1996 (9) TMI 1 - SC - Income Tax

Money received by the assessee in the course of business. Although it was treated as deposit & was of capital nature at the point of time it was received, by efflux of time the money has become the assessee s own money - no explanation why the surplus money was taken to its profit and loss account even if it was somebody else s money- Tribunal is not right in deleting the addition representing unclaimed sundry credit balances written back to the profit and loss account by the assessee

Issues Involved:

1. Taxability of unclaimed credit balances transferred to the profit and loss account.
2. Character of the deposits (capital vs. revenue nature).
3. Applicability of section 41(1) and section 28 of the Income-tax Act.
4. Conflicting decisions among various High Courts on similar issues.

Issue-wise Detailed Analysis:

1. Taxability of Unclaimed Credit Balances Transferred to the Profit and Loss Account:

The Income-tax Officer assessed the amounts of Rs. 17,381 and Rs. 38,975, transferred to the profit and loss account for the assessment years 1982-83 and 1983-84 respectively, as income. The Commissioner of Income-tax (Appeals) and the Tribunal held these amounts as capital receipts, not taxable as income. However, the Supreme Court concluded that the unclaimed credit balances, originally received in the course of trade, had transformed into the assessee's own money by efflux of time. The amounts, therefore, attained the quality of income and were taxable.

2. Character of the Deposits (Capital vs. Revenue Nature):

The Commissioner of Income-tax (Appeals) and the Tribunal considered the deposits as capital receipts, maintaining their character despite being transferred to the profit and loss account. The Supreme Court, referencing the principle laid down in Morley v. Tattersall [1939] 7 ITR 316 (CA), highlighted that the character of a receipt is determined at the time of receipt. However, the Court distinguished this case, emphasizing that the deposits, though initially of capital nature, became revenue receipts due to the lapse of time and the assessee's treatment of these amounts as its own.

3. Applicability of Section 41(1) and Section 28 of the Income-tax Act:

The Commissioner of Income-tax (Appeals) held that section 41(1) was not applicable since the liability to repay the amounts had not ceased. The Tribunal agreed with this view. The Supreme Court, however, focused on the transformation of the amounts into the assessee's own money by lapse of time, thus making them taxable under section 28 as income arising from business.

4. Conflicting Decisions Among Various High Courts on Similar Issues:

The Supreme Court noted the conflicting decisions among High Courts. Some courts held that unclaimed deposits retained by the assessee constituted income, while others maintained that the capital nature of the deposits did not change over time. The Supreme Court resolved this conflict by emphasizing the practical and commonsense approach, determining that the unclaimed deposits, by becoming the assessee's own money over time, should be treated as income.

Conclusion:

The Supreme Court held that the unclaimed credit balances, initially received in the course of trade and later transferred to the profit and loss account, were taxable as income. The amounts, though capital receipts at the time of receipt, transformed into revenue receipts due to the lapse of time and the assessee's treatment of these amounts as its own. The Court answered the question in favor of the Revenue, emphasizing a commonsense approach to the taxability of such amounts. The appeal was disposed of with no order as to costs.

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