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TMI Blog1968 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. 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 in 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 ... 20 nP. Brokerage ... 88 nP. Dharmada ... 02 nP." Bye-Iaw 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of the assessee for that year. During 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. 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 ? " 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, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 nature 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. 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." 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 dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shable. 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. 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ". ..... 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