1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR -------------------------------------------------------- (1)INCOME TAX APPEAL No. 24 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (2)INCOME TAX APPEAL No. 25 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (3)INCOME TAX APPEAL No. 26 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (4)INCOME TAX APPEAL No. 27 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (5)INCOME TAX APPEAL No. 28 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (6)INCOME TAX APPEAL No. 29 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (7)INCOME TAX APPEAL No. 30 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN (8)INCOME TAX APPEAL No. 31 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN 2 (9)INCOME TAX APPEAL No. 53 of 2004 C I T JODHPUR V/S MANTRA TANTRA YANTRA VIGYAN Mr. K.K. Bissa, for the appellant / petitioner. Mr. ANJAY KOTHARI, for the respondent. Date of Order : 18.1.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI DEO NARAYAN THANVI,J. ORDER ----- These nine appeals, arise in identical circumstances, and involve common questions, and are, therefore, being decided by this common order. Before proceeding further, it may be observed, that in one of the appeals, being Appeal No.53/2004, the appeal was admitted by framing two substantial questions of law as under: “1) Whether the learned Tribunal has erred in law in affirming the order of the CIT (A) deleting the addition made by the Assessing Officer on account of life membership subscriptions received by the assessee treating the same as income and whether the finding of 3 the learned Tribunal is perverse? 2) Assuming that the subscription received by the assessee was a capital receipt by way of deposit and the subscription of the subscriber was to be adjusted against the income arise out of the said deposit, whether the Tribunal was right in law in holding that interest which the assessee has shown accrued on the said deposits also does not form part of the income to the assessee merely on the ground that the assessee has not chosen to charge interest from the members of the partnership to whom the money had been advanced?” While the other appeals have been admitted by framing only one substantial question of law, however, it is pointed out by the learned counsel for the Revenue, that in the remaining appeals, applications have been filed by the Revenue, for framing additional question, in line of the Question No.2, framed in Appeal No.53/2004. In such circumstances, instead of standing to ceremony, we have heard learned counsel for either side, on both the questions. The facts, relevant for deciding the questions above are, that the assessee, a Firm, was involved in the business of selling yantras to customers, after being treated by Havan and Puja, and was also selling publication of monthly journal on the astrology, named as “Mantra Tantra Yantra Vigyan”, and was having huge number of subscribers. He was receiving Rs.1500/-, according to the Revenue, by way of subscription for the life membership, which sum received was directly shown in the balance sheet 4 in liability side. Thus, this amount of Rs.1500/- received by the assessee, from various persons, during the various number of years, comprised in these appeals, is the precise subject matter of the controversy. The Assessing Authority noted, that though the sum received from the life members, is directly shown in the balance sheet in the liability side, and it is pointed out by the assessee, that the sum received is by way of deposit from members, and is refundable, as and when demanded by customers/life members. But then, according to the learned Assessing Authority, the scrutiny showed, that cost of journal issued to life members, is shown as business expenses, of the assessee. Then, the learned Assessing Authority proceeded to consider various judgements, cited on either sides, and observed, that in order to decide, whether or not, the amount is a revenue receipt, or capital receipt, its true nature and effect should be looked into. The form, in which it is expressed, is not deciding factor, and that, it is also not relevant, as to whether the assessee, for his accounting purposes, is treating the receipt as deposit, as the assessee may camouflage the real nature of income, by using different phraseology or nomenclature, but the nature of the receipt is to be decided by the circumstances of the receipt. Then, it was held, that since the money, received by the assessee, in the name of life subscription account, is for 5 providing monthly journals to the subscribers, it is a receipt in the nature of revenue. The contention of the assessee, about the subscribers being entitled to withdraw the deposit, was also considered, and it was found, that only two instances have come to light, being of Shri Pramod Kumar and Dr. Vijay Kumar Rai. Thus, only sum of Rs.3000/- was refunded, while the fact is, that an amount of Rs.69,95,988/- remained with the assessee, accumulated till 31.3.1992, and no part of it, has been shown by the assessee as receipts, in lieu of services, being rendered the assessee, by providing the monthly journals to the subscribers, year after year. It was also considered, that in a business of any trader, or any publisher, there always existed the contingencies of refunding the money to the purchasers, if they were not satisfied with the material, they purchased, and in such cases, the trader or a publisher is free to claim deductions, on account of these refunds, as sales