# COMMISSIONER OF INCOME-TAX, PUNJAB JAMMU & KASHMIR, HIMACHAL PRADESH AND PATIALA v. PUNJAB DISTILLING INDUSTRIES LTD

- **Citation:** [1964] 7 S.C.R. 447
- **Court:** Supreme Court of India
- **Decided:** 1961-03-23
- **Case number:** CivIL APPELLATE JuR1so1cnoN: Civil Appeals Nos. 107-111 of 1963
- **Bench:** A.K. Sarkar, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-punjab-jammu-kashmir-himachal-pradesh-and-patiala-v-3146
- **Pages:** 9

## Headnote

Income Tax-Distiller taking deposit refundable on return
of bottles-Balance of deposits after refund, if trading receipt-Indian Income-tax Act, 1922 (11 of 1922), s.10.
The assessee, a distiller of country liquor, carried on the
business of selling liquor to licensed whole salers. The assessee
'5tarted collecting from its customers from the year 1945 besides
the price of the liquor and the bottles in which the liquor was
sold a further charge called "empty bottles return security deposit." The entire sum collected on this account in respect of any
one transaction would be refunded in full on return of 90 per
cent. of the bottles covered by it. The question for consideration
before this Court was whether t~ charge "security deposit"
amounted to a trading receipt assessable to Income Tax.
Held: The amounts paid to the assessee and described as
'security deposit' were trading receipts and therefore income of
the assessee assessable to tax. These amounts were paid as an
integral part of the commercial transaction of the sale of liquor
in bottles and represented an extra price charged for the bottles. They were not security deposits as there was nothing to
secure, there being no right to the return of bottles. These appeals are covered by the judgment of this Court in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax.
Punjab Distilling Industries Ltd. v. Commissi07leT of Income·
tax [1959] Supp. 1 S.C.R. 693, relied on.
Davies v. Shell Company of China Ltd. (1951)32
T.C. 133
and K.M.S. Lakshmanier & Sons v. Commissioner of Incometax and Excess Profits Tax, Madras [1953] S.C.R. 1057, distingW.•hed.
CivIL APPELLATE JuR1so1cnoN:
Civil Appeals Nos.
107-111 of 1963 .. Appeals by special leave from the judgment
and order dated March 23, 1961 of the Punjab High Court in
Income-tax Reference No. 14 of 1960.
R. Ganapathi Iyer and R.N. Saclzthey, for the appellant
(in all the appeals).
S.T. Desai, R.K. Gauba, B.P. Singh and Naunit Lal, for
the respondent (in all the appeals).
March 24. 1964. The Judgment of the Court was delivered by
SARKAR, J.-We think.that these appeals are covered by
the judgment of this Court in Punjab Distilling Industries
.Ltd. v. Commissioner of Income-tax(') and the High . Court
(') [1959] Supp. 1 S.C.R. 693.
Sarkar, I.
1964
Oommiuioner of
lntome-t®;,
Punjab, Jammu
d1 Kashmir,
Himaclial
Pradesh and
Patiala
v.
Pun}ab Diatilling
lnduatries Ltd.
Sarkar, J.
448
SUPREME COURT REPORTS
[19641
was in error in its view that the ratio decidendi of that judgment was not applicable to them. The earlier case had arisen
out of the assessment of the same assessee but it was concerned with the years 1947-48 and 1948-49 while the present appeals are concerned with the years 1946-47, 1949-50, 1950-51,
and 1951-52. The accounting period of the assessee was from
December 1, in one year to November 30 of the following
year. In both the cases the assessments were for income-tax,
excess profits tax and business profits tax, The point for consideration in respect of all these taxes was, however, the same.
A full statement of the facts will be found in the Judgment in the earlier case and it is unnecessary to state them at
length over again. The assessee who was a distiller and seller
of bottled country liquor, started collecting from its customers
from the year 1945 besides the price of the liquor and the
bottles in which the liquor was sold, a further charge called
"empty bottles return security deposit". This charge was made
at a certain rate per bottle delivered depending on its size on
the term that it woud be refunded as and when the bottles were
returned to the assessee and that the entire sum collected on
this account in respect of any one transaction would be refunded in full on return of 90 per cent of the bottles covered by it.
