Lawyers Directory Listing
Chat with us free on WhatsApp — tell us your city and legal matter and our team connects you with the right lawyer. No form, no fee.
Income tax Reference No. 14 of 1960, decided on 23rd March 1961.
Business income
----
--- Manufacture of liquor Amounts received as "empty bottle return security deposits" Whether income from business Punjab Liquor Licence Rules, r. 40 (14) (f) Income tax Act (XI of 1922), S. 10.
The assessee company which carried on the business of manufacture and supply of liquor received from wholesalers, in addition to the price of bottles fixed under the buy back scheme, certain amounts known as security deposits calculated at varying rates per bottle. The assessee undertook to pay back this additional amount when 90 per cent. of the bottles covered by it had been returned and no time limit had been fixed for the return of the bottles.
Subsequent amendments made in April 1948, to the Punjab Liquor Licence Rules gave statutory recognition to demand security, by the licensed distiller, up to 10 per cent. of the bottles issued by him and the return of the bottles by the wholesalers was also made obligatory :
Held, that the collections by the assessee described as "empty bottle return security deposits" were not income assessable under section 10 of the Income tax Act, 1922. The deposits received prior to the amendment, and subsequent to the amendment but in excess of 10 per cent. of the bottles issued, should be treated as trade receipts.
Punjab Distilling Industries Ltd. v. Commissioner of Income-tax (1959) 35 I T R 519 (S C) not applicable.
Lakshmanier & Sons v. Commissioner of Income tax (1953) 23 I T R 202 ref.
STATEMENT OF CASE
The seven reference applications are consolidated.
2. In compliance with the order of the High Court dated April 27, 1959; passed under section 66 (2) of the Indian Income-tax Act, we hereby draw up a statement of the case and refer the following question of law to the High Court of Judicature for the State of Punjab at Chandigarh for their Lordships' opinion :
"Whether, on the facts and circumstances of the case, the collections by the assessee company described in its accounts as empty bottle return security deposits' were income assessable under section 10 of the Income tax Act "
3. The assessee, the Punjab Distilling Industries Ltd., Khasa, is a distiller and carries on the business of the manufacture and supply of liquor, filled in bottles, to approved wholesale Government contractors, who in turn pass them on for distribution to the retailers. The assessments under consideration are the income-tax assessments for the years 1946 47, 1949 50, 1950 51 and 1951 52, excess profits tax assessment for the chargeable accounting period February 1, 1944, to November 30, 1945, and business profits tax assessments for the chargeable accounting periods December 1, 1947 to November 30, 1948 and December 1, 1948 to March 31, 1949. The point involved is the addition of the following net amounts received by the assessee on account of "empty bottles security deposits" in the various assessments as under :
Rs.
1946 47 ... 65,615
1949 50 ... 49,687
1950 51 ... 3,122
1951 52 ... 6,281
The grounds for making the above additions are related to the "buy back bottle scheme" by the Punjab Government. In about 1940, it was found that the cost of quart, pint and nip bottles of various sizes in which liquor was sold, which ranged between 1-4-0, 0-15-0 and 0-12-0 a dozen, increased to about Rs. 3, 2-4-0 and 1-14-0 respectively and the bottles taken by the customers together with the liquor were not returned to the retailers and in turn to the distillers. At the time of sales of spirit, in addition to the price for the liquor, a charge had been made for the bottle also. But since the bottles were not returned by the customers, the Punjab Government passed orders regarding "buy back bottle scheme" under the provisions of the Punjab Excise Act and Liquor Licensing Rules. This was introduced with effect from April 1, 1940, in order to ensure the return of empty bottles to the distillers. The distillers were to refund 0-4-0, 0-3-0 and 0-2-0 for each empty quart, pint and nip bottles respectively collected to a maximum limit of 95% supply by the distiller for distribution. The retailer paid a lower rate to the customer than what be received. In 1943 44 the bottle position became more acute, and in February 1943, the Punjab Government increased the price payable by distillers for bottles returned to 0-6-0, 0-3-3 and 0-2-6 per quart, pint and nip respectively. This system was continued till 1948. The assessee collected the net amounts noted above in the relevant assessment years noted against them as "empty bottles security deposits". From the facts stated above the Tribunal while deciding the appeals for the earlier years 1947 48 and 1948 49 held that the distillers had received deposits by "buy back bottles scheme", and out of it a large amount was left with them as balance and if the bottles were not returned, the assessee had a benefit of the cash lying with it. On the other hand, if they were returned they had become the stock in trade which could be utilized for bottling further manufacture made by it. Working on these arguments, the Tribunal while deciding the appeals for the assessment years 1947 48 and 1948 49 decided earlier had held the inclusions of the sums of Rs. 66,250 and Rs. 53,279 representing the "buy back bottles scheme security deposits" to be in order. The Tribunal had stated
"Are the bottles which contain the liquor sold outright to the distributor by the assessee It can hardly be contended that they are not. If then the sale is complete what the assessee realized as part of the sale proceeds is a receipt in the nature of a revenue receipt, even though by enforcing the right to call for deposits, the assessee undertook to buy back' the empty bottles at a fixed price."
