Fiduciary client balances do not become taxable income by later transfer to profit and loss account

Client money held by a solicitor in a fiduciary capacity does not become trading income merely because unclaimed balances are later transferred to the profit and loss account. The character of the receipt is fixed at the time of receipt, so a later accounting entry cannot convert principal money into taxable revenue. The fact that the clients' recovery may be barred by limitation also does not extinguish the underlying liability or create income. Distinguishing the distillery security-deposit line of cases, the Court noted that those amounts had a profit-making quality from inception. The balances were therefore not revenue receipts and were not liable to tax.

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Issues: Whether unclaimed balances standing to the credit of clients in a solicitors' books and later transferred to the profit and loss account constituted revenue receipts chargeable to tax.

Analysis: Money received by a solicitor from clients for work to be done in the clients' cause is received as the money of the principal in a fiduciary capacity and not as trading receipt. The character of a receipt is fixed when it is received; a later book entry or transfer to the profit and loss account does not convert client money into income. The distinction drawn in the distillery security-deposit case did not apply, because there the amounts formed part of the price and had a profit-making quality from inception. Even if the clients' remedy to recover the balances became barred by limitation, the underlying liability did not cease so as to create taxable income.

Conclusion: The amounts were not revenue receipts and were not liable to tax; the answer to the reference was in the negative, in favour of the assessee.

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