returns, and thus, the assessee was found entitled to claim refund of Rs.3000/-, but it was found, that the amount received, was the income of the assessee. Then, it was also considered, that the amounts received, were advanced to the three partners of the Firm, interest free, and on being asked, it was given out by the assessee, that since the advances were interest free, and, therefore, the assessee Firm was not under any obligation to charge interest from them and, therefore, no interest can be added on this ground. However, the Assessing Authority found, 6 that the partners have further advanced these funds to the family members, interest free, and the family members have ultimately advanced these funds on interest, to various sundry debtors, and to various interest bearing accounts, like bank, NSC etc. Then, the accounts of various such relations were seen. It showed substantial income, while none of them was doing any business, rather they had advanced the money received through Shri Narain Dutt Srimali, from the Firm, at various places, on interest, and thus, the interest attributable on the amount was arrived at. Then, the contention of notional income was also considered, and considering provisions of Section 5(1) of the Act, it was found, that since the money shown in different hands of family members, is owned by the Firm, the income arising out of that money in the hands of the various family members, is the income of the Firm, and liable to be included in the income of the assessee Firm. Accordingly, the assessment was made. This assessment was challenged in appeal by the assessee, and the learned Commissioner found, that the deposits against subscription, are refundable to the constituents, and the assessee is also supplying free copies of magazines against the same, and that the interest income on these deposits, is being shown in the hands of the partners, in their returns, which is the procedure adopted by the assessee, for the last so many years, and 7 the department has accepted the same, without raising any eyebrow, therefore, the addition was deleted from the income. Against this order, the Revenue filed the appeals before the Income Tax Appellate Tribunal, and the learned Tribunal considered various judgments, cited before it. It also took into consideration the second written submissions, furnished on 20.3.2003, by way of rejoinder to the written submissions of the Revenue, and also considered the three Supreme Court judgments, cited from the side of the assessee. Then, relying upon various judgments, it was found by the learned Tribunal, that in the circumstances of the case, as also on the legal position, the subscriber has the right to withdraw the amount and, thus, put an end to life membership, and the amount of deposit of life membership, will obviously remain with the assessee, as a refundable amount of deposit, i.e. a deposit, attached with the liability of being refundable to the customer/ constituent, on demand, by notice, after ten years. It was not found to be a colourable device, to have been involved in the matter under consideration. The Tribunal further found, that the mere fact, that only one or two subscribers alone have withdrawn the amount, does not change the nature of receipts of the amounts, and the same remains with the assessee as a refundable deposit, as the condition, regarding its being refundable, does subsist. Thus, it was 8 found, that the deposit cannot become the money of the assessee, nor can it be said to be the income of assessee. Thus, the deletion ordered by the CIT (A) was found to be justified. Then, regarding the contention about treating the income of interest, earned by the partners, and family members to be treated as income of the Firm, requiring to be added, it was considered, that the partners can withdraw funds authorisedly/legally from the funds of the Firm, and the partnership deed does not provide for charging of interest from the partners on their debit balances, and that no interest is being paid on their credit balance. In such circumstances, it was found, that non-charging of interest by the assessee, from the partners, on the amounts withdrawn by partners from the Firm, will not justifiably make, the interest earned by partner on such amounts, income of the assessee firm, so as to make addition of the amount, in income of the assessee Firm, as it will tantamount to addition, on account of notional/ hypothetical interest income, and not real interest income, earned by assessee. Thus, this part of the finding of the learned Commissioner was also upheld. Arguing the appeals, various case laws were cited on behalf of either side. We have heard the learned counsel, and have gone through the orders of the learned 9 authorities below, so also the various case law cited at the bar. To start with, we take up the case of Dr. K. George Thomas v. Commissioner of Income Tax, reported in 156 I.T.R.412. In this case, the assessee was receiving donations, through the Indian Christian Crusade, from his friends in U.S.A., who believed in the cause, the assessee was sponsoring, and for helping the movement. It was found, that the receiving of donation, was for furtherance of the objects of vocation. There was link between the activities of the appellant assessee, and the payments received by him, which link was close enough. Then, those receipts arose to the assessee, from the carrying-on of his vocation, and they were not casual, and non-recurring receipts, and were found to be taxable, obviously because, the amounts of