The question is whether this charge is a trading receipt assessable to tax. In the earlier case this Court held it to be assessable. This Court then said (p. 687), "the trade consisted of sal

## Text

7S.C.R.
SUPREME COURT REPORTS
447
COMMISSIONER OF INCOME-TAX, PUNJAB JAMMU
& KASHMIR, HIMACHAL PRADESH AND PATIALA
v.
PUNJAB DISTILLING INDUSTRIES LTD.
[A.K. SARKAR, M. HIDAYATULLAH AND J.C. SHAH, JJ.]
Income Tax-Distiller taking deposit refundable on return
of bottles-Balance of deposits after refund, if trading receipt-Indian Income-tax Act, 1922 (11 of 1922), s.10.
The assessee, a distiller of country liquor, carried on the
business of selling liquor to licensed whole salers. The assessee
'5tarted collecting from its customers from the year 1945 besides
the price of the liquor and the bottles in which the liquor was
sold a further charge called "empty bottles return security deposit." The entire sum collected on this account in respect of any
one transaction would be refunded in full on return of 90 per
cent. of the bottles covered by it. The question for consideration
before this Court was whether t~ charge "security deposit"
amounted to a trading receipt assessable to Income Tax.
Held: The amounts paid to the assessee and described as
'security deposit' were trading receipts and therefore income of
the assessee assessable to tax. These amounts were paid as an
integral part of the commercial transaction of the sale of liquor
in bottles and represented an extra price charged for the bottles. They were not security deposits as there was nothing to
secure, there being no right to the return of bottles. These appeals are covered by the judgment of this Court in Punjab Distilling Industries Ltd. v. Commissioner of Income-tax.
Punjab Distilling Industries Ltd. v. Commissi07leT of Income·
tax [1959] Supp. 1 S.C.R. 693, relied on.
Davies v. Shell Company of China Ltd. (1951)32
T.C. 133
and K.M.S. Lakshmanier & Sons v. Commissioner of Incometax and Excess Profits Tax, Madras [1953] S.C.R. 1057, distingW.•hed.
CivIL APPELLATE JuR1so1cnoN:
Civil Appeals Nos.
107-111 of 1963 .. Appeals by special leave from the judgment
and order dated March 23, 1961 of the Punjab High Court in
Income-tax Reference No. 14 of 1960.
R. Ganapathi Iyer and R.N. Saclzthey, for the appellant
(in all the appeals).
S.T. Desai, R.K. Gauba, B.P. Singh and Naunit Lal, for
the respondent (in all the appeals).
March 24. 1964. The Judgment of the Court was delivered by
SARKAR, J.-We think.that these appeals are covered by
the judgment of this Court in Punjab Distilling Industries
.Ltd. v. Commissioner of Income-tax(') and the High . Court
(') [1959] Supp. 1 S.C.R. 693.
Sarkar, I.
1964
Oommiuioner of
lntome-t®;,
Punjab, Jammu
d1 Kashmir,
Himaclial
Pradesh and
Patiala
v.
Pun}ab Diatilling
lnduatries Ltd.
Sarkar, J.
448
SUPREME COURT REPORTS
[19641
was in error in its view that the ratio decidendi of that judgment was not applicable to them. The earlier case had arisen
out of the assessment of the same assessee but it was concerned with the years 1947-48 and 1948-49 while the present appeals are concerned with the years 1946-47, 1949-50, 1950-51,
and 1951-52. The accounting period of the assessee was from
December 1, in one year to November 30 of the following
year. In both the cases the assessments were for income-tax,
excess profits tax and business profits tax, The point for consideration in respect of all these taxes was, however, the same.
A full statement of the facts will be found in the Judgment in the earlier case and it is unnecessary to state them at
length over again. The assessee who was a distiller and seller
of bottled country liquor, started collecting from its customers
from the year 1945 besides the price of the liquor and the
bottles in which the liquor was sold, a further charge called
"empty bottles return security deposit". This charge was made
at a certain rate per bottle delivered depending on its size on
the term that it woud be refunded as and when the bottles were
returned to the assessee and that the entire sum collected on
this account in respect of any one transaction would be refunded in full on return of 90 per cent of the bottles covered by it.
