1973 PLP 371 (PTD)

Tattersall's case (1935‑1939) 22 Tax Cas. 51 rel. Ali Athar for Applicant. S. A. Nusrat for Respondent. Date of hearing : 14th April 1973. NOORUL ARFIN, J.‑The following question has been referred for the opinion of this Court by the Income‑tax Appellate Tribunal : "Whether the amount of Rs. 89,634.00 received by the applicant on behalf of various employees can under any provision of the Income‑tax Act, 1922 be treated as income of the applicant ?''. Our answer to the question rests on the facts as stated in the statement of the case sent by the Tribunal, and these facts are : For the charge year 1959‑60, the Income‑tax officer noticed an amount of Rs. 89,634.00 as at 31‑12‑1954 in the assessee's books under the head "general account". The source of this amount is that the bills issued to the boarders and lodgers of the assessee included an additional charge at ten per cent. of the amount of the bills under the head "service charges". The entry of Rs. 89,634.00 was taken note of by the Income‑tax Officer after Rs. 18,645.00 had been disbursed to the employees. It would appear that the assessee, with a view to discourage the practice of "tipping", introduced the practice of collecting "service charges' from its boarders and lodgers in line with the practice followed by numerous hotels In the western countries. In the statement of the case prepared by the Tribunal, it is stated that as and when recoveries for the service charges were made, the same were paid to the employees. When the amount of Rs. 89,634.00 was brought to the general account, the Income‑tax Officer held that this posting changed the very nature of the amount, which ceased to be the property of the employees, and therefore became a surplus falling in the hands of the assessee and consequently subject to income‑tax. This finding was upheld by the Income‑tax Appellate Tribunal in appeal, and, from the appellate order, the question, reproduced above, has been stated to this Court for its opinion.

2. We are of the view that the Income‑tax Officer as well as the income‑tax Appellate Tribunal fell into error in treating the disputed amount as surplus falling in the hands of the assessee, and therefore as income subject to tax. The statement of the case makes it char that the amounts of service charges were collected from the boarders and lodgers for distribution amongst the employees. But the disputed amount has been treated as income, because it was posted in the assessee's books under the head "general account" and this posting has been held, to have changed the very nature of the dispute amount. In our view, subsequent posting of the amount in the assessee's books under the head "general amount" would not change the character of the amount. The quality and nature of the amount is fixed at the time either of its receipt or Its accrual, notwith standing subsequent change in the nature of the posting of the amount in the assessee's book. The money which was received, or which accrued under the head "service charges" did not have any profit‑making quality about it. It was the money which belonged to the employees for which the assessee was liable to account to them. If the disputed amount was not income a' the time of its receipt or its accrual, then subsequent change in the head of the account, under which the disputed amount is posted, would not make the amount income of the assessee. We are supported in this view by the decision of the Court In appeal in Tattersall's case ((1935-39) 22 Tax Cas. 51). In this case, the assessee carried on the business of auctioneers of horses. Unclaimed balances belonging to clients and amounting to considerable sums remained in the assessee's hands. Originally, the assessee was a proprietary concern. Then it underwent changes, whereby first it became a firm of two partners and later on three partners. Under the partnership deeds, the unclaimed balances were transferred to the credit of the partners with the provision that any payment which might be claimed and made in respect of such balances should be borne by the partners in proportion to their shares of profits at the date of payment. Before transfer of the unclaimed balances to the partners' capital account, these moneys were shown in the balance‑sheet under the title "auction sales suspense account". The question arose whether, on transfer of these balances to the partners' capital account, they became trading receipts or income, subject to income‑tax. Sir Wilfrid Greene, M. R., giving the judgment of the Court of Appeal held that the money which was received, and which remained unclaimed balances was money which had not got any profit‑making quality about it; it was money which, in a business sense, was the client's money and nobody else's and subsequent payment of the money to the partners' account and the fact that the money remained thereafter amongst the partners' assets did neat after the quality of the money. We would respect fully adopt the view of the Court of Appeal, to answer the question sated to this Court by the Income‑tax Appellate Tribunal.

3. Mr. S. A. Nusrat, the learned counsel for the Income‑tax Department, contended, firstly, that the disputed amounts, though actually received, have remained undisbursed to the employees and, secondly, that recovery of service charges was a method resorted to by the assessee to make income which was not subject to tax. As regards the first contention, it is the admitted position that the assessee maintains this account on mercantile system, and therefore the disputed amount does not necessarily represent the amount actually received under the head "service charges". The postings under this head should, therefore, be assumed to have been made in the assessee's books on accrual basis, that is, on submission of bills to the boarders and lodgers, the amount of the bills then being deemed to have accrued due from the boarders and lodgers. There Is no evidence that the whole of the disputed amount had actually been received, as distinguished from having merely accrued, from the boarders and lodgers. If the disputed amount includes moneys, which have accrued, and not received, then there would be no question of disbursing such amounts to the employees, as the amount would be payable to the employees only when service charges were actually received from the boarders and lodgers. As regards the fear of Mr. S. A. Nusrat that the recovery of service charges is a method resorted to by assessee to make tax‑free income, there is do evidence that the assessee has actually resorted to this procedure. In any case, our answer to the question would not apply to cases where there is a finding, based on evidence, that practise of recovered of service charges is resorted to by an assessee for the purpose of making tax‑free income. Such a finding would make it necessary to ascertain whether any moneys under the title "service charges" had actually been received and remained undisbursed for such length of time as to raise the inference that the whole practice was a colourable procedure to enable the assessee to make tax free income. But, as has been stated above, no such finding has been give, by the Assessing Officer. On the other hand, what has been found is that the disputed amount actually belonged to the employees, but the nature and its quality underwent change when it was posted in the assessee's gooks under the head "general account". We have stated above that the nature of the income is fixed at the time of its receipt or accrual and subsequent changes in the method of accounting or posting of such moneys would not change the quality of the money which is so received or accrued.

4. Accordingly, our answer to the question referred by the Income‑tax Appellate Tribunal is in the negative. Answered accordingly.