An agent is liable under Ss. 40(2) and 42(1) of the Income-tax Act as an assessee for income-tax on the profits made on the respondent's transactions and is therefore entitled to retain the estimated amount of income-tax payable on the amount of the respondent's profits.

( 1 ) THIS is an appeal brought pursuant to a certificate under Art. 133 (1) (c) of the Constitution from the judgment and order of the Division Bench of the erstwhile Pepsu High Court pronounced on 10/03/1953, modifying in appeal the order of the Liquidation Judge.

( 2 ) THE fact are fully recited in the judgments of the Courts below and comparatively a brief recital will be sufficient for the purpose of this judgment. The appellant company was incorporated in 1934 under the Companies Act of the erstwhile Patiala State. It carried on the business of commission agency for dealing in forward transactions in various kinds of grain and other commodities. The respondent - firm Ganpat Rai Hira Lal of Narnaul - besides being a shareholder of the appellant company had dealings with it and entered into several forward transactions of sale and purchase of grain and other commodities. The appellant, acting as a commission agent of the respondent and its other constituents entered into several transaction of forward delivery at Hapur with Firm Pyarelal Musadddi Lal, who were carrying on commission agency business at Hapur (and will hereinafter be termed the Hapur firm ). The total profits of the transactions entered into by the appellant with the Hapur firm were Rs. 48,250 on which the Hapur firm paid Rs. 14,730-8 as income-tax. The profits accruing on the transactions entered into on behalf of the respondent amounted to Rs. 29,275-2-6 on which the proportionate income-tax claimed to have been paid was Rs. 9,314-13-4. On 20/05/1943, the appellant was ordered to be wound up and Udmi Ram Aggarwal, a pleader of the old Patiala High Court was appointed its liquidator. The list of contributories was settled on 21/10/1943, and the respondent was placed on that list. Though this matter was challenged in the appeal before the High Court it is no longer in controversy between the parties.

( 3 ) THE Official Liquidator on 18/03/1944, applied under S. 186 of the Patiala Companies Act, for a payment order for Rs. 12,204-12-3 against the respondent and in support of his claim he filed, with this application, copies of the respondent's account in the books of the appellant showing how the amount claimed was due from the respondent. This amount included the sum of Rs. 9,476-13-0, on account of income-tax paid by the Hapur firm for and on behalf of the respondent on the profits of the forward transactions at Hapur and the commission of the Hapur firm. The respondent raised several objections and pleaded inter alia that the Hapur firm with whom the appellant had entered into forward transaction had no right to demand any income-tax from the appellant as no profit had accrued to the appellant which was acting as a commission agent and "was only entitled to the commission". It was also pleaded that as on the total number of transactions entered into between the respondent and the appellant there was a loss, the respondent was not liable to pay any income-tax and that the respondent had no taxable income in the year under dispute or in any other year. On 23/05/1944, the respondent filed an application in which it was submitted that the Hapur firm, who were agents of the appellant at Hapur, had retained Rs. 14,730-8-0, "which was in trust with them under S. 42 of the Income-tax Act" and prayed that the Official Liquidator be directed to apply to the Income-tax Authorities for a refund of the amount retained and paid by the Hapur firm, as no tax was really due on the transactions entered into by the appellant with the Hapur firm and none was payable by the respondent.

( 4 ) AFTER evidence was led by both parties the payment order was made by the learned Liquidation Judge on 18/01/1949, for a sum of Rs. 8,191-0-9 which included a sum of Rs. 6,867-9-6 the proportionate amount of income-tax due on the profits accruing on the respondent's transactions. Against this order the respondent took an appeal to the Division Bench and canvassed two points :