Case: Commissioner of Income Tax (Central), New Delhi Vs. Bijli Cotton Mills Private Limited

These three appeals are preferred on certificates of fitness granted by the Allahabad High Court under s. 66A of the Indian I.T. Act, 1922. They raise a common question whether the amounts realised by thefrom its customers as and for dharmada during the three assessment years54 are liable to be taxed as its income under the Act, and the question arises in the following circumstances The assessee is a private limited company having been incorporated in the year 1943. It carries on the business of manufacturing and selling yarn. Right from the inception it used to realise certain amounts on account of dharmada (charity) from its customers on sales of yarn and bales of cotton. The rate was one anna per bundle of 10 lbs. of yarn and two annas per bale of cotton. In the bills issued to the customers these amounts were shown in a separate column headed dharmada. The assessee did not credit the amounts of dharmada so realised by it in its trading account but it maintained a separate account known as the "dharmada account" in which realisations on account of dharmada were credited and payments made out were debited from time to time. It appears that at a meeting of the board of directors of theheld on January 15, 1945, the board passed a resolution that the monies standing in the "dharmada account" be treated as trust fund of which Lala Nawal Kishore and Lala Ram Babulal, two directors of the company, be the trustees and it was further declared that all the monies realised in future by the company on sale of yarn from the purchasers at the rate of one anna per bale or at such rate as may be decided in future be handed over to the trustees for being utilised in such altruistic, religious and charitable purposes as may be decided upon by them, and that the trustees shall in particular utilise such funds for the advancement of education and the alleviation of misery and sickness of the public in general as they think fit. Subsequently, on October 3, 1950, the said two directors executed a deed of declaration of trust wherein it was stated that a sum of Rs. 85, 000 had accumulated in the charity fund maintained by the trustees and it was declared that the amount did not belong to any individual but it was trust money of which the executants were trustees and it will be utilised by them for altruistic, religious or charitablethe previous year (being the calendar year 1950) relevant to the assessment yearthe total amount received by thein the "dharmada account" as aforesaid amounted to Rs. 21, 898; similarly, during the previous year (being the calendar year 1951) relevant to the assessment yearthe company collected from its customers a sum of Rs. 17, 242 on account of dharmada and a sum of Rs. 904 for the same purpose from the brokers and interest was also credited to this account amounting to Rs. 4, 010 while during the previous year (being the calendar year 1952) relevant to the assessment yearthe assessee received a sum of Rs. 19, 490 as dharmada from its customers and a sum of Rs. 4, 578 was also credited on account of interest in the "dharmada account". In the assessment proceedings for the assessment years4, the assessee claimed that the aforesaid amounts lying to the credit of the "dharmada account " were held in trust by it and were earmarked for charity and as such they were not its income from business liable to tax and in support of this contention reliance was placed upon the resolution passed by the board of directors on January 15, 1945, and the deed of declaration of trust dated October 3, 1950. The ITO rejected the contention and added the said amounts to the assessable income of thein all the years. The appeals before the AAC at the instance of theproved unsuccessful. Further appeals to the Appellate Tribunal also proved futile. Before the Tribunal it was contended on behalf of the assessee that each customer who paid the dharmada amount was a settlor of the trust, that there were as many settlors as there were customers and that the assessee had received these amounts under an obligation to utilise the same for charity; it was pointed out that the resolution of the board of directors dated January 15, 1945, was merely a confirmation of the fact that the amounts were held in trust by the assessee and that the deed dated October 3, 1950, was merely a declaration of the acceptance of the trust by the two trustees mentioned therein; in other words, it was contended that the customers of the assessee created a trust by paying the amounts as dharmada and, the amounts having been earmarked for charitable purposes only they were not the assessees income liable to tax. The Tribunal negatived the claim of the assessee on two grounds, first, that the amounts in question could not be regarded as having been received or held by the assessee under a trust for charitable purposes, the trust being void for vagueness and uncertainty and, secondly, that the realisations partook of the character of trading receipts. At the instance of the assessee, the matter, was carried to the High Court by way of two references,Reference No. 329 of 1964 being in relation to the amounts concerned in the two assessment years53 andReference No.454 of 1965 being in relation to the amount concerned in the assessment yearIn the former reference, the High Court approached the question not from the angle of deciding whether the assessee could claim exemption from tax under s. 4(3)(i) of the Act in respect of the impugned amounts but whether the impugned amounts could be regarded as the profits or gains of the business carried on by the assessee under s. 10(1) of the Act, in other words, in the opinion of the High Court the dispute related to the initial character of the receipt itself and the question was whether the amounts paid by the customers earmarked for charity were the assessees income at all and following an earlier decision of a Division Bench of that very court in the case of Agra Bullion Exchange Ltd. v. CIT [1961] 41 ITR 472 (All)  , the High Court held that the impugned amounts were never the income of the assessee at all and that the assessee was merely acting as a conduit pipe or clearing house for passing on the amounts to the objects of charity. It took the view that the Tribunal erred in holding that the levy for dharmada was in the nature of a surcharge on the price charged for sale of yarn and cotton and that in its opinion the fact that it was a compulsory levy ipso facto did