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

Commissioner of Income-Tax Versus TV Sundaram Iyengar And Sons Limited

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 ... Money received by the assessee in the course of business. Although it was treated as deposit & 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 - no explanation why the surplus money was taken to its profit and loss account even if it was somebody else's money- Tribunal is not right in deleting the addition representing unclaimed sundry credit balances written back to the profit and loss account by the assessee 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether unclaimed sundry credit balances arising from trade transactions, which were originally treated as capital receipts (deposits) by the assessee but subsequently written back to the profit and loss account, constitute taxable income under the Income-tax Act.Whether the character of such deposits received in the course of business can change from capital to revenue by efflux of time, especially when the claims of the depositors become time-barred or unclaimed.Whether the principle laid down in Morley v. Tattersall-that the taxability of a receipt is fixed at the time of receipt and does not change by subsequent accounting treatment-applies to such deposits.Whether the Tribunal was correct in deleting the additions made by the Income-tax Officer on the basis that the amounts were capital receipts and not income.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Characterization of unclaimed deposits as income or capital receiptsRelevant legal framework and precedents: The Income-tax Act provisions relevant to income characterization and sections 28 and 41(1) were considered. The principle from Morley v. Tattersall [1939] 7 ITR 316 (CA) was central, which held that the character of a receipt is fixed at the time it is received and does not change by subsequent accounting entries.Several High Court decisions were examined, including:Punjab Steel Scrap Merchants' Association Ltd. v. CIT: Held that unclaimed deposits from trade transactions, when transferred to profit and loss account, are trading receipts and taxable income.Punjab Distilling Industries Ltd. v. CIT: Held that security deposits taken as part of trade transactions, when retained after refunds, constitute trading receipts and are taxable.CIT v. A. V. M. Ltd.: The Madras High Court held that unclaimed security deposits retained and appropriated by the assessee after a lapse of time are chargeable receipts from trade.CIT v. Batliboi and Co. Pvt. Ltd.: Bombay High Court held that deposits taken in course of sale transactions, when written off to profit and loss account, are taxable as trade receipts.Jay's-The Jewellers Ltd. v. IRC: Distinguished Morley v. Tattersall by holding that surplus amounts from pawnbroking business become assessable profits after lapse of statutory periods.Court's interpretation and reasoning: The Court distinguished the facts of Morley v. Tattersall, where the amounts were held in fiduciary capacity and never became the recipient's money, from the present case where the deposits were part of trade transactions and were adjusted over time. The Court emphasized that although the deposits were capital receipts at the time of receipt, by lapse of time and non-claim by customers, the amounts became the assessee's own money and thus acquired the character of trading receipts.Key evidence and findings: The assessee had received deposits in the course of business, adjusted them against dues, and retained unclaimed balances for a long period. The assessee itself treated these amounts as income by crediting them to the profit and loss account. There was no explanation why these amounts were treated as income if they were not the assessee's own money.Application of law to facts: Applying the principle from Jay's-The Jewellers Ltd. and Punjab Distilling Industries Ltd., the Court held that the unclaimed deposits, by operation of law and lapse of limitation, became the assessee's income. The mere fact that the amounts were capital receipts initially did not prevent their character from changing when they became the assessee's own money.Treatment of competing arguments: The Tribunal and Commissioner of Income-tax (Appeals) had held that the amounts were capital receipts and not income, relying on Morley v. Tattersall. The Court rejected this view, finding that the facts did not fit the fiduciary nature of Morley v. Tattersall and that the principle must be applied in light of the commercial reality and statutory limitations.Conclusions: The Court concluded that the unclaimed deposits written back to the profit and loss account are taxable income of the assessee.Issue 2: Whether the Tribunal erred in not referring the question of law to the High CourtRelevant legal framework: Section 256(2) of the Income-tax Act allows the Tribunal to refer questions of law to the High Court.Court's reasoning: The Court noted that the Tribunal dismissed the application for reference on the ground that no question of law arose. However, given the conflicting High Court decisions on this issue, the Court found it appropriate to decide the question itself rather than refer it.Conclusion: The Court treated the question as referred under section 256(2) and answered it in favor of the Revenue.3. SIGNIFICANT HOLDINGS'The taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income account as his own that did not alter that character.' (Morley v. Tattersall)'The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents ... The unclaimed surplus retained by the assessee will be its trade receipt.' (Para 19)'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.' (Para 22)'The assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account ... commonsense demands that the amount should be treated as income of the assessee.' (Para 22)'The question is answered in the negative and in favour of the Revenue.' (Para 25)Core principles established:The character of a receipt for tax purposes is generally fixed at the time of receipt, but this principle is subject to exceptions where by operation of law or lapse of limitation, the receipt becomes the recipient's own money.Unclaimed deposits or credit balances arising from trade transactions, which remain unclaimed beyond limitation periods and are appropriated by the assessee, become taxable income.Accounting treatment alone does not determine taxability; the substance and commercial reality of the transaction must be considered.The principle in Morley v. Tattersall applies only where the amounts are held in fiduciary capacity and never become the taxpayer's own money.Final determinations:The amounts representing unclaimed sundry credit balances written back to the profit and loss account are taxable as income of the assessee.The Tribunal erred in deleting the additions and in refusing to refer the question of law.The appeal is disposed of in favor of the Revenue with no order as to costs.