High Court Of Madras
CIT vs. Aries Advertising (P) Ltd.
Sections 41(1)
V.S. Sirpurkar & K. Raviraja Pandian, JJ.
Tax Case No. 439 of 1996
12th February, 2002
Counsel Appeared
T. Ravi Kumar, for the Revenue : None, for the Assessee
JUDGMENT
V.S. SIRPURKAR, J. :
The referred question is whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 1,77,186 being credit balances written off and transferred to the assessee’s general reserve account was not income of the assessee chargeable to income-tax?
2. A few facts first : The assessee had written off the above sum being the aggregate of certain unclaimed liabilities. These were the credits which were made during the business by some customers of the erstwhile company which the present assessee had taken over. The total of such credit balance came to the above amount and the assessee-company treated this as the unclaimed amount by those parties, transferred this amount of the general reserve. In the return submitted, it was claimed that an amount of Rs. 1,77,886 being the balance due to printers, block makers and souvenir publishers by the erstwhile firm of Aries Advertising Bureau outstanding for more than three years has been transferred to general reserve since these amounts have remained unclaimed for a long period of time. In short, what had happened was that though initially these were the deposits or credits made by various customers of the aforementioned Aries Advertising Bureau and were regularly being adjusted against the bills in favour of that company, the said amounts remained with Aries Advertising Bureau and, ultimately, Aries Advertising Bureau having been taken over by the assessee, the assessee treated these amounts as the unclaimed amounts by those various customers and, therefore, transferred them to the general reserve.
3. The AO in his well considered order went into the nature of this amount and came to the conclusion that this amount would have to be viewed as income of the assessee. In that order, the AO also found that these amounts were shown as standing in the name of sundry creditors. He observed that the assessee-company had taken over a sum of Rs. 35,94,360.20 standing in the name of “sundry debtors” and that, deductions were claimed as against that amount which were substantially granted. Therefore, he felt that the same treatment would have to be given to these amounts which stood in the name of “sundry creditors” and these amounts would have to be held as income.
4. In an appeal, it was argued that though the amounts were pending for long years and perhaps became irrecoverable on account of limitation, yet, it could not be said that the liability to pay these amounts had ceased. The appellate authority, relying on the decision of this Court in the case of CIT vs. Pre-stressed Concrete Co. (S.I.) (P) Ltd. (1986) 55 CTR (Mad) 380 : (1986) 162 ITR 314 (Mad) : TC 19R.281, held that the expiry of the limitation period only deprives the creditor of his remedy to institute the suit in a Court of law but, the indebtedness nevertheless continued and as such there was no cessation of liability and therefore, such amount could not be brought to tax under s. 41(1) of the Act. The appeal was thus allowed on that question. This finding of the appellate authority in favour of the assessee was challenged by the Revenue before the Tribunal. However, the Tribunal declined to interfere and dismissed the appeal. It felt that the appellate authority had followed a binding decision of this Court cited supra and that the Department only wanted to keep the matter alive. It is under these circumstances that the Revenue approached this Court and as stated above a question ultimately was referred to us.
Learned counsel for the Revenue contended that the aforementioned judgment was distinguishable on the facts and could not therefore apply. He further argued that in the facts of this case, the concerned amount was bound to be treated as income.
We have gone through the judgment ourselves. We find that in the facts of the present case, the said judgment will not apply. In that judgment, the assessee had been treating the said amount outstanding against it and its nature of the liability also reflected in the balance-sheet. Such is not the case here. Instead, the assessee here has not treated the said amount as a liability and more particularly a continuing liability. On the other hand, the assessee has transferred this amount to the general reserve. It is trite law that any amount transferred to the general reserve would be out of the profits alone. The term “reserve” in contradistinction with the term “provision” has been clarified by the apex Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC). The apex Court therein observed that : “The broad distinction between the two is that whereas a ‘provision’ is a charge against the profits to be taken into account against gross receipts in the P&L a/c, a ‘reserve’ is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business.” Therefore, it would have to be held that once the assessee transferred this amount to the general reserve, it treated the same as the profit. Once this position is clear, then the further question remains as to whether the amount such as above becomes the income of the assessee in its hand. That question no more remains res integra. The Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 136 CTR (SC) 444 : (1996) 222 ITR 344 (SC) : TC S13.1348 has concluded this question as also the claim of the assessee that these amounts which were in the nature of deposits or credits did not change their character and could not be said to be an income in the hands of the assessee. The Supreme Court, by majority, has answered the question that such amounts after they were treated to be profits, as has happened in this case, changed character and therefore could be held to be income particularly because the assessee had become richer by reason of such amount having been treated as a profit and further having been transferred to the general reserve. The apex Court came to the following conclusion : “that, if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its P&L a/c. The amounts were assessable in the hands of the assessee.”
The situation is no different in the present case. The amount represents the various credits and deposits during the trading with the aforementioned Aries Advertising Bureau. They remained for a long time to be recovered (even before the limitation period) and thus remained unclaimed. The amounts were then transferred by the assessee- company to the general reserve obviously treating them to be the profits. Therefore, in our opinion, the Supreme Court’s decision cited supra applies on all fours. In that view we are of the clear opinion that the amount of Rs. 1,77,186 being the credit balances written off and transferred to the general reserve account has to be treated as income of the assessee chargeable to income-tax. We answer the reference accordingly against the assessee.
[Citation : 255 ITR 510]
