IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 02.01.2007 CORAM THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN Tax Case (Reference) Nos.87 to 94 of 2001 The Commissioner of Income Tax Coimbatore. ..Applicant in all T.Cs. Vs. M/s. Sakthi Finance Ltd. Coimbatore. ..Respondent in all T.Cs. For Applicant :: Mr.T.Ravikumar For Respondent :: Mr.R.Vijayaraghavan Tax cases referred to the High Court by the Income-Tax Appellate Tribunal under section 256(1) of the Indian Income Tax Act 1992 (Act XI of 1992) in R.A Nos.253 to 260/Mds/97 in I.T.A. Nos.3206/Mds/90, 1996/Mds/91, 2175/Mds/95, 2174/Mds/93, 1573/Mds/96, 1574/Mds/96, 1338/Mds/96 and 2586/Mds/92 for the assessment years 1987-88, 1988-89, 1990-91, 1991-92, 1992-93, 1993-94 and 1989-90 on its file for decision on the following questions of law viz., (i) “Whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conclusion that the lesess were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on the assessee were to be declared as unconstitutional. When there is no reference to the fact in the bills issued by the assessee to the leasee and when there is no material on recod apart from a unilateral letter which does not confer any contractual right on the lessee, leading to the conclusion that the lessee was award of his legal right to receive such refund ?" (2) “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts collected by the assessee from lessess towards sales tax represented only contingent deposits?” (TC(R) NOS. 87 and 93 of 2001) (i) “Whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conclusion that the lessess were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on https://hcservices.ecourts.gov.in/hcservices/ the assessee were to be declared as unconstitutional. When there is no reference to the fact in the bills issued by the assessee to the leasee and when there is no material on record apart from a unilateral letter which does not confer any contractual right on the lessee, leading to the conclusion that the lessee was award of his legal right to receive such refund ?" (2) “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts collected by the assessee from lessess towards sales tax represented only contingent deposits and therefore quashing the directions of the commissioner of Income-tax under Sec. 263 on this issue?” (TC(R) NOS. 88 of 2001) 1) "Whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conslusion that the lessess were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on the assessee were to be declared as unconstitutional when there is no rerefence to the fact in the bills issued by the assessee to the lessee and when there is no material on record apart from a unilateral letter which does not confer any contractual right on the lessee, leading to the conclusion that the lessee was aware of his legal right to receive such refund?" 2) "Whether, on the facts and in the circumsances of the case, the Tribunal was right in law in holding that the amount collected by the assessee from lessee towards sales-tax represented only contingent deposits?" 3) "Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the assessee is entitled as revenue deduction under Sec.37(1) the expenditure incurred by it in patitions, false ceiling etc. in the assessee's own premises used for housing lockers?' 4) "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to depreciation at the rate aplicable to a plant at 33 1/3 on its buildings housing the sale deposit lockers?" (TC(R).No.89 of 2001) (1) "Whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conclusion that the lessees were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on the assessee were to be declared as unconstitutional, when there is no reference to the fact in the bills issued by the assessee to the lessee and when there is no material on record apart from a unilateral letter https://hcservices.ecourts.gov.in/hcservices/ which does not confer any contractual right on the lessee, leading to the conclusion that the lessee was aware of his legal right to receive such refund?" 2)"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount collected by the assessee from lessees towards sales tax represented only contingent deposits (and therefore questioning the directions of the Commissioner of Income-Tax under section 263 on this issue?") 3) " Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the assessee is entitled as revenue deduction under sec.37(1) the expenditure incurred by it in partitions, false ceiling etc. in the assessee's own permises used for housing lockers?" 4)" Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to depreciation at the rate applicable to a plant at 33 1/3% on its buildings housing the safe deposit lockers?" 5." Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred on false ceiling, partition etc. in the assessee's lease hold premises were revenue in nature?" (TC (R) No.90 of 2001) [1] “Whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conclusion that the lessees were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on the assessee were to be declared as unconstitutional, when there is no reference to the fact in the bills issues by the assessee to the lessee and when there is no material on record apart from a unilateral letter which does not confer any contractual right on the lessee, leading to the conclusion that the lessee was aware of his legal right to receive such refund?” [2] “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount collected by the assessee from lessees towards sales tax represented only contingent deposits [ and therefore questioning the directions of the Commissioner of Income-tax under Section 263 on this issue?” [3] “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled as revenue deduction under Section 37[1] the expenditure, incurred by it in partitions, false ceiling etc. in the assessee's own premises used for housing lockers?” https://hcservices.ecourts.gov.in/hcservices/ [4] “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to depreciation at the rate applicable to a plant at 33 1/3% on its buildings housing the safe deposit lockers?” [TC[R] No.91/2001] 1. "whether on the facts and in the circumstances of the case, the Tribunal was right in law and had valid material to come to the conclusion that the lessees were aware that what they paid was only contingent deposit and that it was to be returned to them if the sales tax levy on the assessee were to be declared as unconstitutional, when there is no reference to the fact in the bills issued by the assessee to the lessee and when there is no material on record apart from a unilateral letter which does not consider any contractual right on the lessee, leading to the conclusion that the lessee was aware of his legal right to receive such refund?" 2. "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts collected by the assessee from lessees towards sales-tax represented only contingent deposits?" 3. "Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the assessee is entitled to depreciation at the rate applicable to a plant at 33 1/3% on its buildings housing the safe deposit lockers?" (TC (R) Nos. 92 and 94 of 2001) arising out of order dated 17.8.1995, 29.9.1995, 14.9.1992, 13.7.93, 12.10.1995 and 4.6.1996 in ITA.Nos.290-C & 291-C for the Assessment years 94-95, 290-C & 291-C for the Assessment year 94-95; 545-C for the Assessment year 92-93, 138-C for the Assessment year 93-94 292 G for the Assessment year 94-95 256A-C for the Assessment year 95-96 127-C for the Assessment year 96-97 on the file of the Commissioner of Income Tax (Appeals) Coimbatore respectively as against order date 30.3.94, 30.3.94, 27.3.1992, 30.3.1993, 30.3.1994, 28.5.95 and 22.3.1996 in PAN/GIR.No.CU- 0166 for the Assessment year 87-88, PAN/GIR.No.C2-0166 for the Assessment year 88-89, PAN/GIR.No.C2-0166 for the Assessment year 89-90, PAN/GIR.No.C2-0166/SR I/CBE for the Assessment year 90-91, PAN/GIR.No.C2-0166 for the Assessment year 91-92, PAN/GIR.No.C2-0166/SRI/CBE for the Assessment year 92-93, PAN/GIR.No.CU-0166/SRI/CBE for the Assessment year 93-94, on the file of the Deputy Commissioner of Income Tax, Spl Range I, Coimbatore respectively. These referebce cases coming on for hearing on this day upon perusing the order of Reference of the Income-Tax Appellate Tribunal Ms 'B' Bench dated 24.01.2001. The Statement of the case dated 17.12.1999 submitted by the Income-Tax Appellate Tribunal and the Record in the case and upon hearing the arguments of Mr.T.Ravikumar Special Counsel for Income-Tax on https://hcservices.ecourts.gov.in/hcservices/ behalf of the Applicant in TCs and of Mr.r.Vijayaraghavan, Advocate for the Respondent in all TCs the Court delivered the following Judgment. J U D G M E N T (Delivered by P.D.DINAKARAN,J.) T.C.(R) No.87 of 2001 has been preferred against R.A.No.253/Mds/97 with reference to the assessment year 1987-88, T.C.(R) No.88 of 2001 has been preferred against R.A.No.254/Mds/97 with reference to the assessment year 1988-89, T.C.(R) No.89 of 2001 has been preferred against R.A.No.255/Mds/97 with reference to the assessment year 1988-89, T.C.(R) No.90 of 2001 has been preferred against R.A.No.256/Mds/97 with reference to the assessment year 1990-91, T.C.(R) No.91 of 2001 has been preferred against R.A.No.257/Mds/97 with reference to the assessment year 1991-92, T.C.(R) No.92 of 2001 has been preferred against R.A.No.258/Mds/97 with reference to the assessment year 1992-93, T.C.(R) No.93 of 2001 has been preferred against R.A.No.259/Mds/97 with reference to the assessment year 1993-94 and T.C.(R) No.94 of 2001 has been preferred against R.A.No.260/Mds/97 with reference to the assessment year 1989-90. 2. The above batch of references has been made under Section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, Chennai Bench 'B', at the instance of the Commissioner of Income-tax, Coimbatore, raising substantial questions of law, referred to and dealt with hereunder, arising out of the common order dated 10.1.1997 of the Income- tax Appellate Tribunal, Chennai Bench 'B'. In pursuance of the directions of this Court, the Income-tax Appellate Tribunal has stated a case. T.C.(R) Nos.87 of 2001 and 93 of 2001 (R.A.Nos.253 and 259/Mds/97 with reference to the assessment years 1987-88 and 1993-94: 3.1. In respect of T.C.(R) Nos.87 of 2001 and 93 of 2001 with reference to the assessment years 1987-88 and 1993-94, the Tribunal has referred the following question of law for our consideration: “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts collected by the assessee from lessees towards sales tax represented only contingent deposits ?" 