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TMI Blog1953 (6) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... hus there were five appeals but the point involved in all of them was the same. The assessee company was incorporated in May, 1945, and obtained the certificate of commencement on the 2nd of June, 1945. In reality it was a reconstructed company which was originally the Amritsar Distillery Company Limited and it had taken over the undertaking of the old company with all its assets and liabilities as from the 1st of December, 1944. For the purposes of income-tax the accounting year of the old as well as the new company ended with November of every year. The point in dispute relates to the empty bottle security deposit account which arose in the following circumstances. Before World War II bottles were cheap but difficulty was anticipated in regard to the supply of these bottles as the war progressed. In January, 1940, therefore, the Financial Commissioner of Lahore issued a circular in regard to the excise auctions held in that month. Note 2 to paragraph 6 of this circular was:- At the time of auction it should be explained to the bidders that for every empty quart, pint or nip excise bottle returned to the retailer by the public, the retailer shall be bound to refund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted what in the statement of the case is described as so-called security deposits (that is, in addition to the price of bottles and liquor which was duly credited to the trading account) and thus they obtained in the years 1940 to 1944 large sums of money although in 1941 and 1944 they got nothing. And although in the years 1940, 1942 and 1943 large sums were taken as security deposits no empty bottles seem to have been returned or refund of security deposits claimed. In February, 1943, the Financial Commissioner, Lahore, issued another circular by which he raised the prices of the bottles payable by the distillers as also the prices which were to be paid by licensed retailers to the consumers. The new company continued to take similar security deposits. The company managed to get some official recognition to their practice of demanding security. In March, 1944, the Financial Commissioner issued the following circular:- (1) Where the licensee for the new year 1944-45 is the same as for the expiring year 1943-44, he should be called upon to supply empty bottles before the first instalment of spirit is issued to him from the distillery. (2) The Amritsar Distillery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be required to return the full number of empty bottles to the distillery. 8. The buy-back system for empty excise bottles which was introduced with effect from the 1st April, 1940, will be continued in 1945-46. Licensed retailers shall not permit empty excise bottles to pass into the possession of consumers except in return for a bottle or bottles of similar capacity. If a bottle is not provided, they shall be bound to refuse supply unless the consumer produces a container of his own for the liquor. Wholesalers shall pay to the licensed retailer for every empty quart, pint and nip returned to them 0-5-6, 0-2-6 and 0-2-3 respectively. The distilleries are bound to take back from every wholesaler upto the full number of bottles issued to him. The prices payable by the distillery are 0-6-0, 0-3-3 or 0-2-6 for every empty quart, pint or nip, respectively, delivered at the distillery premises. If the wholesale vendor does not keep a stock of bottled spirit to meet the monthly requirements of retailers his licence will be liable to cancellation. If the licensees experience any difficulty in getting buy-back prices for any bottles to which they are entitled they should deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of the case the Tribunal have stated: If the deposits were in reality only 'security deposits' there is no evidence that the assessee company exercises its right, if any, to forfeit any portion of the security deposits or that the depositors have lost their right to claim refund of the deposits on fulfilling the conditions on which the deposits were made, or that the ownership in the sums deposited has passed from the depositors to the assessee company. The High Court directed the following question to be referred:- Whether, on the facts and circumstances of the case the security deposits received for the purposes of ensuring the return of empty bottles was income assessable under Section 10 of the Income- tax Act? This question as suggested by the Tribunal is:- Whether there was material before the Tribunal on which it could hold that the collections by the assessee company described in its accounts as empty bottle return security deposits were in fact a portion of sale proceeds of bottles and, therefore, trading receipts of the company? I would, however, restate the question in the following words:- Whether on the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posits from wholesalers which was refundable, as I have said, pro rata against the return of the bottles. What it comes to is this, that when bottles full of liquor were sold the purchasers had to pay the price of the bottles plus a certain sum of money fixed by the Financial Commissioner which was refunded as and when the bottles were returned. Whatever be the name given to security deposits in effect it was nothing more than charging the buyers the real price of the bottles plus the amount authorised by the Financial Commissioner. Mr. Grover for the assessee submitted that this was a sum which was in deposit with the assessee which remains a liability of the assessee company payable at any time when the buyers bring the bottles and it is not a liability which has become unenforceable by lapse of time and he relied on the rule laid down in Morley (Inspector of Taxes) v. Tattersall [1938] 3 All E.R. 296; 7 I.T.R. 206, where it was held that the nature of receipt is to be gathered as at the inception of the receipt and it cannot subsequently become trading receipt if it was not so in the beginning. But that case will not in my opinion be applicable to the facts of this case becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or subject to a condition thereafter to be fulfilled the contract is an agreement to sell. I cannot see how this section applies to the facts of the present case. In reality there was no distinctin between that sum of money which had been charged as the price of the bottles and the other sum which was called security deposits . On the return of the bottles the assessees were to refund the price as well as the deposit which they had taken. If instead of selling the bottle and the liquor at the price fixed by the Financial Commissioner and charging an extra sum as deposit for the return of the bottle the assesses had charged the whole amount as the price of the bottle plus the liquor, I am assuming that this had the approval of the excise authorities, the arrangement would not have been in any manner different in its effect. In other words if the price of the empty bottles was ₹ 3 a dozen and instead of charging ₹ 3 per dozen plus another ₹ 3 a dozen as security deposit to ensure the return of the bottles the assessee had charged ₹ 6 a dozen, the effect of the transaction would have been the same. The assessee would have to return ₹ 6 when bottles in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount at the termination of the dealings. The Supreme Court held that under this last arrangement the deposits which were received constituted borrowed money for the purpose of Rule 2A of Schedule II of the Excess Profits Tax Act, 1940, but the deposits received by the assessees from the 5th May, 1944 to the 14th February, 1945, that is, under the first two arrangements were trading receipts and were not borrowed money for the purposes of Rule 2A. At page 211 Patanjali Sastri, C.J., observed:- Turning now to the deposits received by the appellants from 5th May, 1944, to 14th February, 1945, we are of opinion that, having regard to the terms of the arrangement then in force, they partake more of the nature of trading receipts than of security deposits. It will be seen that the amounts received were treated as advance payments in relation to each 'contract number; and though the agreement provided for the payment at the price in full by the customer and for the deposit being returned to him on the completion of delivery under the contract, the transaction is one providing in substance and effect for the adjustment of the mutual obligations on the completion of the contract. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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