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PETITIONER: COMMISSIONER OF INCOME TAX, MADURAI

       Vs.

RESPONDENT: M/S, T.V. SUNDARAM IYENGAR & SONS LTD.

DATE OF JUDGMENT:       11/09/1996

BENCH: B.P. JEEVAN REDDY, SUHAS C. SEN

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T SEN,J.      Leave granted.      The amounts  in dispute  in this case are small and the tax effect  is even  smaller. We  would have  declined to go into the  dispute at  this stage,  but for  the fact that an interesting question of law is involved.      The income  tax assessment of M/s T.V. Sundaram Iyengar & Sons  Ltd. for  the assessment  years 1982-83  and 1983-84 were completed  on 1st August,  1984. The Income Tax Officer found that  the assessee  had transferred  an amount  of Rs. 17,381/- to  the profit  and loss  account  of  the  company during the  accounting period  ended  on  31st  March,  1982 (assessment year  1982-83), and  an amount  of Rs.  38,975/- (assessment  year  1983-84),  But  these  amounts  were  not included in  the total  income of  the assess, The sums were stated to  be credit  balances standing  in  favour  of  the customers of  the company,  Since these  balances  were  not claimed by  the customers,  the amounts  were transferred by the assessee  to the  profit and  loss account.  There is no dispute that  the amount  was received  by the  assessee  in course of  trade transactions, The Income Tax Officer was of the view  that because the surplus had arisen as a result of trade transactions,  the amounts  had a  character of income and had  to be  added as  income of  the  assessee  for  the purpose of income tax assessment.      The Commissioner  of Income  Tax (Appeals), held in his order that since the parties were not claiming these amounts for a  long time,  the assessee  wrote back these amounts by crediting them  to profit  and loss  account, Such an amount cannot be  treated as  income either  under Section 41(1) or under Section  28, since  these were excess trading advances given by the clients to the assessee. In the first instance, these amounts  were not  revenue receipts,  but were capital receipts, when the assess writes back such a credit balance, it would  not constitute  part of  his taxable  income.  The additions were,  therefore, deleted  by the  Commissioner of Income Tax. On further  appeal, the  tribunal took  the  same  view  and rejected the contention of the department that these amounts

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were essentially  trading receipts  and were  of  a  revenue nature and,  therefore, were  liable to  be included  in the computation of  assessee’s taxable income. The tribunal took note of  the decision  of Punjab  High Court  in the case of Punjab  Steel   Scrap   Merchants’   Association   Ltd.   v. Commissioner of  Income Tax  Punjab (43 I.T.R. 164) but held that the  decision of  the madras  high court in the case of Commissioner of  Income Tax,  Tamil Nadu,  I v.  A.V.M. Ltd. (146  I.T.R   355)  was  binding  upon  it  and,  therefore, dismissed the appeal.      An application  was made  to the  tribunal to refer the question of  law arising out of the order of the tribunal to the  High  Court.  The  application  was  dismissed  by  the tribunal holding that no question of law arose in this case, On further  application to  the  High  Court  under  Section 256(2), the  High Court held that the question now sought to be agitated was completely concluded by the decision of that Court in case of A.V.M. (supra). Hence this appeal.      It has  been contended  on behalf of the appellant that there is  a conflict  of decision  among the  High Courts on this question,  Some of  the High Courts have taken the view that if  deposits taken  by the  company in  course  of  its trading operations  were not refunded at all or in full, the amounts retained  by the  assessee and  taken to  profit and loss account  would constitute  its income.  The second view which has  been adopted  by some other High Court is that if the deposits  taken were originally of a capital nature, its character will not change merely by lapse time and even when the amount  is taken  to the  profit and loss account of the assessee. The  origin of  the amount  may  be  the  business activity of  the assessee. But every receipt in the business carried out by the assessee is not income.      It has  been urged   that  on review of the conflicting decisions of  the Tribunals, the following question of a law raised by  the Department  should have  been referred to the High Court for its decisions:-      Whether on  the facts  and  in  the      circumstances  of   the  case,  the      appellate Tribunal  is right on law      in deleting  the addition  made  by      the Income Tax Officer representing      unclaimed  sundry  credit  balances      written back  to the  Profit & Loss      Account by  the assessee during the      previous  year   relevant  for  the      assessment        year        under      consideration?      It may  be mentioned  that three other questions of law on some  other points  decided by the Tribunal were directed to be referred to the High Court under Section 256(2) of the Income Tax  Act. Since  the case  relates to assessments for the assessment years 1982-82 and 1983-84, we have decided to deal with  and answer  the question  instead of  directing a reference to  the High  Court for  its opinion. The assessee had received  deposits in  course of its business which were originally treated as capital receipts. Some of the deposits were neither claimed by not returned to the depositor. There is no  dispute that  the deposits were received in course of the carrying  on of  the business  of the assessee. The only point to be decided so that even though the deposits were of capital nature  at the  point of  time  of  receipt  by  the assessee, could  its character  change by influx on time? IN the case  of Morley  (H.M. Inspector  of Taxes)  v.  Messrs. Tattersall, (1939)  7 ITR 316 (CA), it was laid down by Lord Greene that  the taxability  of a  receipt  was  fixed  with

