1987-VIL-63-ITAT-HYD

Equivalent Citation: [1987] 22 ITD 9 (HYD.) (SB)

Income Tax Appellate Tribunal HYDERABAD

ITA NO. 1771 (HYD.) OF 1986

Date: 23.04.1987

DETECTIVE DEVICES (P.) LTD.

Vs

INCOME-TAX OFFICER

G.C. Sharma, G. Satyanarayana, Anoop Sharma and R.K. Raghavan for the appellant.
N. Santhanam for the respondent.

BENCH

CH. G. KRISHNAMURTHY, GEORGE CHERIYAN, AND T. VENKATAPPA, JJJ

JUDGMENT

Per Shri George Cheriyan, Vice President

This appeal is by the assessee and relates to the assessment year 1983-84.

2. The assessee is a company in which the public are not substantially interested. The accounting period for the relevant assessment year ended on 30-9-1982. The assessee-company is a dealer in liquefied low-pressure gas purchased by them from M/s Union Carbide. The assessee supplies gas to consumers in small cylinders. Each consumer pays an amount which the company styles as a deposit towards the gas cylinder. According to the company, this amount is a security deposit which they are liable to refund to the consumers on termination of the contract for supply of gas and, therefore, will not form part of the income. According to the revenue, the amount so collected, which in this accounting year came to Rs. 16,74,000, was a trading receipt. The Income-tax Officer had brought this amount to tax as a trading receipt, and such order of the Income-tax Officer was also upheld by the Commissioner of Income-tax (Appeals). The assessee appealed to the Tribunal and placed reliance on a decision of the Indore Bench of the Tribunal in the case of Goyal Gases ( P.) Ltd. v. ITO [IT Appeal No. 2214 (Delhi) of 1984] in support of the plea that the amount referred to could not constitute taxable receipt.

The revenue, on the other hand, relied on an order of the Tribunal in the case of Ideal Engineers Hyderabad (P.) Ltd. v. ITO [IT Appeal No. 551 (Hyd.) of 1985] in support of the plea that such amounts constituted a trading receipt. In view of the conflict between the views taken by the two Benches of the Tribunal, the matter was referred to the President of the Tribunal on the point "whether the security deposit received by the assessee from its customers on supply of the cylinders is a trading receipt and liable to be taxed" for considering whether a Special Bench may be constituted. In pursuance of such reference, the President constituted a Special Bench and it is in such circumstances that the case has come to be heard by this Bench.

3. The assessee-company was incorporated on 14-8-1981. The company entered into an agreement on 1-1-1982 with one G.K. Kabra who was the Proprietor of M/s Detective Devices & Equipment Co. which carried on similar business (pp. 14A to 14C of paper book II). In terms of the agreement, the assessee-company agreed to take over plant and machinery of the erstwhile proprietary concern at a cost of Rs. 8,23,698. This did not include the cost of any cylinders which the proprietary concern had, because such cylinders were not taken over by the assessee-company. The assessee also agreed to meet the liabilities of the proprietary concern to the extent of Rs. 9,27,156. Other assets of the proprietary business were also taken over by the assessee-company. After the commencement of business on 1-1-1982, the assessee-company started supply of cylinders to customers by entering into agreements under which amount of Rs. 100 per cylinder, termed as "deposit for supplying gas" collected from various parties. This is one time deposit intended for safe keeping of cylinders. It is seen from the summary statement of cylinders supplied and amounts collected that 16,740 cylinders were supplied in all to 93 parties from whom in the aggregate Rs. 16,74,000 was realised. In a few instances, supplies to single parties were in excess of 500 cylinders, in many instances, it was in excess of 100 cylinders and there were also about 10 instances where single cylinders were supplied. (Details at pages 10 to 13 of paper book II.) The agreement that the assessee had drawn up contained the terms and conditions governing the loan of cylinders to customers and such terms and conditions are as under:

"1. Detective Devices Private Limited (hereinafter called the company) shall loan to the consumer and the consumer shall take on loan the Company Cylinder(s) (hereinafter called the equipment) required for the supply of Company’s product viz. KABSONS GAS.

2. The consumer shall deposit with the company an amount in accordance with the company’s tariff in force for the time being the whole or part of which shall be held by the Company as security for the due performance by the consumer of his obligation under the contract.

3. At all times the consumer shall have no right or interest in the property of the equipment and shall remain responsible to the Company for its safe custody and proper use until it is returned to the Company or to its Distributors. The consumer shall not sell, mortgage or otherwise dispose of the equipment or create any interest therein or charge thereon in favour of any party.

4. If the consumer removes the equipment to any address other than shown on the front thereof, he should immediately inform the Distributor by whom the equipment was supplied.

5. The Consumer shall not take the equipment outside the area serviced by the Distributor from whom the equipment was originally taken in the event of consumer’s departure from the area for reasons of transfer etc. the consumer shall inform the Distributor. The company however does not guarantee about the supply of gas in the new area to which the equipment is shifted.

6. The consumer shall not undertake to repair the equipment or cause the same to be repaired by anyone except the Company or their Distributor nor shall the consumer use the cylinder for any purpose other than as a cylinder for the gas supplied by the Company.

7. The Company shall be at liberty and the Consumer shall permit the Company or its Distributors or any other person authorised by the Company or by the Distributors to enter all reasonable hours the consumers’ premises and/or otherwise take back or remove from the consumer any empty cylinder belonging to the Company.

8. The consumer shall be liable for the loss of or damage to the equipment or any part thereof except or otherwise provided here- under. In the event of loss or irreparable damage the consumer reimburses the Company for the missing or damaged equipment in accordance with the company’s tariff In force for the time being in the event of repairable damage the Company shall have the equipment repaired at all the expense of the consumer. The decision of the Company as to whether the equipment is damaged and in need of repair shall be conclusive and binding on the consumer.

