1988S C M R 872 (PLP)

MUHAMMAD HALEEM, C.J.‑‑This appeal, by leave, arises from the judgment of the High Court of Sind, Karachi, dated 13‑10‑1977 by which the question namely, "whether in the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs.6,95,171 representing unclaimed balance consisting of the value of unutilised tickets was taxable income of the applicant", referred to by the Income‑tax Appellate Tribunal, Karachi, for decision was answered in the affirmative in Civil Reference No. 15 of 1969. Leave to appeal was granted to consider: firstly, whether the payments received by the appellant for the sale of its tickets became its income only when the tickets were utilized; and, secondly, in the event of the tickets not being utilized the character of the moneys received could be regarded as income merely by its transfer from the "Unearned Transportation Account" to the , "Profit and, Loss Appropriation Account," The dispute relates to the charge year 1960‑61 relating to the accounting year ending 30‑6‑1960. The appellant is an airline, and like all other airlines sells tickets which are sometimes not utilized. and in that case the amount received against the ticket is entered in the account described as "Unearned Transportation Receipts." The amount is transferred by the appellant into its revenue account only when the ticket is utilized as, according to it, the price of the ticket does not become a trading receipt until it is so utilized. Accordingly, in those cases where the tickets were not utilized for three years, the price of these tickets was taken as unclaimed balances which were then transferred to, its "Profit and Loss Appropriation Account" which included items such as the un-appropriated profits of earlier years, capital gains etc. and not to its "Profit and Loss Account." Thus, in the charge year 1960‑61, the sale price of unutilized rickets was transferred to its "Profit and Loss Appropriation Account." The Income‑tax Officer by order dated 25‑6‑1965 treated it as taxable income as it was transferred from the "Unearned Transportation Receipts." The appeal also failed as it was dismissed by the Income‑tax Appellate Tribunal. Karachi, by its order, dated 26‑11‑1966. However, the question framed as aforestated was referred to the High Court for its decision under section 66(1) of the Income‑tax Act, 1922, at the instance of the appellant. The High Court answered the question in the affirmative relying on the cases reported as Punjab Steel Scrap Merchants Association Ltd. v. Commissioner of Income‑tax Punjab (1961) 43 I T R 164, Lakshmanier and Sons v. Commissioner of Income‑tax (1953) 23 I T R 202 and Ratanchand Lallumal In re. (1936) 4 I T R

198. The main question for consideration is as to whether the amount against the unutilized tickets is a refundable deposit or a trading receipt. The High Court while answering the question held as under:‑ "The nature and character of the amounts received or receivable by the applicant from the sale of the tickets, leave us in no doubt that they are essentially trading receipts. The moneys are received by the applicant in the course of its business the very nature of which was that of issuing tickets to intending passengers. They were moneys of the applicant when received, notwithstanding that there was super‑imposed a condition of the contract of sale that the price would be refundable in full or in part, if the ticket remains unutilised. The moneys had clearly a profit making character about them and they were trading receipts at the point and at the time of their receipt irrespective of the head 'unearned transportation receipts, to which the amounts were credited by the applicant, according to the special practice followed by it," The essence of the above observation is that the sale price received against an unutilized ticket has a profit‑making character, and therefore, it is a trading receipt. The case of Morley (H.M Inspector of Taxes) v. Messrs Tattersall, (1935‑1939) 22 Tax Cases 51), was distinguished on the ground that at the time of the auction of the horses, the moneys received by the auctioneers did not have the character of trading receipts as it was the moneys of their clients less their commission, and due to this factor, therefore, did not change the character of receipts by their transfer to the partners' account in the later years on the reconstitution of the firm. The other two cases namely, Commissioner of Income‑tax v. E.V. Miller, P L D 1959 S C 219 and Hotel Metropole Ltd. v. Commissioner of Income‑tax, 1973 P T D 371, were held to be distinguishable on facts as in each case the High Court held that the character of the receipts did not change. Now for deciding this question, the principle to be adopted is that the character and the nature of the trading receipt has to be determined at the time of receipt itself. In Morley's case, this question was considered at length and answered as follows:‑‑ "It might, I think, be more convenient to deal with Mr. Hills' argument first, because that is the one which starts off with this perfectly clear admission, that the money when received from the purchasers was not a trade receipt. That proposition, I should have thought, in any case, was quite incontestable. The money which was received 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. It was money for which they were liable to account to the client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out do not alter that circumstance. It would have been for income‑tax purposes, in my judgment, entirely improper to have brought those receipts into the account at all for the purpose of ascertaining the balance of profits and gains. Indeed, as I have said, the Crown did not suggest that that would have been proper. But what was said was this: Mr. Hills' argument was to the effect that, although they were not trading receipts at the moment of receipt, they had at that moment the potentiality of becoming trading receipts. That proposition involves a view of Income‑tax law in which I can discover no merit except that of novelty. I invited Mr. Hills to point to any authority which in any way supported the proposition that a receipt which at the time of its receipt was not a trading receipt could by some subsequent operation ex post facto be turned into a trading receipt, rot, be it observed, as at the date of receipt, but as at the date of the subsequent operation. It seems to me, with all respect to that argument, that it is based on a complete misapprehension of what is meant by a trading receipt in Income‑tax law. No case has been cited to us in which anything like that proposition appears. It seems to me that the quality and nature of a receipt for Income‑tax purposes is fixed once and for all when it is received. What the partners did in this case, as I have said, was to decide among themselves that what they had previously regarded as a liability of the firm they would not, for practical reasons, regard as a liability; but that does not mean that at that moment they received something, nor does it mean that at that moment they imprinted upon some existing asset a quality different from what it had possessed before. There was no existing asset at all at that time. All that they did, as I have already pointed out, was to write down a liability item in their balance sheet, and how in the world