donations, received were donations, not liable to be refunded back by the assessee, to the persons, named. Another judgment on the same question is Dr. K. George Thomas v. Commissioner of Income Tax, reported in 159 I.T.R.851. Obviously, this judgment also being of the same assessee, for different years, will not help the case of the Revenue. Then, Sir Kikabhai Premchand v. Commissioner of 10 Income Tax, reported in 24 I.T.R.506, is a case entirely on different aspect, viz., during the relevant year of account, the assessee had withdrawn some silver bars, and shares from business, and settled them on certain trusts, in which he was the managing trustee. In his books, assessee credited the business with the cost price of the bars and shares, so withdrawn. However, the Income tax authorities found, that the assessee had derived income from the stock in trade, thus transferred, and assessed him on a certain sum, being the difference between the cost price of the silver bars, and shares, and their market value, at the date of their withdrawal, from the business. In our view, it will suffice to say, that this case has no bearing on the case in hand. Then Union of India v. Gosalia Shipping P.Ltd., reported in 113 I.T.R.307, is again a different case, inasmuch the ship was hired, and certain fixed monthly rent was agreed to be paid, on the basis of dead weight carrying capacity of the ship, at $. 4.5 per ton, while the ship was called at an Indian Port, and was loaded with the Company's goods, the question arose about the income, being on account of the carriage of goods. Obviously, the question involved was, as to whether the amount paid was hire charges, paid on the carriage of goods, or not, which obviously, has nothing to do with the controversy, involved in the present case. 11 Then, National Cement Mines Industries Ltd. v. Commissioner of Income Tax, reported in 42 I.T.R.69, is again a case, off the mark, where the amount was relatable to the production, and consumption of raw material, and the purchaser Company was to pay the amount, on that basis, to other Company. This judgment obviously, has nothing to do with the controversy, involved in the present case. The judgment of Hon'ble the Supreme Court, in Mcdowell & Co. Ltd. v. Commercial Tax Officer, reported in 154 I.T.R.148, does take the view, that the tax planning may be legitimate, provided it is within the framework of the law, and colourable devices cannot be part of tax planning, and it is wrong to encourage, or entertain the belief, that it is honourable to avoid the payment of tax, by dubious methods, and that it is the obligation of every citizen to pay the taxes honestly, without resorting to subterfuges. This legal principle, propounded by the Hon'ble Supreme Court, does not admit of any dispute or doubt, we respectfully bow to it. Then, we come to the judgment of Hon'ble Supreme Court, in P.H. Divecha v. Commissioner of Income Tax, reported in 48 I.T.R.222. In this case, a Firm was appointed as distributor for specified area with monopoly rights, it worked as such for 16 years. However, thereafter, the 12 manufacturer took over the distribution in those areas and served a notice upon the Firm, terminating the agreement. In those circumstances, it was also agreed, that as a gesture of goodwill, the manufacturer agreed to pay in instalments Rs.40,000/- per annum, to each of the partners of the Firm. This amount was found by the Hon'ble Supreme Court, to be not a taxable amount, by giving various reasons as under: “(i) that the agreement between the firm and Philips Electrical Co. created a monopoly right of purchase for and a monopoly right of sale in certain areas. It secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement. (ii) That in the absence of any proof that the amount payable to the partners represented the likely profits of the firm that would have arisen if the agreement had not been terminated, it could not be said that it replaced those profits. Although the amount was large there was nothing to show that it was an adequate measure of the profits that were expected to be made during the three years in which the amount was to be paid. (iii) That the payment could not be regarded as payment for any services rendered even though it was described as remuneration in addition to the ordinary profits of trading. The payment was made out of regard for the qualities of the three partners who had built up a vast net work of sales organisation of which the company would obtain the benefit when it entered on the business of selling for itself. (iv) That as it was not related to any business done or to loss of profits and it was not recompense for services, past or future, the payment did not bear the character of income taxable under the Income Tax Act, 1922. (v) That the payment not being income, profits or gains, section 4(3)(vii) of the Act had no application. (vi) That the payment did not fall within section I0 13 (5A) (d) of the Act and was not liable to tax under that section.” It was further held that - “In determining whether a payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business the receipt in the hands of the recipient cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person, who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. Generally, the fact that the amount involved was large or that it was periodic in character has no decisive bearing upon the matter. A payment may even be described as “pay”, “remuneration”, etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period.” Then, we