Old unclaimed credit balances of my customers have gone time-barred and I have written them back to my profit and loss account. Is that taxable even though they were capital receipts when I got them?
Yes. The Supreme Court held that money received in the course of trade, though a deposit and of capital character when received, changes character when it becomes the assessee's own money by limitation or by some other statutory or contractual right. The deposits here were taken in the course of trade, adjustments were made against them in the course of trade, the customers' claims had become time-barred, and the assessee itself carried the surplus to its profit and loss account with no explanation for doing so if the money was somebody else's. On a common sense view the trader had become richer by the amount, and it is his income.
Decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and Suhas C. Sen JJ; judgment by Sen J) on 1996-09-11, reported as AIRONLINE 1996 SC 421; 1996 AIR SCW 4126; 1996 (6) SCC 294; 1997 Tax LR 8; (1996) 88 Taxman 429; (1996) 222 ITR 344. It bears on section 28, section 41(1) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the decision that lets the Department tax a written-back trade balance without going near section 41(1), and that is precisely why it matters. The revenue authority here is section 28, so the arguments that defeat a section 41(1) addition - that remission must come from the creditor, that limitation bars the remedy without extinguishing the debt - do not answer it. The Court works instead through Jay's The Jewellers, where surpluses were rightly held to sit in a suspense account until time settled their fate, and then became receipts of the trade by operation of law. It also fixes the boundary of Morley v Tattersall, which remains good for money that was never the recipient's at all: an auctioneer's client money, or a solicitor's client account in Sandersons and Morgans. What separates the cases is whose money it was when received.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The assessments for assessment years 1982-83 and 1983-84 were completed on 1 August 1984. The Income Tax Officer found that the assessee had transferred Rs 17,381 to its profit and loss account in the year ended 31 March 1982 and Rs 38,975 in the following year, without including either in total income. The sums were credit balances standing in favour of the company's customers, unclaimed by them and therefore written back. It was not disputed that the money had been received in the course of trade transactions. The Income Tax Officer held that as the surplus had arisen out of trade transactions it had the character of income. The Commissioner (Appeals) deleted the additions, holding that the amounts were excess trading advances given by clients, capital and not revenue receipts when received, so that writing them back created no taxable income, and that neither section 41(1) nor section 28 applied. The Tribunal agreed, treating the Madras High Court decision in CIT v A.V.M. Ltd (146 ITR 355) as binding on it, and noting but not following the Punjab High Court decision in Punjab Steel Scrap Merchants' Association Ltd v CIT (43 ITR 164). The Tribunal refused to refer a question of law, and the High Court under section 256(2) held the point concluded by A.V.M. The Revenue appealed. Three other questions had been directed to be referred. Because the years were old, the Supreme Court decided to answer the question itself rather than direct a reference.
The question proposed to be raised was treated as referred under section 256(2) and answered in the negative and in favour of the Revenue, with no order as to costs. The Tribunal's decision could not be upheld. These amounts were not security deposits held for performance of a contract by the assessee's constituents; there was no finding to that effect, and the deposits were depleted by adjustments made from time to time in the course of trade. Deposits taken in the course of trade, against which adjustments are made in the course of trade, leave an unclaimed surplus that is a trade receipt of the assessee, and the assessee had itself treated the amount as a trade receipt by bringing it into its profit and loss account. Although the money was of capital nature when received, by influx of time it had become the assessee's own money, the customers' claims having become barred by limitation, and there was no explanation from the assessee why the surplus was taken to profit and loss if it was somebody else's money.
The Court began with Morley v Tattersall (1939) 7 ITR 316, where Lord Greene held that the taxability of a receipt is fixed by its character at the moment of receipt and that a recipient's later treatment of it in his income account does not alter that character. That principle was not doubted, but its foundation was that Tattersall, an auctioneer, held sale proceeds belonging to his clients, was entitled only to commission, and was bound to return the proceeds when demanded, with no question of limitation arising; no trading asset was created and only the method of book-keeping changed. The Court then set that against Punjab Distilling Industries Ltd v CIT (1959) 35 ITR 510, a decision of three judges, where additional sums taken from wholesalers as bottle security deposits were held to be integral to the commercial transaction of selling liquor, to have been the assessee's money when paid and to have remained so, and the surplus left after refunds was assessable; and against Punjab Steel Scrap Merchants' Association, where unclaimed advances against the price of scrap iron, written back after three years, were held to be trading receipts. Sandersons and Morgans (1970) 75 ITR 433, on interest on a solicitor's client money, fell on the Tattersall side because the money was received in a fiduciary capacity. The decisive authority was Jay's The Jewellers Ltd v Commissioners of Inland Revenue 29 Tax Cases 274, where Atkinson J held that pawnbroking surpluses should sit in a suspense account, not in the annual trading account, because only time would show their ultimate fate; and that once the statutory period ran, so much of the suspense account as remained became by operation of law a receipt of the company, arising out of an ordinary trade transaction, which common sense required to be brought into the profit and loss account of that year. Applying that, the Court held the assessee had become richer by an amount arising out of ordinary trading transactions, and that where an amount received in a trading transaction later becomes the assessee's own money by limitation or by another statutory or contractual right, it changes character and is income.
