$~R-4 & R-5
THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 14.02.2013
+ ITR 60-61/1999
+ ITR 69-72/1999
CIT ..... Petitioner
versus
M/S K AND CO. ..... Respondent
Advocates who appeared in this case:
For the Petitioner : Mr Abhishek Maratha, sr. standing counsel
For the Respondent : None
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR
JUDGMENT
BADAR DURREZ AHMED, J (ORAL)
These six income tax references pertaining to the assessment years
1989-90 to 1993-94 raise the following questions :-
"Assessment Year 1989-1990:
(1) Whether, on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
the assessee firm was entitled to depreciation claim of
`18,67,822/- only in respect of commercial vehicles
acquired and leased out by it on the last two days of the
ITR Nos.60-61/1999 & 69-72/1999 Page 1 of 14
accounting period even though the said vehicles were not put
to use during the relevant accounting period?
(2) Whether, on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
the tickets sent to the stockist do not become a sale on their
despatch but assumes the character of a sale on the
happening of various events including the draw taking
place?
(3) Whether, on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
,,changed method of accounting adopted by the assessee
firm did not give a distorted picture of the business for the
purposes of computing the taxable income of the assessee
and was acceptable even though the opening stock and
closing stock were valued by different methods?
Assessment Year 1990-91:
(1) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
the assessee firm was entitled to depreciation claim of
`7,76,010/- only in respect of commercial vehicles acquired
and leased out by it in the last week of the accounting period
even though the said vehicles were not put to use during the
relevant accounting period?
(2) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
the tickets sent to the stockist do not become a sale on their
despatch but assumes the character of a sale on the
happening of various events including the draw taking
place?
ITR Nos.60-61/1999 & 69-72/1999 Page 2 of 14
(3) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in holding that
,,changed method of accounting adopted by the assessee
firm did not give a distorted picture of the business for the
purpose of computing the taxable income of the assessee and
was acceptable even though the opening stock and closing
stock were valued by different methods?
(4) Whether on the facts and in the circumstances of the
case, the Honble Tribunal was right in law in holding that
the interest income of `87,695/- included in `10,51,987/-
shown as ,,other income by the assessee was eligible for
deduction u/s 32 AB of the I.T. Act, 1961?
(5) Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that investment
income amounting to `63,365/- shown by the assessee as
,,other income was eligible for deduction u/s 32 AB of the
I.T. Act 1961 even though the said income being interest
received from the Bank on Short Term Fixed Deposit was
assessable as income from other sources?
Assessment Year 1991-92:
Whether on the facts and in the circumstances of the case,
the Appellate Tribunal was right in law in holding that the
assessees firm was entitled to depreciation claim of
`2,95,000/- only in respect of commercial vehicles acquired
and leased out during the relevant previous year, even
though the user of these vehicles was not proved?
Assessment Year 1992-93:
Whether on the facts and in the circumstances of the case,
the Appellate Tribunal was correct in law in holding that the
assessees firm was entitled to depreciation claim of
ITR Nos.60-61/1999 & 69-72/1999 Page 3 of 14
`4,02,588/- only in respect of six commercial vehicles
acquired and leased out by it during the relevant previous
year, the user of which was not proved.
Assessment Year 1993-94:
Whether on the facts and in the circumstances of the case,
the Appellate Tribunal was right in law in holding that the
assessees firm was entitled to depreciation claim of
`6,71,188/- only in respect of ten commercial vehicles
acquired and leased out by it during the relevant previous
year, the user of which was not proved.
Assessment Year 1989-90:
Whether on the facts and in the circumstances of the case,
the Appellate Tribunal was right in law in directing the
Assessing Officer to recompute the assessees income?"
2. We shall first take up the questions in respect of the assessment
year 1989-90. There are two sets of questions for this year. The first set
comprises of three questions and the second set of the fourth which is
essentially a consequential issue.