9. The Company shall replace free of charge the equipment or any part thereof found to be defective or unfit for use as a result in their opinion of normal wear and tear.

10. All necessary installation work shall be carried at the consumer’s expense and on his own responsibility. The material used for the installation shall be such as have previously been approved by the Company. The Company or the Distributors shall have the right to inspect the installation at any time and if considered necessary for the reason of safety to refuse to supply gas. The fact of the Company supplying gas shall not however be demand to impose any liability on the Company with regard to the fitness or otherwise of the installation work.

11. The consumer shall use appliances only a type approved by the Company. If the consumer is found to have installed or to be using any other type of appliance the Company reserves the right to refuse to supply the gas and withdraw the connection.

12. The Company shall not be liable for any loss or damage caused to any person or property as a result of the installation or use of the gas by the consumer. In case of any accident involving consumer’s installation, he will forthwith advise the Company’s Distributor from whom he received supply.

13. The Company as well as the consumer shall be at liberty to terminate the contract by giving fifteen days’ notice in writing. On the termination of this contract the consumer shall forthwith return the equipment to the Company or their Distributor and the Company or their Distributor shall refund the balance of the deposit if any after deducting the amount due to the Company or Distributor."

In addition, there were certain guidelines issued by the company to their dealers for loaning and surrendering of cylinders, which are as under:

"1. The dealer shall give the cylinder on deposit issuing the Sub- scription Voucher as per prescribed proforma along with terms and conditions of loaning the cylinder.

2. The dealer shall collect security deposit strictly as per the company schedule as applicable at the time of delivery of the cylinder.

3. The dealer shall undertake to supply gas to all the consumers who have obtained the Company’s cylinder from any authorised dealer of the company in India.

4. The company has loaned the cylinder to the dealer for use by consumer needing company’s gas.

5. The cylinder is the property of the company and no dealer/ consumer has the right over this company’s property.

6. The cylinder would be maintained by company for safe use of liquefied gas supplied by the company.

7. The dealer shall not carry out any change in the cylinder fitments and shall not undertake any repairs such as welding, brazing, etc.

8. The dealer shall check the leak of each cylinder from joints and also from valves by soap water, prior to delivery to the consumer.

9. The dealer must return the cylinders to the Company when they notice leak from the joints/valves and the company undertakes to replace the same without charging anything to the dealer/ consumer.

10. Company shall give extra cylinders to each dealer for, maintaining the stock for the supply of gas refills and to take care of return of defective cylinders, if any.

11. The dealer shall have option to obtain gas from various filling points installed/approved by the company.

12. The cylinder being portable, the dealer would normally supply from his delivery points on cash and carry basis.

13. The dealer, however, would fix the appliances/regulators properly and ensure that the fittings are leak-proof. He shall also undertake home delivery by charging extra service charges.

14. Dealer is under obligation to accept the return of cylinder by the consumer and refund full security amount as per the company’s schedule/as per the -Subscription Voucher issued by any authorised dealer of the company, which would accompany the cylinder at the time of surrender. The deposit should be refunded to the consumer immediately. Dealer shall accept unconditionally the return of cylinder by the consumer if the consumer surrenders.

15. The dealer shall be at liberty to refuse the refund if the original Subscription Voucher does not accompany the cylinder or the dealer finds cylinder marking differs from the company marking layout. In such cases the dealer on the request of consumer shall return the cylinder with/without Subscription Voucher to the company and company decision shall be final. He would also inform consumer accordingly.

16. While accepting the cylinders the dealer should ensure that the returned cylinder has all marking on the foot ring as per the company layout of marking.

17. Dealer shall permit the consumer to return the cylinder directly to the company if the consumer so desires. The company undertakes to refund the full security deposit as per the company schedule provided original Subscription Voucher accompanies such returns.

18. The dealer shall be at liberty to re-loan the cylinder received back from the consumer if he desires to do so. Alternatively company undertakes to refund security deposit against such cylinder when returned to the company along with Subscription Voucher received from consumer.

19. The dealer shall undertake to return all those cylinders which fall due for testing as per Explosives Act. The company stall circulate information In this regard from time to time.

20. The company would replenish the quantity of cylinders received from the dealer for retesting.

21. The company shall accept the cylinders even if the bung thread has been damaged, valve fittings damaged or the foot ring is missed. However, company does not accept the cylinders which have been mishandled resulting in deep denting, burning etc. resulting in making the cylinder unserviceable.

22. Dealer shall follow and explain all safety precautions to the consumer."

At the time of taking the amount styled as ‘deposit’, a Subscription Voucher was issued showing the quantity of cylinders supplied, the amount deposited, and was signed by the consumer. A blank specimen thereof is at page 8 of paper book I and a filled in specimen is at page 9 of paper book I. Page 10 of paper book I gives copy of the Delivery Challan relating to the Subscription Voucher. Page 11 gives the bill in relation to the supply of gas for the 48 cylinders in respect of which Rs. 4,800 was collected as per Subscription Voucher at page 9. The cost of the gas as per the bill at page 11 of paper book I was Rs. 432 for 86.4 units and packing charges of Rs. 200 were collected. Sales tax was levied only on this amount of Rs. 632 at 4 %. On the amount of Rs. 4,800, no sales tax was collected. It will thus be seen that the assessee is collecting price for gas supplied in each bill, and no reference to Security Deposit is being made.

