JUDGMENT Dr. [ENTITY], J.
1. By this reference under [SECTION] of the [ACT], made at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the interest of Rs. 38,103 was the income of the assessee, and could be subjected to tax in its own hands as such ?"
2. The assessee is a shipping agent. The controversy relates to the assessment year 1975-76, the relevant previous year being the year ended on December 31, 1974. During the above previous year, the assessee had collected over Rs. 2 crores as freight on behalf of non-resident ship-owners in respect of goods loaded on their ships as shipping agent of those ship-owners. There was always a time lag between the collection of freight and final remittance to the non-residents in the foreign countries, i.e., U. S. S. R., and during such period, the funds remained idle with the assessee in the current account in the banks. A sum of Rs. 83,62,000 was due to the various non-resident ship-owners at the end of the previous year. During the above previous year, the assessee deposited a sum of Rs. 16,50,000 as call deposits in the banks in its own name out of which it earned an interest of Rs. 38,102.73. This income was credited by the assessee to an account named as "interest on freight payable account". This income was not disclosed by the assessee in its return of income. The Income-tax Officer, in the course of assessment, noticed the call deposit of Rs. 16,50,000 on the assets side of the balance-sheet of the assessee. However, in the details of income furnished, no interest received thereon had been furnished. The assessee was asked by the Income-tax Officer to explain the reasons for such non-disclosure of interest amount. In reply to the enquiry made by the Income-tax Officer, it was explained by the representative of the assessee that though a sum Rs. 38,102.73 was received by the assessee as interest on call deposit, it was not taken into the profit and loss account on the ground that the funds with which the bank deposits had been made were not the assessee's funds but belonged to the non-resident foreign principals, namely, the ship-owning companies of the U. S. S. R. This amount was transferred and credited by the assessee to "freight interest payable account". In pursuance of further enquiry by the Income-tax Officer, it was conceded by the representative of the assessee that though there were 13 shipping companies, all belonging to the U. S. S. R. and the freight collected pertained to each of them, the funds deposited in the fixed deposit were never sought to be identified as pertaining to any one or more of the individual shipping companies by debiting their accounts when the amount was transferred to fixed deposit and crediting their accounts with the amount of interest earned with the amount of deposit in the fixed deposit.
3. It was also admitted that the call deposits were made in the name of the assessee as owner of the funds and not as agent of the shipping companies. From these facts and circumstances, more particularly the facts stated above, the Income-tax Officer did not find the explanation of the assessee a credible one. On a consideration of the totality of the facts and circumstances of the case, he came to the conclusion that the assessee had never intended to earn any income by way of interest on behalf of the non-resident ship-owners. The Income-tax Officer, therefore, held that the sum of Rs. 38,103 was the assessee's income for the year under consideration.
4. Against the Income-tax Officer's order, the assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) considered the facts and circumstances of the case and arrived at the following categorical findings of fact :
1. The freight earnings realised by the assessee merged in the assessee's own funds and were undistinguishable from them.
2. They were like any other liability which the assessee had to meet when the time for repayment fell due.
3. It would be a misnomer to call the assessee a trustee for the freight earnings realised by it on behalf of its principals. The assessee was liable to make over the freight earnings to the principals only on receipt of clearance from the Reserve Bank for remittance. Till then, he was not bound by any agreement to invest the earnings in interest-bearing deposits so as to earn income for the principals.
4. The Commissioner of Income-tax also took note of the conduct of the assessee in regard to the amount of interest and observed the fact that while seeking the Reserve Bank's permission to remit the freight earnings, it did not even report the earning of any interest on such freight earnings, not to speak of seeking permission for remittance of the amount of interest to the principals It, therefore, held that legally and factually, the interest earning was the income of the assessee.
5. The Commissioner of Income-tax (Appeals), therefore, upheld the order of the Income-tax Officer bringing the same to tax in the hands of the assessee.
