ORDER
Vimal Gandhi, Judicial Member
1. These two appeals for the assessment years 1984-85 and 1985-86 are directed against the consolidated order passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 modifying the assessments made under Section 143(3) of the Act and directing the Assessing Officer to add the following amounts in the assessments :
(i) Rs. 50,950 and Rs. 1,74,699 representing credits in “Sales Tax Suspense Account” in the assessment years 1984-85 and 1985-86 respectively;
(ii) Rs. 45,45,744 lying credited in “Collector of Customs (Party)” account in the assessment year 1985-86.
2. The Commissioner of Income-tax (hereinafter referred to as the ‘CIT) held that the Assessing Officer failed to take cognizance of entries shown towards liability side in above a/cs in the balance-sheet and thus made erroneous assessments which were also prejudicial to the interests of the revenue. The CIT issued show-cause notice, heard the assessee’s representative and directed that addition at (i) above be made with the following observations :
The explanation given before me was not available to the assessing officer at the time of completion of assessment. The only information available on the record to the assessing officer was that the amount represented sales tax suspense account. The amount was obviously collected from parties on account of sales tax. The moment sales was effected to the parties a liability of payment of the sales tax was created. This liability could be extinguished on production of declaration forms. Admittedly, declaration forms were collected much later. Hence the amount collected on account of sales tax was to be treated as sales tax collection. Thus, when collected it was collected on account of sales tax and therefore in the fitness of this it should have been included in the trading account so as to swell the gross turnover (including sales collected). The assessee collected the sales tax amounts from the parties but held on to the same to be paid only if demanded by the sales tax authorities. As long as the amount was collected on account of sales tax there were payable to Government account. The said liability was not discharged as at the end of the relevant accounting period. In the light of this I find that the ITO on the basis of facts available before him was bound to apply Section 43B of the Income Tax Act, while completing the assessment. Not having done so he committed an error which is prejudicial to the interest of revenue.
The addition at(ii) above was directed to be made with the following observations:
On consideration of facts and submission I am unable to agree with the contention. It is true that the goods are imported on behalf of parties. But as soon as the responsibility of import is taken, the assessee company makes itself liable to the payment of custom duty on the import. It is his lookout to collect Custom Duty from the parties concerned. But the liability to the Government rested only with the actual importer namely in this case with the assessee company. The assessee has given copies of delivery challans, debit notes and copy of bill of entry with reference to one of the importers namely of G.I. Sheets on behalf of Nava Bharat Enterprises. The Bill of Entry with regard to this import brought by Vessels India Progress and all other papers mention only the importer namely the assessee company. The liability of custom duty therefore relates to the assessing company. It is with a view to keep the amount as long as possible and utilise the same that the assessee company did not pay the amount to the Government but gave the bank guarantee against them and continued to hold the money in his account. Money was collected of account on Custom Duty payable by the assessee on behalf of the party. Thus as soon as it is collected the amount is liable to be paid to the Custom authorities and therefore these amounts came within the scope of ‘any sum payable by the assessee by way of tax or dues under any law for the time being in force’. The amount should have been shown as receipt of customs duty collected and would have been reflected in the trading account of the assessee company to be claimed as a deduction when paid. In view of the provision of Section 43B of IT Act, any sum payable by way of tax or dues whether reflected in the trading account or not was to attract provisions of Section 43B if not paid till the end of the year. The assessing officer was clearly in error in not taking this into account.
3. He has challenged the above order of the CIT in appeal before the Tribunal. Shri S.K. Tulsiyan, the learned counsel for the assessee contended that the amounts in dispute were taken by the assessee under valid contracts and were refundable to purchasers and therefore could not constitute trading receipts. With reference to deposit under the head “Sales Tax Suspense Account”, Shri Tulsiyan explained that the assessee, as a dealer, sold industrial gases to its customers who were registered dealers under the West Bengal Sales Tax Act. The dealers gave requisite declaration form in majority of cases and were charged with sales tax accordingly. However some petty customers who were registered dealers were not able to furnish the declaration under the Sales Tax Act due to non-availability of declaration at the time of sale. As per arrangement between the assessee and the customers those persons made deposit which was refundable on furnishing of the -declaration. Thus, deposit is taken under special circumstances. Shri Tulsiyan referred to relevant provisions of the West Bengal Finance (Sales Tax) Act, 1941 (hereinafter referred to as the ‘Sales Tax Act’). He further argued that admittedly no sales tax was recovered by the assessee as per bills. Shri Tulsiyan sought to distinguish the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 by pointing out that in the said case the assessee after collecting sales tax from its customers neither deposited the same with the Government nor refunded to the customers and the receipts were treated like any other income. Shri Tulsiyan further submitted that in the same case for the subsequent year, the Calcutta High Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385, took a different view of the matter.
