Unclaimed sundry credit balances written back to profit and loss account constitute taxable income when appropriated by assessee

The SC held that money initially received as deposits of capital nature became the assessee's own money through efflux of time. The assessee failed to explain why surplus money was credited to profit and loss account if it belonged to others. The Tribunal erred in deleting the addition of unclaimed sundry credit balances that were written back to profit and loss account. The SC ruled that such unclaimed balances, when appropriated by the assessee, constitute taxable income and cannot be deleted from assessment.

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Issues: Whether unclaimed sundry credit balances transferred to the profit and loss account by an assessee (originally received in the course of trade as deposits or credits) become taxable as the assessee's income by virtue of lapse of time or limitation.

Analysis: The critical legal question is whether the character of receipts originally treated as capital (deposits/credit balances) can change into revenue (taxable income) when they remain unclaimed and by operation of law or limitation become the assessee's own money. The Court examined competing authorities applying the principle in Morley v. Tattersall that taxability is generally fixed by the character of a receipt at the time of receipt, and contrasted decisions where deposits or security-like receipts were nevertheless held to be trading receipts because they were integral to commercial transactions and were the assessee's moneys from the outset. The Court relied on precedents (including Punjab Distilling Industries Ltd. and Jay's-The Jewellers) which recognize that where an amount received in the course of trade becomes the assessee's absolute asset (for example by lapse of time or operation of law) and the assessee treats it as its own by bringing it into profit and loss account, the amount acquires the quality of trade receipt taxable as income. Applying this framework to the facts, the Court found that the unclaimed credit balances arose in the course of trade, were depleted by adjustments, remained unclaimed until claims became time-barred, and were appropriated by the assessee into its profit and loss account; thus they had converted into a definite trade surplus.

Conclusion: The question is answered in the negative and in favour of the Revenue.

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