1953 (6) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Whether the security deposits collected by the assessee company for the return of empty bottles were income assessable under Section 10 of the Income-tax Act.
2. Whether the collections described as empty bottle return security deposits were in fact a portion of the sale proceeds of bottles and therefore trading receipts of the company.

Issue-wise Detailed Analysis:

1. Nature of Security Deposits as Assessable Income:
The primary issue was whether the security deposits collected by the assessee company for ensuring the return of empty bottles constituted income assessable under Section 10 of the Income-tax Act. The assessee company, incorporated in May 1945, continued the practice of its predecessor, the Amritsar Distillery Company Limited, of collecting security deposits from wholesalers. These deposits were refundable pro rata against the return of empty bottles. The Income-tax authorities treated the unrefunded balances of these deposits as the company's taxable income. The Tribunal found that the bottles were expected to be returned within a reasonable period, and the monies were to be refunded when those bottles were returned. The Tribunal concluded that these funds lying in deposit were income in the hands of the assessee because if the bottles were not returned, the assessee benefited from the cash, and if they were returned, the bottles became stock-in-trade for further use.

2. Security Deposits as Trading Receipts:
The second issue was whether the collections described as empty bottle return security deposits were in fact a portion of the sale proceeds of bottles and therefore trading receipts of the company. The Tribunal found that the collections of deposits were, in their inception, part of the sale proceeds of bottled liquor. The assessee was essentially charging an extra price for the bottles, which was repayable upon the return of the bottles. The Tribunal concluded that these sums, which were the unrefunded balances of the security deposits, were rightly included in trading receipts.

Legal Reasoning and Precedents:
The court examined the nature of the transactions entered into by the assessee company. From 1940 to 1944, the predecessor company collected security deposits to ensure the return of bottles, which were refundable pro rata against the return of bottles. In 1944, the Financial Commissioner recognized the company's claim to charge a penalty for non-return of bottles. The court noted that the practice continued post-1944, with the assessee company collecting security deposits, which were refundable upon the return of bottles. The court distinguished this case from Morley (Inspector of Taxes) v. Tattersall [1938], where the money received by auctioneers was never their money but the customers' money. The court found that in the present case, the collections of deposits were part of the sale proceeds of bottled liquor, making them trading receipts.

Supreme Court Precedent:
The court referred to the Supreme Court's decision in K.M.S. Lakshmanier and Sons v. Commissioner of Income-tax and Excess Profits Tax, Madras [1953], where the Supreme Court held that deposits received under certain arrangements were trading receipts and not borrowed money. The court applied this principle, concluding that the nature of the receipts in the present case was trading receipts.

Conclusion:
The court answered the question in the affirmative, holding that the amounts received by the assessee as empty bottle return security deposits were trading receipts and should be treated as such. The assessee was ordered to pay the costs of the Commissioner of Income-tax, with counsel's fee set at Rs. 1,000. The reference was answered accordingly.