4. With reference to “Collector of Customs (Party) Account”, Shri Tulsiyan explained that the assessee as handling agent imported goods for its customers ‘(principal). The licence to import goods was in the names of the customers and the goods imported always remained the property of the customers. The assessee never treated the imported goods as trading goods. The purchases and sales of those goods were never shown in the books of the assessee. The assessee received ‘charges’ for handling goods on behalf of its principal. The above factual position is not disputed even by the CIT. Payment of custom duty was the liability of the principal. Goods were imported under Letter of Authority from the principal. The assessee was shown as ‘importer’ in certain documents as per arrangement with the principal. On import custom authorities charged custom duty which was considered to be in excess of what was payable under the law. The excess duty levied was accordingly challenged before the High Court and the Court directed that goods be released subject to furnishing of bank guarantee. The assessee was prepared to furnish the bank guarantee provided the principal deposited the excess amount with the assessee. As per understanding, the deposit equal to excess custom duty was to be refunded to the principal depending upon the final order of the High Court. Thus, under no circumstances the deposit could be treated as trading receipt of the assessee. Shri Tulsiyan submitted that all deposits held by the assessee were held under legal obligation and in a fiduciary capacity. The assessee never treated any goods imported as its own which all along remained the property of the principal. The deposits were taken by the assessee to safeguard its interest and to secure performance of contract from the customers. The learned counsel for the assessee also emphasised that only real income can be assessed to tax. He further stated that it would be inequitious under the law to ask the assessee to pay tax on deposits which were of refundable character. The High Court may ultimately uphold the levy of custom duty. Wherefrom the assessee would pay the huge amount now secured through bank guarantee if large portion of the same is to be paid as tax? It would, therefore, be unjust both under law and on facts to treat the deposits as income of the assessee.
5. Shri S.C. Sen, the learned departmental representative supported the impugned order of the CIT. He argued that sales tax was collected by the assessee in the course of its business and was part of trading receipts. In this connection, Shri Sen referred to Section 4 of the Sales-tax Act which, according to him, is a charging section. He also referred to Section 2(1) of the Sales-tax Act defining a ‘dealer’. According to Shri Sen the liability to recover sales tax accrues as soon as sale is effected. Any recovery made in whatever form to discharge the above liability was income of the assessee. -Section 5 and Rule referred to by the assessee’s counsel only deal with quantification of liability and they have nothing to do with liability accrued. Furnishing or non-furnishing of declaration is a private arrangement between the parties, which cannot override the statutory provisions governing time of incidence of liability. Shri Sen further submitted that as per law the nomenclature given to a deposit or the manner in which entries were made was not decisive. Shri Sen also submitted that the amount collected from dealer was not refunded to the dealer and therefore the amount was held as part of trading receipt by the assessee. He strongly relied upon the decision of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615. Shri Sen further stated that the decision in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.) supports the proposition that sales tax collected was part of trading receipts.
6. Shri Sen again submitted that the above principle would equally apply to the amounts collected by the assessee to discharge its obligation under the Customs Act. The deposit under the head “Collector of Customs (Party) Account” was part of trading receipts. Collection of customs duty from customers stood on the same footing as sales tax. It was ‘assessee’ who was shown as “importer” in the relevant documents and as the “petitioner” in the litigation before the Hon’ble High Court. Thus, custom duty was the assessee’s liability and any amount recovered to discharge the said liability was trading receipt. In this connection, Shri Sen drew our attention to the observations of the learned authors Chaturvedi and Pithisaria Vol. 4, page 961. The departmental representative also relied on the decision of the Calcutta High Court in the case of CIT v. Partabmull Rameshwar [1977] 107 ITR 526 wherein excise duty collected was held to be part of trading receipts.
