1. Unclaimed credit balances from trade transactions transferred to profit and loss account — Taxability as income under Income Tax Act. (Para 3 )
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1996 Supreme(SC) 1432
1996(7) Supreme 68
SUPREME COURT OF INDIA
A.M. Ahmadi, C.J.I., B.P. Jeevan Reddy and Suhas C. Sen, JJ.
Commissioner of Income Tax, Madurai -Appellant
versus
M/s. T.V. Sundaram Iyengar & Sons Ltd. -Respondent
Civil Appeal Nos. 11864-67 of 1996
(Arising out of SLP (C) Nos. 5173-76 of 1993)
Decided on 11-9-1996
Counsel for the Parties :
For the Appellant : S.C. Manchanda, Sr. Advocate, S.N. Terdol and R. Sathish, Advocates.
For the Respondent : A.T.M. Sampath and V. Balaji, Advocates.
IMPORTANT POINT
If 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 own money because of limitation or by any other statutory or contractual right, so the amount should be treated as income of the assessee.
Headnote:Income Tax Act, 1961-Sections 41(1), 28-Assessment Years 1982-83 and 1983-84-Money received by assessee in course of carrying on his business-Amounts remained with assessee for a long period unclaimed by trade parties-Claims of deposit became time barred-Trade surplus-Surplus money was taken to its profit and loss account-Amount should be treated as income of assessee.
Held that if 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 own 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. (Para 16)
Legal Category Hierarchy
Table of Contents
2. Whether unclaimed trading deposits, originally capital in nature, retain that character or become taxable revenue receipts upon being written back to the profit and loss account. (Para 7 , 8 )
3. Analysis of whether the character of trade deposits changes over time; distinction between fiduciary holdings and trade receipts that become assets by operation of law. (Para 9 , 10 , 12 , 13 , 14 , 15 , 16 , 17 )
4. Amounts received in trading transactions, though initially capital, become taxable income when they become the assessee's own money due to limitation or statutory right. (Para 16 )
5. Appeal allowed in favor of the Revenue; addition of unclaimed credit balances to taxable income upheld. (Para 18 )
6. When do unclaimed trade deposits become taxable income?
An amount received in a trading transaction, even if not initially revenue in character, becomes taxable income when it becomes the assessee's own money due to limitation or other statutory or contractual rights. (Para 16 )
7. How is the principle of character fixed at receipt distinguished in trade transactions involving limitation?
While the character of a receipt is generally fixed at the moment of receipt, in trade transactions where a new asset is created automatically by operation of law, such as through limitation, the amount becomes a trade surplus and is taxable. (Para 14 , 16 )
8. Does the original capital nature of a trade deposit prevent it from becoming taxable income later?
No. If the money was received in the course of business and remains unclaimed until the claim is barred by limitation, it attains a different quality and becomes a definite trade surplus taxable as income. (Para 16 , 17 )
JUDGMENT
Sen, J.-Leave granted.
2. 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.
3. 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/- during the accounting period ended on 31st March, 1983 (assessment year 1983-84). But these amounts were not included in the total income of the assessee. 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.
4. 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 assessee 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.
5. On furthter appeal, the Tribunal took the same view and rejected the contention of the department that these amounts 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, Punjab1, 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. 2, was binding upon it and, therefore, dismissed the appeal.
6. 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 the case of A.V.M. Ltd. (supra). Hence this appeal.
7. It has been contended on behalf of the appellant that there is a conflict of decisions 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 Courts is that if the deposits taken were originally of a capital nature, its character will not change merely by lapse of 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.
8. It has been urged that on review of the conflicting decisions of the Tribunals, the followin