the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that money received in the course of trade, though a deposit and of capital character when received, changes character when it becomes the assessee's own money by limitation or by some other statutory or contractual right. The deposits here were taken in the course of trade, adjustments were made against them in the course of trade, the customers' claims had become time-barred, and the assessee itself carried the surplus to its profit and loss account with no explanation for doing so if the money was somebody else's. On a common sense view the trader had become richer by the amount, and it is his income. This was decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and Suhas C. Sen JJ; judgment by Sen J) and bears on section 28, section 41(1) of the Income Tax Act 1961. It is reported as AIRONLINE 1996 SC 421; 1996 AIR SCW 4126; 1996 (6) SCC 294; 1997 Tax LR 8; (1996) 88 Taxman 429; (1996) 222 ITR 344. This is the decision that lets the Department tax a written-back trade balance without going near section 41(1), and that is precisely why it matters. The revenue authority here is section 28, so the arguments that defeat a section 41(1) addition - that remission must come from the creditor, that limitation bars the remedy without extinguishing the debt - do not answer it. The Court works instead through Jay's The Jewellers, where surpluses were rightly held to sit in a suspense account until time settled their fate, and then became receipts of the trade by operation of law. It also fixes the boundary of Morley v Tattersall, which remains good for money that was never the recipient's at all: an auctioneer's client money, or a solicitor's client account in Sandersons and Morgans. What separates the cases is whose money it was when received. If it applies to you, the first step is this: Look first at whose money it was when received. If it was received on someone else's behalf in a fiduciary capacity, Tattersall protects it; if it arose out of your own trading, it does not.
The assessments for assessment years 1982-83 and 1983-84 were completed on 1 August 1984. The Income Tax Officer found that the assessee had transferred Rs 17,381 to its profit and loss account in the year ended 31 March 1982 and Rs 38,975 in the following year, without including either in total income. The sums were credit balances standing in favour of the company's customers, unclaimed by them and therefore written back. It was not disputed that the money had been received in the course of trade transactions. The Income Tax Officer held that as the surplus had arisen out of trade transactions it had the character of income. The Commissioner (Appeals) deleted the additions, holding that the amounts were excess trading advances given by clients, capital and not revenue receipts when received, so that writing them back created no taxable income, and that neither section 41(1) nor section 28 applied. The Tribunal agreed, treating the Madras High Court decision in CIT v A.V.M. Ltd (146 ITR 355) as binding on it, and noting but not following the Punjab High Court decision in Punjab Steel Scrap Merchants' Association Ltd v CIT (43 ITR 164). The Tribunal refused to refer a question of law, and the High Court under section 256(2) held the point concluded by A.V.M. The Revenue appealed. Three other questions had been directed to be referred. Because the years were old, the Supreme Court decided to answer the question itself rather than direct a reference. The matter was decided on 1996-09-11 by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and Suhas C. Sen JJ; judgment by Sen J). On those facts the Supreme Court held as follows. The question proposed to be raised was treated as referred under section 256(2) and answered in the negative and in favour of the Revenue, with no order as to costs. The Tribunal's decision could not be upheld. These amounts were not security deposits held for performance of a contract by the assessee's constituents; there was no finding to that effect, and the deposits were depleted by adjustments made from time to time in the course of trade. Deposits taken in the course of trade, against which adjustments are made in the course of trade, leave an unclaimed surplus that is a trade receipt of the assessee, and the assessee had itself treated the amount as a trade receipt by bringing it into its profit and loss account. Although the money was of capital nature when received, by influx of time it had become the assessee's own money, the customers' claims having become barred by limitation, and there was no explanation from the assessee why the surplus was taken to profit and loss if it was somebody else's money.
The Court began with Morley v Tattersall (1939) 7 ITR 316, where Lord Greene held that the taxability of a receipt is fixed by its character at the moment of receipt and that a recipient's later treatment of it in his income account does not alter that character. That principle was not doubted, but its foundation was that Tattersall, an auctioneer, held sale proceeds belonging to his clients, was entitled only to commission, and was bound to return the proceeds when demanded, with no question of limitation arising; no trading asset was created and only the method of book-keeping changed. The Court then set that against Punjab Distilling Industries Ltd v CIT (1959) 35 ITR 510, a decision of three judges, where additional sums taken from wholesalers as bottle security deposits were held to be integral to the commercial transaction of selling liquor, to have been the assessee's money when paid and to have remained so, and the surplus left after refunds was assessable; and against Punjab Steel Scrap Merchants' Association, where unclaimed advances against the price of scrap iron, written back after three years, were held to be trading receipts. Sandersons and Morgans (1970) 75 ITR 433, on interest on a solicitor's client money, fell on the Tattersall side because the money was received in a fiduciary capacity. The decisive authority was Jay's The Jewellers Ltd v Commissioners of Inland Revenue 29 Tax Cases 274, where Atkinson J held that pawnbroking surpluses should sit in a suspense account, not in the annual trading account, because only time would show their ultimate fate; and that once the statutory period ran, so much of the suspense account as remained became by operation of law a receipt of the company, arising out of an ordinary trade transaction, which common sense required to be brought into the profit and loss account of that year. Applying that, the Court held the assessee had become richer by an amount arising out of ordinary trading transactions, and that where an amount received in a trading transaction later becomes the assessee's own money by limitation or by another statutory or contractual right, it changes character and is income. In the words reproduced by the source cited on this page: "the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right."
