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TMI Blog1990 (3) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... s collected were accounted for as income in the immediately preceding assessment years. 3. Before deciding the includibility or otherwise of the sum of Rs. 89,60,696 as part of income of the assessee or not it is very essential for us to know about the nature of the credit guarantee commission and how the said commission was modified from time to time. The APSFC filed a paper book and pages 19 to 24 of the said paper book represents a Memorandum to its Board meeting dated 11-9-1985. The evolution of the credit guarantee scheme from time to time was clearly traced out in that Memorandum. It is stated that the credit guarantee scheme for small scale industries was originally introduced by the Government of India in July 1960. The said scheme was administered by a Wing of the Reserve Bank of India known as Guarantee Organisation. The scheme was introduced with a view to encourage the State Financial Corporations and Commercial Banks in sanctioning more loans to the small scale industries and to cover their risks associated in advancing loans to the small scale sector as they are highly vulnerable to sickness. The scheme was intended to cover the consequent losses to the term lending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for small scale industrial units will be considered to the loans advanced by all eligible credit institutions subject to their being covered under the Credit Guarantee Scheme. 4. The APSFC and the Uttar Pradesh State Finance Corporation are the two Corporations which appear to have expressed certain reservations and pending clarification from the Reserve Bank of India they have not joined the Scheme as such. Particularly the APSFC felt that there was a substantial hike in guarantee fee for a second time since 1979 and the burden of payment of guarantee fee has become too much having regard to the corresponding benefits accrued from the scheme. 5. The APSFC has been debiting the guarantee fee to the respective loan accounts in respect of loans above Rs. 1 lakh. Even prior to the hike in the guarantee fee the parties were showing reluctance to pay the same to the APSFC resulting in accumulated overdues from time to time. With the increased rates according to the Scheme, the problem of recovery of guarantee fee from the borrowers will be increased in view of the revised SSI definition as more number of units will have to be covered under the scheme and thereby the overdues posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dified scheme from 1-4-1981. 7. Subsequently in 1982 when the APSFC was advised to join the modified scheme by IDBI in order to get refinance on its advances made to SSI units, at the instance of APSFC, the Government of Andhra Pradesh made representations to the Union Ministers for Industries and Finance requesting to examine the various anomalies in the operation of the modified scheme and to delink the scheme from the refinance scheme of IDBI. However, no decision has come from the authorities regarding the anomalies, etc. since no decision was arrived at on the subject the APSFC could not take any final decision on the subject and was not able to decide whether or not to join the modified scheme operated by DICGC. 8. Pending decision of the APSFC to join or not to join the scheme it had given a letter of undertaking to the IDBI, on the filing of which refinance was released to it in respect of all loans to the small scale industrial units. The undertaking given by the APSFC to the IDBI dated 16-3-1982 is as follows : " We hereby undertake to join the new guarantee scheme operated by Deposit Insurance and Credit Guarantee Corporation (DICGC) with retrospective effect from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sanction of term loans beyond Rs. 25 lakhs the interest charged is 1% less. The APSFC felt that it is a time consuming exercise for settlement of claims besides being very expensive. The settlement of each claim on an average will take six months to one year after protracted correspondence and APSFC has been spending some lakhs of rupees per annum towards administrative expenses for the operation of the scheme. Once a decision is taken by the APSFC to join the modified scheme it has to establish a separate section to look after this work both at branch offices as well as at head offices, which means further recurring expenditure on the administrative side. 9. Thus the pros and cons of joining the scheme were put forward in a memorandum prepared for the Board meeting of the APSFC held on 11 -9-1985, which was figuring as item No. 25 of its agenda. On 11-9-1985 after going through the merits and demerits of the modified scheme enumerated in the memorandum the executive body of the Board passed a resolution as follows : " Resolved to authorise the Managing Director to suitably take up the matter concerning the operation of modified Credit Guarantee Scheme with IDBI and request IDB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollected Rs. 89,60,696 from loanee concerns towards credit guarantee commission, during the year and the same is shown under ' liabilities ', whereas the same was accounted as ' income ' tin the immediate previous year pending final decision on 'delinking of DICGC scheme from the refinance scheme. The company has not accounted this sum as income of this year. The Income-tax Officer felt that with the result of this change in accounting of the APSFC the income for the assessment year 1985-86 was lower by Rs. 89,60,696 