Calcutta High Court
Commissioner Of Income-Tax vs Ellenbarrie Industrial Gases Ltd. on 7 May, 1993
Equivalent citations: [1994]208ITR67(CAL)
JUDGMENT AJIT K. Sengupta, J.
1. In this reference under Section 256(1), of the Income-tax Act, 1961, relating to the assessment years 1984-85 and 1985-86, the following questions of law have been referred to us by the Tribunal :
"Assessment year 1984-85 :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provision of Section 43B of the Income-tax Act was not applicable on amount collected by the assessee as sales tax which was neither refunded to the parties nor paid to the Government account within the relevant previous year ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount collected by the assessee from the parties was 'deposit' and not sales tax when the Tribunal itself has viewed that ultimately the liability for payment of sales tax through assessment can be placed on the assessee ?"
"Assessment year 1985-86 :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount collected by the assessee on account of customs duty payable by the assessee on behalf of the parties but not paid within the previous year was not hit by the provisions of Section 43B of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that if the goods are imported on behalf of the parties, customs duty attached to such import does not become the liability of the assessee, when in the instant case the assessee advanced bank guarantee as per direction of the hon'ble court for the disputed portion of customs duty and received the equal amount from the parties inasmuch as the assessee has to pay such customs duty if the hon'ble court finally directs to make such payment ?"
2. In fact, there are two issues covered by the four questions, one relating to includibility in the total income of the deposit of sales tax under Section 43B of the Act, common to both the assessment years, the other relating to includibility of customs duty collected by the assessee from third parties for whom the assessee acted as an authorised agent for the imports, in terms of Section 43B of the Act, as part of the total income from the assessment year 1985-86.
3. The assessee, a resident Indian company, was assessed in respect of the two assessment years, viz., 1984-85 and 1985-86, under Section 143(3) on June 11, 1986, and July 23, 1986, respectively. The said assessments were, however, set aside by the Commissioner under Section 263 as the Income-tax Officer completed the assessments without making the additions which the Commissioner considered to be called for in view of the provisions of Section 43B. In the said order, the assessment was directed to be modified by way of additions to the total incomes of the following amounts :
(i) Rupees 50,950 and Rs. 1,74,699 representing credits in "Sales tax suspense account" appearing in the balance-sheets relevant to the assessment years 1984-85 and 1985-86, respectively.
(ii) Rupees 46,45,744 lying credited in "Collector of Customs (Party) account" appearing in the balance-sheet relevant to the assessment year 1985-86.
4. With regard to the deposit of sales tax appearing in the balance-sheet, the assessee contended that the deposit is the difference between the sales tax payable by a registered dealer on production of the declaration forms and the sales tax payable by a registered dealer treated as an unregistered dealer for not producing the declaration forms. In respect of certain sales, the purchasers were registered dealers but could not immediately produce the declaration form which alone entitled them to the lower sales tax rate prescribed for a registered dealer. The assessee, therefore, at the time of sale, collected the higher sales tax which was payable by an unregistered dealer from such parties who, though registered dealers, could not produce the declaration form immediately on sale, but promised to produce the same later. This additional collection made for the time being was, however, to be refunded to such purchasers as and when they would furnish the requisite declaration form. The assessee submitted that this extra tax collection was merely a caution money refundable against production of the declaration form and was, therefore, not an item of trading receipt and profit and loss account nor did it represent a liability of the assessee to the State Government as, under the statutory scheme of sales tax, such declaration forms were allowed to be obtained and placed before the sales tax assessing authorities on the eve of the completion of assessment. The amount so collected becomes a liability of the assessee if non-availability of the form becomes the ultimate eventuality. It was further contended that the collection of full sales tax is the arrangement of the assessee with its customers who are mostly registered dealers under the Sales Tax Act and the arrangement was an imperative necessity as the declaration forms are not readily available with the purchasers and were to be obtained from the Sales Tax Officer which necessarily caused a time lag between the date of purchase and the ultimate furnishing of the declaration forms to obtain the concession in tax for the purchases by a registered dealer. This aspect of the necessity of the arrangement was not questioned by the Commissioner, yet he held that whatever amount is collected from the parties at the time of sale by way of sales tax fastens on the assessee a liability to pay such collections to the sales tax authorities. Irrespective of the circumstances, each and every collection of sales tax was to be treated as sales tax collection and part of the trading receipt entering the trading account. The crediting of the collection to a suspense account gives no escape from the liability. Section 43B requires that, unless such liability was discharged by payment to the Government account, such collection should also be part of the gross turnover and, therefore, part of the profit. The account entry by crediting a suspense account instead of the profit and loss account does not alter the position.
