Case: Punjab Distilling Industries Ltd Vs. The Commissioner Of Income-Tax, Simla

1. The appellant is a company carrying on business as a distiller of country liquor. It was incorporated in May 1945 and was in fact a previously existing company called the Amritsar Distillery Co. Ltd. reconstructed under the provisions of the Companies Act. The appellant carried on the same business as its predecessor, namely, sale of the produce of its distillery to licensed wholesalers. The wholesalers in their turn sold the liquor to licensed retailers from whom the actual consumers made their purchases. The entire trade was largely controlled by Government regulations.After the war started the demand for country liquor increased but difficulty was felt in finding bottles in which the liquor was to be sold in order to relieve the scarcity of bottles the Government devised in 1940 a scheme called the buy-back scheme. The scheme in substance was that a distiller on a sale of liquor became entitled to charge a wholesaler a price for the bottles in which the liquor was supplied at rates fixed by the Government which he was bound to repay to the wholesaler on the latter returning the bottles. The same arrangement, but with prices calculated at different rates was made for the liquor sold in bottles by a wholesaler to a retailer and by a retailer to the consumers. Apparently it was conceived that the price fixed under the scheme would be found to be higher than the price which the bottles would fetch in the open market and the arrangement for the refund of the price would therefore encourage the return of the bottles from the consumers through the intermediaries ultimately to the distiller. The price refundable was later increased perhaps because the previous price did not fully achieve the desired result of the bottles finding their way back to the distillers.Sometime in 1944, the Amritsar Distillery Co. Ltd. which then was in existence, insisted on the wholesalers paying to it in addition to the price of the bottles fixed under the buy-back scheme, certain amounts described as security deposits and calculated at varying rates per bottle according to sizes for the bottles in which the liquor was supplied to them promising to pay back for each bottle returned at the rate applicable to it and further promising to pay back the entire amount paid on a transaction when 90 per cent of the bottles covered by it had been returned. The company while it was in existence realised these additional sums and so did the appellant after it took over the business. The object of demanding and taking these additional sums was obviously to provide additional inducement for the return of the bottles to the distiller so that its trade in selling the produce of its distillery might not be hampered for want of bottles. No time limit had been fixed within which the bottles had to be returned in order to entitle a wholesaler to the refund, nor does it appear that a refund had ever been refused. The price of the bottles received by the appellant under the buy-back scheme was entered by it in its general trading account while the additional sum received for them was entered in the general ledger under the heading "Empty Bottles Return Security Deposit Account". It is not disputed that for the accounting periods with which this case is concerned, the additional amounts had been taken without Governments sanction and entirely as a condition imposed by the appellant itself for the sale of its liquor.4. The appellant was assessed to income-tax on the balance of the amounts of these additional sums left after the refunds made thereout. It had also been assessed to business profits tax and excess profits tax on the same balance. Its appeals against the orders of assessment to these taxes to the Appellate Assistant Commissioner and thereafter to the Tribunal failed. It then obtained an order referring a certain question arising out of the assessments for decision by the High Court of Punjab. The question originally suggested was reframed and in its final form reads thus: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 at the Income-tax Act ?The High Court answered the question in the affirmative. The present appeal is against that decision which related to all the three varieties of taxes for which the appellant had been made liable.

