Unclaimed customer credit balances from trading deals written off to general reserve treated as taxable business income

Whether unclaimed credit balances written off and transferred to the assessee's general reserve constituted taxable income was determined by applying the principle that amounts appropriated to general reserve are treated as profits when the assessee no longer acknowledges any subsisting liability. Since the credits/deposits arising from trading transactions remained unclaimed for a long period and were unilaterally transferred to general reserve, the HC held they assumed the character of the assessee's trading receipts, attracting the ratio in SC precedent on unclaimed balances. Consequently, the sum was held to be income chargeable to income-tax, and the reference was answered against the assessee.

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Issues Involved: Whether the sum of Rs. 1,77,186 written off and transferred to the assessee's general reserve account is income chargeable to income-tax.

Facts: The assessee wrote off the sum of Rs. 1,77,186, representing unclaimed liabilities from customers of the erstwhile company taken over by the assessee. The Assessing Officer viewed this amount as income of the assessee, considering it as standing in the name of sundry creditors.

Appellate Proceedings: The appellate authority held that the expiry of the limitation period did not cease the liability to pay the amounts, following a court decision. The Income-tax Appellate Tribunal upheld this decision, stating that the Department merely wanted to keep the matter alive.

Arguments: The Revenue contended that the previous judgment was distinguishable and that the amount in question should be treated as income. The court analyzed the nature of the liability and the treatment of the amount by the assessee.

Legal Analysis: The court differentiated between a provision and a reserve, citing the distinction as clarified by the apex court. It noted that once the amount was transferred to the general reserve, it was treated as profit, following the principles established in previous court decisions.

Conclusion: The court held that the amount of Rs. 1,77,186, written off and transferred to the general reserve, should be treated as income chargeable to income-tax, as the assessee had become richer by treating the amount as profit and transferring it to the general reserve. The court relied on the Supreme Court's decision to support its conclusion.

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