3. The assessee, during the relevant years, was engaged in the
business of printing of lottery tickets and organizing lotteries on behalf
of, inter alia, the Government of Sikkim. Additionally the respondent-
assessee also carried on the business of leasing of vehicles for
commercial use. In respect of the financial year ending on 31.3.1989, the
assessee had changed its method of accounting which it had adopted
ITR Nos.60-61/1999 & 69-72/1999 Page 4 of 14
earlier. In the earlier years, the respondent-assessee had shown all its
dispatches of tickets to its stockists as sales without being concerned with
the question of whether the tickets were sold to the ultimate customers or
not or whether the draw had taken place or not. In other words, in earlier
years any dispatches made by the respondent-assessee during the relevant
accounting year were treated as sales. With effect from the assessment
year 1989-90, the respondent-assessee sought to adopt a different method
of accounting. The respondent-assessee did not show all the dispatches to
stockists as sales until and unless a draw had also taken place. In other
words, those dispatches in the accounting year for which the draw was to
take place in the succeeding year were not shown as sales. The assessee
did not show such dispatches as part of the closing stock either. It is in
this backdrop that the said questions have been formulated for our
consideration.
4. Insofar as question No.1 is concerned which deals with the
entitlement of the respondent-assessee to depreciation to the extent of
`18,67,822/- in respect of assessment year 1989-90 the issue before the
authorities below was whether the respondent-assessee was entitled to
such a claim. The point raised by the revenue being that the respondent-
ITR Nos.60-61/1999 & 69-72/1999 Page 5 of 14
assessee had procured the vehicles only two days prior to the end of the
accounting year and had leased out said vehicles. Lease rental of
`75,306/- had been realised by the respondent-assessee and had been
accounted for by the respondent as part of its income for the assessment
year 1989-90. The revenues contention was that the leased vehicles ha d
not been put to commercial use and, therefore, depreciation could not be
claimed in respect of the same. Their contention was based on the
premise that the said vehicles did not have permanent registrations but,
only had temporary registrations and also did not have any commercial
permit for being deployed as commercial vehicles. Therefore, according
to the revenue, the vehicles could not have been put in use by the lessees
and, consequently, the respondent-assessee should not be entitled to the
claim of depreciation made by it.
5. Certain provisions of the Motor Vehicles Act, 1988 had also been
referred to by the authorities below. However, we are of the view that we
need not refer to those provisions. This is so because it is not the
respondent-assessee who is plying those vehicles. The respondent-
assessees business is only to lease out those vehicles, which it did.
Therefore, in our view the moment the respondent-assessee entered into
ITR Nos.60-61/1999 & 69-72/1999 Page 6 of 14
the agreement with the lessees for leasing the vehicles to them and
transferred possession for that purpose to the lessees, the
respondent/assessee would be deemed to have utilized those vehicles for
the purposes of its business, which was leasing of vehicles. If any
authority for this proposition were needed, the same would be supplied by
the decision of this Court in CIT Vs. Bansal Credits Ltd. : (2003) 259
ITR 69 (Del.). Consequently, this question is answered in favour of the
assessee and against the revenue.
6. We now move on to question No.2 which deals with the issue of
the point of sale of the lottery tickets. According to the revenue, the
moment the respondent-assessee dispatches the tickets to its stockists, a
sale takes place. Therefore, the fact that the tickets were sent to the
stockists within the accounting year would mean that the sales had been
finalized during that year. It is also the contention of the revenue that it is
irrelevant as to when the draw actually takes place. We notice that the
Tribunal has held otherwise after examining the relevant clauses of the
agreement of the respondent-assessee with the stockists. This would be
clear from the paragraph 39 of the impugned order in respect of the
assessment year 1989-90 which reads as under :
ITR Nos.60-61/1999 & 69-72/1999 Page 7 of 14
"39. In order to appreciate the arguments, it would be
necessary on our part to set out certain relevant clauses of
the agreement as follows :-
"2. That the Organizing Agent shall dispatch tickets for
various the Draws so as to reach the stockists at their place
of destination mutually agreed upon. In case of loss of
tickets in transit, to the place of destination of the tickets,
dispatched by the Organising Agent then the Organising
Agent shall be responsible for such loss."