4. At this stage, it may be mentioned that the value of fixed assets of Rs. 8,23,698 mentioned in the agreement of 1-1-1982 was more than the written down value of such assets in the hands of the erstwhile proprietor. In the hands of the erstwhile proprietor, the difference was offered for taxation under the provisions of s. 41(2) as per details in page 20 of paper book II and such amount was also duly subjected to tax in the case of the erstwhile proprietor for the assessment year 1983-84 by the assessment order dated 31-3-1986 in which the Income-tax Officer started with the total income as returned. The said assessment order also mentions clearly what we have stated earlier viz. that cylinders of the erstwhile proprietor were not taken over by the assessee.

5. Before the Income-tax Officer, the assessee had claimed that the amount of Rs. 16,74,000 credited as a deposit was not a trading receipt and was not taxable. The Income-tax Officer has quoted a letter from the assessee dated 12-2-1986 wherein the assessee described what was an LPG cylinder, who was the owner of the cylinder, what wore the responsibilities of the owner, what was practice in the trade and industry in relation to the cylinder, what, were the rights of the individual who took over the cylinder and what was the life of the cylinder. There was also a reference to the practice of the oil companies in loaning cylinders and to the contention of the assessee that the practice adopted by it in taking deposits and in loaning cylinders was identical to that followed by the oil companies.

6. Apparently, the assessee relied on another case, Domestic Gas Co. Ltd., which was assessed in the same Income-tax Circle, to support its plea that no portion of the amount taken as deposit could be taxed, because the amount only represented a loan given by the consumer to the assessee- company. The Income-tax Officer proceeded to make a comparative study of the various clauses of the agreement in the assessee’s case and that in the case of Domestic Gas Co. Ltd. For the purposes of the present appeal, it is sufficient to just broadly state that he tried to draw certain distinctions between the clauses whereby he sought to establish that though in the case of Domestic Gas Co. the amount taken was not considered as taxable, the case of the assessee was different. For example, he stated that in one of the clauses in the case of Domestic Gas Co., the consumer could not remove the cylinder to any other address other than that shown in the application form without obtaining prior written permission of the company’s dealer, whereas in the case of the assessee, intimation was sufficient before the cylinder was removed. He also sought to make a point of the fact that there was a clause in the agreement that the assessee did not guarantee about the supply of gas in the new area to which the cylinder may have been shifted. There was a reference to a clause which permitted the assessee’s personnel to enter at all reasonable hours the consumer’s premises to take back or remove from the customer empty cylinder belonging to the assessee. This the Income-tax Officer considered was arbitrary and he mentioned that there was no such clause in the case of Domestic Gas Co. Ltd. For these and other differences and also for the reason that in fact no refunds had been made by the assessee in the year of account, the Income-tax Officer came to the conclusion that the amount of Rs. 16,74,000 was a taxable receipt. We are not dwelling in detail further on the reasons which weighed with the Income-tax Officer, because, according to the learned counsel for the assessee, none of the reasons could lead to the conclusion that the amount of Rs. 16,74,000 was taxable receipt and when the learned Departmental Representative opened his case, he submitted that he would address arguments independent of the reasons which weighed with the Income-tax Officer to support the stand of the revenue and he was not placing reliance on the reasons enumerated in the order of assessment but was only seeking to support the conclusion of the Income-tax Officer viz. that Rs. 16,74,000 was a taxable receipt. The Commissioner of Income-tax (Appeals) has not given any specific reasons except to mention that following the decision of the Hyderabad Bench of the Tribunal in Ideal Engineers Hyderabad (P.) Ltd.’s case (supra) the addition was being confirmed. The Commissioner did not state in the order the reasons for differing from certain other decisions of the Tribunal which were relied on by the assessee, and again for this reason, perhaps, the learned Departmental Representative submitted that he would be addressing arguments independently to support the upholding of the addition.

7. The learned counsel for the assessee submitted that in the case of Goyal Gases (P. ) Ltd. ( supra) the Tribunal had gone into the question whether the amount stated to have been received as deposit of about Rs. 18,97,000 which was not brought to tax originally by the Income-tax Officer could be considered to constitute an error prejudicial to the revenue so as to enable the Commissioner of Income-tax to exercise his revisional powers. He submitted that the Tribunal came to the conclusion that there was no mistake prejudicial to the revenue in not subjecting the amount to tax. In the said case the Tribunal had considered the ratio of the decision of the Supreme Court in the case of CIT v. Punjab Distilling Industries Ltd. [1964] 53 ITR 75 and had referred to the terms under which the gas cylinders were supplied against which deposits were given by consumers and the Tribunal had come to the conclusion that the purchaser had to return the gas cylinder to the assessee, the cylinders were embossed with the name of the assessee, were distinctly numbered, and cylinders were not meant for sale. and under the agreement entered into with the consumer, the cylinders remained the property of the assessee. Therefore the facts were materially different from the facts in the case of Punjab Distilling Industries Ltd. (supra) and no specific inquiry was necessary into the nature of the deposits to come to the conclusion, that they were deposits and the Commissioner was wrong in assuming that the judgment of the Supreme Court would apply to the facts of the case.