Reasoning: We think that the High Court took substantially a correct view of the matter when it said thatin realising these amounts "the company was really charging an extra price for the bottles". It is clear to us that the trade consisted of sale of bottled liquor and the consideration for the sale was constituted by several amounts respectively called, the price of the liquor, the price of the bottles and the security deposit. Unless all these sums were paid the appellant would not have sold the liquor. So the amount which was called security deposit was actually a part of the consideration for the sale and therefore part of the price of what was sold.Nor does it make any difference that the price of the bottles was entered in the general trading account while the so-called deposit was entered in a separate ledger termed "empty bottles return deposit account" for, what was a consideration for the sale cannot cease to be so by being written up in the books in a particular manner.Again the fact that the money paid as price of the bottles was repaid as and when the bottles were returned while the other moneys were repaid in full when 90 per cent of the bottles were returned does not affect the question for none of these sums ceased to be parts of the consideration because it had been agreed that they would be refunded in different manners.It is not contended that the fact that the additional sums might have to be refunded showed that they were not part of the price. It could not be so contended because what was expressly said to be the price of bottles and admitted to be price was also refundable. If so, then a slightly different method providing for their refund cannot by itself prevent these additional sums from beingwe 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 bottles which they had bought. 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.It would therefore appear that the deposits in that case were held not to be trading receipts because they had not been made as part of a trading transaction. It was held that they had been received anterior to the commencement of the trading transactions and really formed the trading structure of the Company. The character of the amounts with which we are concerned is entirely different. They were parts of the trading transactions themselves and very essential parts : the appellant would not sell liquor unless these amounts were paid and the trade of the appellant was to make profit out of these sales. The fact that in certain circumstances these amounts had to be repaid did not alter their nature as trading receipts. We have already said that it is not disputed that what was expressly termed as price of bottles was a trading receipt though these had to be repaid in almost similar circumstances. We may point out that it had not been said in Shell Company case 1951-32 Tax Cas 133 that the deposits were not trading receipts for the reason that they might have to be refunded; the reason for the decision was otherwise as we have earlier pointed out, namely, that they were no part of the trading transactions. We therefore think that the deposits dealt with in the Shell Company case 1951-32 Tax Cas 133 were entirely of a different nature and that case does not help.It seems to us that the amounts involved in the present case were exactly of the nature of the deposits made in the second period in Lakshmanier and Sons case, 1953 S C R 1057 : (A I R 1953 S C 145). There, as here, as soon as a transaction of sale was made the seller received certain moneys in respect of it. It is true that in Lakshmanier and Sons case, 1953 S C R 1057 : (A I R 1953 S C 145), the transaction was a contract to sell goods in future whereas in the present case the transaction was a sale completed by delivery of the goods and receipt of the consideration. But that cannot change the nature of the payment. In Lakshmanier and Sons case, 1953 S C R 1057 : (A I R 1953 S C 145) the payment initially made was refundable after the price had been paid; in the present case the contract is to refund the amount on the return of the bottles already sold. In each case therefore the payment was made as part of a trading transaction and in each case it was refundable on certain events happening. In each case again the payment was described as a deposit. As in that case, so in the present case, the payment cannot be taken to have been made by way of a security deposit. We must therefore on the authority of Lakshmanier and Sons case, 1953 S C R 1057 : (A I R 1953 S C 145), hold the amounts in the present case to have been trading receipts.We therefore think that the present case is governed by the arrangement covering the second period and not the third period mentioned in Lakshmanier and Suns case 1953 S C R 1057: (A I R 1953 S C 145), and come to the conclusion that the amounts with which we are concerned were tradingare unable to agree. If we are right in our view that the amounts were trading receipts, it follows that they must have a profit making quality about them. Their payment was insisted upon as a condition upon which alone the liquor would be supplied with an agreement that they would be repaid on the return of the buttles. They were part of the transactions of sale of liquor which produced the profit and therefore they had a profit making quality. Again, a wholesaler was quite free to return the bottles or not as he liked and if be did not return them, the appellant had no liability to refund. It would then keep the moneys as its own and they would then certainly be profit. The moneys when paid were the moneys of the appellant and were thereafter in no sense the moneys of the persons who paid them.20. Having given the matter our anxious consideration which the difficulties involved in it require, we think that the correct view to take is that the amounts paid to the appellant and described as "Empty Bottles Return Security Deposit" were trading receipts and therefore income of the appellant assessable to tax.We agree with the High Court that the question framed for decision in this case should be answered in the affirmative.