"4. That the Organising Agent shall pay service charges at
the rate of 3 per cent on the basis of the total value of tickets
sold. The stockists may deduct the service charges while
making the payment."
"5. That the Organising Agent may fix quota of lottery
tickets to be supplied to the stockists based on his actual
demand and sales in the past or as may be agreed. The
Organising Agent, however, reserves the right to reduce the
quota of tickets for a particular draw or draws without
assigning any reason whatsoever. The tickets will be
supplied to the stockists on F.O.B. basis on a proper challan
form (dispatch slip). The stockists would be under an
obligation to tally tickets received with the challan form.
Any discrepancy must be immediately intimate to the
Organising Agent within 24 hours of the receipt of the
tickets."
"8. The stockiest will ensure that the payment of a
particular draw is made to the Organising Agent positively
one week in advance of the actual date of draw and the
Demand draft will be made in favour of ,,K & Co. New
Delhi and shall be payable on the Nationalised bank at New
Delhi."
ITR Nos.60-61/1999 & 69-72/1999 Page 8 of 14
"16. That the tickets issued for a draw and anticipated to
remain unsold, should so returned that they are physically
received by the Organising Agent at least one day before the
actual date of the draw. Ticket received thereafter, will not
be accepted and treated as sold by the stockiest and the
stockiest shall remain reliable for its payment in the same
manner as if the tickets have actually been sold."
"17. That telegraphic, telephone or any other information
sent to the Organising Agent regarding the unsold tickets
would be ignored and in case the tickets want benefit for the
return of tickets, the tickets must in that event, reach the
Organising Agent at least 24 hours before the draw."
30. That the stockists has deposited interest free but
refundable security with the Organising Agent. This security
shall be refunded when this agreement is terminated.
However, the Organising Agent shall have the right to adjust
from the security all dues which are payable by the stockist
to the Organising Agent."
7. We notice that the Tribunal, after going through the said
agreement, had observed that the arrangement by which the respondent-
assessee sent tickets to the stockists who in turn sold the same to their
agents did not indicate that the sale took place at the point of dispatch of
tickets to the stockists. We also notice that the unsold tickets are to be
returned to the organizing agent of the respondent-assessee at least one
day before the actual date of the draw and any tickets received thereafter
would not be accepted and treated as sold by the stockists. This makes it
ITR Nos.60-61/1999 & 69-72/1999 Page 9 of 14
clear that those tickets which are returned by the stockists cannot be
treated as having been sold. The corollary to this is that mere dispatch of
tickets to the stockists would not entail a sale. It is only those dispatches
of tickets which are not returnable in the manner indicated above which
would be recorded as sales. Thus, till the date of the draw or just prior to
the date of the draw it cannot be ascertained as to whether the dispatched
tickets were actually sold or not. We, therefore, agree with the view
taken by the Tribunal and consequently, decide this question in favour of
the assessee and against the revenue.
8. Question No.3 pertains to the change in the method of accounting
adopted by the assessee which, we may straightaway say, tends to distort
the picture for the purpose of taxable income of the assessee. This is so,
because, even if we hold that mere dispatches to the stockists did not
amount to sales, the unsold amount should have been treated as part of
the stock of the respondent-assessee which has not been done by the
respondent-assessee in the accounting method adopted by it. It cannot
maintain the position that it has not sold the tickets and that those tickets
are also not part of its stock. Therefore, to that extent, the accounting
method adopted by the respondent-assessee does, in fact, distort the
ITR Nos.60-61/1999 & 69-72/1999 Page 10 of 14
picture for the purpose of ascertaining the taxable income. We answer
this question in favour of the revenue and against the assessee. As a
corollary, the last question, in respect of the assessment year 1989-90 to
the effect as to whether the Tribunal was right in law in directing the
assessing officer to re-compute the assessees income, is to be decided in
favour of the revenue and against the assessee. The Tribunal was correct
in law in directing the assessing officer to re-compute the income.
