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TMI Blog1996 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 the 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 the 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, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1982-83 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 the course of its business which were originally treated as capital receipts. Some of the deposits were neither claimed by nor returned to the depositors. There is no dispute that the deposits were received in the course of the carrying on of the business of the assessee. The only point to be decided is that even though the deposits were of capital nature at the point of time of receipt by the assessee, could their character change by efflux of time ? In the case of Morley (H. M. Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA), it was laid down by Lord Greene that the taxability of a receipt was fixed with reference to its character at the moment it was rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mposed 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 liquor in 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 [1939] 7 ITR 316 (CA) was distinguished, by observing "it was never contended that the amounts whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposits against overdue collections. Sometimes, the deposits were kept for the purpose of adjustment either wholly or in part against the 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 CIT v. Batliboi and Co. Pvt. Ltd. [1984] 149 ITR 604, the Bombay High Court dealt with a case where the assessee 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 was sold. The surplus deposits, if any, were 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 off in the books of the assessee by transferring them to the profit and loss account. It was held by the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulfilment of the contract. There is no finding to that effect. The deposits were taken in the course of the trade and adjustments were made against these deposits in the 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 [1939] 7 ITR 316 (CA) was that Tattersall was an auctioneer. He sold horses on behalf of his clients. The sale proceeds were not his money but were his clients' 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 the 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 accounts of the partners, it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 has not been reduced by payments to clients, that part of it which is 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 year 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 commonsense way of dealing with these matters. . . ." The principle laid down by Atkinson J., applies in full force to the facts of this case. If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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