6. The findings of the Income-tax Officer and the Commissioner of Income-tax (Appeals) were confirmed by the Tribunal on further appeal by the assessee. The Tribunal noted the fact that the deposits in question were made by the assessee in its own name and the interest earned thereon was described under the account as "interest on freight payable account". The Tribunal also noted the fact that the amount credited was not shown in the freight payable account.
7. On a consideration of the totality of the facts and circumstances of the case, the Tribunal observed that the assessee failed to substantiate that a relationship of trustee and beneficiary existed between the assessee and the foreign principals. The Tribunal also referred to the decision of this court in CIT v. [ENTITY] D. Desai [1972] 84 ITR 713 and observed that the ratio of the said decision was not applicable to the facts of the present case because the relationship between the assessee and the foreign principal was not similar to that between a solicitor and his clients. The Tribunal reiterated that there did not not exist any trust in the instant case. It was merely an obligation to return freight money to the foreign principals and that there was a vast difference between a mere obligation and a trust. The Tribunal, therefore, confirmed the order of the Income-tax Officer and the Commissioner of Income-tax (Appeals). Hence this reference at the instance of the assessee.
8. We have heard learned counsel for the assessee, Mr. [ENTITY], at length. We have also perused the facts and circumstances of this case and the various authorities cited by learned counsel for the assessee. Reliance was placed on the decision of this court in CIT v. [ENTITY] D. Desai [1972] 84 ITR 713. In this case the assessee, a solicitor, had deposited the money belonging to his clients in the bank out of which certain interest income was earned. A question arose whether such income was the income of the assessee. This court, on consideration of the relevant rules of the Bombay High Court on its original side in relation to the duty of the attorney in regard to the money received by them from clients' accounts, held that under the said rules the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients is that of a quasi-trust and that he holds such moneys in a fiduciary capacity and the income or interest earned from that money is equally held by him him subject to such fiduciary relationship existing between him and his clients. It was in view of the above finding in regard to the relationship of solicitor with his clients that this court held that if the solicitor unauthorisedly converts the income from the clients' moneys, the taxation must proceed on the basis that the income did not in fact belong to him and the income was not liable to be taken into computation in his personal assessment. The ratio of the above judgment cannot be applied to a shipping agent, whose relationship with the shipping companies is totally different.
9. In [ENTITY] D. Desai [1972] 84 ITR 713, this court took into consideration the relevant rules of the Bombay High Court on the original side which govern to control the profession of solicitors in holding that the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients was that of a quasi-trust and he held such moneys in a fiduciary capacity and observed (at page 715) :
"A mere reading of these rules shows that a solicitor of this court is obliged to keep a separate banking account in respect of all the moneys received by him from or on behalf of his clients. He can appropriate moneys out of the said account to himself personally only in the limited class of cases provided for by these rules. These moneys are to be segregated and kept by a solicitor in a separate bank account in the title of which the word 'client' must appear and he can withdraw and appropriate it to himself only in so far as the rules permit him to do so. In this connection it must also be borne in mind that a solicitor who is a creature of the rules made by this High Court is subject to the inherent and disciplinary jurisdiction of this court and any breach committed by him of these rules is capable of entailing what would be a disastrous consequence to him of his name being struck off the roll of solicitors maintained by this court. Therefore not only do these rules provide for the segregation and holding in water-tight compartment of the amounts received by a solicitor from or on behalf of his clients, but there also is enough sanction provided by the rules for enforcing that what these rules provide is complied with".
10. It was in view of the provisions of the above rules, that it was held that the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients is that of a quasi-trust and he holds such moneys in a fiduciary capacity. The case of a solicitor falls, in our opinion, within the provisions of [SECTION] of the [ACT] because he has not the whole beneficial interest in such moneys. He must, therefore, hold such moneys for the benefit of the persons having such beneficial interest, such persons being his clients whose moneys are deposited in the clients' account. A solicitor, therefore, in view of the provisions of [SECTION], has to perform the same duties and is subject to the same liabilities and disabilities as if he were a trustee in respect of the said moneys, his clients to whom the said moneys belong being the beneficiaries. The provisions of [SECTION] of the [ACT] would apply and a solicitor being a trustee of such a quasi-trust cannot use or deal with the trust property for his own profit or for any other purpose unconnected with the trust. He can deals with them only to the extent provided for under the said rules of this High Court. The corpus, i.e., the moneys credited in the clients' account, is held by a solicitor in his fiduciary capacity and hence the income or interest derived from such corpus is equally held by him subject to such fiduciary relationship existing between him and his clients.