5. It is the admitted position that such additional sales tax collected from a registered dealer treated as an unregistered dealer in the absence of declaration forms was not credited to the trading account as part of the turnover and was credited to a separate suspense account which appeared in the balance-sheet as a liability. According to the assessee's contention, the liability is not to the Government account but to the purchaser who provisionally submitted to being taxed as an unregistered dealer on condition of refund of the extra sales tax so paid, upon production of the declaration forms.
6. The Tribunal has gone into the scheme of taxation under the Sales Tax Act and extracted the provisions to show that there are lower and higher rates of taxation for registered and unregistered dealers. The registered dealers, while purchasing, can avail of the lower rate only on furnishing declaration forms to his seller. There is a time lag between the date of sale and the availability of such declaration form which is to be obtained from the sales tax authorities. The law itself acknowledges that such time-lag is bound to interpose. Rule 27A(9) of the Bengal Sales Tax Rules, 1941, therefore, draws the deadline for furnishing the relevant declaration forms upon failure of which the assessee as the seller shall be held liable to pay sales tax at the higher rate meant for sales to an unregistered dealer even though the buyer is a registered dealer failing to produce the declaration. The Tribunal, in this connection, quoted the said rule which reads as under :
"The declaration in Form XXIV or XXIVA shall be produced by a dealer up to the time of assessment under Section 11 by the first assessing authority :
Provided that if the appellate or revisional authority is satisfied that the dealer concerned was prevented by sufficient cause from producing such declarations within the aforesaid time, that authority may allow for reasons to be recorded in writing such declarations to be produced within such further time as that authority may permit."
7. In this connection, the Tribunal finally came to the finding as contained in the following observation in paragraph 12 of its order :
"We have already recorded that the liability to collect the sales tax arises when sale is made and there is no controversy about the above proposition. The assessee collected the sales tax through bills at the rate applicable to registered dealers and the said amount is definitely part of the trading receipts of the assessee. But the Revenue here wants to tax the 'deposit' as amount of deposit along with tax actually collected in the bill as the assessee's sales tax liability accrues even when sale was made to a registered dealer because the requisite declaration at that time was not furnished. On consideration of the provisions quoted above, we are unable to accept this view. As per Section 5(1)(aa) of the Sales Tax Act, sales tax is to be collected from a registered dealer at the rate prescribed. The proviso to Sub-section (1) would not come into play unless the dealer selling the goods furnishes in the prescribed manner a declaration containing prescribed particulars. It is not provided unless the purchaser of goods furnished the declaration. If it was so provided the seller was bound to charge sales tax at the rate applicable to an unregistered dealer without the declaration. In such a situation, the total amount collected was sales tax and the Revenue had a point. But here the statutory provision is quite the opposite ; instead of purchaser, the seller is to furnish the declaration. The time of furnishing the declaration under Rule 27A(9) is also relevant. Unless the time provided is over and assessment is made taking the sale as a sale to an unregistered dealer the amount (of deposit) representing the difference could not be treated as sales tax. Further, the scheme of the Act clearly envisages that declaration forms may not be available at the time of sale. Those forms are not freely available and are to be obtained from the sales tax authorities. The form can be furnished after the sale. An agreement or arrangement to take security or deposit for compelling the registered dealer to furnish the declaration is not barred under the statutory provision. In fact, such an arrangement is in tune with the statutory provision. There is, thus, no liability to charge sales tax from a registered dealer at the rate applicable to an unregistered dealer if the declaration is not furnished at the time of sale. The assessee could take the deposit and refund the same to the dealer on receiving the requisite declaration. The deposit is taken to safeguard the risk and interest of the assessee because ultimately the liability through the assessment can be placed on the assessee. All the same, deposit when collected had a contractual obligation to refund the same. Such a liability was enforceable under the law. The amount unrefunded and lying as deposit as at the end of the accounting period could not be treated as the assessee's income when the return under the Sales Tax Act for the relevant quarter can be furnished within one month of the end of the quarter and the declaration could be furnished much later. As stated earlier, the Revenue has not challenged the existence and validity of the arrangement made between the assessee and its purchasers."