7. The learned departmental representative then referred to the provisions of Section 43B of the Income-tax Act, 1961 introduced with effect from 1-4-1984. According to him, prior to introduction of the above section, collection of amount from customers for discharging a statutory liability was not very significant in a case where mercantile system of accounting was being followed. Even if the amount collected was trading receipt there was a corresponding accrued statutory liability and thus no assessable income resulted from receipt. But under Section 43B deduction for certain statutory liability is to be allowed only on actual payment basis. Here, in the present case, the assessee can also claim deduction in the year in which sales tax or custom duty is actually paid. Shri Sen also referred to Section 41(1) of the Act and submitted that remission or cessation of liability was relevant only under the above provision and not otherwise. A receipt which is a trading receipt at its inception cannot change its character subsequently. Shri Sen concluded his argument by saying that the Assessing Officer failed to consider the relevant entries or legal nature of the deposit in both the accounts and thus made assessments erroneous and prejudicial to the interests of the revenue under Section 263 of the Act. He accordingly supported the impugned order of the CIT. Shri Tulsiyan in rebuttal, once again, reiterated his submissions already recorded above.
8. We have given our serious thought to the rival submissions. We have also considered the relevant case law and material brought on record by the parties. In view of authoritative pronouncements of the Hon’ble Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd. (supra), it is too late in the day to contend that sales tax collected by a dealer is not part of trading receipt. The custom duty normally collected by a trader on sale of goods should also be treated as part and parcel of price of goods as pointed out by S.K. Das, J., in the case of George Dakes (P.) Ltd. v. State of Madras [1961] 12 ITC 476 (SC):
So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.
It cannot also be disputed that a trading receipt does not cease to be so because it is kept in a separate account. Non-incorporation in the profit and loss account is also not material. The argument with reference to the legal change brought about by Section 43B of the Income-tax Act may be correct but is not relevant as the assessee never claimed any deduction of the amounts lying as deposits. This provision may be attracted when question of deduction of liability is raised. The legal principles advanced by the learned departmental representative are well-founded. All the same we are to see whether the above principles are applicable to the facts of the case.
9. There is no dispute between the parties on facts. Shri Tulsiyan is right in saying that agreement between the assessee and its customers or the background under which the deposits were made is not factually challenged by me CIT. Thus, there is no dispute that “Sales Tax Suspense Account” represented deposits taken’ from customers who are charged sales tax as “registered dealers” without giving the requisite declaration form at the time of sale. The deposit represented the difference between the tax payable by a registered dealer and an unregistered dealer. The said deposit is refunded on furnishing or declaration by the dealer. Of course, till the end of the relevant years before us the amount collected from purchasing dealers was not refunded. The CIT does not factually dispute the arrangement claimed to be made by the assessee with its customers. It is also not in dispute that deposits are being collected by the assessee from its customers as per the practice followed for the past, several years. It is not the case of the revenue that the assessee had no intention to refund the deposits even on furnishing of declaration forms. In respect of “Collector of Customs (Party) Account”, there is no dispute that the assessee acted as forwarding and handling agent and the goods imported always remained the property of the assessee’s customers (principal). There is no challenge to the correctness of the assessee’s account where sale and purchase of imported goods is not reflected. Thus, existence, legality and validity of arrangements under which deposits in both the accounts were collected has not been challenged. As per the revenue, the deposits are or would deem to be sales tax and customs duty recovered in the course of business carried on by the assessee and, therefore, assessable income. The assessee disputes the above legal inference. So, the question to be considered is whether the deposits, in the two accounts under consideration, when received by the assessee, had the character of assessable receipts.
10. For determining the above question, we must refer to the two sets of decisions. The cases of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray & Co. (P.) Ltd. (supra) fall in one category. In these cases the assessee collected sales tax from its customers. The amount collected was not separately earmarked. It was neither paid to the State Government as sales were inter-State sales [in Sinclair Murry & Co. (P.) Ltd.’s case (supra)]. In Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC), the statutory liability providing for recovery of sale tax was claimed to be not valid. The amounts were collected as sales tax in the sale bills. The Supreme Court rejected the claim that the assessee may be compelled to deposit the amount of sales tax in the State Exchequer or refund to the purchaser. It is relevant to state here that in the above cases no contractual liability to refund the amount was pleaded. With respect to statutory obligation the conduct of the assessee in these cases clearly showed that neither the amount was deposited with the Government nor refunded to the customers. The amount collected was being utilised for earning further income. The Supreme Court held that deduction can be claimed in the year the amount is deposited with the Government or refunded to the purchasers.