as per its own admission in the note. The matter was put for clarification of the APSFC and the APSFC filed a note dated 12-1-1988. In the said note it was stated that the amount collected from the loanee institutions is to be paid to the DICGC if a final decision is taken to be so. If on the other hand, it is finally decided that the APSFC should not participate in the credit guarantee scheme, the amount is to be repaid to the loanee institutions and in either case the Corporation would not retain this money. The APSFC under those circumstances claimed that the amount should not be treated as income. However, the Inspecting Assistant Commissioner (Assessment) Range-I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not mercantile, though it was wrongly stated to be so in the assessment order. The learned Commissioner (Appeals) purporting to follow the Supreme Court decision in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542, felt that the APSFC may not be justified in claiming deduction for the amount payable by it in its turn to the DICGC on accrual basis and since the amounts were collected from customers in the course of its business activity, the inclusion of the same as part of APSFC's receipt appears to be quite justified. He held that applying the ratio of the Supreme Court decision in Chowringhee Sales Bureau (P.) Ltd's case the Inspecting Assistant Commissioner should be held to have rightly included the amount in question as income of the APSFC. Further the APSFC has been admitting similar amounts collected in previous years as part of its income. If the APSFC has been adopting mercantile system, then it might be entitled to claim the corresponding amount payable by it to the DICGC as a deduction in its assessment. Since the APSFC has been following the cash method of accounting the corresponding liability to the DICGC cannot be permitted as a deduction since the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission collected by it right from 1-4-1981. We accept these points of distinction and we hold that for these the Supreme Court case is distinguishable from the facts of the present case. 13. Let us examine the nature of the guarantee commission. The whole modified scheme appears to us to be as follows. The role of DICGC in the modified scheme appeared to be analogous to an insurer against loss or a guarantor for and on behalf of the small scale units to whom the APSFC and other financial institutions advanced moneys. The loans granted to the SSI units often go risky since those units often go sick and the realisation of the loans would not be possible to the financial institutions. The role of the DICGC appears to be that it would guarantee repayment of loans taken by the SSI units from the APSFC. The premium it receives from the SSI units through the APSFC would be a consideration for the DICGC to stand as a surety for such SSI units. The DICGC makes up the loss if any sustained by the APSFC in respect of loans advanced to the SSI units of course within agreed limits. The loanees (SSI units) having borrowed from the APSFC go on repaying the loans and also provide insurance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances we hold that no part of the Guarantee Commission collected can be considered to be a trading receipt in the hands of APSFC. We also hold that the Supreme Court decision in Chowringhee Sales Bureau (P.) Ltd.'s case is quite distinguishable from the facts of the present case, since in that case the assessee always maintained that while keeping custody of the sales-tax amount collected it is not liable to pay sales-tax, since the auction sale is not a sale and the State Legislature is not entitled to levy sales-tax. The assessee in that case did not pay the sales-tax amount to the seller of the goods or paid the amount to the State Government. In the receipts passed by it the assessee was only shown to be the seller of the goods. However, in this case even at the time of receipt it was made clear by the APSFC that the amount of Guarantee Commission should go to the DICGC and does not form part of its trading receipt. Thus there is distinction between the Supreme Court decision and the present case before us. 14. The learned counsel for the APSFC contended that from the very moment of receipt of the Guarantee Commission it was received for and on behalf of either DICGC to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on business of manufacturing and selling yarn had realised amounts on account of ' Dharmada ' from its customers on sales of yam and cotton, at the rate of one anna per bundle of 10 Lbs. of yam and two annas per bale of cotton. In the bills issued to the customers these amounts were shown in a separate column headed ' Dharmada '. The assessee did not credit the amounts so realised by it in its trading account, but maintained a separate account known as the ' Dharmada account ', in which the realisations on account of Dharmada were credited and payments made thereunder were debited. The Tribunal held that the amounts could not be regarded as trading receipts. The High Court reversed that finding. On appeal the Supreme Court held that the ' Dharmada ' amounts could not be regarded as part of the price or a surcharge on the price of goods purchased by the customers. The amount of ' Dharmada ' was undoubtedly a payment which a customer was required to pay in addition to the price of the goods which he purchased from the assessee, but the purchase of the goods by the customer would be an occasion and not the consideration for the ' Dharmada ' amount taken from