By TIOL News Service

MUMBAI, JULY 17, 2017: THE issue before the Bench is - Whether extinguishment of customer's right over the refund receivable due to expiry of limitation, would render cessation of debtor's liability and hence can be assessed as income u/s 41 of Income Tax Act. YES is the verdict.

Facts of the case:

The assessee was running the educational institution known as 'National School of Banking'. The institution was imparting training and preparing the students for competitive exams conducted by banks for recruitment. In this venture, the Assessee had a scheme that the students who could not pass the banking recruitment exam, 50% of the fees will be refunded to them within two months from the declaration of the result of the examination. The amount which was refundable under the scheme was credited to the Guarantee Liability Account in the Balance sheet in the year 1989-90. Such liability from the Assessment Year 1982 onwards got accumulated to Rs.23,50,530/-. Out of said amount, some amount was refunded by the Applicant upto 31/03/1989 and the balance amount of Rs.21,21,900/- was credited to the Guarantee Liability Account in the Balance sheet. The said amount was assessed as income u/s 41 of Income Tax Act by the AO. On appeal, the CIT(A) allowed the refund granted by the Assessee beyond the period of two months and the balance amount was held to be taxed in the year concerned.

On appeal, the HC held that,

++ it is seen that in case of Commissioner of Income Tax vs. T.V. Sundaram Iyengar and Sons Ltd, the Apex Court has observed that the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, 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. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers have become barred by limitation. In Commissioner of Income Tax vs. Sugauli Sugar Works (P.) Ltd., the Apex Court held that the expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt is well settled. It is further observed that mere entry in the books of account of the debtor made unilaterally without any act on the part of creditor will not enable the debtor to say that liability has come to an end;

++ in the present case, the deposits were of the year 1981-82. From 1981-82 to 1988-89, meager amount was refunded. The first circular states that if the refund is to be claimed by the student, the sum should be claimed within two months. After lapse of two months, the claim, shall not be entertained. The subsequent circular did not find favour with the Tribunal as it did not inspire confidence. The Tribunal held that the contention on behalf of the Assessee that the terms and conditions for grant of refund had been relaxed is not acceptable. The Tribunal has considered the contract between the parties i.e. after lapse of two months, the right of students to claim the amount coming to an end. The second circular was disbelieved by the Tribunal. The said finding is a findings of fact, which cannot be gone into in the reference. The contract between the parties was clear that the refund must be claimed by the candidate within two months of the declaration of the result of the concerned written test. Refund claimed thereof will not be granted. In view of the clear finding of fact, the parties would be governed by the contract. Moreover as far as subsequent refunds are concerned, the Tribunal has taken care of the same and has directed the Assessing Officer to adjust against the demand under appeal.

(See 2017-TIOL-1299-HC-MUM-IT )