3.2. During the relevant assessment years, the assessing officer added the contingent deposit collected by the assessee as a business income, even though the assessee claimed the contingent deposit as a revenue receipt. According to the assessee, the contingent deposit collected by them could not be assessed to tax as a part of trading receipt, as the said deposit does not belong to the assessee at all and is meant for the payment of sales tax proposed to be levied by the State Government. On the other hand, the Revenue contended that the amount collected as contingent deposit towards the sales tax payable by the https://hcservices.ecourts.gov.in/hcservices/ assessee is still open to be assessed to tax, since till such sales tax is paid by the assessee out of the contingent deposit, such deposit forms part of the assessee's income. But the assessing officer invoking Section 43B of the Income-tax Act, 1961, disallowed the claim of the assessee holding that the contingent deposit is nothing but sales-tax collected from the lessees on lease rentals and not paid to the Government and hence, it has to be disallowed under Section 43B and accordingly, added the contingent deposit to the assessee's income. 3.3. Aggrieved by the said order of the assessing officer, the assessee preferred appeals before the Commissioner of Income-tax (Appeals) who, by order dated 17.8.1995, upheld the disallowance of the claim of the assessee. The Commissioner observed that it is not disputed that the Tamilnadu Sales-tax Department has levied the said tax on the appellant in respect of its lease rentals received from the customers. The amount of tax payable has also been quantified and the like amount has also been collected from the customers as a measure of precaution. The commissioner further observed that in the event of the appellant's claim of exemption from the said liability is ultimately upheld and became final then the customers might get the amount paid by them individually refunded to them under a contractual obligation. The Commissioner also observed that the statutory liability is never a contingent liability and it will not cease to exist by reason of the fact that the taxpayer is disputing the liability. But, the statutory liability ceased to exist when a competent court strikes down the vires of the provisions imposing the levy of sales tax on lease rentals. The Commissioner further observed that even though this Court stayed the operation of the provision of sales tax in respect of lease rentals in a writ petition filed by the assessee, the same has not been finally disposed of and in the case of a contractual liability, the liability will accrue only in the year in which the dispute is finally settled between the parties. But, the Commissioner distinguishes the said proposition with the statutory liability, as it is not even a case where the collection was made towards possible proceedings by the sales tax department and it is the collection of a quantified amount as per the actual proceedings of the sales tax department. The Commissioner, ultimately, held that though the assessee called it as contingent deposit, the same cannot be accepted because the customers when they paid the amounts they have paid with the awareness that what they paid is towards the possible sales tax on lease rentals and accordingly, held that as per section 43B of the Act, inasmuch as the collected amount has not been paid towards the credit of the Government, the disallowance has been rightly made. The Commissioner also observed that if the assessee ultimately succeed in their dispute and refund the collected amount to the customers, it is open to them to claim the deduction of the amount appropriately in that year. 3.4. However, on further appeals by the assessee against the said order of the Commissioner dated 17.8.95, the Income-tax Appellate Tribunal, by order dated 10.1.1997, recording the undertaking given by the assessee that they would refund the amount if the proposed levy of sales tax was struck down as unconstitutional by the Courts, held that the https://hcservices.ecourts.gov.in/hcservices/ Revenue was not at all justified in disallowing the contingent deposit invoking Section 43B and also held that the said amount cannot be treated as business receipt and accordingly, directed the assessing officer to delete the addition. 3.5. It is against the said order of the Tribunal, at the instance of the Commissioner of Income-tax, the Tribunal has stated a case and referred the question of law referred to above. 4. Mr.T.Ravikumar, learned standing counsel appearing on behalf of the Revenue, relied upon the decision of this Court in COMMISSIONER OF INCOME- TAX v. SOUTHERN EXPLOSIVES CO. [(2000) 242 I.T.R. 107] and contended that the assessee having collected the amount to meet its statutory liability towards sales tax proposed to be levied by the State Government on lease rentals and kept it as contingent deposit and having not paid the same to the State Government, that amount cannot be claimed as a deduction, as the amount so collected partake of the character of trading receipt and so long as it remains with the assessee, deduction cannot be allowed and it should be treated as income of the assessee. 5. On the other hand, the learned counsel appearing for the assessee relying on the decision of the Apex Court in K.C.P. Limited v. COMMISSIONER OF INCOME-TAX [(2000) 245 I.T.R. 421] as well as the decision of this Court in COMMISSIONER OF INCOME-TAX v. ARYA VAIDHYA PHARMACY (CBE) LTD. [(2006) 284 I.T.R. 335], contended that as the contingent deposit collected by the assessee is associated with the liability to refund, it could not be taxed as a part of the trading receipt and hence, the amount was not assessable. 6.1. Of course, it is a settled law that as long as the receipt of the amount by the assessee was clearly associated with a liability to refund the amount, such receipt of amount would not be characterised as an income and, therefore, the same cannot be taxed vide K.C.P. Ltd. v. CIT [(2000) 245 I.T.R. 421 (SC)], referred supra. 