11. The cases of CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 (SC), CIT v. Thakar Das Bhargava [1960] 40 ITR 301 (SC), Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 3l6 (CA) and CIT v. Smt. Lilavati F. Shah 1990 Tax LR 946 (Bom.) fall in the other category. In the case of Tolly gunge Club Ltd. (supra), the Club conducted Gymkhana races for amateur riders. It charged fees for admission into the enclosure at the time of race. Along with admission fees, the assessee charged from persons entering the Club “surcharge” to be spent for local charities as perresolution of the Club. The revenue treated the ‘surcharge’ as part of trading receipts. The Supreme Court held that the ‘surcharge’ at the time of receipt being earmarked with obligation to be spent for local charities was not part of trading receipts. P.N. Bhagwati, J., (later Chief Justice of India) approvingly quoted the following observations of Lord Macnaghten in London County Council v. Attorney-General [1901] AC 25 (HL):
It is familiar learning and yet Lord Macnaghlen had to draw our attention to it in London County Council v. Attorney-General [1901] AC 25 (HL) that income tax is a tax on income. It is what reaches the assessee as income that is intended to be charged to tax under the Act. Every receipt by the assessee is not necessarily income in his hands. It is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax.
Their Lordships then quoted as follows :
The question then arises whether this obligation to utilise the surcharge for local charities was an obligation to apply the surcharge to local charities after it reached the assessee as its income or it was diverted for being applied to local charities before it was received by the assessee. Did it involve an application by the assessee of a part of its income to local charities, or was it rather an allocation of a receipt for local charities before it became income in the hands of the assessee? The true test for determining this question is, to use the words of Hidayatullah, J., in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) whether the amount sought to be deducted, in truth, reached the assessee as his income. The learned judge proceeded to explain this test in the following words :
In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches, the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another’s income.
It is clear on the application of this test that, in the present case, the surcharge being impressed with an obligation in the nature of trust for being applied to local charities was by this obligation diverted before it reached the hands of the assessee and, at no stage, it became a part of the income of the assessee. When the assessee received the amounts on account of surcharge, they were impressed with a legal obligation to be applied for the benefit of local charities and they never reached the assessee as part of its income. The case clearly fell within the rule in Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC) and the surcharge received by the assessee could not be regarded as income assessable to tax.
In Smt. Lilavati F. Shah’s case (supra), the assessee an Octroi Agent entitled to commission collected Octroi duty for payment to Poona Corporation 90% of duty which was refundable was paid by the assessee and 10% was contributed by the importer. The said 10% was retained even after goods were imported out of Corporation. The retention of even 10% was held to be illegal and in a civil suit a sum of Rs. 8,49,730 was decided in favour of the assessee. On a question whether the above amount was taxable the Bombay High Court held as follows :
14. Upon the evidence that is available in the statement of the case, the assessee was an octroi agent whose only remuneration for the agency was commission at the rate of 2.5% of the octroi duty. There is nothing to indicate that he became entitled to the rebate in octroi duty on his own account or that the importer did not have any right thereto. It must, accordingly, be held that the rebate was received by the assessee as an agent for the importer to whom he was liable by reason of a fiduciary relationship. Consequently, it cannot be held that the amount of Rs. 8,49,730 was received by the assessee as a trading receipt and was liable to tax as his income.
The Court derived support from the decision of the Calcutta High Court in the case of Bengal & Assam Investors Ltd. v. CIT [1983] 142 ITR 156 and of CIT v. Karam Chand Thapar & Bros. (Coal Sales) Ltd. [1979] 117 ITR 621. The Court also considered the decisions of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray & Co. (P.) Ltd.’s case (supra).