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reference to its character at the moment it was received and that merely because the recipient treated if subsequently in his income  account as his own did not alter that character. This principle  of law  is the  basis of  several  judgments delivered on  this issue  by our  courts. In some cases, the principle laid  down by  Lord Greene  had not  been followed because of  special facts, but the principle as such has not been doubted.      We shall  refer to  some of  the cases  decided by  our courts to see how this principle was understood and applied. In the  case of  Punjab Steel  Scrap Merchants’’ Association Ltd. v.  Commissioner of  Income Tax,  Punjab, (1961) 43 ITR 164, the  assessee company  was a  dealer in  scrap iron. It received form  its constituents a deposit in advance for the supply of  scrap. I  the price  of scrap  iron delivered was more that  the amount  deposited, the assessee recovered the excess. Where  the price  of scrap  iron delivered  was less that the  amount deposited  and a  surplus remained with the assessee and  the constituents  did  not  claim  the  excess amount, the  assessee retained  the amounts to the credit of the constituents.  Unclaimed credit balances, after a period of three years were transferred by the company to its profit and loss  account. The  amounts so transferred to the profit and loss  account were  held by the Punjab High Court  to be trading  receipts   and  liable   to  be   included  in  the computation of  the assesee’s  taxable income.  It was  held that the  amount in  question were payments towards price of the scrap iron which was to be supplied to the constituents. They were  essentially trading  receipts. The case of Morley v. Tattersall  (supra) was  distinguished on the ground that in that  case the  moneys received  by Tattersall were never the moneys of the firm but moneys of the customers.      In the  case of  Punjab Distilling  Industries Ltd.  v. Commissioner of Income Tax, Simla, (1959) 35 I.T.R. 510, the assessee carried  on business  as  a  distiller  of  country liquor and  sold the  produce of  its distillery to licensed wholesalers. Under  a scheme  devised by the Government, the distiller used  to charge  the wholesalers  a price  for the bottles in  which the  liquor was supplied at rates fixed by the Government,  which the distiller was bound to repay when the bottles  were returned.  Additionally, the assessee tool from the  wholesalers certain  further amounts  described as security deposits  without  the  Government’s  sanction  and entirely as  a condition  imposed by the assessee itself for the sale  of its  liquor. The  moneys described  as security deposits were  also returned  as and  when the  bottles were returned. The  price of the bottles received by the assessee was entered  by it  in its general trading account while the additional sum  was entered  in the general ledger under the heading "empty  bottles return  security  deposit  account". After the  bottles were returned, the assessee was left with a surplus  in the security deposit account. The question was whether this  amount left  with the  assessee even after the refunds were made could be treated as business income of the assessee. It  was held  by a  Bench of  Three Judges of this Court that  the additional  amounts taken  as deposits  were integral parts  of the  commercial  transactions of the sale of the  liquor bottles.  When they  were paid, they were the moneys of the assessee and remained thereafter the moneys of the assessee. They were the assessee’s trading receipts. The balance of  these additional  sums left  after the  refunds, were held  to be  assessable to  tax. The  case of Morley v. Tattersall (supra)  was distinguished,  by observing "it was never contented  that the amounts  when received as price of the constituent’s  horses were  Tattersall’s income  and the