11. That is not the position of the assessee-shipping agent vis-a-vis the freight received by it on account of the shipping companies. Evidently, the sum of Rs. 83,62,000 was mixed up with the funds of the assessee. A sum of Rs. 16,50,000 only which was deposited in the banks was claimed to be a part of the above money and the interest thereon belonging to the principals. There is nothing to show what happened to the balance money which was due as on that date. It is apparent that freight, as and when received, automatically got mixed with the funds of the assessee and what remained was only the obligation to remit the amount so collected in sue curse after obtaining the permission of the Reserve Bank for such remittance. The assessee was not obliged to keep a separate banking account in respect of the moneys received by way of freight on account of the shipping companies nor in fact was any such account ever maintained. On the other hand, all such moneys were appropriated by the assessee to itself. A part of the money that was deposited with the bank was also in an account in the assessee's own name. There is nothing to show that these deposits were on the "shipping companies" account. In such a situation, the ratio of the decision of this court in [ENTITY] D. Desai [1972] 84 ITR 713, cannot apply.
12. Reference may be made in this connection to a decision of the King's Bench Division in [PRECEDENT]. This is also a case of shipping agent who was authorised to sell cargo of coal belonging to a foreign principal and to recover the sale proceeds thereof. The nature of relationship between the principal and the shipping agent was the subject-matter of controversy. It was observed (at page 521) :
"It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must had it over to the person who is his cestui que trust. If, on the other hand, he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he please, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of the money, but merely a debtor".
13. Dealing with facts of the case before it, it was observed (at page 522) :
"He was employed to sell the coals, and to receive the money for them; he was under no obligation to keep the money so received as a separate fund, but he was entitled to mix it with his own moneys, and he was merely a debtor for the amount of the ultimate balance due from him".
14. It was accordingly held (at page 522) :
"In my opinion the principle applicable to the case of a banker and customer applies. The defendant in the ordinary course of his business as a shipping agent has incurred a debt "
15. In our opinion, the ratio of this decision squarely applies to the facts of the present case.
16. On a consideration of the facts and circumstances of the present case in the light of the above proposition, it is clear that there was no fiduciary relationship between the assessee and the ship-owners. The assessee was merely a debtor in respect of the money received by it by way of freight. Moreover, the conduct of the assessee also clearly goes to show that what was deposited in the bank was the fund belonging to the assessee and what was received by it was interest thereon which had accrued to it. This conclusion also gets support from the fact that out of a sum of Rs. 83,62,000, even according to the assessee, a sum of Rs. 16,50,000 was deposited in the bank and that too in its own name, without any reference to the ship owners. There is a clear finding that this amount was also not shown in the accounts of the assessee as due to the ship-owners. There is no dispute about the fact that the amount of interest was never remitted to the ship-owners. Not to speak of remittance, the assessee never informed the Reserve Bank of India about the amount of interest nor sought for any permission to remit the same. In fact what was remitted was only the actual amount of freight. There is a clear finding that the amount of interest was still lying with the assessee. All these factors taken together clearly go to show that the amount deposited in the bank belonged to the assessee and, therefore, the interest thereon also accrued to the assessee. The assessee had full dominion over the same. There is nothing to show that this amount belonged to someone other than the assessee except the statement of the assessee before the Income-tax Officer that this interest was earned on money belonging to the ship-owners.