8. The Tribunal came to the final conclusion that, having regard to the special circumstances of the case and the legislative scheme of the levy and collection of sales tax, this extra collection from the registered dealer treating him as unregistered dealer in the absence of declaration forms yet to forthcome, represented a deposit by the said registered dealer as caution money refundable against the declaration form eventually furnished. In such circumstances, it cannot be said that such collection would form part of the trading receipts. Section 43B, therefore, does not operate. The arguments placed before the Tribunal were respectively reiterated by learned counsel of the petitioner.
9. Learned counsel for the assessee emphasized that the collection from the registered dealer at the higher rate of sales tax meant for unregistered dealers in the absence of spot furnishing of declaration forms is in essential character nothing but security deposit. Under Section 5(1)(aa) of the Bengal Finance Sales Tax Act, the tax is levied at 1 per cent. on so much of the taxable turnover as represents sales to a registered dealer supported by the declaration form. The proviso to the said clauses makes an exception to the effect that this concessional rate of 1 per cent. for sales to registered dealer shall not avail unless the declaration containing the prescribed particulars in the prescribed form are obtained from the buyer and furnished before the sales tax assessing authority. Rule 27A(9) leaves open the opportunity of producing such declaration forms in support of sales to registered dealer till the time of assessment under Section 11. Even if the dealer produces such declaration forms before the appellate authority and satisfies it that he was prevented by sufficient cause from producing such declaration, the declaration shall be accepted even at that late stage. The combined reading of the various provisions clearly shows that the concessional rate of 1 per cent. in the case of sales to a registered dealer is dependent on the availability of the declaration form and such declaration forms are not ordinarily available immediately on sales. Therefore, some caution has to be taken by the seller as a prudent trader to keep himself indemnified in the event of ultimate failure of the registered dealer to furnish the declaration form. That prudent caution is taken by the seller by collecting from the registered dealer the full rate of tax payable by an unregistered dealer. This arrangement is of imperative necessity on the part of the seller for protection of his interests. Therefore, at the time when the sale is made to a registered dealer, the selling dealer accepts the full tax, the difference being the security for furnishing the declaration form and the security is refundable as and when the buying dealer furnishes the declaration form. Under Section 10E, there is a statutory obligation that no dealer who is liable to pay tax shall collect in respect of any sale made by him any amount of tax in excess of what is payable under the Act. The failure to comply with that condition is culpable and shall be visited with penalty under Section 10E(3). Thus, even lawfully the selling dealer cannot treat the collection of extra tax from the buying dealer who is registered, as collection of tax. It, by the essential scheme of the law, is to be a security for furnishing the declaration form. It is not in the character of collection of any sales tax as law bars the selling dealer from collecting any amount in excess of the sales tax payable by him. When its quintessential character is a security deposit, it cannot form part of the trading receipt or income of the assessee.
10. Learned counsel for the Revenue relied upon the decisions of the Supreme Court in Chowringhee Sales Bureau Pvt. Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray and Co. Pvt. Ltd. v. CIT [1974] 97 ITR 615 for the proposition that sales tax collected as part of the sales shall form part of the trading receipts. Therefore, the assessee, by not including any part of the collection of sales tax in the turnover and by crediting the collection to a suspense account cannot side-step the provisions of Section 43B.