Consequently, the assessing officer has to re-compute the income by
treating the unsold tickets as part of the stock of the respondent-assessee.
9. Insofar as the other assessment years are concerned, we find that
the question with regard to depreciation is common to all of them.
Therefore, the answer given by us in respect of the assessment year 1989-
90 would apply to each of the other assessment years. This would mean
that the question in respect of the assessment year 1991-92, 1992-93,
1993-94 stand fully answered because in those years the only question is
with regard to depreciation.
10. We are left with the assessment year 1990-91 wherein the three
questions raised in assessment year 1989-90 have been raised in the year
1990-91 also. They stand answered accordingly. Additionally, two
ITR Nos.60-61/1999 & 69-72/1999 Page 11 of 14
questions with regard to the claim under Section 32AB of the Income Tax
Act, 1961 have been raised. The questions raised are as under :
"(4) Whether on the facts and in the circumstances of the
case, the Honble Tribunal was right in law in holding that
the interest income of `87,695/- included in `10,51,987/-
shown as ,,other income by the assessee was eligible for
deduction u/s 32 AB of the I.T. Act, 1961?
(5) Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that investment
income amounting to `63,365/- shown by the assessee as
,,other income was eligible for deduction u/s 32 AB o f the
I.T. Act 1961 even though the said income being interest
received from the Bank on Short Term Fixed Deposit was
assessable as income from other sources?"
These questions arose in the backdrop of the factual situation that the
respondent-assessee had to place certain funds as margin money in order
to obtain the bank guarantee which was required by the State Government
of Sikkim for the purpose of enabling the respondent-assessee to carry on
the business of printing lottery tickets and for conducting lotteries on
behalf of the State Government of Sikkim. The funds which were placed
as margin money earned interest. The question which arose was whether
these amounts would be placed under the head of ,,business income or
under the head of ,,income from other sources under Section 56 of the
Income Tax Act, 1961. We need not labour much on this issue inasmuch
ITR Nos.60-61/1999 & 69-72/1999 Page 12 of 14
as the law stands settled in several decisions including those of the
Supreme Court and this Court. The decisions are :
1. CIT Vs. Bokaro Steel Ltd. : (1999) 236 ITR 315 (SC)
2. CIT Vs. Koshika Telecom Ltd. : (2006) 287 ITR 479 (Del.)
3. CIT Vs. Jaypee DSC Ventures Ltd. : (2011)335 ITR 132 (Del.)
These decisions make it clear that where income is received from
deposits made by the assessee are deposits which are inextricably linked
to the business of the assessee, such income cannot be treated as income
received from other sources. In the present case, the Tribunal has held
that the interest received by the assessee was inextricably linked to the
business of the assessee. This is so because the margin money
requirement was an essential element for obtaining the bank guarantee
which was necessary for the contract between the State Government of
Sikkim and the respondent-assessee. If the respondent-assessee had not
furnished the bank guarantee it would not have got the contract for
running the said lottery. Therefore, the interest received on the funds
which were kept by way of margin money for obtaining the bank
guarantee cannot but be said to be inextricably linked to the business of
ITR Nos.60-61/1999 & 69-72/1999 Page 13 of 14
the assessee. Consequently, we answer these questions in favour of the
assessee and against the revenue.
All the questions referred before us are answered and the
references stand disposed of accordingly.
BADAR DURREZ AHMED, J
R.V.EASWAR, J
FEBRUARY 14, 2013
vld
ITR Nos.60-61/1999 & 69-72/1999 Page 14 of 14
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