P.N. KHANNA, J.

( 1 ) THE question REFERRED TO to us under section 66 (1) of the Income-tax Act,

1922 at the instance of the Revenue is:-"whether on the facts and in the

circumstances of the case, the Tribunal was legally justified in holding the amounts

of Rs. 2,400. 00 and Rs. 11,656. 00 as capital receipts of the company"

( 2 ) THE relevant assessment year is 1959-60 corresponding to the previous year

ending June 30, 1965, and the relevant facts are as follows: The assessee company,

besides having other income, carried on cinema films distribution business. It had

secured distribution rights of eight pictures for the pre-partition Northern Indian

territory. It entered into an agreement dated August 6, 1946 with its sub-distributor,

Messrs Sind Film Distributing Company, for the exhibition of these films in Sindh and

Baluchistan territory. Clause 2 of the agreement required the sub-distributor to pay

a sum of Rs. 40,000. 00 as deposit for the faithful performance of the terms and

conditions of the agreement, which was to be adjusted at the rate of Rs. 5,000. 00

against each of the eight pictures. Under clause 3, the sub-distributor was to pay a

sum of Rs. 32,500. 00 as advance against each of the costume pictures and Rs.

25,000. 00 as advance against each of the social pictures. The sub-distributor

accordingly paid Rs. 40,000. 00 to the assessee company under Clause 2 and Rs.

2,30,000. 00 under clause 3 of the agreement. Clause 5 of the agreement read as

follows:-"5. That in consideration of the distributor paying advance against each

picture and further exploiting at his own expense, the distribution of the said

pictures in the contracted territory, the Company shall allow to the distributor a

commission of 15 per cent of the entire realizations of each of the above 8 pictures.

As and when the advance amount mentioned above plus commission of 15 per cent

are realised, the distributor will remit to the company the balance 85 per cent of

further realisations so as to reach the company by the 7th of each succeeding

calendar month along with a statement of runs and account of each picture at

various cinemas in their circuit. "the sub-distributor was, thus, to charge 15 per cent

of the total receipts, as its commission, while the balance 85 per cent of the

realisations was earmarked for the assessee. The sub-distributor, however, was

allowed to retain this balance till the entire amount advanced by it under clause 3

was fully recouped. Thereafter, 85 per cent of the realisations, was to be remitted to

the assessee company. In case the sub-distributor was unable to so recover the said

advance in respect of any picture, it (. e. the advance amount) was required under

clause 6 of the agreement to be refunded by the assessee to the sub-distributor

after two years of the pictures release in Karach. During the assessment year 1959-

60, an item of Rs. 26,715. 00 stood on the credit side of the profit and loss account

of the assessee, which included Rs. 21,825. 00 and Rs. 2,400. 00 representing

forfeiture of advances lying to the credit of the sub-distributor since 1947. As no

commission was paid to the assessee nor prints returned, the assessee company

closed its account during the instant year and transferred these items to the profit

and loss account.

( 3 ) THE assessee company claimed that these sums were not taxable as being of

capital nature. The Income-tax Officer, did not agree. As a sum of Rs. 10. 169. 00

had already been taxed in 1957-58, he brought to tax the remaining item of Rs.

2,400. 00 and Rs. 11. 656. 00 during the relevant assessment year. The Appellate

Assistant Commissioner in appeal confirmed the assessment holding, that these

amounts represented advances and commission receivable from the sub-distributor

and that the credits represented adjustments in revenue account. The Tribunal in

second appeal, however, excluded the said amounts from the assessees income

holding that the assessees action in transferring these amounts to the profit and

loss account could not change the character and nature of the amounts and that the

character of these payments was of a loan. The character of Rs. 40,000. 00 received

as deposit was that of security amount repayable on due performance of the

contract. The sum of Rs. 2. 400. 00 which had remained outstanding, was thus

merely a deposit and not a trading receipt in the hands of the assessee. Regarding

Rs. 2,30,000. 00 paid under clause 3 of the agreement, the Tribunal was of the view

that it was an advance,. e. a loan to the assessee company repayable by

appropriation of 85 per cent of the realisations, which were receivable by the

assessee. The assessee according to the Tribunal, had paid similar advances to the

producers m respect of these films, for securing the distribution rights, which was a

normal feature of such transactions. In its own turn while giving sub-distribution

rights for smaller territories, the assessee company had demanded and received

such advances from the subdistributor. The character of this payment, according to

the Tribunal, was a loan, repayable by appropriation by the sub-distributor, of 85

per cent of the realisations payable to the assessee company. It was further held

that the amounts received as deposits and loan could not subsequently acquire the

character of a revenue receipt. The additions made by the Income-tax officer, were,

therefore, excluded. It was out of this order of the Tribunal that the above

mentioned question was said to have arisen and which was then REFERRED TO to

us for opinion.