not impress the same with the character of a trading receipt. The High Court pointed out that the amounts realised by the assessee on account of dharmada were never treated as trading receipts or as a surcharge on the sale price which was evident from the fact that such realisations were never credited to the trading account nor shown in the profit and loss statement for any year. It further observed that it was well known that the dharmada was a customary levy prevailing in certain parts of the country and where it was paid by the customers to a trading concern the amount was not paid as a price for the commodity sold to the customer. In this view of the matter, the High Court answered the questions in favour of the assessee and against the revenue. Following this decision, the High Court answered the question raised in the latter reference also in favour of the assessee. The CIT, Delhi (Central), New Delhi, has challenged the aforesaid view of the High Court before us in thesefor the revenue raised acontention in support of these appeals. In the first place, he contended that since the realisation or recovery of dharmada amounts by the assessee from each of its customers was a compulsory levy such payments from the customers point of view must be regarded as a part of the consideration or price for the goods purchased by them from the assessee. He urged that such compulsory levy would be in the nature of a premium or surcharge on the price and as such will have to be regarded as a trading receipt. In that behalf reliance was placed upon two decisions, one of the Andhra Pradesh High Court in Poosarla Sambamurthi v. State of Andhra [1956] 7 STC 652     and the other of Madras High Court in N. S. Pandaria Pillai v. State of Madras [1973] 31 STC 108  , where similar amounts charged by the assessee as and by way of dharmam in the former case and mahimai in the latter case were held to be part of the price includible in the taxable turnover of the assessee. Secondly, he contended that it is well settled that a gift for dharmam or dharmada is void for vagueness and uncertainty and, therefore, when the dharmada amounts were paid by the customers and received by the assessee these amounts could not be regarded as "property held under trust or other legal obligation for charitable purposes" within the meaning of s. 4(3)(i) of the Act and in this behalf strong reliance was placed upon the meanings given to the expressions dharma and dharmada in Prof. Wilsons Glossary of Judicial & Revenue Terms, the decision of the Privy Council in Ranchordas v. Parvatibai [1899] LR 26 IA 71; ILR 23 Bom 725 (PC) and the decision of the Bombay High Court in Devshankar Naranbhai v. Moti Ram Jageshvar [1893] ILR 18 Bom 136. Apart from this legal position he sought to support the Tribunals finding that no trust could be said to have been created by the customers on the basis of certain factual aspects

Court's reasoning:
Since the realisations in question in the present case are not a part of the price or surcharge on the price but payments for the specific purpose of being spent on charitable purposes, they cannot be regarded as trading receipts of thewith the factual aspects on the basis of which counsel for the revenue sought to support the Tribunals finding that no trust could be said to have been created by the customers it will be apparent from the above discussion that none of the aspects are such as would lend support to the inference drawn by the Tribunal. We have already dealt with the alleged compulsory nature of the levy and have pointed out that the dharmada amounts cannot be said to have been paid involuntarily by the customers and in any case the compulsory nature of the payments, if there be any, cannot impress the receipts with the character of being trading receipts. Further, it is not possible to accept the submission that the customers being illiterate did not appreciate that they were paying the amounts with a view to create a trust, especially when it has been found that such payments were made pursuant to a custom which obtained in the commercial and trading community; indeed, being a customary levy the constituents or customers, whether literate or illiterate, would be knowing that the additional payments over and above the price were meant for being spent by the assessee for charitable purposes. Further, the fact that the assessee would be having some discretion as regards the manner in which and the time when it should spend the dharmada amounts for charitable purposes would not detract from the position the assessee held qua such amounts, namely, that it was under an obligation to utilize them exclusively for charitable purposes. It is true that the assessee did not keep these amounts in a separate bank account but admittedly a separate dharmada account was maintained in the books in which every receipt was credited and payment made thereout on charity was debited and the High Court has clearly found that these amounts were never credited in the trading account nor were carried to the profit and loss statement. Having regard to this position, it seems to us clear that the Tribunals finding that no trust could be said to have been created by the customers in respect of the impugned amounts will have to be regarded asthe result, after considering both the aspects, we are of the view that the impugned realisations made by the assessee from its customers for dharmada being validly earmarked for charity or charitable purposes could not be regarded as the assessees income chargeable toin the facts and circumstances of the case, it is obvious that these receipts would not be trading receipts only if at the time these are received they are held under a trust or other legal obligation to spend the same for charitable purposes. In other words, if the legal obligation to spend the same for charitable purposes is void and, therefore,the receipts or the realisations may have to be regarded as trading receipts in the hands of the assessee. That being the position, in our view, the approach adopted by the High Court to determine the question at issue cannot be regarded as correct. As pointed out earlier, the High Court approached the question from the angle of deciding whether the impugned amounts realised by the assessee could be regarded as the profits and gains of the business carried on by the assessee under s. 10(1) of the Act, impliedly suggesting that a claim for exemption for such amounts under s. 4(3)(i) of the Act was unnecessary or irrelevant and that the dispute