8. The learned counsel then submitted that there was a specific agreement for the supply of cylinders (which we have set out in full already) and the cylinders remained the property of the assessee company and the assessee-company was responsible for the proper maintenance of the cylinders. The proper storage and maintenance of cylinders he submitted was also subject to the provisions of the Indian Explosives Act as well as the Gas Cylinders Rules, 1981, which was published in the Gazette of India, Extraordinary, dated February 24, 1981. There were provisions relating to filling of cylinders, marketing of cylinders delivery and despatch of cylinders and examination and testing of cylinders, etc., in these rules. Further rule 26 specifically provided that the owner of each cylinder had to maintain a record giving specified particulars. All these were maintained by the assessee alone and the question of the ownership of the cylinders passing to any other person did not arise (copy of the Gazette containing the rules is at pages 13 to 33 of paper book 1). He gave particulars of cylinders purchased by the assessee of which details were maintained and such details are at pages 7 to 9 of paper book II giving the serial numbers etc. He also relied upon a letter dated 30-12-1986 from the Chief Controller of Explosives addressed to Ideal Engineers Hyderabad (P.) Ltd.’ s case (supra ) stating that no cylinders meant for filling compressed gas including LPG can be sold as per the Gas Cylinder Rules, 1981, without obtaining specific permission or approval from the said department. Copy of the said letter is at page 6 of the paper book 11. On the basis of such evidence the submission of the learned counsel was that the question of the assessee taking the amount classified as deposit as sale consideration for the cylinder could never arise. The cylinders in terms of the contract, were given only on loan, and the deposit had to be returned when the contract for supply of gas was terminated. A reference was made to the decision of the Delhi High Court in CIT v. National Air Products Ltd. [1980] 126 ITR 196 to state that the High Court has held that gas cylinders were plant, and depreciation was allowable on gas cylinders. In the assessee is case also it was submitted that the cylinders were plant with which the assessee carried on the business and was not its stock- in-trade i.e. cylinders did not represent goods which were bought and sold. The Delhi High Court’s view that cylinders were plant, the learned counsel submitted, was supported by the ratio of the judgment of the Supreme Court in Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86.

9. The deposit taken towards the cylinder was about twice the cost of the cylinder. The learned counsel submitted that it was settled law after the decision in Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA) which has been relied on by Court after Court, in different judgments, that what had to be considered was the nature of the transaction at the time it took place. He submitted in particular that this judgment had been referred to by the Andhra Pradesh High Court in the case of Badri Narayan Balakishan v. CIT [1965] 57 ITR 752 and by the Supreme Court in Punjab Distilling Industries Ltd.’ s case (supra ). In the case of Punjab Distilling Industries Ltd. (supra) he submitted that there was a buy- back scheme for bottles in which liquor was sold and the extra amount taken at the time of sale, though classified as security deposit, was considered in the circumstances by the Court to be part of the price of the goods sold. The learned counsel went on to state that the Supreme Court in the aforesaid case had analysed the Judgment in the case of K.M.S. Lakshmanier & Sons v. CIT [1953] 23 ITR 202 in coming to the conclusion that it did. The facts in the present case he submitted were materially different and he reiterated that the cylinders, which constituted the plant of the assessee, and for which a deposit was taken from the consumer at a point of time anterior to the contract for supply of gas to the consumer, could not have become the stock-in-trade of the assessee. He stated that the amount taken as deposit was nothing but a loan of money by the consumer to the assessee and the money taken as loan was a debt due to the consumer at a stage anterior to entering into contract to supply gas. The gas, he stated, was separately billed for, and sales tax was levied only on the price of gas, and not on the deposit amount taken.

10. The learned counsel went on to submit that in any view of the matter the amount taken as deposit did not constitute part of the trading receipts, because, it had to be kept in trust, and had to be paid back to the consumer and to this extent, it should be considered that the amount was kept by the assessee, to be disbursed later when the contract for supply of gas was terminated to the consumer and the amount thus got diverted by overriding title back to the consumer at the relevant time. In support of this proposition reliance was placed on the decision of the Supreme Court in the case of CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 and the decision of the same Court in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60.

11. Even based on the theory of real income inasmuch as the amount was returnable under a contractual compulsion he submitted that the amount taken as deposit will never constitute the taxable income of the assessee. In this regard he stated that whether the amount was returnable under a statutory obligation or a contractual compulsion would not make any difference as far as the concept of real income was concerned and reference was made to the ratio of the judgment of the Supreme court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. A reference was also made to certain other orders of the Tribunal where the Tribunal had held that when cops were sold together with yarn the price taken for cops as security deposit did not constitute taxable income. For all the aforesaid reasons the learned counsel submitted that the amount of Rs. 16.74.000 would not have constituted a trading receipt of the assessee and was not therefore taxable.

12. The learned departmental representative at the outset submitted that he was not relying on the reasoning of the Income-tax Officer for holding that the amount received as security deposit for cylinders constituted a taxable receipt. But he was only relying on the conclusion of the Income-tax Officer that the amount of Rs. 16,74,000 was income which was taxable. So also he submitted that he was not seeking to derive support from any independent reasoning in the order of the Commissioner of Income- tax (Appeals). As far as the order of the Commissioner of Income- tax (Appeals) was concerned, the Commissioner of Income-tax (Appeals) had followed the decision of the Tribunal in the case of Ideal Engineers Hyderabad (P.) Ltd. (supra) and this order of the Tribunal, it is stated, supported the contention of the revenue that the amount in question was taxable. The learned departmental representative, however, stated that the powers of the Income-tax Appellate Tribunal were not confined to considering and adjudicating only upon the correctness or germaneness of the reasoning of the authorities below, but it was open to him to canvas any argument which, on the facts, was relevant to support the stand of the respondent, namely, that the amount in question was taxable.

13. The learned departmental representative placed reliance in this regard on the ratio of the decision of the Punjab and Haryana High Court in the case of CIT v. Om Parkash Didhi Chand [1983] 141 ITR 750.

14. The learned departmental representative placed before us a tabular statement which was as under:

With reference to the figures in the aforesaid statement his submission was that though large amounts were collected under the terminology of deposit the cash balance with the assessee was negligible. It was only in the region of Rs. 4,000 to Rs. 6,000 in most of the years. He stated that where the deposit collected was Rs. 100 per cylinder and the assessee was maintaining only a negligible cash balance it was clear that the assessee had no idea of returning any amount by way of deposit because the cash balance would not have been sufficient for returning the amounts, had the customers so demanded. He stated, therefore, that the inference was that the assessee was sure that the question of demanding refund of the amount by any consumer would not arise.