The question is whether this charge is a trading receipt assessable to tax. In the earlier case this Court held it to be assessable. This Court then said (p. 687), "the trade consisted of sale
of bottled liquor and the consideration for the sale was constituted by several amounts respectively called, the Price of the
liquor, the price of the bottles and the security deposit. Unless
all these sums were paid the appellant would not have sold the
liquor. So the amount which was called security deposit was
actually a part of the consideration for the sale and, therefore,
part of the price of what was ~old."
In respect of the years now under consideration the
Income-tax Officer taxed these charges and on appeal the Appellate Assistant Commissioner confirmed the Income-tax
Officer's view. On further appeal, however, the Income-tax
Tribunal reversed the decisions of the authorities bdow and
held that these charges were loans and not trading receipts.
It may be stated that all this had happened before the aforesaid earlier judgment was delivered. After the Tribunal's decision, the Commissioner of Income-tax obtained a reference of
the following question to the Punjab High Court: ·
"Whether on the facts and circumstances of the case
the collections by the assessee company. described
in its accounts as 'empty bottle return security
deposits' were income assessable under Section 10
of the Income-tax Act."
7 S.C.R.
SUPREME COURT REPORTS
449
1960
It is of interest to note that the earlier case also concerned
.an identical question and had been answered both by the
High Court and this Court in the affirmative.
If the judgment in the earlier q1se covered the present appeals, then the question referred would, of course, have to be
answered in the affirmative. The High Court, however, took
the view that as a result of the amendment of the rules made
under the Punjab Excise Act, 1914 which came into effect
irom April I, 1948, the charges collected after that date were
not covered by that judgment. It held that the amended rule
made the ratio decidendi of our judgment inapplicable to the
charges collected after that date. The rule referred to is r.
40(14)(0 and the relevant part of it on which the High Court
based its view is as follows: -
Commi8sioner o/
IncQme-taz,
Punjab, Jammu
&r Kashmir,
HimaclUJl and
Patiala
v
Punjab Distilling
Industries Ltd. p
<v) It is compulsory for the licensee to return at least
90 per cent. of the bottles issued to him by the
licensed distiller.
(vil The licensed distiller may, at the time of issue,
demand security at the rates of three rupees, two
rupees or one rupee and eight annas per dozen
quart, pint or nip bottles respec!ively upto 10 J.ler
cent. of the bottles issued by him and confiscate
the security to the extent falling short of the 90 per
cent. limit.
The licensee referred to in the earlier of the ntles quoted
is the wholesaler to whom the distiller sold his liquor. It is not
very .::!ear what is meant by the words "upto 10 per cent. of
the bottles issued" or the words "falling short of the 90 per
cent. limit". It is not necessary, however, to pursue this matter
for we shall not be concerned with the precise meaning of
these words. It is not in dispute that some charge described as
a deposit was realised on the term that it would be refunded
in certain eventualities and that is enough for our purpose for
lhe only question is whether this charge was a trading receipt.
The High Court thought that the earlier judgment of this
Court had been based on three considerations, namely (!) that
the charge concerned had been made without Government's
sanction and entirely as a condition imposed by the assessee
itself for the sale of its liquor; (2) that it could not be security
deposit for the return of the bottles for there was no right to
their return and (3) that it was refundable under the contract
of sale itself. In the High Court's view if these circumstances
were not there, our decision would have been different. The
High Court held that since the amended rules came into force,
none of these considerations was available and, therefore, the
LP(D) !SCI-15&
Sarkar, J.
1964
Commissioner of
Income.tax,
Punjab, Jammu
JIKasMnir,
Himaau.l
Pradeah and
Patia'fa
v.
Punjab DiMUting
lnd""1'iea Ltd..
Sarkar, J.
450
SUPREME COURT REPORTS
[1964}
charges could not be held to be trading receipts. The following quotation from the judgment of the High Court fairly
summarises its reasoning: -
"The amended rules were given effect from 1st April.