It was also held that the collections of deposits were a part of sale proceeds of bottled liquor from the very inception and the earmarking such receipts, in the account books, for being utilized for the purpose of buying back the goods already sold, could not have altered the nature of the receipts. The assessee had gone up to the High Court under section 66 (2) and the following law point had been referred to the Punjab High Court for decision ;
"Whether on the facts and circumstances of the case, the security deposit received for the purpose of ensuring the return of empty bottles was income assessable under section 10 of the Income tax Act "
While deciding the appeals against the assessment for the years 1946-47, 1949-50, 1950-51 and 1951-52 as also assessments made under the Excess Profits Tax Act for the chargeable accounting period December 1, 1944 to November 30, 1945 and the assessments made under the Business Profits Tax Act for the chargeable accounting periods December 1, 1947, to November 30, 1948, and December 1, 1948, to March 31, 1949, the Tribunal, however, came to a different conclusion and held that these deposits were not trading receipts. In paragraph 10 of its order the Tribunal held that the security deposit remained throughout the wholesalers' property subject to company's lien for damages, if any, to which it might be entitled. In the opinion of the Tribunal, the security deposits were in the nature of loans and not trading receipts. The Tribunal accordingly held that the security deposits were not the appellant's trading receipts and that the surplus credits at the end of each year in the "empty bottle security deposit account" were not the assessee's income, profits and gains. This order of the Tribunal was passed on October 31, 1952. A copy of the order passed by the Tribunal is part of the case and is Annexure "A".
4. After the order of the Tribunal was passed on the 31st October 1952, the High Court decided the reference applications for the earlier years. The High Court held that the collections made by the assessee and described in its account as "empty bottles return security deposits" were income assessable under section 10 of the Indian Income tax Act. The ruling of the High Court is reported as Punjab Distilling Industries Ltd. v. Commissioner of Income tax ((1953) 24 I T R 597). Against the decision of the Punjab High Court, an appeal was taken up to the Supreme Court. The Supreme Court confirmed the decision of the Punjab High Court. The judgment of the Supreme Court is reported as Punjab Distilling Industries Ltd. v. Commissioner of Income tax ((1959) 35 I T R 519 (S C).).
5. The statement of the case was placed before the parties. The assessee suggested that the circular issued by the Excise and Taxation Commissioner's Office on the 22nd March 1948, be made part of the case. The circular is accordingly made part of the case and is Annexure "B". The Commissioner of Income tax has no suggestions to make. The statement is accordingly finalized.
D. N. Awasthy and H. R. Mahajan for the Commissioner.
Bal Raj Kohli for the Assessee.
In compliance with the orders of this Court dated 27th April 1959, made under section 66, subsection (2) of the Indian Income-tax Act, the Income tax Tribunal at Delhi by its order dated 9th December 1959, has drawn up a statement of the case and has referred the following question of law to this Court
"Whether, on the facts and circumstances of the case, the collections by the assessee company described in its accounts as empty bottle return security deposits' were income assessable under section 10 of the Income tax Act "
The assessee company is the Punjab Distilling Industries Limited, Khasa, carrying on business of manufacture and supply of liquor filled in bottles to approved wholesale Government contractors, who in their turn sell the liquor to retailers. The assessee company was incorporated in May 1945, and is the successor of the company known as the Amritsar Distillery Company Limited carrying on the same business. This reference covers income tax assessments for the years 1946-47, 1949-50, 1950-51 and 1951-52 corresponding to accounting periods beginning with 1st December 1945 to 30th November 1946 and similarly 1948-49, 1949-50 and 1950-51. This reference also covers excess profits tax assessment for the chargeable accounting period from 1st December 1944 to 30th November 1945 and business profits tax assessments for the chargeable accounting periods from 1st December 1947 to 30th November 1948 and 1st December 1948 to 31st March 1949. For the earlier assessment years 1947-48 and 1948-49, on a reference to the High Court the following question was restated :
"Whether, on the facts and circumstances of the case, the collections by the assessee company described in its accounts as empty bottle return security deposits' were income assessable under section 10 of the Income tax Act "
The above question was answered by the bench hearing the Put reference in the affirmative and it was held that the amounts received by the assessee as empty bottles return security deposits were trading receipts and should be treated as such (Punjab Distilling Industries Ltd. v. Commissioner of Income tax). The Te, Supreme Court on appeal filed by the assessee company confirmed the decision of the High Court. The judgment of the Supreme Court is reported as Punjab Distilling Industries Ltd. v. Commissioner of Income tax.