It was decided by the Supreme Court on 1996-09-11 and is reported as AIRONLINE 1996 SC 421; 1996 AIR SCW 4126; 1996 (6) SCC 294; 1997 Tax LR 8; (1996) 88 Taxman 429; (1996) 222 ITR 344. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28, section 41(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question proposed to be raised was treated as referred under section 256(2) and answered in the negative and in favour of the Revenue, with no order as to costs. The Tribunal's decision could not be upheld. These amounts were not security deposits held for performance of a contract by the assessee's constituents; there was no finding to that effect, and the deposits were depleted by adjustments made from time to time in the course of trade. Deposits taken in the course of trade, against which adjustments are made in the course of trade, leave an unclaimed surplus that is a trade receipt of the assessee, and the assessee had itself treated the amount as a trade receipt by bringing it into its profit and loss account. Although the money was of capital nature when received, by influx of time it had become the assessee's own money, the customers' claims having become barred by limitation, and there was no explanation from the assessee why the surplus was taken to profit and loss if it was somebody else's money. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 28, section 41(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - B.P. Jeevan Reddy and Suhas C. Sen JJ; judgment by Sen J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Think before writing an old trade balance back to the profit and loss account, since the Court treated the assessee's own accounting as strong evidence, and asked why the assessee did it if the money was not its own. If you must clear the balance, be able to explain the accounting entry and to show that the liability subsists and is acknowledged. Do not defend such an addition on section 41(1) grounds alone. The Department here won under section 28, where cessation of liability is not the question. Keep genuine security deposits documented as retained against performance of a contract, since the Court's reasoning turned on there being no finding that these were held as security until the contract was fulfilled.
Still good law. This is the leading authority on written-back trade balances and is applied constantly; nothing in the judgment suggests doubt and I checked no later authority. Read it alongside the Supreme Court's later decision in CIT v Sugauli Sugar Works, which holds that a unilateral book entry and the running of limitation do not amount to remission or cessation for section 41(1). The two are reconcilable because they are about different charging provisions - Sugauli Sugar is about a deduction previously allowed and a trading liability ceasing, this case is about a receipt of the trade changing character - but a reader must be careful which provision the addition has been made under. The reasoning also depends on the money having been the assessee's own when received rather than held for another, which is where Morley v Tattersall still governs. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/cit-v-tv-sundaram-iyengar-unclaimed-trade-deposits/, which asked: We are writing back old unclaimed credit balances of customers to the profit and loss account. Were they capital receipts that stay untaxed, or do they become income? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The judgment does not decide the year in which such an amount becomes taxable where the write-back and the expiry of limitation fall in different years, saying only that time settles the fate of the suspense account. It does not deal with the three other questions that had been directed to be referred. It also leaves the Madras decision in A.V.M. Ltd, on which the Tribunal and the High Court relied, without express treatment beyond the result. The harvested text carries transcription errors, including in the reported citations of the cases discussed and in one of the figures, so details should be checked against the report at (1996) 222 ITR 344. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question proposed to be raised was treated as referred under section 256(2) and answered in the negative and in favour of the Revenue, with no order as to costs. The Tribunal's decision could not be upheld. These amounts were not security deposits held for performance of a contract by the assessee's constituents; there was no finding to that effect, and the deposits were depleted by adjustments made from time to time in the course of trade. Deposits taken in the course of trade, against which adjustments are made in the course of trade, leave an unclaimed surplus that is a trade receipt of the assessee, and the assessee had itself treated the amount as a trade receipt by bringing it into its profit and loss account. Although the money was of capital nature when received, by influx of time it had become the assessee's own money, the customers' claims having become barred by limitation, and there was no explanation from the assessee why the surplus was taken to profit and loss if it was somebody else's money.
TaxSphere, “CIT v T.V. Sundaram Iyengar & Sons Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-tv-sundaram-iyengar-unclaimed-trade-deposits/ (validity last checked 2026-08-29)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
I wrote back an old provision for disputed sales tax in my books. Can the officer tax it under section 41(1) as a cessation of liability?
The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
Old creditor balances have been sitting in my books for twenty years and nobody has sued. If I move them to reserves, does section 41(1) tax them?