1948. To securities demanded in accordance with
the above rules the three considerations which
prevailed with their Lordships of the Supreme
Court and which have been mentioned above will
not apply to the instant case. It cannot. therefore,
be said, as was the case in the appeal before their
Lordships of the Supreme Court, that the 'additional amounts had been taken without Government's sanction and c·ntirely as a condition imposed by the appellant itself for the sale of its liquor'.
Again it cannot be said that the 'wholesalers were
under no obligation to return the bottles.' Lastly,
in view of the statutory rule amended in 1948 it
cannot be said that the deposit ·was part of each
trading transaction and was refundable under the
terms of the contract relating to trading transaction under which it had been made."
It is not in dispute that if the High Court was in error
in this reasoning, the present case will be governed by the
earlier decision.
With respect to the learned Judges of the High Court, we
think that the earlier judgment of this Court has been misunderstood by them. That judgment had not been based on the three
points mentioned by the High Court and this we now proceed
to show. The first point of distinction between the two cases
was based on the observation in the earlier case that the additional amounts had been taken without Governmenfs sanction
and entirely as a condition imposed by the appellant itself for
the sale of its liquor'. The High Court apparently th9ught that
by this observation it was suggested that if the amounts had
been taken under Government's sanction, then they would not
have been taxable. We are wholly unable to agree that this is
a correct reading of that judgment. That observation contained
only a recital of fact and was made for the purpose of distinguishing these amounts from the other amounts charged by
the assessee as price of bottles to which we have earlier referred. The other amount was charged under a scheme framed
"
by the Government and called the "buy back scheme". We find
nothing in the earlier judgment to show that the conclusion
there arrived at was based on the fact that the charge had not
been. made with the sanction of the GovernmeQt. That nothing
turned on whether a charge was made under a Government
scheme or purely as a matter of contract would indeed appear
to have always been the common case. Thus even before the
7 S.C.R.
SUPREME COURT REPORTS
451
.amended rules had come into force, the assessee had been
.collecting under the aforesaid "buy scheme" which had
the sanction of the Government, from its customers as price
of the bottles, a charge which was refundable on the return of
the bottles. The charge now under consideration is a charge
.additional to that collected under the 'buy back scheme' and
this we have earlier said. lthas never been in dispute, either in
the earlier case or now, that the charge under the 'buy back
scheme' which was collected under Government's sanction
constituted a taxable income. This Court had never ·said, nor
was it ever contended by the assessee that a collection would
not be taxable if it had been made with the sanction of the
Government. The first point of distinction sought to be made
by the High Court is, therefore, unfounded.
The second point made by the High Court was that the
observation in the earlier judgment that the charge could not
be a security for the return of the bottles as there was no right
to such return, was no longer applicable as under the amended
rules there was a right to the return of the bottles. We do not
agree for reasons to be stated later, that under the amended
rules there was such a right but we will assume for the present
that there was. Now, the argument in connection with which
that observation was made was that if the charges were deposits
for securing the return of the bottles, they were not trading
receipts. By the aforesaid observation this Court dealt with the
first part of this argument and said that the assumption that
the charges were for securing the· return of the bottles was
unfounded for there was no right to such return. If the charges
were not by way of security deposit the argument must, of
.course, fail. So that was one answer that was given to the argument. But this Court did not stop there and proceeded to
•consider the argument as a whole, namely, whether if the
charges were security deposits, they were not trading receipts.
Now, the reason why it was said that if the charges were
security deposits they were not trading receipts is to be found
in two cases on which the argument was based. The first. was
the case of Davies v. Shall Company of China Ltd.('). In that
·Case the Company had delivered its product to certain agents
for sale and payment of the sale proceeds to it. The Company
took money from each agent as deposit to secure itself against
the risk of default by him to account for the sale proceeds. It
was observed by Jenkins L.J.,
"Mr. Grant described the agents' deposits as part of
the Company's trading structure, not trade receipts
but anterior to the stage of trade receipts, and I
think that is a fair description of them. It seems to
!'l (1951) 32 T.C. 133.
LP(D)iSCI-15
1964
Comm-•/
Imome-taz,
Punjab, Jamm•
di Kaahmir,.
Himachal
Pradukand
Paliala
y,
Punjab Dialilling
lndmtrieo Lid.
Sarkar, J,
Oommialitnlu of
]ncome-ta:t,
Pvnjab. Jammu
di Kaali.mir,
Himadoal
Pmduhaml
Patiala
v.
