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Commissioner Of Income Tax v. Bijli Cotton Mills (P.) Ltd.
Factual and Procedural Background
This reference arises under Section 66 of the Indian Income-tax Act, 1922, concerning the assessment year 1951-52 and the previous calendar year 1950. The assessee, a private limited company manufacturing yarn, supplied yarn worth Rs. 2,28,325 to a Bombay party named Messrs. Sukh Dayal Ram Bilas. In early 1948, the Government imposed an additional excise duty on yarn. Anticipating liability for this duty on the yarn supplied, the assessee requested the Bombay party on February 8, 1948, to pay Rs. 74,361 towards the potential additional excise duty, clarifying that if the duty was not payable, the amount would be refunded. The Bombay party paid this amount in March 1948. Subsequently, the assessee persuaded the Government that no such excise duty was payable on this supply, resulting in the amount not being paid to the Government. The assessee refunded Rs. 7,239 to the Bombay party and credited the remaining Rs. 67,125 to its capital reserve account in 1950.
For the assessment year 1951-52, the Income-tax Officer treated the Rs. 67,125 as the assessee’s income for 1950. This was upheld by the Appellate Assistant Commissioner but reversed by the Appellate Tribunal, which held that the amount did not constitute income for that year and deleted it from the assessment.
The Commissioner of Income-tax, Lucknow, referred the question of law to the court challenging the Tribunal's decision.
Legal Issues Presented
- Whether, on the facts and circumstances, the sum of Rs. 67,125 credited to the capital reserve account in 1950 was a business receipt assessable to income-tax in the assessment year 1951-52?
Arguments of the Parties
Commissioner of Income-tax's Arguments
- The receipt of Rs. 67,125 in March 1948 should be regarded as a trading receipt.
- Reference was made to the letter dated February 8, 1948, and a telegram referring to Rs. 74,361 as the difference between the old and new price, indicating this was part of trading transactions.
- Reliance on Section 64A of the Sale of Goods Act was made, which allows the seller to add to the contract price an amount equivalent to excise duty paid or payable, supporting the contention that the amount was a trading receipt.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Morley v. Tattersall, [1938] 22 T.C. 51; [1939] 7 I.T.R. 316 | The quality and nature of a receipt for income-tax purposes is fixed once and for all when it is received. | The court applied this principle to determine that the receipt in March 1948 fixed the nature of the amount, and no later accounting entries in 1950 could alter its character as income for that earlier year. |
Court's Reasoning and Analysis
The court first accepted the Commissioner's argument that the initial receipt of Rs. 74,361 in March 1948 was in the nature of a trading receipt, supported by the letter and telegram references and the Sale of Goods Act provision allowing adjustment of contract price by excise duty amounts.
However, the court emphasized the timing of income recognition, relying on the principle from Morley v. Tattersall that the character of a receipt is fixed when received. Since the amount was received in March 1948 and remained with the assessee until the end of 1950, the court focused on whether the amount credited to the capital reserve account in 1950 constituted income for that year.
The court noted that no new receipt occurred in 1950, only accounting entries were made. The question of consent from the Bombay party regarding the adjustment was deemed irrelevant to the income recognition issue. Consequently, the court held that there was no income of the assessee in 1950 relevant to the assessment year 1951-52.
Thus, the Tribunal was correct in deleting the Rs. 67,125 from the income assessment for 1951-52.
Holding and Implications
The court held that the sum of Rs. 67,125 credited to the capital reserve account in 1950 was not a business receipt assessable to income-tax for the assessment year 1951-52.
The question was answered in favor of the assessee. The Commissioner of Income-tax, Lucknow, was ordered to pay Rs. 200 as costs of the reference. The decision directly affects the parties by confirming the non-taxability of the amount in the disputed assessment year. No broader precedent beyond the facts of this case was established.
