Commissioner of Income Tax vs Aries Advertising (P.) Ltd.

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 ? 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 to 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.

The Assessing Officer 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 Assessing Officer 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 sub- stantially 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.

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

Commissioner of Income Tax Vs. Pre-stressed Concrete Co. (S.I.) P. Ltd., 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 u/s 41(1) of the income tax Act, 1961 (''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.

The 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., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . 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 profit and loss account, 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."" (p. 560)

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 Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar

and Sons Ltd., 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 profit and loss account. 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 profit and loss account. The amounts were assessable in the hands of the

assessee."" (p. 345)

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.