the customer. It was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he APSFC as trustee of those amounts collected and by virtue of overriding title the amounts collected towards credit guarantee commission should not be considered as part of the trading receipts in the hands of the APSFC. To support this legal proposition the learned counsel, Shri Rathnakar has cited the Supreme Court decision in CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776. In that case the assessee was a social and sports club, which had conducted horse races with amateur riders and charged fees for admission into the enclosure of the club at the time of the races. In 1945 a resolution was passed at the general body meeting of the club for levying a surcharge of eight annas over and above the admission fees and it was agreed that those proceeds should go to the Red Cross Fund. This resolution was varied by another dated 30-1-1950 to the effect that the surcharge should be earmarked ' for local charities and not solely for the Indian Red Cross '. Every entrant was issued two tickets, one an admission ticket for admission to the enclosure of the club, and the other a separate ticket in respect of the surcharge of eight annas for local charities. The question was whether receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this case to the facts on hand, the learned advocate submitted that the guarantee commission was collected separately. From the beginning the receipt was towards the discharge of a liability of the APSFC. In the balance sheet prepared for the assessment year under consideration it was noted under schedule ' O ' paragraph 7 that the amount of Rs. 89,60,696 was shown under the head ' liabilities '. Therefore the amount in question cannot be treated as the income of the APSFC at all. 18. The learned advocate for the APSFC cited the Allahabad High Court decision in Addl. CIT v. Brijlal Gupta [1974] 94 ITR 88. The assessee in this case is a senior advocate. He received a professional income of Rs. 80,745. He claimed 10% of the amount for being paid as clerkage to his clerical establishment and contended that it was not his income. When the question came up ultimately before the High Court, the High Court took up the question whether a senior advocate can engage a clerk and it was ultimately found that a senior advocate also can engage a clerk and the argument that a senior advocate's clerk had no function whatever to perform and if a senior advocate maintains a clerk that practice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived as trade receipt. This decision was sought to be pressed into service for the argument that firstly the Guarantee Commission was a separate category of receipt and it was never intended to be received as part of the trading receipt by the APSFC and the APSFC would be a trustee for DICGC with regard to the Guarantee Commission collected if ultimately the APSFC, joins the modified scheme of 1981. If it does not join the scheme according to the option open to it, which may be conceded by the IDBI, then the money collected towards Guarantee Commission is liable to be paid to the loanee institutions and it becomes an agent for those institutions and in which case the APSFC stands in a fiduciary capacity even with regard to the loanee institutions. 20. Another decision cited before this Tribunal is that of the Bombay High Court in the case of CIT v. Tanubai D. Desai [1972] 84 ITR 713. The headnote of the said decision is found to have revealed the ratio of the same, which is as follows : " In view of the provisions of the rules of the Bombay High Court on its original side, the position of a solicitor vis-a-vis the money received by him from or on behalf of his clients is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is found that freight has been charged on a weight greater than that of the coal actually despatched then a claim is lodged with the colliery for refund of this extra freight charged. This is known as ' under-loading charges ' shortly referred to as ' under-charges '. The assessee collected the under-loading charges from the colliery, independent and irrespective of any demand from the consignees. Some of the consignees demand the under-charge and the assessee passed on the amounts received by it. There were also cases where the amounts were not demanded. The question of assessability of under-charges collected and not demanded by the consignees fell for consideration before the Calcutta High Court. Negativing the contention of the Revenue the Calcutta High Court held that the amounts collected by way of under-charges had been received by the assessee as an agent and, therefore, in a fiduciary capacity vis-a-vis the consignees. Such amounts did not constitute trading receipts and accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be as income of the assessee. This decision was pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission was determined with reference to the capacity under which it was received, the subsequent conduct of the APSFC from the subsequent entry of the said guarantee commission in the books of account of the APSFC will not affect the true legal position of the said receipt. Therefore simply because for some years the amount is taken as income of the APSFC in the earlier years it does not estop the assessee to contend either the real nature of the receipt or the taxability of it. 23. The next decision cited on behalf of the APSFC was the Andhra Pradesh High Court decision in CIT v. Andhra General Finance Corpn. [1985] 156 ITR 386/ 20 Taxman 312. In that