1. This is a reference under Section 66 of the Indian Income-tax Act, 1922. The assessment year is 1951-52. The previous year was the calendar year 1950. The assessee is a private limited company manufacturing yarn. The assessee supplied yarn to a Bombay party by name Messrs. Sukh Dayal Ram Bilas. The yarn sold was worth Rs. 2,28,325. In the beginning of 1948, the Government imposed additional excise duty on yarn. The assessee apprehended that it might be required to pay additional excise duty on the yarn supplied to the Bombay party. On February 8, 1948, the assessee called upon the Bombay party to pay a sum of Rs. 74,361 towards additional levy that might be required to be paid to the Government. It was made clear in that letter that in case the amount was not paid to the Government, the amount would be refunded to the Bombay party. The Bombay party paid the assessee the sum of Rs. 74,361 in March, 1948, The assessee, however, persuaded the Government that no such additional excise duty was payable by the assessee on the yarn supplied to the Bombay party. The result was that the money remitted by the Bombay party to the assessee towards additional levy was never paid to the Government. Out of the amount lying with the assessee, a small amount of Rs. 7,239 was refunded by the assessee to the Bombay party. The balance remained with the assessee. In the calendar year 1950 the assessee credited the balance amounting to Rs. 67,125 to the capital reserve account of the assessee. For the assessment year 1951-52, the Income-tax Officer held that the sum of Rs. 67,125 represented the assessee's income during the calendar year 1950. The decision was upheld in appeal by the Appellate Assistant Commissioner. But the assessee succeeded before the Appellate Tribunal. The Tribunal held that the sum of Rs. 67,125 did not constitute the assessee's income for assessment year 1951-52. This sum of Rs. 67,125 was, therefore, deleted.
2. At the instance of the Commissioner of Income-tax, Lucknow, the Appellate Tribunal has referred the following question of law to this court:
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 67,125 appropriated to the capital reserve account of the assessee in 1950 was not a business receipt assessable to income-tax in the assessment year 1951-52?"
3. In dealing with the item of Rs. 67,125 the Tribunal framed two issues. The first issue was whether the amount that was received from the Bombay party was at all a trading receipt. The second issue was whether the amount was liable to tax in the year in which it was received or in the year in which it was credited in the capital reserve account. On the first issue the Tribunal's finding was that the amount received from the Bombay party did not constitute trading receipt of the assessee. On the second issue the Tribunal held that, even on the assumption that it was a trading receipt, it was not income for the assessment year 1951-52.
4. Dr. Misra, appearing for the Commissioner, challenged the Tribunal's finding on the first issue. Dr. Misra urged before us that the receipt of Rs. 67,125 by the assessee in March, 1948, must be regarded as a trading receipt. Reference was made to the letter dated February 8, 1948, sent by the assessee to the Bombay party. A telegram sent by the assessee to the Bombay party was quoted in that letter. In that telegram the sum of Rs. 74,361 was referred to as the difference between the old price and the new price.
5. Dr. Misra also relied upon Section 64A of the Sale of Goods Act. According to Clause (a) of Section 64A, Sale of Goods Act, the seller my add so much to the contract price as will be equivalent to the amount paid or payable in respect of excise duty on goods.
6. We, therefore, find some force in Dr. Misra's contention that the receipt of Rs. 74,361 in March, 1948, was in the nature of a trading receipt.
7. But such as answer on issue No. 1 is not likely to be of much benefit to the Commissioner in the present reference. The question remains whether this was a trading receipt during the previous year relevant to the assessment year 1951-52. In Morley v. Tattersall, [1938] 22 T.C. 51; [1939] 7 I.T.R. 316 Sir Wilfrid Greene M. R. observed on page 65 that the quality and nature of a receipt for income-tax purposes is fixed once and for all when it is reserved.
8. In the instant case the sum of Rs. 74,361 was received by the assessee from the Bombay party in March, 1948. The amount remained with the assessee from March, 1948, till the end of the calendar year 1950. All that happened in 1950 was that the assessee made certain entries in its account books in the account of the Bombay party. The sum of Rs. 67,125 was credited to the capital reserve account of the assessee.
9. There was some discussion before us as to whether the adjustment was made with or without the consent of the Bombay party. The assessee contended that the Bombay party was agreeable to such adjustment. The Appellate Assistant Commissioner was not prepared to accept that position. The Tribunal has not gone into the question of the alleged consent of the Bombay party. We do not think that the alleged consent of the Bombay party would make much difference as regards the question whether there was any income of the assessee in the calendar year 1950. We have seen that the amount in question was received by the assessee as far back as March, 1948. There was no further receipt during the calendar year 1950. So, even on the assumption that there was a trading receipt during the year 1948, there was no income of the assessee during the calendar year 1950. The net result is that there was no income of the assessee for the previous year relevant to the assessment year 1951-52, The Tribunal was right in deleting this amount of Rs. 67,125.
10. Our answer to the question referred to this court is that, on the facts and in the circumstances of the case, the sum of Rs. 67,125 was not a business receipt assessable to income-tax for the assessment year 1951-52. The question is answered in the assessee's favour. The Commissioner of Income-tax, Lucknow, shall pay the assessee Rs. 200 as costs of the reference.
Question answered in favour of the assessee.
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