12. To determine the question whether the amount collected as deposit was ‘sales tax’ or was impressed with legal obligation, we may now refer to the relevant provisions of the Sales-tax Act. Section 2(c) of the Act defines “dealer” as a person who carries on the business of selling goods in West Bengal. Section 4 of the said Act provides for incidence of taxation. Section 5 of the said Act provides for charging tax at different rates on different goods. The rate of tax to be charged in case of a registered dealer is lower than that applicable to an unregistered dealer (purchaser). As we are concerned with the case of a registered dealer who has not furnished declaration but has undertaken to furnish the same later, we may usefully refer to and reproduce below Sub-sections (6) and (7) of Section 4; and Section 5(aa) of the Sales-tax Act with proviso thereto. The other relevant sections are similarly worded and hence need not be reproduced.
Section 4(6): Every dealer, who has become liable to pay tax under Sub-section (1) or Sub-section (2) or Sub-section (4) of this section or Sub-section (3) of Section 8 and is registered under this Act, shall, in addition to the tax referred to therein, be also liable to pay tax under this Act on all his purchases from-
(i) a dealer who is not registered under this Act, of goods other than gold, rice (Oryza Saliva L) and wheat (Triticum vulgare, T. compactum, T. sphaerocoocum, T. durum, T. asstivun L., T. Dicoocum) intended for direct use in the manufacture in West Bengal of goods for sale, and of containers and other materials for the packing of goods as purchased or manufactured;
(ii) a registered dealer, to whom a declaration referred to in the proviso to Clause (bb) of Sub-section (1) of Section 5 has been or will be furnished by him in respect of sales referred to in Sub-clause (i) or Sub-clause (ii) of the said clause, of goods purchased against such declaration, and used by him directly in the manufacture in West Bengal, of goods or in the packing of such goods, when such manufactured goods arc transferred by him to a place outside West Bengal or disposed of by him, otherwise than by way of sales in West Bengal;
(iii) any person, whether a dealer or not, who is not registered under this Act, of goods other than gold, rice and wheat intended for a purpose, other than those specified in Clause (i).
(7) If any question arises whether, –
(a) a purchase has been made from a registered dealer, or
(b) a purchase has been made from a dealer who is not registered for a purpose other than those specified in Clause (i) of preceding sub-section, and hence is not liable to be taxed under the said clause, or
(ii) a purchase made against a declaration referred to in the proviso to Clause (bb) of Sub-section (1) of Section 5 is not liable to be taxed under Clause (ii) of Sub-section (6),
the burden of proof shall be upon the dealer who claims to be not liable to be taxed.
5. Rate of tax – (1) The tax payable by a dealer under this Act shall be levied on his taxable turnover at the rate of, –
(a) ** ** **
(aa) one per centum of such part of his taxable turnover as represents sales to a registered dealer of goods, other than gold and lottery tickets and bicycles and spare parts, accessories and component parts thereof and other than those referred to in Section 14 of the Central Sales-tax Act, 1956 (74 of 1956) and those specified by the State Government under Clause (cccc), of the class or classes specified in the certificate of registration of such dealer as being intended for resale, other than that byway of sale referred to in Sub-clause (a) of Clause (g) of Section 2 or in Section 6D by him in West Bengal, and of containers and other materials for the packing of goods of the class or classes so specified :
Provided that the provisions of this clause shall not apply to any sale referred to therein unless the dealer selling the goods furnished in the prescribed manner a declaration containing prescribed particulars in the prescribed form obtainable in such manner and subject to such conditions and restrictions as may be prescribed from the prescribed authority duly filled up and signed by the registered dealer to whom the goods are sold.
Rule 27A(9) of the West Bengal Sales-tax Rules, 1954 providing for time of furnishing relevant declaration read 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 declaration within the aforesaid time, that authority may allow for reasons to be recorded in writing such declaration to be produced within such further time as that authority may permit.
We have already recorded that liability to collect the sales tax arises when sale is made and there is no controversy about the proposition. The assessee collected the sales tax through bills at the rate applicable to registered dealers and the said amount is definitely part of 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 was assessee’s sales tax, liability accrued even when sale was made to a registered dealer because the requisite declaration at that time was not furnished. On consideration of provisions quoted above, we are unable to accept this view. As per Section 5(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 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 sale as sale to 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 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 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 unregistered dealer if declaration is not furnished at the time of sale. The assessee could take 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 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 declaration could be furnished much later. As stated earlier the revenue had not challenged the existence and validity of the arrangement made between the assessee and its purchasers.