11. The reliance on the decisions of the Supreme Court does not advance the Revenue's case. It has been very correctly submitted that here the collection by the assessee is in its essential nature a mere deposit to be released on the reciprocity of release of declaration forms by the purchasing dealer. This deposit gets transformed into sales tax only to the extent the declaration form does not finally come forth at the last point of time when such form is to be presented to the sales tax authority under the Sales Tax Rules, i.e, at the time of assessment or before expiry of time extended by such authorities.
12. We, therefore, hold that the Tribunal was right in treating this collection of sales tax being the differential between the sales tax collectible from a registered dealer furnishing the declaration form and the sales tax payable by the purchaser treated for the time being as an unregistered dealer, as the deposit of security not partaking of the character of trading receipt. That being the case, Section 43B cannot have application. Therefore, we answer the first two questions common to both the assessment years in the affirmative and against the Revenue.
13. The facts relating to the second issue covering the third and fourth questions are that customs duty was collected by the assessee from the importers for whom the assessee acted as an authorised agent. An amount of Rs. 46,45,744 was, thus, lying in credit under an account, namely, "Collector of customs (Party)".
14. It was stated by the assessee that it acted as a commission agent for importing goods against letters of authority on behalf of third parties against their import licences and realised commission/service charges. The assessee received deposits against bank guarantees furnished against customs duty liability for goods so imported on behalf of the parties as per the directions of the High, Court. The goods imported neither belonged to the assessee nor were they included in its turnover. As such, the provision of Section 43B was not attracted to the facts of the case. The Commissioner of Income-tax did not accept the above contentions and held that, as soon as goods were imported, the assessee, instead of making payment to the Government, gave the bank guarantee against it and utilised the money by holding it in its account. The amount should have been shown in the trading account of the assessee as customs duty collected and should have been claimed as deduction when paid. As such, the provisions of Section 43B were attracted in the instant case, inasmuch as the sum was payable by way of tax or duty whether reflected in the trading account or not and not paid till the end of the year.
15. The assessee carried the issue before the Income-tax Appellate Tribunal and advanced the same arguments as were advanced before the Commissioner of Income-tax. It admitted that the assessee was shown as the "importer" in certain documents as per arrangement with the principal. The excess customs duty levied by the customs authority was challenged before the High Court and the court directed release of the goods subject to furnishing of the bank guarantee. The assessee furnished the bank guarantee and the principal deposited the excess amount with the assessee which was to be refunded to the principal, depending on the final order of the High Court. Therefore, this cannot be treated as the trading receipt of the assessee.
16. The Department, on the other hand, urged that the assessee was shown to be the importer in the relevant document and it was the "petitioner" in this litigation before the High Court. The deposit under the head "Collector of customs (Party) Account" was part of the trading receipts and the collection of customs duty from customers stood on the same footing as sales tax. The Department also referred to the observations of Chaturvedi and Pithisaria, Volume 4, and relied on the decision of the Calcutta High Court in CIT v. Partabmull Rameshwar [1977] 107 ITR 526, wherein it was held that excise duty collected was part of the trading receipts. Further, it referred to the relevant provisions of Section 43B and urged that statutory liability is to be allowed only on actual payment basis. The Tribunal, however, viewed that the assessee never traded in the goods imported ; therefore, customs duty cannot be the assessee's trading receipts. There was no dispute that the goods were imported by the assessee as an agent on behalf of the parties. Therefore, customs duty attached to such imported goods cannot become the liability of the assessee. It, therefore, concluded that as an agent under a legal enforceable obligation, the assessee acted in a fiduciary capacity. As such, under no circumstances, it can be treated as a trading receipt of the assessee. The conclusion of the Tribunal given in paragraphs 14 and 15 of the order is as follows:
"The addition in respect of deposit under the head 'Collector of customs (party) account' is totally untenable. The assessee admittedly never traded in the goods imported and, therefore, it is difficult to understand how customs duty became the assessee's trading receipt. The reasons given by the Commissioner of Income-tax in his impugned order which is sought to be defended before us is that the assessee imported the goods and became liable to pay customs duty which was any sum payable by the assessee by way of tax or duty under any law for the time being in force under Section 43B of the Income-tax Act, 1961. As 'money was collected on account of customs duty and payable by the assessee on behalf of the party' and not paid to the Government it attracted the provisions of Section 43B and became the assessee's taxable income. With respect, we find it difficult to accept this sort of reasoning. The Commissioner of Income-tax admits : 'It is true that the goods are imported on behalf of the parties'.
