1996 (9) TMI 1 - SC - Income Tax

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 ... Nature of unclaimed sundry credit balances - income or capital receipts - profit and loss account - amount received in the course of trade transactions - HELD THAT:- The principle laid down by Atkinson J., applies in full force to the facts of this case. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts. 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.