relates to the initial character of the receipt itself and is as to whether the amount paid by the trading members earmarked for charity was the assessee's income at all

22. It would be noticed that in the above case the unclaimed balance of brokerage was not sought to be taxed by the department at all.

23. On a review of the authorities cited at the bar, it would appear that the taxability of such unclaimed balances would depend on the nature and character of the initial receipts. If the amounts initially received partake of the character of a trading receipt, the unclaimed accumulations of such receipts would necessarily be taxable as such; if, however, the amounts are initially the trading liability of the assessee, the unclaimed balances cannot be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit. In the present case, as we have noticed above, the amounts initially received by the assessee were its trading liabilities and, therefore, the amount in question is not liable to be assessed as the income of the assessee. In the circumstances', we answer the question referred to this court in the negative and in favour of the assessee. The assessee would be entitled to its costs which we assess at Rs. 200.