How then would customs duty attached to the goods imported become the liability of the assessee, and not that of the principal who was admittedly the owner of the goods ? The assessee has no answer to the objection to claim in its hands : 'You cannot claim liability. You are only an agent.' The deduction, on the other hand, could not be denied in the hands of the principal merely because goods were imported through the assessee who was shown as the 'importer' in certain documents. The customer remained the owner of the goods throughout and took the same after being imported."
17. It is settled law that an agent can sue and be sued for and on behalf of the principal. The agent has a lien and is entitled to be reimbursed for expenses incurred on behalf of its principal. A bare reading of Section 226 of the Indian Contract Act, reproduced below, would help to settle the controversy :
"226. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person."
18. It is clear from the record that the customs authorities levied customs duty as soon as the goods were imported. The High Court stayed recovery of duty and directed that bank guarantee be furnished in respect of the disputed customs duty till the matter is finally adjudicated. Although the High Court stayed the recovery of customs duty, the Revenue says that the deposit collected is customs duty. The customs duty already stands quantified and determined (subject, of course, to the order of the High Court). The assessee furnished the bank guarantee as its customers (principals) agreed to deposit equal amount with the assessee. Under the above agreement/arrangement, the goods are released and taken over by the customers. The assessee protected its interest and risk by taking the deposit. The receipt issued by the assessee in the case of Messrs. Nav Bharat Enterprise of Makum Road, Tinsukia, Assam, on receipt of the deposit is to the following effect :
" Received with thanks from M/s. Nav Bharat Enterprise of Makum Road, Tinsukia, Assam, a sum of Rs. 1,89,400 (Rupees one lakh eighty nine thousand four hundred only) by cheque only towards deposit on account of extension by bank guarantee in favour of the Collector of Customs. The said amount will be refunded/adjusted only after the final settlement of the case in the court."
19. Thus, the deposit was collected as an agent under a legally enforceable obligation. It was specifically earmarked as agreed between the parties.
20. It was held in a fiduciary capacity and can, under no circumstances, be treated as receipts.
21. On the facts, the Tribunal found that the assessee never traded in the goods imported and, therefore, the customs duty which the assessee received from the importers for whom the assessee acted as the authorised agent could not be the assessee's trading receipt. Nor is it his liability to pay duty to the Customs Department. If the goods are imported on behalf of the parties, the customs duty attached to the goods imported cannot be the liability of the assessee and such liability is that of the principal. The principal was the importer and the owner of the goods. The assessee was acting as an agent on behalf of the principal. The agent is entitled to be reimbursed for the expenses incurred on behalf of the principal for clearance and removal of the goods imported.
22. The collection of the disputed amount of customs duty was stayed by the writ court on an application under article 226 of the Constitution of India on the furnishing of a bank guarantee. The assessee furnished the bank guarantee as its client, the principal, agreed to deposit an equivalent amount with the assessee. Under this arrangement, goods were released and delivery was taken by the actual importers. The assessee protected its interest and risk by the taking of the deposits. Thus, the deposit was collected by the assessee from the importers in the assessee's capacity as agent under a legally enforceable obligation.' It was specifically earmarked, according to the agreement between the parties, and was held by the assessee in its fiduciary capacity and hence cannot be treated as the assessee's trading receipt. In any event, the assessee had not claimed the said amount as an allowable deduction and Section 43B ex facie cannot have any application. Security deposits are never trading receipts and cannot be treated as income specially when the security deposits are not obtained as part of the proceeds of sales. In this connection, the following decisions are relied upon by learned counsel for the assessee :
(i) Bengal and Assam Investors Ltd. v. CIT, .