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only contention   was  that they  became income  upon  being transferred to  the credit of the partners." It was observed that the case turned on the fact that the moneys received by the  Tattersall  were  never  it’s  moneys;  they  had  been received on behalf of others and that receipt only created a liability towards Tattersall. It was held, " Now it seems to us quite  impossible to  say that  amounts with which we are concerned were  not the appellant’s moneys in the sense that the constituent’s moneys in the hands of Tattersall were not it’s own  ." Later  on, in  the judgment, it was pointed out that the  moneys were  part of  the  transactions of sale of liquor which  produced the profit and, therefore, they had a profit-making quality.      In the case of Commissioner of Income Tax, West Bengal- I, v.  Sandersons  and Morgans, (1970) 75 ITR 433, principle of Morley  v. Tattersall  (supra) was applied. In that case, the question was whether interest received by a solicitor on the amounts  belonging to  his clients  was taxable  as  his income. This  court held  that  amounts  received  from  his clients by  a solicitor  were not trading receipts, but were in fiduciary  capacity. Therefore,  the principles laid down in Tattersall’s case will apply.      In the  case of  Pioneer Consolidated  Company of India ltd. v.  commissioner of  Income Tax,  U. P.  (1976) 104 ITR 686, the  assessee transferred an amount of  Rs 18,295,00 to it’s profit  and loss  account in the previous year relevant to the  assessment year  1957-58.  This  amount  was  mainly composed of  refunds of  customs and  other duties  paid  on behalf of  it’s customers. The unclaimed surplus was treated as income  of the  assessee by  the department.  It was held that though  the amount was not income when it was realised, but when  it was  not  claimed  by  the  customers  and  the assessee chose  to treat the unclaimed balance as its income and showed  it in  its account as such, it could not be said that the  income tax  authorities committed    an  error  in accepting the statement of the assessee.      In the  case of commissioner of Income Tax, Tamil Nadu- I, v.  A. V.  M. Ltd., (1984) 146 ITR 55, the assessee was a distributor of  films. It  took security  deposits from  the exhibitors  before   handing  over   films  for  exhibition. sometimes the  exhibitors did  not send  the collections but instructed the  assessee to  set off  or adjust its security deposits  against   overdue  collections.  Some  times,  the deposits were  kept for  the purpose  of  adjustment  either wholly or  in part  against dues  of the  exhibitor  towards payment  of   collections.  It   happened  that  even  after adjustment some  balance was still left in deposits with the assessee. No  one came  forward to  claim these deposits and the  assessee  after  waiting  for  five  years  decided  to appropriate the  amounts for  its own use by making suitable book entries.  It was  held the  amount could  be treated as chargeable receipts of the assessee from trade.      In the case of Commissioner of Income Tax, Bombay city- IV v.  Batliboi and co. pvt Ltd., (1984) ITR 604, the Bombay High Court dealt with a case where the assesses was a dealer in machinery.  The practice  of the  assessee company was to take deposits  from intending  purchasers. The deposits were later adjusted  towards purchase price of the machinery that were sold.  The surplus deposits, if any, were not generally refunded to  the customers.  Occasionally, the  assessee was unable to  refund some  of the  excess deposits  for various reasons. Such  excess deposits  were written of in the books of the  assessee by transferring them to the profit and loss account. It  was held  by the  Division Bench  of the Bombay High  Court   that  having  regard  to  the  nature  of  the

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transaction,  the   receipts  in   question  could   not  be considered as  amounts held  by the assessee for the benefit of anybody  else. The  deposits were  in respect of specific transaction of  sale and  were adjusted towards the purchase price of  the machinery  that were  sold. It was more in the nature of  a trade  receipt, especially  when  the  assessee brought such  surplus deposits  remaining the  hands to  its profit and  loss account.  Therefore, the amount was taxable as trade receipt in the hands of the assessee.      There is  no dispute  that the  deposits  in  the  case before us  were received from trade parties who had not made any claim  for repayment  of the  balance.  The  income  tax officer has  pointed out  that the  amount had  arisen as  a result of trading transaction and had a character of income. The Tribunal  has, however, held that the amount received in course of  trade was  of  capital  nature.  The    Tribunal, thereafter, straightway  applied the  principle of Morley v. Tattersall (supra) and held since it was of a capital nature at the  time of  the receipt, it could not become assessee‘s income later on.      We are  unable to  uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by  the   assessee  for   performance  of  contract  by  its constituents. As  it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The commissioner  of income  tax  (Appeal)  found  that  the assessee wrote  back the  amounts to  its  profit  and  loss account because  the various  trading parties  did not claim these amounts  for a  long  time.  The  amounts  represented credit balances  in the  name of the trading parties and was taken to  its profit  and loss  account. The Commissioner of Income Tax (Appeal) hold that these amounts were not revenue receipts but  were of  capital nature. Provisions of Section 41(1) were  not attracted  in the facts of this case because the assessee‘s  liability to  pay back  the amounts  to  its customers had  not ceased.  The Tribunal  agreed  with  this view.      We fail  to see  how these  deposits were  in  any  way different from  the deposits which came for consideration in the  case   of  Punjab   Distilling   Industries   Ltd.   v. Commissioner of  Income Tax,  Simla, (1959)  35 ITR 519. The amounts were  not given  and  retained  as  security  to  be retained till  the fulfillment  of the contract. there is no finding to that effect.  The deposit were taken in course of the   trade and adjustments were made against these deposits in course  of trade.  The unclaimed  surplus retained by the assessee will  be its  trade receipt.  The  assessee  itself treated the  amount as  its trade  receipt by bringing it to its profit and loss account.      The basic fact in Morley v. Tattersall (supra) was that Tattersall was  an auctioneer.  He sold  horses on behalf of his clients.  The sale  proceeds were not his money but were his client’s  money. Tattersall was entitled to receive only commission out  of the  sale proceeds. The agreement between Tattersall and  his customers  was that  the  sale  proceeds would be  returned to the customers as and when demanded and not earlier.  Sometimes the  customers did  not  demand  the payment  of  the  sale  proceeds  immediately.  Such  amount remained with  Tattersall. But  important point was that the amount was  not returnable  unless and until demanded by the customers. There  was  no  question  of  the  claim  of  the customers being  barred by limitation in that case. When the amount was  taken to  the character  of the receipts did not change and  the amount  did not  become a trading receipt in the hand of Tattersall.