case the assessee was a registered firm carrying on business as financiers under hire purchase arguments. It advanced money on hire purchase agreements to the intending purchasers of motor vehicles against hypothecation of the vehicles. The loans advanced were repayable in instalments, together with the stipulated interest thereon. In addition, the assessee also collected from its constituents certain amounts payable by them to the Hindustan Ideal Insurance Company (HIIC) towards premia on account of ' accident insurance policies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the question was whether the sum of Rs. 80,55,976 did not represent interest income at all. According to the assessee the correct interest income to be taken into account was the net income after setting off the rediscounting charges paid to the Reserve Bank of India and the Industrial Development Bank of India under the IDBI Bills Rediscounting Scheme. The Income-tax Officer as well as the Appellate Assistant Commissioner rejected the contention put forward by the assessee and treated the impugned sum of Rs. 80,55,976 as part of income of the assessee. However, the Tribunal, on an interpretation of the Bills Rediscounting Scheme, held that the transaction entered into between the purchaser and the bank under the scheme was one integrated transaction and the rediscounting of the bills by the assessee with the Industrial Development Bank of India could not be considered as a separate transaction. The Tribunal also held that even though a larger interest was collected from the purchaser, the assessee-bank had to pay a portion of it to the Industrial Development Bank of India in accordance with the scheme and also undertook to get those rediscounted bills back by paying them well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the scheme for which it could retain up to 1.75 per cent which alone accrued to the bank and in respect of the remaining interest received from the purchaser on the advance made to him, there was an overriding title of the Industrial Development Bank of India. Ultimately the High Court held that the Tribunal was right in holding that the sum of Rs. 80,55,976 representing the rediscounting interest paid on bills did not form part of the interest income of the assessee chargeable under the provisions of the Interest Tax Act, 1974. This decision is stated to be very near to the facts on hand. It was also cited to impress upon us that just like the assessee in that case the APSFC acts only as a conduit pipe or a media for collecting and making over the guarantee commission from the loanee institutions to the DICGC. It is also cited to be pressed into service for the proposition that the amount of Rs. 89,60,696 collected as guarantee commission cannot be considered to be the income in the hands of the APSFC. The learned counsel wanted to impress upon us the fact that just like in the case before us, in the case decided by the Karnataka High Court also there was a scheme under which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us in the note filed before the Inspecting Assistant Commissioner dated 12-1-1988 the APSFC clearly undertook that the amounts collected towards guarantee commission were to be paid to the DICGC if a final decision is taken to be so. Otherwise if an option is given and the APSFC exercises the option and decides not to participate in the credit guarantee scheme, the amount is to be repaid to the loanee institutions. Further in ground No.3 preferred before this Tribunal the APSFC clearly admitted that the guarantee commission collected had to be either paid to the DICGC or should be paid back to the loanee institutions from whom it is collected and thus it is merely an agent and this amount was collected only in a fiduciary capacity and as such it did not partake, the character of income. Thus at more than one place the assessee had acknowledged itself to be merely an agent or a conduit pipe to pass all these moneys collected as guarantee commission either to DICGC or to the loanee institutions and it acted only as a trustee of those moneys collected. 26. It is next contended that merely because the assessee treated the amounts collected in a particular way it does not determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us hold that the Supreme Court decision in Chowringhee Sales Bureau (P.) Ltd's case is not at all applicable to the facts of the present case and that each of the decisions cited on behalf of the APSFC would support its contention in one facet or the other. When the APSFC did not join the modified credit guarantee scheme introduced from 1-4-1981 we fail to understand why it was under a duty to pay the credit guarantee commission to the DICGC. On the last day of the previous year relevant to the assessment year 1985-86 the view is not clear. It is not known whether the APSFC is going to join the scheme or whether it had been given an option to get out of the scheme. In the meanwhile, however, in order to get refinance to the loans advanced by it the APSFC gave an undertaking, the text of which is already extracted above, saying that if it is compulsory for it to join the scheme it undertakes to pay the guarantee commission retrospectively from 1-4-1981. Therefore, we hold that as the matter stands on the last day of the previous year relevant to the assessment year 1985-86 the assessee is not under a legal obligation to pay the credit guarantee commission to the DICGC. In our opini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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