15. The next contention of the learned departmental representative was that the concept of circulating capital was opposed to fixed capital, and where the amount received was circulating capital that would constitute income. A case relied on in this regard was the decision of the Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362. According to the learned departmental representative the cylinders were circulating capital, in kind, and did not constitute plant at all and therefore represented clearly the stock-in-trade of the assessee. The learned departmental representative referring to the decision of the Supreme Court in the case of State Bank of India v. CIT [1986] 157 ITR 67 submitted that the manner in which entries were made by the assessee could not be conclusive of the true nature of the receipt. While he did not dispute the proposition in Morley’ s case (supra ) that the nature of the receipt had to be determined at the time of inception, he submitted that in the present case the transaction of taking an amount as deposit towards cylinder, and price charged for supply of gas was part of the same trading transaction, and having regard to the ratio of the judgment of the Andhra Pradesh High Court in Badri Narayan Balakishan’s case (supra) the amount in question was clearly a taxable amount.

16. With reference to the terms of the contract, the learned departmental representative submitted that there was no clause whereby the consumer had to pay penalty if the cylinder was not returned. This, according to him, showed that in reality the assessee had divested itself of ownership of the cylinder in favour of the consumer.

17. Yet another argument made by the learned departmental representative was that the contract was only a contingent contract and the possibility of a refund being sought, in any view of the matter, was a remote possibility and what the assessee had acquired was nothing other than trading receipts.

18. The learned departmental representative further submitted that if the dealer made a single bill instead of making separate subscription voucher for the so-called deposit, and a separate bill for the sale of gas, then the entire amount would have been nothing but a trading receipt and it would have reflected the true nature of the transaction. Referring to the decision in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 (SC) it was submitted that the real object of the transaction had to be seen, and if that was seen, there was no doubt that in substance the so-called deposit was nothing but receiving of trading receipts.

19. The learned departmental representative also sought assistance from the decision of the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 where the Court had referred to its earlier decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 and submitted the Supreme Court pointed out that it was the duty of the Court in every case where ingenuity is expended to avoid taxing and welfare legislations to get behind the smoke- screen and discover the true state of affairs. In this regard the learned departmental representative stressed that the assessee did not pay any interest on the so-called deposits to consumers. Further the money was made use of by the assessee as its own funds for buying assets and again reiterated that the assessee did not retain sufficient cash balance which it would have retained had it any idea of making refunds.

20. The main plank of the argument of the learned departmental representative was the ratio of the decision of the Supreme Court in the case of Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 . He submitted that it was settled law that when the Supreme Court rendered a decision no argument should be advanced that one or other aspect of a contention was not taken due note of. Going at length through the judgment, the learned departmental representative submitted that the Supreme Court had analysed the case of K.M.S. Lakshmanier & Sons (supra) and had come to the conclusion that the so-called security deposit in that case (Punjab Distilling Industries) towards bottles was nothing but a trading receipt.

21. Regarding the contention of the learned counsel for the assessee that in any event it should be considered that there was an overriding title as far as the amounts received were concerned, the submission of the learned departmental representative was that if there was to be diversion of overriding title a third party should be involved whereas in the present case there were only two parties, namely, the assessee and the consumer.

22. An alternative contention of the learned departmental representative was that even if the cylinder was considered as plant there was a "transfer" of such plant within the extended meaning of the term in section 2(47) and the amount received by way of deposit was nothing but short-term capital gains. This is because, according to the learned departmental representative, if the cylinder represented plant, when the cylinder was made over to the consumer there was clearly extinguishment of some ownership rights which vested in the assessee. He sought to clarify that ownership was a bundle of rights and as long as some of the rights were extinguished then there was clear receipt of short-term capital gains.

23. In reply, the learned counsel for the assessee sought to clarify that the right of a respondent was something more restricted than the right of an appellant in an appeal.

According to the learned counsel for the assessee an inferential fact could not be imported by- the respondent for supporting his case though he very fairly stated that the respondent could urge any legal issue in support of his stand with reference to the facts on record. Therefore, the learned counsel submitted that when the learned departmental representative was giving up the reasoning of the authorities below and particularly that of the Income-tax Officer it was not open to him to canvas for the proposition that the transactions in question were anything other than those represented in the books, namely that there were separate transactions in respect of receipts or deposits towards cylinders and in respect of sale of gas. Referring to the decision in the case of Punjab Distilling Industries Ltd. (supra) the learned counsel for the assessee submitted that K.M.S. Lakshmanier & Sons’ case (supra) was analysed by the Supreme Court. He stated that the assessee’s case squarely fell within the arrangement in the 3rd part of the accounting year in K.M.S. Lakshmanier & Sons’ case (supra) where the court held that the amounts received were deposits and not trading receipts. The observations at pages 528 and 529 of 35 ITR were relied on in this regard.

24. As far as the tabular statement relied on by the learned departmental representative to show cash balances etc. was concerned, the submission of the learned counsel for the assessee was that these figures were of no consequence. There was no Instance cited to show that the assessee did not honour the commitment to return the deposit. The mere fact that there were no instances in the accounting period of termination of contract for sale of gas would not render the amounts which originally were deposits, a trading receipt.

25. On the point that there was short-term capital gains, according to the learned counsel, there was no merit in that plea excepting one of novelty. He submitted that the contract was not of sale and if the contract was to be pronounced upon it was clearly nothing but a contract for loan of the cylinder for a particular period of time, namely, the duration for the period for which gas was to be supplied. He emphasised that no title passed in the present case in relation to the ownership of the cylinders.