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    Tattersall’s case  was explained  and distinguished  in the case  of Jay’s-The  Jewellers Ltd.  V. Commissioners  of Inland Revenue, 29 Tax Cases 274. In that case, the assessee company carried on business of jewellers and pawnbrokers. In course of  its business  of pawnbroking, it received various articles as  pledges on the strength of which it lent money. The pledges  were of  three types - (a) pledges pawned for a sum of  ten shillings or under; (b) pledges pawned for a sum exceeding ten shillings as not exceeding ten pounds; and (c) pledges pawned  for a sum exceeding ten pounds. The business of pawnbroking  was controlled by the Pawnbrokers Act, 1872. It was  pointed out  in that Act that if a pledge pawned for ten shillings  or under  was not redeemed and days of grace, the  pledged  article  would  become  pawnbrokers’  absolute property. There  was no  dispute that  profit arising out of sale of such article would be the pawnbrokers’ income. Under the second  type of  pledges which  were pawned  for  a  sum exceeding ten  shillings and  not exceeding  ten pounds, the pledges  article   did  not   become  the  property  of  the pawnbrokers. If  the pledges  were sold  for more  than  the amount of the loan and interest due at the time of sale, the excess had  to be paid to the pawner on demand  provided the demand was  made   within three years after the sale. In the third type  of case  where pledges  were pawned  for  a  sum exceeding ten  pounds, there was no time limit for return of the excess  amount of  the pawners after the sale. But limit set in  after six  years. It  was held in that case that the surplus receipts in the pawnbrokers’ trade became assessable profits. In  the court agreed with the assessee’s contention that these  surpluses were  debts owed  to the customers and that for  three years  or six  years as the case may be, the company could  be called  upon to  pay  the  amount  to  the customers. The whole amount was a legal liability. The Court also  agreed   with  the   assessee’s  contention  that  the surpluses were  not trading  receipts in  the year  in which they were received. However, the Court went on to hold:-      "The true accountancy view would, I      think,  demand   that  these   sums      should be  treated as  paid into  a      suspense  account,  and  should  so      appear in  the balance  sheet.  The      surpluses  should  not  be  brought      into the  annual trading account as      a receipt  at  the  time  they  are      received. Only  time will show what      their ultimate  fate and  character      will be.  After  three  years  that      fate is  such, as  to one  class of      surplus, that  in  so  far  as  the      suspense  account   had  not   been      reduced  by  payments  to  clients,      that part  of it  remaining becomes      by operation  of law  a receipt  of      the  Company,   and  ought   to  be      transferred   from   the   suspense      account and  appear in  the  profit      and loss  account for that years as      a receipt  and profit. That is what      it in  fact is.  In that  year Jays      become the  richer  by  the  amount      which automatically becomes theirs,      and that  asset arises  out  of  an      ordinary  trade   transaction.   It      seems to  me to be the common sense      way of dealing with these matters."

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    The principle laid down by Atkinson, J. applies in full force to  the facts  if this case. If a common sense view if the matter  is taken,  the assessee;  because of the trading operation,   had  become  richer  by  the  amount  which  if transferred to  its profit  and loss account. The moneys had arisen out  if ordinary  trading transactions.  Although the amounts received  originally was  not of  income nature, the amounts  remained  with  the  assessee  for  a  long  period unclaimed by  the trade  parties. By lapse of long time, the claim of  the deposit  became time  barred  and  the  amount attained a  totally different  quality. It became a definite trade surplus. Atkinson, J. pointed out that in Tattersall’s case no  trading asset was created. Mere change of method of book-keeping had  taken place.  But, where a new asset  came into being  automatically by  operation of law, common sense demanded that the amount should be entered in the profit and loss   account for  the year and be treated income. In other words, the  principle appears  to be  that of  an amount  is received in 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 won money because of limitation or by any other  statutory or contractual right. When such a thing happens, common  sense demands  that the  amount  should  be treated as income of the assessee.      In the  present case,  the money  was received  by  the assessee in  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 influx of time the money had become  the assessee’s  own money.  What  remains  after adjustment of  the deposits  had 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  in  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 common sense way of dealing with the amounts.      Under these  circumstances we dispose of the appeals as under:-      The question  proposed  to  be  raised  is  treated  as referred under  Section 256(2).  The question is answered in the negative  and in  favor of the Revenue. There will be no order as to costs.