17. The controversy can be looked into from one more angle. There were 13 shipping companies. The relationship between the assessee and each shipping company was separate and distinct. The accounts of different shipping companies were maintained separately showing the amount due to each of them. The assessee contends that a part of the amount due to the shipping companies was put in call deposits in its own name. There is nothing to relate this amount or income therefrom to the amount due to any of these companies. All these factors also go to show that the deposits and interest thereon belonged to the assessee.
18. Counsel for the assessee submitted that the fact on details were kept of the different parties whose money was deposited in the bank or no bifurcation of interest amount was kept is immaterial. Reliance in support of this contention was placed on the decision of this court in CIT v. [ENTITY] D. Desai [1972] 84 ITR 713. We have already indicated that the facts and circumstances of this case are totally different from those in [ENTITY]'s case [PRECEDENT]. The observations in that case being made in the peculiar fact-situation of that case including the relevant High Court rules governing the relation of a solicitor and his clients cannot be construed to be of universal application irrespective of the facts and circumstances of a particular case.
19. Counsel for the assessee placed reliance on the decision in the House of Lords in [PRECEDENT]. The facts of that case are quite different and the fact-situation and the legal relationship is different than that of the ship agent and the ship-owners and that being so, this judgment is also of no help to us in deciding the controversy before us. Reliance was also placed on another decision of the House of Lords in [PRECEDENT]. The above decision, in our opinion, is of no assistance to us in deciding the controversy in the present case where we are only to decide the question whether the income is taxable in the hands of the assessee or not. The following passage of Lord Justice [ENTITY] (at page 491 of the report) makes the position clear :
"I would observe more generally that the question whether income is earned or not is question which arise between the trustee and the Inland Revenue, and it has no relation either to the legal duty which a trustee owes to the trust and the beneficiaries, or to the legal conception that such a payment as that under consideration derives from a testator and can be regarded as a legacy. The source of the sum and its character as a receipt in the hands of the trustee are two separate and unconnected things".
20. Reliance was also placed by counsel for the assessee on the decisions of this court in [PRECEDENT] and in [PRECEDENT], the Calcutta High Court in Bengal and [PRECEDENT] and [PRECEDENT] [PRECEDENT], the House of Lords in [PRECEDENT] Quistclose Investments Ltd. [PRECEDENT] and [PRECEDENT] [PRECEDENT], the Court of Appeal in [PRECEDENT] and the Chancery Division in English v. Dedham Vale Properties Ltd. [1978] 1 All ER 382. In our opinion, the above decisions are also clearly distinguishable and are not applicable to the facts and circumstances of the case before us.
21. We may, in this connection, refer to the decision of the Supreme Court in [PRECEDENT]. In that case, the assessee, a private limited company dealing in furniture, also acted as an auctioneer. In respect of the sales effected as auctioneer it realised during the relevant previous year, in addition to the commission, a sum of Rs. 32,986 as sales tax. The amount was credited separately in its account books under the head "Sales tax collection account". The assessee did not pay the amount of sales tax to the actual owner of the goods nor did it deposit the amount realised by it as sales tax in the State Exchequer, because it took the position that the statutory provision creating that liability upon it was not valid, or refund it to the persons from whom it had been collected. In the cash memos issued to the purchasers in auction sales the assessee was shown as the seller. It was held by the Supreme Court that the sum of Rs. 32,986 realised by the assessee-auctioneer as sales tax formed part of its trading or business receipts and the fact that it was credited by the assessee under the head "Sales tax collection account" did not make any material difference. It was, however, observed that the assessee would be entitled to claim the deduction of the amount as and when it pays it to the State Government.
22. On a careful consideration of the entire facts and circumstances of the case in the light of the principles of law set out above, we are of the clear opinion that the assessee was merely a debtor for the amount of freight due from it to the shipping companies and not a trustee and hence the interest of Rs. 38,102.73 accrued on the call deposits made by it was the income of the assessee and was rightly subjected to tax in its hands as such.
23. In the result, the question referred to us is answered in the affirmative and in favour of the Revenue and against the assessee.
24. Under the facts and circumstances of the case, we make no order as to costs.