23. In this case, the assessee in its business of general insurance agency, collected amounts on account of premium payable by its clients to the insurer. Thus, its clients paid their premium through the assessee as their agent to the insurer. In the process of rendering this service to the clients, the assessee collected some excess amounts from the clients over the years, which were neither paid to the insurance companies nor refunded to the assessee's clients. The clients also did not claim the refund of the amounts.
24. Such unclaimed amount of premium collected but not paid to the insurance company was sought to be taxed as the assessee's income by the Income-tax Officer who did not accept the assessee's contentions that it did not receive the insurance premium as a trading receipt and the same represented liability to the clients which remained unclaimed for years. Thus, such collection by the assessee in its capacity as the agent could not constitute any part of its taxable income. This court held that under Section 2(10) of the Insurance Act, 1938, an "insurance agent" meant an insurance agent licensed under Section 42 of the Act who received or agreed to receive payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business. When the assessee was receiving the premium from its clients, he was receiving it as an agent for and on account of the principal, the policy holder. The amount was returnable to the policyholder if not paid to the insurance company. There was a fiduciary relationship between the assessee and the principal. The assessee received the amount of rebate for early payment as an agent of the principal who is entitled to the rebate. Thus, this court laid down that the taxability of an amount must be determined on the nature of the receipt and the capacity in which it was received.
25. In this case, the assessee was a distributor of films. It received deposits from the film exhibitor returnable after completion and fulfilment of the agreement. The Madras High Court took the view that these deposits are different from other receipts from the film exhibitor, i.e., the theatre collections. The deposits were not to be viewed as part of the trading receipts of the assessee whereas the theatre collections bore the character of trading receipts, while the deposits did not bear such character. The excess of the security deposits lying with the assessee/distributor could not be liable to be taxed.
(iii) CIT v. A. Tosh and Sons (P.) Ltd., .
26. In this case, the assessee, an exporter of tea, had agreed with the foreign buyers that their tax and duties would be paid by the foreign buyers and the refund and rebate of such taxes and duties as and when received by the assessee would be remitted to the foreign buyers. According to the agreement, the rebates were remitted to the buyers abroad, but the Income-tax Officer, however, reopened the assessment for the assessment years 1972-73 and 1975-76 in a bid to assess such receipts to tax. But this court held that the assessee was under a contractual obligation to remit the said amounts received to the foreign buyers. Therefore, it followed that such amounts never reached the hands of the assessee as its own receipt or income. The assessee received the same on behalf of its foreign buyers who were entitled to the amounts and to hold the assessee accountable for the same. The amounts were never the income of the assessee as these were diverted even at the inception by an overriding title in favour of the foreign buyers. Any accretions to the said amounts by way of interest or otherwise could not be held to be the income of the assessee.
27. The case before us has close resemblance with the facts in the cases cited by learned counsel for the assessee. It is not in dispute that the assessee was not the importer but merely acted as the authorised agent of the importers. Thus, the liability to pay the Customs Department was not the liability of the assessee and the liability was of its clients who are its principals. The assessee was merely acting as an agent on behalf of the principal and did not have itself any liability. The customs duty which it collected from its clients to get itself reimbursed in respect of the Customs duty paid by it to the Customs authorities on behalf of the principals cannot be its trading receipts. Therefore, such collection cannot also enter its profit and loss account. The assessee also furnished bank guarantee as its customers agreed to deposit equal amount with the assessee. Under the above arrangement, goods are released and taken over by the customers. The assessee protected its interest and risk by taking the deposits, as contended by learned counsel. But the effect and purport of its contractual relation between the assessee and its clients from whom such collections were made have not been gone into by the Tribunal. As it appears from the statement of the case, what is determinative of the character of the receipt is the nature of the relationship between the purported principals, i.e., the assessee's customers and the assessee. We, therefore, decline to answer the second question common to both the assessment years and remand the matter to the Tribunal for fresh consideration of the precise nature of the relation between the assessee and its customers and to decide the issue in accordance with the principles of law as laid down in the decisions cited above. If necessary, the Tribunal may allow the parties to adduce evidence.
28. There will be no order as to costs.
Shyamal Kumar Sen, J.
I agree.