The question calling for answer arises in the following circumstances. After the declaration of the last war in 1939 there was felt scarcity in finding bottles for filling country liquor. To meet this difficulty the Government devised a scheme in 1949 known as the "buy back scheme". Under this scheme the distiller on a sale of liquor was entitled to charge from the wholesaler price for the bottles in which the liquor was supplied at rates fixed by the Government and the distiller was required to repay to the wholesaler at the specified rates on the latter returning the empty bottles. Similar arrangement was made for the liquor sold in bottles by a wholesaler to a retailer and by a retailer to the consumer but the price of the bottles of different kinds was scaled down. It was expected that the price of the empty bottles fixed under the scheme being high would be a temptation for the return of the empty bottles, and the consumers through the intermediaries. the retailer and the wholesalers, would return the empty bottles to the distiller for refilling them with liquor and thus, it was conceived, a regular supply of empty bottles would be ensured and the scarcity of bottles would be met. The predecessor company, the Amritsar Distillery Company Limited, however, insisted on the wholesalers making a payment to it in addition to the price of bottles fixed under the buy back scheme, of certain amounts known as security deposits calculated at varying rates per bottle according to quart, pint and nip bottles. The distillers undertook to pay back to the wholesaler for each bottle returned the rate applicable to it and further promised to pay back the entire additional amount deposited by way of security when 90% of the bottles covered by it had been returned. These additional sums were realised by the predecessor company and after its incorporation in 1945 by the assessee company. The object of the security scheme appears to be to provide additional inducement for the return of the empty bottles to the distillers. There was no time limit fixed within which the empty bottles had to be returned in order to entitle the wholesaler to the refund. The additional price of the empty bottles was entered by the assessee company in the general ledger under the heading "Empty Bottles Return Security Deposit Account". The price of the bottles received under the buy back scheme was entered in the assessee's general trading account. The assessee was assessed to income tax on the balance of the amounts of the additional sums left after the refunds had been made. It was assessed to income tax, excess profits tax and business profits tax on the same balance.
The learned counsel for the Department has maintained that the question referred to this Court being identical and arising under similar circumstances as in the case of previous reference should be answered in the same manner. We have been taken through the judgment of the Supreme Court referred to above in which the decision of this Court was confirmed. The Supreme Court in dismissing the appeal of the assessee laid stress upon three matters :
(i) In paragraph 3 of the judgment it was observed :
"It is not disputed that for the accounting periods with which this case is concerned, the additional amounts had been taken without Government's sanction and entirely as a condition imposed by the appellant itself for the sale of liquor."
(ii) In paragraph 7, the Supreme Court said :
"Now, if these additional sums were not part of the price, what were they Mr. Sastri said that they were deposits securing the return of the bottles. According to him, if they were such security deposits, they were not trading receipts. Again we are unable to agree. There could be no security given for the return of the bottles unless there was a right to their return for if there was no such right, there would be nothing to secure. Now we find no trace of such a right in the statement of the case. The wholesalers were clearly under no obligation to return the bottles. The only thing that Mr. Sastri could point out for establishing such an obligation was the use of the words security deposit'. We are unable to hold that these words alone are sufficient to create an obligation in the wholesalers to return the bottlers which they had brought. If it had been intended to impose an obligation on the wholesalers to return the bottles, these would not have been sold to them at all and a bargain would have been expressly made for the return of the bottles and the security deposit would then have been sensible and secured their return. The fact that there was no time-limit fixed for the return of the bottles to obtain the refund also indicates that there was no obligation to return the bottles. The substance of the bargain clearly was that the appellant having sold the bottles agreed to take them back and repay all the amounts paid in respect of them."
(iii) In paragraph 15, their Lordships said :
"In the case in hand the deposit was part of each trading transaction. It was refundable under the terms of the contract relating to a trading transaction under which it had been made ; it was not made under an independent contract nor was its refund conditioned by a collateral contract, as happened in Lakshmanier & Sons' case".
On the above considerations, their Lordships found that the amounts were trading receipts having a profit making quality about them. These payments were part of the transactions of sale of liquor which produced the profit and, therefore, they had a profit making quality. Agreeing with the decision of the High Court, it was held that the question framed for decision was rightly answered in the affirmative.
The learned counsel for the assessee has maintained that new facts have intervened after 1948 and the considerations governing the decision of the Supreme Court no longer existed. The new considerations were that with effect from 1st April 1948, the Punjab Liquor Licence Rules were amended. Section 14 of the Punjab Excise Act (I of 1914) confers upon the Financial Commissioner the power to make rules. In the exercise of this power and amendment was made in these rules. The relevant amendment is reproduced below in extenso :
"For clause (f ) of sub rule (14) of rule 40 of the said Rules, the following shall be substituted, namely:-
(f) (i) The licensee shall sell country spirit at such rates as may be fixed from time to time by the Excise and Taxation Commissioner, East Punjab, and endorsed on the licence.
