Security deposits and loan-like advances retain their character at receipt, and limitation expiry does not turn liability into income.

Amounts received as a security deposit under the contract remained a liability at the time of receipt because the deposit secured faithful performance and had no link to price or realisations, so it was not a trading receipt. The amount described as an advance was likewise treated as borrowed money rather than an advance of the assessee's share of realisations, since it functioned as loan-like financing repayable directly or by adjustment against realised amounts. The expiry of limitation did not convert either subsisting liability into income, because limitation bars the remedy but does not extinguish the debt. The receipts were therefore capital in nature and not taxable revenue receipts.

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Issues: Whether the amounts received under the agreement, namely the security deposit under clause 2 and the advance under clause 3, were capital receipts or taxable trading receipts.

Analysis: The receipt of money must be characterised at the time it is received. A deposit taken to secure faithful performance of the contract, with no relation to the price or realisations, remains a liability and is not a trading receipt. The advance under clause 3 was also not an advance payment of the assessee's share of realisations; it was a loan-like financing arrangement independent of the actual receipts, repayable directly or by adjustment of realised amounts, and therefore retained the character of borrowed money. The expiry of limitation did not convert either liability into income, because limitation bars the remedy but does not extinguish the debt.

Conclusion: The amounts were capital receipts and not taxable revenue receipts; the reference was answered in favour of the assessee.

Ratio Decidendi: A receipt received as a security deposit or as borrowed money keeps that character at the moment of receipt, and the mere lapse of limitation does not transform the subsisting liability into income.

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