Punjab Di/dilling
lndmtriea Ltd.
.Sarkar, J.
452
SUPREME COURT REPORTS
[1964)
me that it would be an abuse of language to describe ·one of these agents, after he had made a
deposit, as a trade creditor of the Company in
respect of the deposit, not on account of any goods
supplied or services rendered by him in the course
of its trade, but simply by virtue of the fact that
he has been appointed an agent of the Company
with a view to him trading on its behalf, and as a
condition of his appointment has deposited with
or, in other words, lent to the Company the amount
of liis stipulated deposit."
That was the kind of security deposit which Mr. Sastri
appearing for the assessee on the earlier occasion said the
"empty bottles .return security deposits" were. The real point,
therefore, in contending that the deposits were security deposits
was to establish that they were not part of the trading transactions at all but related to a stage anterior to the trading
transactions. This contention was rejected and it was held that
the "empty bottles return security deposits" were not the kind
of deposits considered in the Shall Company case.
The other case on which Mr. Sastri then relied was K.M.
S. Lakshmanier & Sons v. Commissioner of Income-tax and
Excess Profits Tax Madras('). That case dealt with three
trade arrangements. Mr. Sastri contended that the "empty
bottles return security deposits" were the kind of deposits
dealt with in the third arrangement considered in that case but
this argument also failed. Under the third arrangement, the
trader took from its constituent at the commencement of an
expected series of trading transactions with it a deposit and
kept the same till the business connection came to an end
whereupon the deposit was refundable to the constituent with
interest at 3 per cent per annum after deduction thereout of
any amount remaining due from the constituent on the trading
transactions. The understanding was that the constituent would
pay for each purchase made by him from the trader during
the continuance of the business connection and it was only
where he failed to make the payment that the amount due·
became liable to be deducted from the deposit. This deposit
was held by this Court to be a loan for these reasons : "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 instalment or otherwise. Such
price was to be paid by the. customer in full against delivery
in respect of each contract ............... 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
(') [1953] S.C.R. 1057.
7 S.C.R.
SUPREME COURT REPORTS
453
of the customer's default ............ The transaction had thus
all the essential elements of a contract of loan." (p. 1063).
None of these cases, therefore, was concerned with the
question whether a security deposit was by its very nature such
that it could not be a trading receipt. The first case dealt with
1964
Oommiasionu of
lncome-taz,
Punjab, Jamm1'
& Kaahmir,
Himachal
Praduhand
an actual security deposit but it was held that that deposit
Pa1;a1a
was not a trading receipt not for the reason that it was ii P
. 6 Ti·,nr ,
security deposit but for
the reason
that it
formed
t:1~.tri~ ~;;t
the structure under which trading transactions producing
trading receipts were conducted and was not itself connected
with any trading transaction. In the second case the receipt
was held to be a loan; that it might be also a security deposit
was not even mentioned. It was held not to be a trading receipt
because it had no connection with the trading transactions but
related to a stage anterior to the trading transactions.
It is, therefore, clear that the contention that the charges
formed a security deposit had been advanced only for the
purpose of showing that they were not a part of the trading
transactions. The question was not really whether the charges
were security deposits but whether they were part of the trading transactions or had been made at anterior stages. This
Court decided that they were part of the trading transactions
and were not relatable to an anterior stage. That is all that it
was called upon to decide and did decide.
That on the earlier occasion this Court was not concerned
with the question whether the charges made were security
deposits or not would appear from the following observations
occurring at p. 690. "Mr. Sanyal was prepared to argue that
even if the amounts were securities deposited for the return
of the bottles, they would still be trading recepits, for they
were part of the trading transactions and the return of the bottles was necessary to enable the appellant to carry on its trμde,
namely, to sell liquor in them. As we have held that the
amounts had not been paid as security for the return of the
bottles, we do not consider it necessary to pronounce upon
this contention." This Court, therefore, did not decide that if
the deposits had been made to secure the return of the bottles, they could not be a trading receipt. The High Court was
in error in distinguishing the present case from the earlier one
on the basis that this Court had then so decided.