26. The learned counsel stressed that the ratio in McDowell & Co. Ltd.’ s case (supra) has no application because the assessee by passing entries etc. in the manner that he did was not trying to camouflage the true nature of the transaction. In any event the learned counsel submitted that even if the stand of the department that what was received was trading receipt must ‘be accepted, then against the same the cost of the cylinders would have to be allowed as deduction, as he had originally contended for, and such amount exceeded Rs. 8 lakhs. According to him the law did not warrant, even in the view of the department, that receipts alone would be taxed and outgoings against such receipts which were of revenue nature were not to be allowed as deduction.

27. We have considered the rival submissions. The department in the present case is the respondent. In New India Life Assurance Co. Ltd. v. CIT [1957] 31 ITR 844 , the Bombay High Court had occasion to deal with the scope of section 33(4) of the Indian IT Act, 1922 which is in pari materia with section 254 of the IT Act, 1961. Dealing with this Chagla C.J. observed at page 855 as under:

"The position with regard to the respondent is different. It is not open to him to urge before the court of appeal and get a relief which would adversely affect the appellant. If the respondent wanted to challenge the decision of the trial court, it was open to him to file a cross-appeal or cross-objections. But the very fact that he had not done so shows that he is quite content with the decision given by the trial court. Therefore, under these circumstances, his only right is to support the decision of the trial court. It is true that he may support the decision of the trial court, not only on the grounds contained in the judgment of the trial court but on any other ground. In appreciating the question that arises before us, one must clearly bear in mind the fundamental difference in the positions of the appellant and the respondent. The appellant is the party who is dissatisfied with the judgment; the respondent is the party who is satisfied with the judgment. Now what we have Just said Is nothing more than really a summary of the provisions with regard to appeals and cross- objections contained in Order XLI of the Civil Procedure Code; and as we shall presently point out, the position of the Appellate Tribunal is the same as a court of appeal under the Civil Procedure Code and the powers of the Tribunal are identical with the powers enjoyed by an appellate court under the Code." (Emphasis supplied)

The Allahabad High Court in the case of Marolia & Sons v. CIT [1981] 129 ITR 475 has expressly stated that they were in agreement with the aforesaid view of the Bombay High Court. The only restraint is that the respondent cannot seek for an enhancement of the tax payable by the appellant when the respondent has not appealed by putting forth arguments which would result in such enhancement. In the present case, the learned departmental representative is only seeking to support the addition and therefore it is open to him to support the said addition on grounds other than that taken by the assessing officer or the first appellate authority. We, therefore, proceed to consider the grounds of the learned departmental representative since no fresh facts are involved other than those already on record.

28. Taking the tabular statement it is open to every prudent businessman to utilise amounts which come into his coffers to the maximum advantage. Therefore, the mere fact that large cash balances were not maintained does not support the department’s stand that there was no idea of returning the deposit. There is no instance brought to notice that any consumer had made a claim for refund of deposit and the assessee had baulked such payment. Nor can the assessee be expected to keep large cash balances in books uninvested and for reasons of security. Both parties have agreed that the nature of the transaction has to be determined at the time of the transaction following the ratio in Morley’ s case (supra) which has been accepted by various Courts in India. Both parties have canvassed their respective stands placing reliance, on the observations of the Supreme Court in Punjab Distilling Industries Ltd.’s case (supra). In the said case the Supreme Court had analysed the various receipts taken at different points of time in the accounting period in K.M.S. Lakshmanier & Sons’ case (supra). In the accounting period yarn was sold to their constituents under three successive arrangements each of which covered a part of the accounting period. Under each arrangement the assessee was paid a certain initial sum by the customers. Under the first arrangement the assessee had two accounts for each constituent, namely, ‘a contract deposit account’ and ‘a current yarn account’ crediting the moneys received from the customers in the former account and transferring them to the yarn account in adjustment of the price of the bales supplied then and there, that is, as and when deliveries were made under a contract either in instalment or in full. Such amounts were held to be taxable as representing advance payments of the price and it was held such amounts could not be borrowed money. For the second part of the accounting period the arrangement was that the payment made by a constituent at the time of making of a contract was taken as "contracts advance fixed deposit". It was refunded when the goods under the contract had been supplied and the price in respect thereof paid in full irrespective of the earlier payment. Here again it was held that the amount represented a trading transaction because the amounts were payments against supply of goods. Then there was the arrangement in the third period. To quote from the decision of the Supreme Court at 528 and 529 of 35 ITR:

"The payments during the third period were made under the following arrangements: "Instead of calling for amounts from you towards ‘Security Deposit’ due to bales for which we are entering into forward contracts with you and returning the same to you from the said deposit then and there, as we are doing now, and in order to make it feasible, we have decided to demand from you a certain sum towards Security Deposit and keep the same with us so long as our business connection under forward contracts will continue with you." Under this arrangement a certain sum was kept in deposit once and for all and thereafter Lakshmanier & Sons commenced to enter into the trading transactions, namely, forward contracts for sale of yarn with the constituents who deposited the money. The sum so deposited was to be refunded with interest at three per cent per annum at the end of the business connection between the parties, if necessary, after retaining thereout any amount due on the contracts made with the constituent which, the latter was at the termination of the business found not to have paid. Patanjali Sastri CJ. observed at page 207 in regard to the deposits made under this arrangement :

"The amount deposited by a customer was no longer to have any relation to the price fixed for the goods to be delivered under a forward contract — either in instalments or otherwise. Such price was to be paid by the customer in full against delivery in respect of each contract without any adjustment out of the deposit, which was to be held by the appellants as security for the due performance of his contracts by the customer so long as his dealings with the appellants by way of forward contracts continued, the appellants paying interest at 3 per cent, in the meanwhile, and having, as appears from the course of dealings between the parties, the use of the money for their own business. It was only at the end of the "business connection" with the appellants that an adjustment was to be made towards any possible liability arising out of the customer’s default. Apart from such a contingency arising, the appellants undertook to repay an equivalent amount at the termination of the dealings. The transaction had thus all the essential elements of a contract of loan, and we accordingly hold that the deposits received under the final arrangement constitute borrowed money."