(ii) On presentation of any empty excise bottle, the licensee shall pay to the person offering it for sale, five annas and six pies, two annas and six pies, or two annas and three pies for every empty quart, pint or nip bottle respectively. The licensee shall display these prices prominently at the licensee's premises.
(iii) The licensed wholesaler of country spirit shall pay to the licensed retail vendor, for every quart, pint or nip bottle returned to him, five annas and six pies or two annas and six pies or two annas and three pies respectively.
(iv) Similarly on presentation of empty bottles at the distillery, from which they were issued, the licensed distiller shall pay to the licensee offering the bottles for the sale, six annas, three annas and three pies or two annas and six pies for every empty quart, pint or nip bottle respectively issued by the distiller on or after the 1st April 1940.
(v) It is compulsory for the licensee to return at least 90% of the bottles issued to him by the licensed distiller.
(vi) The licensed distiller may, at the time of issue, demand security at the rates of three rupees, two rupees or one rupee and eight annas per dozen quart, pint or nip bottles respectively up to 10% of the bottles issued by him and confiscate the security to the extent falling short of the 90% limit.
(vii) If the wholesale country liquor licensee experiences any difficulty in getting buy back prices for empty bottles to which he is entitled, he may deposit the rejected bottles with the Distillery Inspector concerned, who will satisfy himself whether those bottles come within the rules or not, and if they do, and the licensed distillery still fails to accept them, the Distillery Inspector shall refer the matter to the Excise and Taxation Commissioner for orders. (These instructions shall take effect from the 1st April 1948)."
The effect of this amendment is that statutory recognition is given to the practice which had previously prevailed with the licensed distiller to demand security at the rates of three rupees, two rupees, and one rupee and eight annas, per dozen quart, pint or nip bottles respectively, up to 10% of the bottles issued by him and the distiller could confiscate the security to the extent of falling short of the 90% limit. The previous practice was to demand security for each bottle and to confiscate it where the empty bottles returned fell short of 90%. of course, in respect of the bottles not returned. In other words, if the wholesaler returned the empty bottles up to 90% or above he was entitled to the return of the security deposited in respect of them. If the bottles returned fell below 90 % then the .distiller was entitled to confiscate the amount of the security in respect of the number of bottles not returned. The statutory rule entitled the licensed distiller to demand security at the specified rates up to 10% only of the bottles issued by him. If the distiller demanded security in excess of 10 % of the bottles issued by him that of course was beyond the permissible limit. The amended rules were given effect from 1st April 1948. To securities demanded in accordance with the above rules, the three considerations which prevailed with their Lordships of the Supreme Court and which have been mentioned above will not apply to the instant case. It cannot, therefore, be said, as was the case in the appeal before their Lordships of the Supreme Court, that the "additional amounts had been taken without Government's sanction and entirely as a condition imposed by the appellant itself for the sale of its liquor". Again it cannot be said that the "wholesalers were under no obligation to return the bottles". Lastly, in view of the statutory rule amended in 1948 it cannot be said that the deposit "was part of each trading transaction (and) was refundable under the terms of the contract relating to trading transaction under which it had been made". We are of the view that to the security deposits to which the amended Punjab Liquor Licence Rules were applicable the question framed should be answered in the negative. In the case of deposits received prior to 1st April 1948, or to deposits received subsequent to that date but in excess of 10% of the bottles issued the case of assessee is not distinguishable either on facts or in principle to the previous case. The decision of the Supreme Court will, therefore, apply to the income tax reference for the assessment year 1946-47 and in part to the income tax reference for the assessment year 1949-50. The excess profits tax reference will be covered by the Supreme Court decision as the chargeable accounting period is from 1st December 1934, to 30th November 1945. The business profits tax reference for the chargeable accounting period from 1st December 1947, to 30th November 1948, will be covered by the decision of the Supreme Court for the period from 1st December 1947, to 31st March 1948, but not for the chargeable accounting period from 1st April 1948, to 30th November 1948, and 1st December 1948 to 31st March 1949. We, therefore, answer the question under reference as under:
"On the facts and circumstances of the case the collections by the assessee company described in its accounts as empty bottle return security deposits' were not income assessable under section 10 of the Income tax Act in so far as the collections have been made after 1st April 1948 and to the extent allowable under rule 40, sub rule (14), clause (f) of the Punjab Liquor Licence Rules as amended."
In the circumstances of the case, we leave the parties to bear their own costs of this reference.
Question answered in the negative.
Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.
🔍 Find a Lawyer