We now turn to the question whether under the amended
rules there was any right in the ·distiller to the return of the
bottles. We think there was not and in this respect the two
cases .are identical; in none was the charge in fact. a security
deposit. The reason for that view is this. The liquor passed
through three sales before it reached tbe consumer first the
distiller sold it to wholesaler then the wholesaier to a
retailer and lastly, the retailer to the consumer, If the
Sarkar, J.
Co,nmissiontf" of
Inrome-tax,
Punjab. Jammu
~ Ka.skmif",
Himachal
Pradesh and
Patiala
v.
P unjoh DistiUin1
ln-fu.<1trie~ LtdSarkar, J.
454
SUPREME COURT REPORTS
[1964]
rules created an obligation on the wholesaler to return the
bottles to the distiller, then the rules. would provide for a return
of the bottles to the wholesaler by the retailer and to the
retailer by the consumer; without such rules it would be idle
to require the wholesaler to return the bottles to the distiller.
We have not been shown anything creating a right in the
wholesaler or the retailer to a return of bottles. Clearly, the
consumers were under no obligation to return the bottles in
which they bought liquor. Sub-clause (v) of the rule on which
the High Court based itself, referred to the return of the bottles in which liquor was sold. In the absence of a right in the
wholesaler to a return of the bottles from the retailer, it would
be insensible to read that provision as creating an obligation
on the wholesaler to return the bottles. He had no means
under the rules to perform that obligation. That rule, therefore, must be read as intending only to lay down that if the
wholesaler could not return the bottles, his <ieposit was liable
to be confiscated under sub-d. (vi). Again, the rules do not
lay down any procedure by which the distiller might enforce
the return of the bottles to him, which they would have undoubtedly done if it was intended to give him a right to the
return of the bottles. Indeed there is nothing to show that he
can obtain such a return. Whether the wholesaler would be
liable to punishment under the Act for breach of his obligation to return the bottles or not is to no purpose, for we are
now concerned with the right of the distiller to obtain a return
of the bottles. It seems to us that the only reason why the rules
required a wholesaler to return the bottles to the distiller was
to authorise the imposition of a term of the sale upon the
breach of which, tpe charges lnade for the bottles would cease
to be refundable.
We now come to the last point of distinction made by the
High Court. On the earlier occasion this Court had said that
the amount deposited was refundable under the terms of the
contract constituting the trading transaction and was, therefore, a trading receipt. The learned Judges of the High Court
seem to have been of the opinion . that since the rule was
amended, the deposits had to be made under it and, therefore, were not thereafter received under the contract or as part
of the trading transaction constituted by it. With great respect
to the learned Judges, there appears to be some confusion
here. The rule by its own fdrce does not compel a deposit to
be made. The terms of the rule make this perfectly clear. All
that it does is to empower a distiller to take a deposit. But the
deposit must be taken under a contract in regard to it: it is not
taken under the rule itself. In other words, all that the rule
does is to authorise the making of a contract concerning the
deposit on the terms mentioned in it, the object apparently
7 S.C.R.
SUPREME COURT REPORTS
455
being to avoid any question as to its validity arising later. We
19G4
may here point out that the trade.in liquor is largely control-co,,,,,,;,.;;-,,;;;, of
led by Government regulations. It must, therefore, be held Inw'!'e-tax,
that the deposit was actually taken under a contract; it was
~·1:,t.;[;~mmu
none the less so though the contract was authorised by the
H;ma,·hal '
stationery rules. The third point of distinction on which the f:ad7h and
High Court relied was, therefore, also without foundation.
at•a :.
Whether if the deposits had been~made without a contract and Punjah DistUhng
directly under the rules and in respect of a trading transaction
Ina,,,tric.• J,id.
made by a contract they would have been trading receipts or
Sarkar, J.
not, is not a question that arises in the present appeals and on
that question we express no opinion now.
For these reasons we think that these appeals are compietely governed by the earlier judgment of this Court and we
answer the question referred in the affirmative. We should
state that even according to the High Court the amounts collected as "empty bottles return security deposit" prior to April
I, 1948, were chargeable to tax.
The appeals are allowed and the respondent will pay the
costs here and below.
There will be one set of costs allowed as hearing fee.
Appeals allowed.