6.2. Similar issue came up for consideration before this Court in COMMISSIONER OF INCOME-TAX v. ARYA VAIDHYA PHARMACY (CBE) LTD. [(2006) 284 I.T.R. 335], where the assessee had collected sales tax at 30% and retained it as a deposit without paying it to the State Government on the ground that there was a dispute as to whether the ayurvedic medicines, viz., arishtams and asavas, manufactured by the assessee were subject to sales tax at 30% or 8% and after the decision of the Apex Court by judgment dated 15.3.1989, holding that the said medicines were taxable only at 8% with a direction to refund the excess amount to the customers to the extent it was possible and to donate the left over excess, which could not be refunded, to a charitable trust, this Court finding that the amount collected by the assessee was clearly associated with a statutory liability and if such sales tax need not be paid, the said amount had either to be refunded to the customers or transferred to the charitable trust, but the same could not be taxed as a part of the trading receipt. https://hcservices.ecourts.gov.in/hcservices/ 6.3. But, the facts of the present case is totally different and is identical to the facts of the case in COMMISSIONER OF INCOME-TAX v. SOUTHERN EXPLOSIVES CO. [(2000) 242 I.T.R. 107], cited supra, which is relied upon by the Revenue. In the said case, the assessee was a dealer in explosive detonators and safety fuses and apart from collecting four per cent of the price of the goods and paying it to the Government, it also collected further four per cent on the price of the goods as deposit against sales tax, as though the said explosive detonators and safety fuses might be treated as chemicals and as such higher rate of sales tax could be collected by the Government. Even though the assessing officer accepted the return of income, the Commissioner exercising his power under Section 263 of the Act, directed re-assessment and to include the additional amount collected, which, on appeal by the assessee, was negatived by the Tribunal. Hence, on a reference made to this Court, it was observed that the true character of a receipt must be judged with reference to the reasons for the collection, and the liability for meeting which the collection was made and when such liability is a statutory liability, which the assessee was required to meet, and for meeting which it was by the statute or authorities permitted to collect the amount required from its customers, the true character of the collection is a trading receipt. It was further observed that by calling a portion of the amount as deposit, it cannot be said that the assessee had constituted itself as a trustee, and therefore, the amounts received were not required to be regarded as part of its trading receipt. This Court, ultimately, held that the amounts collected by the assessee were amounts which were meant to be utilised by the assessee for meeting its tax liability and even if the assessee had paid over the entire amount received by it as deposit towards sales tax to the State Government, it would still have been open to the assessee to seek refund, if the assessee wished to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible. It was further held that the fact that the assessee had chosen to adopt the device of labelling a part of the amounts collected towards its sales tax liability as deposit could not make a difference and hence, the amount formed part of the assessee's income. 6.4. Even in the case of K.C.P. Ltd., [(2000) 245 I.T.R. 421 (SC)], cited supra, the Apex Court observed in clear terms that if the amount so collected is passed on to the State Government or refunded to the purchasers, then the assessee would be entitled to claim deduction, meaning thereby that if the assessee had not paid, such deposit can be disallowed under Section 43B of the Act, as the assessee had not discharged his liability as per Section 43B of the Act. 6.5. Accordingly, the reference with regard to the question whether the amounts collected by the assessee from lessees towards sales tax represented only contingent deposits is answered in the negative, in favour of the Revenue and against the assessee. T.C.(R) No.88 of 2001 (R.A.No.254/Mds/97) with reference to the assessment year 1988-89: https://hcservices.ecourts.gov.in/hcservices/ 7.1. In respect of T.C.(R) No.88 of 2001 with reference to the assessment year 1988-89, the Tribunal has referred the following question of law for our consideration: “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts collected by the assessee from lessees towards sales tax represented only contingent deposits and therefore quashing the directions of the Commissioner of Income-tax under sec.263 on this issue ?" 7.2. Pursuant to the order of the Commissioner under Section 263 of the Act, the assessing officer re-opened the assessment for the assessment year 1988-89 and added the amounts collected as contingent deposit towards sales tax on lease rentals, as has been done in the earlier assessment year 1987-88. The Tribunal quashed the direction of the Commissioner, following the reasons given in its earlier order for the assessment year 1987-88 and hence, the above reference. 7.3. The issue raised in the above question is already answered in T.C.(R) Nos.87 and 94 of 2001 with reference to the assessment years 1987- 88 and 1993-94. Accordingly, the reference with regard to the assessment year 1988-89 is answered in