Having observed that the description of the payment made by the customer as a deposit made no difference for a deposit included as a loan, the learned Chief Justice further said at page 208:

"The fact that one of the conditions is that it is to be adjusted against a claim arising out of a possible default of the depositor cannot alter the character of the transaction. Nor can the fact that the purpose for which the deposit is made is to provide a security for the due performance of a collateral contract invest the deposit with a different character. It remains a loan of which the repayment in full is conditioned by the due fulfilment of the obligations under the collateral contract."

In the present case certain amounts were taken as deposit under a contract, towards security of the cylinders supplied. The moment the said deposits were paid, the consumer became entitled to the supply of gas. Gas was the commodity which was being sold. The amount deposited did not have any relation to the price fixed for the goods to be delivered which in the present case was gas nor is to be adjusted out of deposit as in K.M.S. Lakshmanier & Sons’ case (supra). The amount was held by the assessee as security for the consumer returning the cylinder and also observing other conditions of the contract. The business connection in the present case came to an end only when the consumers decided to terminate the contract by surrendering the gas connections or it would have come to an end if notice had been given by either party. On such termination the amount became repayable. Looking to the observations of the Supreme Court which we have set out regarding the transaction in the third period in Lakshmanier’ s case, the transaction of deposit in the present case also has all the essential elements of a contract of loan and the deposits constitute borrowed money. The Supreme Court had clearly pointed out that the mere fact that the amount was to be adjusted against claim arising out of possible default would not alter the character of the transaction. According to the Supreme Court such a deposit remained a loan of which the repayment in full was conditioned by the due fulfilment of the obligations under the collateral contract.

29. We are of the view that in the present case, the amounts received are clearly deposits in the light of the aforesaid observations of the Supreme Court whereby they approved the decision In K.M.S. Lakshmanier’s case (supra) as far as the third part of the accounting period was concerned.

30. The absence of a penalty clause does not make any difference. As a matter of fact in the present case the deposit collected is about twice the cost of the cylinder and in case the cylinder is not returned forfeiture of an amount equal to the cost could be construed as sufficient penalty. Again the mere fact that the possibility of person giving up the gas connection is remote does not alter the nature of the payment when made because at the time of payment it was nothing but deposit.

31. Coming to the decision of the Andhra Pradesh High Court in Badri Narayan Balakishan’s case (supra) it is clear that the amount received, classified as deposit here has nothing to do with the transactions in the commodity dealt in as such and did not constitute part of the price of the commodity supplied, namely, gas, but was received only for the due performance of obligations by the consumer and service by the assessee by ensuring that the cylinders are properly maintained etc. The assessee in the present case was fully saddled with the liabilities under the Indian Explosive Act as well as rules relating to gas cylinders. Our conclusion that the amounts received were deposits which did not partake the nature of trading receipts is also in conformity with the tests enunciated by the Andhra Pradesh High Court in the case of Badri Narayan Balakishan (supra).

32. As far as the argument of the learned departmental representative that there was a transfer in the present case even if the cylinders were taken as plant is concerned, we have to state that the contract clearly shows (Clause 1) that there was only a loan and no sale of the cylinders. It was clearly mentioned in the contract in clause 3 that the consumer would not have any right or interest in the property and further the consumer was prohibited from mortgaging or otherwise disposing of the property. Clause 13 also provided that on termination of the contract, the equipment was to be returned to the company and the company was to refund the balance of the deposit if any after deducting the amount due to the company. Therefore, in general law there was no sale. The further point to be examined is whether there was any relinquishment of the asset or any extinguishment of right within the meaning of section 2(47) which gives an extended definition of the word ‘transfer’.

33. It is clear from the terms of the contract that there was "no relinquishment of the asset". No doubt, ownership is a bundle of rights. The point which survives is whether there was extinguishment of any rights therein" within the meaning of section 2(47). In the case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300, the Gujarat High Court observed at pages 307 and 308:—

"The word ‘extinguishment’ is the kingpin of this expression. It is a word of ordinary usage having the widest import. Usually it connotes the end of a thing, precluding the existence of future life therein (see Black’s Law Dictionary, fourth edition, page 696). It has been variously defined as meaning a complete wiping out, destruction, annihilation, termination, cancellation or extinction and it is ordinarily used in relation to right, title, interest, charge, debt, power, contract or estate (see Corpus Juris Secundum, volume 35, page 294). In Rawson’s Pocket Law Lexicon, the meaning assigned to it is : ‘the destruction or cessation of a right either by satisfaction or by the acquisition of one which is greater’. In Ramanlal Gulabchand Shah v. State of Gujarat AIR 1969 SC 168 at page 175, the word ‘extinguishment’ which is employed in conjunction with the expression ‘of any such rights’ In article 31-A of the Constitution, was interpreted as meaning ‘complete termination of the rights’."

In the present case, there has been no wiping out, destruction, annihilation, termination, cancellation or extinction of any right. All that has happened is that for a certain period the consumer is permitted the use of the cylinder to the exclusion of the assessee, that is, during the period the cylinder is at the residence or other premises of the consumer. It was ascertained by us that the gas supplied by the assessee could be utilised for similar purposes as liquefied petroleum gas viz. for heating purposes as well as for lighting purposes etc. and the cylinders, which were smaller than the usual LPG cylinders could be utilised as stand by cylinders. There is thus no extinguishment of any ownership rights in the cylinders and hence even under the extended meaning, there is no transfer within the terms of section 2(47) and the question of bringing to tax any surplus as short-term capital gains does not arise.