come to another judgment of Hon'ble Supreme Court, in Siddheshwar Sahakari Sakhar Karkhana Ltd. v. Commissioner of Income Tax, reported in 270 I.T.R. p.1. The facts of this case were, that the assessee was a co- operative society, which carried on the business of 14 manufacturing sugar. Its members were predominantly sugarcane farmers. The share capital of the society was contributed, not only by the members, but also by the State Government. Its bye-laws provided for deduction of amounts, towards refundable, and “non-refundable” deposits, from the cane price, payable to the grower members. Under bye-law No.61-A(i) the non-refundable deposits were not to be refunded, till the Government share capital, and the term loans taken from IFCI and other financial institutions for capital expenditure, were repaid fully, (ii) the board of directors of the society may convert such deposits into shares, after repayment of the loans taken towards capital expenditure, and long term loans taken from banks for capital expenditure, (iii) the amount standing to the credit of a member could be transferred at his option to the account of another, (iv) after one year of his ceasing to be a member, the amount could be refunded to him subject to approval of the Board, and (v) on his death, the amount could be paid to his heirs, with the approval of the board. Until repayment, the deposits so collected, were to be utilized for repaying the term loans, taken for capital expenditure. Interest was payable on the deposits. The amounts, so deducted, were credited to the individual accounts of the members. The assessee was also entitled to collect, by deduction from the cane price payable to the members, term deposits for a period, not exceeding five years, on which interest, not exceeding 12 percent, was 15 payable. Pursuant to instructions, issued by the Director of Sugar, certain amounts, at prescribed rates, were also deducted by the assessee from the cane price, and credited to certain Funds, viz., the Chief Minister's Relief Fund, Late Shri Y.B. Chavan Memorial Fund, Hutment Fund, Area Development Fund, and Cane Development Fund. The Appellate Tribunal held, that the amounts, collected by the assessee, towards the non-refundable deposits, and the refundable deposits (term deposits) could not be treated as the income of the assessee, and the amounts deducted for being credited to the funds, were not trading receipts of the assessee. The High Court held, that the amounts collected towards the non-refundable, and refundable deposits were trading receipts of the assessee, but the amounts deducted towards the funds, were diverted by overriding title, and were not its income. On these facts, the Hon'ble Supreme Court held as under: “… … … that the line of enquiry, in order to determine the true nature and character of the receipts, did not stop at ascertaining the mere fact whether the realization was in the course of trading. Although the use of the expression “deposit” did not conclude the issue, the expression was used in the bye-laws to mean just what it said. The repayment of loans taken for capital expenditure and the share capital of the Government were two specified events which were by no means uncertain, though the time of repayment was indefinite. On the occurrence of the two events, the right to demand refund would accrue to the member- depositor. Such a right, though contingent in nature initially, inhered in the depositor from the beginning. The word “may” in the bye-laws had to be construed as “shall” and the board was bound to allot shares to the members in relation to the deposits, after full 16 repayment to the Government and the financial institutions. The existence of the other features such as transferability of the deposit to another member and the provision for refund of the deposited amount to the member in case of cessation of membership or to his legal heirs in case of death indicated that the deposited amount could not be treated as money belonging to the assessee-society. The payment of interest at a specified rate from year to year was consistent only with the fact that the deposited amount still belonged to the members. And the fact that the deposited amounts were credited to the individual accounts of the members corroborated the circumstance that the deposits belonged to the members. The amounts deducted from the cane price towards the non-refundable deposits were not trading receipts of the assessee.” It was further held as under: “It is not any and every receipt linked to the trading activity that acquires the quality of revenue receipt. The tribunal or the court should go further and delve into the true nature, character and purpose of the realizations. If the amounts are meant to be held by the assessee as deposits liable to be returned to the depositor at a specified point of time or on the happening of specified contingencies which are by no means uncertain or are otherwise treated as the depositor's money – the depository having no unfettered dominion over the said funds, then, it is difficult to characterize them as the income of the assessee. Though the manner in which the sums are treated by the assessee in its accounts is neither conclusive nor a sure indication of the nature and character of the receipt, yet it is not an irrelevant factor.” Then, we take up the judgment in U.P. Bhumi Sudhar Nigam v. Commissioner of Income Tax, reported in 280 I.T.R. p.197. In this case, the Government had given grant-in-aid to the assessee for implementation of various specific