Full Judgment Text
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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.