merely related to the initial character of the receipt itself and following the decision in Agra Bullion Exchange case [1961] 41 ITR 472 (All)  , it held that the amounts in question which were paid by the customers earmarked for charity were riot trading receipts and were never the income of the assessee at all. It is clear that while making this finding the High Court assumed that the customers while paying these amounts had validly earmarked them for charity. Since the revenue had specifically raised a dispute that the receipts of dharmada would neither create a valid trust nor a valid legal obligation to spend the same for charitable purposes, dharmada being a vague and uncertain concept, the High Court could not, in our view, come to the finding that these realisations were not trading receipts unless it further found that earmarking for dharmada was a valid earmarking for charity. In our view, therefore, both the aspects of the question are required to be considered for the purpose of arriving at a correct decisionour view, this question is covered by the decision of this court in Tollygunge Clubs case [1977] 107 ITR 776 (SC). In that case, theconducted horse races with amateur riders and charged fees for admission into the enclosure of the club at the time of the races; a resolution was passed in 1945, at the general body meeting of the club for levying a surcharge of eight annas over and above the admission fees, the proceeds of which were to go to the Red Cross Fund; this resolution was varied by another resolution dated January 30, 1950, to the effect that the surcharge should be earmarked "for local charities and not solely for the Indian Red Cross"; every entrant was issued two tickets, one, an admission ticket for admission to the enclosure of the club, and the other, a separate ticket in respect of the surcharge of eight annas for local charities; the question was whether receipts on account of the surcharge were to be treated as the respondents income for the assessment yearthe Appellate Tribunal and the High Court on a reference held that the respondents receipts from the surcharge levied on admission tickets for purposes of charity could not be included in the respondents taxable income. On further appeal, this court held, confirming the decision of the High Court, that the surcharge was not a part of the price for admission but was a payment made for the specific purpose of being applied to local charities.On parity of reasoning the dharmada amounts paid by the customers cannot be regarded as part of price or a surcharge on price of goods purchased by the customers. The amount of dharmada is undoubtedly a payment which a customer is required to pay in addition to the price of the goods which he purchases from the assessee but the purchase of the goods by the customer would be the occasion and not the consideration for the dharmada amount taken from the customer. It is true that without payment of dharmada amount the customer may not be able to purchase the goods from the assessee but that would not make the payment of dharmada amount involuntary inasmuch as it is out of his own volition that he purchases yarn and cotton from the assessee. The dharmada amount is, therefore, clearly not a part of the price, but a payment for the specific purpose of being spent on charitable purposes. The two decisions on which reliance was placed by counsel for the revenue, namely, Poosarla Sambamurthis case [1956] 7 STC 652 (AP)   and Pandaria Pillais case [1973] 31 STC 108 (Mad)   are clearly distinguishable and inapplicable to the facts of this case inasmuch as both the decisions were rendered under sales tax legislation where the question that was required to be considered was whether the realisations for dharmada (charitable purpose) in the former case or mahimai (religious purpose) in the latter case would fall within the definition of "turnover" as contained in the concerned legislation and it was held that such realisations were includible in the assessees turnover. We do not wish to express any opinion on the correctness of these decisions. Suffice it to state that the ratio of these decisions cannot apply to the instant case.Since the realisations in question in the present case are not a part of the price or surcharge on the price but payments for the specific purpose of being spent on charitable purposes, they cannot be regarded as trading receipts of thewith the factual aspects on the basis of which counsel for the revenue sought to support the Tribunals finding that no trust could be said to have been created by the customers it will be apparent from the above discussion that none of the aspects are such as would lend support to the inference drawn by the Tribunal. We have already dealt with the alleged compulsory nature of the levy and have pointed out that the dharmada amounts cannot be said to have been paid involuntarily by the customers and in any case the compulsory nature of the payments, if there be any, cannot impress the receipts with the character of being trading receipts. Further, it is not possible to accept the submission that the customers being illiterate did not appreciate that they were paying the amounts with a view to create a trust, especially when it has been found that such payments were made pursuant to a custom which obtained in the commercial and trading community; indeed, being a customary levy the constituents or customers, whether literate or illiterate, would be knowing that the additional payments over and above the price were meant for being spent by the assessee for charitable purposes. Further, the fact that the assessee would be having some discretion as regards the manner in which and the time when it should spend the dharmada amounts for charitable purposes would not detract from the position the assessee held qua such amounts, namely, that it was under an obligation to utilize them exclusively for charitable purposes. It is true that the assessee did not keep these amounts in a separate bank account but admittedly a separate dharmada account was maintained in the books in which every receipt was credited and payment made thereout on charity was debited and the High Court has clearly found that these amounts were never credited in the trading account nor were carried to the profit and loss statement. Having regard to this position, it seems to us clear that the Tribunals finding that no trust could be said to have been created by the customers in respect of the impugned amounts will have to be regarded as