13. The above discussion was necessary to meet the points raised by the parties. Otherwise in several cases even the amounts collected as statutory levies in the course of business were held not to be part of trading receipts as there was a legal obligation to refund the amounts held in fiduciary capacity. We have already quoted the decision in the case of Smt. Lilavati F. Shah (supra) and other cases. The assessee’s case stands on a much better footing than the reported cases, as here there is admitted contractual obligation to refund the deposit. In all the decided cases, such an obligation to refund the amount was disputed by the revenue. Here, as stated earlier, there is no such dispute. We may further mention that in the periods relevant to the assessment years 1984-85 and 1985-86 the assessee showed sales at Rs. 3,14,68,198 and at Rs. 2,30,02,472 apart from other receipts of several lakhs. The deposits collected were only Rs. 50,950 and Rs. 1,74,699. We have given these figures to show that only in rarest of rare cases collection was made and it was insignificant. The assessee was not running its business on sales tax collection as were the case in the cases of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) Sinclair Murray & Co. (P.) Ltd. (supra). Therefore, for all the above reasons, we are unable to hold that the deposits in sales tax account were part of trading receipts and thus taxable in the assessee’s hands for the assessment years 1984-85 and 1985-86.
14. 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 reason given by the CIT in his impugned order which is sought to be defended before us is that the assessee imported the goods and became liable to pay custom 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 custom duty and payable by the assessee on behalf of the party” and not paid to the Government it attracted provisions of Section 43B and became assessee’s taxable income. With respect, we find it difficult to accept this sort of reasoning. The CIT admits : “it is true that the goods are imported on behalf of parties”. If goods are imported on behalf of the parties how custom duty attached to the goods imported would become liability of the assessee, and not that the principal? The principal was admittedly the owner of the goods. The assessee has no answer to the objection to claim in its hand “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 ‘importer’ in certain documents. The customers remained the owner of the goods throughout and took the same after imported.
15. 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 logical consequences as if the contracts had been entered into and the acts done by the principal in person.
It is clear from the record that customs authorities levied custom 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 disputed custom duty till the matter is finally adjudicated (although the High Court stayed the recovery of custom duty, the revenue says that deposit collected is custom duty). Custom duty already stands quantified and determined (subject, of course, to the order of the High Court). The assessee furnished bank guarantee as its customers (principal) agreed to deposit equal amount with the assessee. Under the above agreement/arrangement the goods were 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 M/s. Nav Bharat Enterprise of Makum Road, Tinsukia, Assam on receipt of 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 lac eighty nine thousand four hundred only) by cheque only, towards deposit on account of extension by Bank Guarantee in favour of Collector of Customs. The said amount will be refunded/adjusted only after the final settlement of the case in the court.
Thus, the deposit was collected as an agent under a legal enforceable obligation. It was specifically earmarked as agreed between the parties. It was held in a fiduciary capacity and can under no circumstances be treated as trading receipts.
16. It is settled law that revenue cannot re-write agreement reached between the parties. It is not permissible to ignore implications of admitted legal relationship. The assessee, in both the cases, instead of cash could have taken security in kind (for example, immovable property) to cover its risk and due performance of contracts. The legal implications and character of transaction would have remained the same. Of course, deposit in cash was more advantageous to the assessee but merely on account of above advantage the deposit will not become trading receipt or taxable income. For all the above reasons, we hold that the CIT was not correct in holding that deposits in the two accounts were taxable income of the assessee.
17. Shri S.C. Sen, the learned departmental representative, also argued that the Assessing Officer failed to consider the relevant entries and therefore his order was erroneous and in so far prejudicial to the interests of the revenue. We have already shown that the CIT, after considering the relevant material, decided the matter On merits and held that the deposits in questions were taxable income of the assessee. There is no dispute that such a course could be adopted by the CIT under Section 263 of the Income-tax Act. There is no claim that further investigation of matter by the revenue is necessary. In the circumstances we were required to decide and consider the case on merit. The above contention, therefore, does not advance the case of the revenue.
18. In view of the above discussion, we vacate the order of the CIT passed under Section 263 of the Income-tax Act.
19. In the result, the assessee’s appeals are allowed.