by effecting that operation you can be said to have converted a sum received years and years ago into something which it never was is a thing which, with all respect, passes my comprehension." We have found no distinction which the High Court highlighted in its judgment by not placing reliance on it. The observation laid down the correct criteria necessary for determining the nature and character of the trading receipt. The contract of transport at the time of re ceipt of the sale price of the ticket was subject to the stipulation that if unutilized the money would be refunded. The receipt of the price cannot, therefore, be read in isolation. This stand was taken right from the very inception, and in the balance sheet the amount was shown as a liability. It was also asserted, as will be seen from the narration hereafter. In para 5 of the judgment of the High Court, the case of the appellant was that the sale price paid for the ticket by an intending purchaser was in the nature of a refundable deposit as by that payment the purchaser acquired the right of travelling by a certain flight or in the event of an open date ticket by any flight he chooses to avail of within the specified period. In other words, the transaction was a contingent contract to carry the passenger as and when he chose to travel otherwise the amount was refundable deposit; and, therefore, it was not a trading receipt. The High Court rejected this submission and held that the moneys received had "clearly a profit‑making character, and therefore, they were trading receipts. This conclusion was also considered in Morley's case, and it was held that this reasoning was based on a complete misapprehension of what is meant by the trading receipt in Income‑tax law. The criterion thus to be adopted was the quality and nature of a receipt for income‑tax purposes is fixed once and for all when it was received, which the High Court failed to notice while deciding the issue. In Miller's case, one out of the two questions answered was whether dividends received by the shareholders out of the agricultural income of the company were themselves agricultural incomes and thus not liable to inclusion in the total income. This Court after reviewing the case law on the subject held: "But if income lying in reserve with the person is agricultural income which he himself cannot enjoy and is meant to be distributed among its rightful claimants, it cannot be disputed that no change of character is implied in the distribution of that income because income is earned for expending and a person who is precluded in law from expending it on his own enjoyment and holds it for the benefit of the others does not bring out any change in the nature of that income when he passes it on to the beneficiary." We do not see how this ratio is not' applicable to the case under consideration as here too until the tickets are utilized the amounts received against those tickets are a liability of the airline and its mere transfer to its "Profit and Loss Appropriation Account" could not change the character of the trading receipt although it retains that character despite the transfer. In Hotel Metropole's case, a question arose whether the "service charges" from the boarders and lodgers for payment to the employees could be regarded as income of the assessee. The Income‑tax Officer held that the posting of the service charges under the head 'general account' by itself was an income by the very nature of the amount received 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 tax. This finding was upheld by the Income‑tax Appellate Tribunal, The High Court on a reference accepted the ratio decidendi of Morley's case and held as under:‑‑ "That the quality and nature of amount is fixed at the. time either of its receipt or its accrual, notwithstanding subsequent change in the nature of the posting of the amount in the assessee's books. 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 at 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." Again the High Court affirmed that the nature of the income is fixed at the time of its receipt or accrual and subsequent changes in the r method of accounting or posting could not change the quality of money which is so received or accrued. We would follow the criteria laid down in the aforementioned cases in determining the character and nature of the trading receipt rather than to follow the cases from Indian jurisdiction which had taken a contrary view and relied on by the High Court. In Punjab Steel Scrap Merchant's Association v. Commissioner of Income‑tax, (1961) 43 I T R 164, the distinguishing feature was that the assessee had not shown the amount as liability in his own balance‑sheet. Morley's case was distinguished. In preference to it, the two decisions of the Supreme Court of India namely, Lakshmanier and Sons v. Commissioner of Income‑tax (1953) 23 I T R 202 and Punjab Distilling Industries v. Commissioner of Income‑tax (1959) 35 I T R 519 were followed. The broad distinction in this case (43 I T R 164) was that the moneys when received from the customers were advance payments and could not be characterised as moneys borrowed. Again on the facts of the case the "contracts advance fixed deposits" were held to partake more of the nature of the trading receipts than of security deposits as the transaction was one providing in substance and effect for the adjustment of the mutual obligations on the completion of the contract. Such is not the case here. At the time of the hearing of the appeal, the unamended section 10(2‑A) of the Income‑tax Act was not brought to our notice which is pivotal in the decision of the case, instead the amended section 10(2‑A )(iii) was referred to which provided that where the trading liability or a portion thereof has not been paid within three years of the expiry of the previous year in which it was allowed it no longer remained a trading liability but was liable to be computed as profit. On this premise we dismissed the appeal. However, at the time of writing reasons for the order we came across the unamended section 10(2‑A) which referred only to remission or cessation of liability but not the limitation as provided in the amended provision. It is nobody's case that the passenger, who had purchased the ticket, had foregone his right to recover the unutilised fare or for that matter the liability of the Corporation to return it, had ceased. Accordingly, the liability continued notwithstanding that its recovery was barred by limitation. This question was dealt with in Kohinoor Mills Co. Ltd. v. Commissioner of Income‑tax Bombay City (1963) 49 I T R 578 and Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay (1958) S C R 1122 and held accordingly. We, therefore, issued notice for review of the order, and after hearing the counsel for the parties, we are of the view that the case is covered by the unamended section 10(2‑A) of the Income‑tax Act. Therefore, the sum of Rs.6,95,171 transferred to the "Profit and Loss Appropriation Account" could not be regarded as income within the meaning of section 10(2‑A) (as it then existed) of the Income‑tax Act. The High Court and the Income‑tax Authorities, accordingly, were in error to hold that the tickets when sold were trading receipts. In conclusion, the appeal succeeds and is allowed with costs M.B.A /P‑33/S Appeal allowed