34. In the view that we have taken, it is not necessary to examine whether there is any diversion by overriding title. We have not confined ourselves to the description given by the entries in the books of account of the assessee, but we have examined independently the terms of the contract under which the amounts were received and the terms under which they became repayable. We have gone to the very inception of the receipt of the amounts and have determined the true nature of such receipts at the moment of inception as is required to be done according to the ratio in Morley’ s case (supra) which stands approved of by all courts in India. The fact that no interest was charged from the consumer or that the assessee made use of the money when it was available to the assessee does not also alter the nature of the transactions.

35. In the present case, there is no attempt at any camouflage of the true nature of the transactions and as such the ratio in McDowell & Co. Ltd.’s case (supra) has no application. We have independently examined the arguments of the revenue, and the result of such examination is that we are unable to subscribe to the conclusion of the Division Bench of the Tribunal in the case of Ideal Engineers Hyderabad (P.) Ltd. (supra). We would, therefore, hold that the amount of Rs. 16,74,000 has to be excluded from assessment in the present case.

36. The next ground of appeal is that the Commissioner erred in not allowing depreciation on the cost of cylinders. The stand of the learned departmental representative was that the cylinders in the present case did not constitute plant but stock-in-trade. In the present case, what was supplied by the assessee and dealt in was gas. Gas was supplied in cylinders. The cylinders clearly constituted plant having regard to the definition of the term ‘plant’ in the judgment of the Delhi High Court in National Air Products Ltd.’ s case (supra) and the Supreme Court in National Air Products Ltd.’ s case (supra). Therefore, the assessee is entitled to depreciation. The learned counsel for the assessee submitted that the assessee was entitled to depreciation at 100%, because in terms of Item III(ii)F(4) Gas cylinders including valves and regulators are entitled to 100% depreciation. The submission of the learned departmental representative was that such depreciation at 100% was admissible only in respect of persons who manufactured gas themselves and stored it in cylinders and not for persons like the assessee who bought and sold gas. Here, we are unable to agree with the learned departmental representative. Where the depreciation rates are admissible only to plant in manufacturing concerns, such position is made expressly clear in the entries in Appendix I to Income-tax Rules. For example, against Item III(ii)F(5), it is stated that 100% depreciation is admissible in respect of "Glass manufacturing concerns-Direct fire glass melting furnaces". Therefore, we hold that depreciation. at 100 % is admissible on gas cylinders whether in the hands of the manufacturer or in the hands of a person who fills gas bought from others into the cylinders. The assessee is, therefore, entitled to depreciation at 100% on the cost of cylinders of Rs. 8,52,383.

37. Before parting with the aforesaid point, we have to note and deal with an argument of the learned departmental representative, viz. that where the equipment is not wholly used by the assessee, depreciation can be allowed only on a proportionate part of the cost of the asset and further, if any part of the cost of the asset is met by anyone else, then in determining the actual cost, the cost met directly or indirectly by such other person is to be reduced. In the present case, the cylinders are used by the assessee for filling gas and the filled in cylinders are supplied to the consumers. The user is exclusively by the assessee. The consumer does not use the cylinder. Again, the deposit does not go to reduce the cost to the assessee. The cost remains the same and the deposit is refundable when the cylinder is returned. These arguments of the learned departmental representative, therefore, cannot help the revenue in whittling down the claim for depreciation.

38. In the view we have taken, it is not necessary to go into the question as to whether the cost of cylinders would be an admissible deduction against the receipts of Rs. 16,74,000, because we have held that the amount did not constitute trading receipts.

39. The learned counsel for the assessee did not press the ground against the finding of the Commissioner of Income-tax (Appeals) confirming the disallowance of Rs. 4,471 made by the Income-tax Officer out of travelling expenses.

40. The last ground taken in the appeal is that depreciation should have been allowed on the cost of assets as taken over from the previous owner according to the amounts stipulated in the agreement. To clarify this position, we may state that the value of the assets on which depreciation was admissible in terms of the agreement has been marked up from the written down value in the hands of the previous owner. The details of Rs. 8,23,698 on which depreciation was claimed and which was the price fixed in terms of the agreement, are as under:—

FIXED ASSETS

 

The written down value of these assets was lower. For example, the written down value of the omnibus was only Rs. 34,300 while it was taken over at Rs. 70,000. The written down value of the L.P.G. Road tanker was only Rs. 2,13,347, whereas it was taken over at Rs. 3,00,000. Similar upward revision was there in the case of other assets also. The plea was that the takeover was at the market price. As already mentioned, the previous owner f had taken the value in terms of the agreement, and the written down value, and the difference had been offered for taxation under s. 41(2) and was subjected to tax in the hands of the previous owner Sri G.K. Kabra for the assessment year 1983-84 in the assessment order dated 31-3-1986. Under the provisions of s. 41(2), a surplus can be brought to tax only where it results from sale. Therefore, what was sale price to Sri Kabra from which the surplus was assessed in his hands under s. 41(2) becomes purchase price or actual cost to the assessee. Therefore, there was no justification in not allowing depreciation on the price at which the assets were purchased by the assessee from the previous owner and, therefore, the assessee is entitled to depreciation, where admissible, at the actual cost paid by the assessee in terms of the agreement.

41. Before parting with the appeal, we must place on record our appreciation of the very lucid and elaborate arguments put forth both on behalf of the assessee by the learned counsel Sri G.C. Sharma and on behalf of the department by the learned departmental representative Sri N. Santhanam. Such assistance has been of immense help to us in rendering our decision.

42. In the result, the appeal is allowed in part.

 

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