( 4 ) MR. B. N. Kirpal, the learned counsel appearing for the Revenue, contended

fore us that the amounts received by the assessee company, both under clause 2

and clause 3 of the agreement were trade receipts, and, therefore, income of the

assessee and could not be regarded as capital receipts. The payment received under

clause 3, according to him, was clearly advance payment of the 85 per cent of the

realisations, which the sub-distributor would have paid to the assessee in

accordance with the clause 5, otherwise on exploitation of the pictures. The subdistributor, instead of paying as and when realisations were made, had paid in

advance and was, under the agreement, enabled to make adjustments of this

advance against actual realisations earmaked for the assessee. They were,

therefore, he urged, in the nature of trade or revenue receipts. The Tribunal,

according to him, was in error in holding the said receipts to be capital receipts.

( 5 ) MR. G. C- Sharma, the learned counsel for the assessee submitted, on the

other hand, that the sums received by the assessee under clause 2 of the

agreement were nothing but security deposits for due performance of the contract,

which under no circumstances could be regarded as trade receipts. The sums

received under clause 3 likewise, according to the counsel, were advances, in the

nature of loans and not advance payment of 85 per cent of the realisations. These

loans were to be advanced against delivery of prints and publicity materials

underclause 4 of the agreement and were required to be refunded by the company

to the sub-distributor under clause 6 of the agreement, in case, the latter was

unable to make sufficient realisations within two years after the release of the

pictures concerned in Karachi, against which the loan advanced by it was otherwise

to be adjusted. These payments, according to the learned counsel, were borrowed

sums in the nature of capital receipts and could not be regarded as income.

( 6 ) THE sharp controversy raised as above, illustrates the difficulties experienced in

drawing a clear distinction between revenue and capital receipts in respect of

borderline items. Even the cases cited by the learned counsel on both sides, do not

lay any infallible tests to determine the character of the payments received, which is

bound to vary according to the facts and circumstances of the case. Yet, the decided

cases do help in indicating the kind of considerations which may usefully be kept in

mind in solving the difficulties encountered. Before analysing the facts in some

details, therefore, we will proceed to examine the cases that have been cited before

us by the counsel on both sides.

( 7 ) THE first two cases brought to our notice are judgments of the English Court of

Appeal. In Morley v. Tattersall, 22 TC 51, the court held "that quality and nature of

a receipt for the income-tax purposes is fixed once and for all when it is received".

Unclaimed balances from the amounts realised on the sale of customers horses in

auctions held by Tattersall, in that case, were considered by the said firm as

customers money in the firms hand required to be paid as and when demanded.

On receipt, the said sums were passed into the general funds of the firm, shown in

its balance sheet as the proper liability item. For domestic reasons of their own, the

partners after some years carried the said balances in the balance sheet to their

personal accounts. The court was of the view that that did not alter the reality of the

position. It was held that at the time of transferring the balances to their own

accounts, the partners "could not imprint upon some existing asset, the quality

different from what it had possessed before". There was no existing asset at all at

that time, as it was a liability. By writing down the liability item in the balance sheet,

they could not convert it into something which it never was.

( 8 ) IN Davies v. The Shell Company of China Ltd. , 32 TC 1330), the assessee

under agreement with its agents, was to retain deposits received from the agents

during the period of the agency for making good the agents defaults in the event of

any default in payment. These amounts remained simply as loan owing by the

company to the agents and repayable on the termination of the agency. Agents

deposits were described as part of the companys trading structure, not trade

receipts, but anterior to the stage of trade receipts. The agent was held to be a

creditor of the company in respect of deposit, not on account of any goods supplied

or services rendered by him in the course of its trade, but simply by virtue of the

fact that he had been appointed an agent of the company with a view to trade on its

behalf; and as a condition of appointment had deposited with or, in other words,

lent to the company the amount of his stipulated deposit. As loans, they were held

to be loans on capital and not revenue account, to be considered as part of the

companys fixed and not of its circulating capital.

( 9 ) OUT of the cases decided by our Supreme Court, the most important appears

to be that of K. M. S. Lakshmanier and Sons v. Commissioner of Income-tax and

Excess Profits tax, Madras (1953) 23 ITR 202 (2 ). The transactions of the assessees

in that case, were covered by three different arrangements. Under the arrangement,

the assessees had two accounts for each constituent, viz. "contract deposit account"

and "current yarn account", crediting the money received from the customer in the

former and transferring it to yarn account in adjustment of the price of yarn

supplied, as and when delivered. The amounts received under this arrangement

were held by the Supreme Court to be taxable as mere advance payments of the

price and not as borrowed money. Under the second arrangement, the payment

made by the constituents, was taken as "contract advance fixed deposit" and it was

refunded when the goods were supplied and the price paid in full. The Supreme

Court held these payments to be of the nature of trading receipts rather than

security deposits or borrowed money. The amounts received were treated as

advance payments in relation to each contract number. Under the third

arrangement, the assessees demanded and received from the customer as security

deposit a certain sum which was to be held as security for the due performance of

the contracts by the customer so long as his dealing with them continued. Price was

to be paid by the customer in full,. e. without any adjustment out of the deposit

which carried interest. The Supreme Court held that the amount deposited by the

customer was no longer to have any relation to the price fixed for the goods to be

delivered. The price was to be paid in full against delivery without any adjustment

out of the deposits. It was only at the end of the business connection that an

adjustment was to be made towards any possible liability arising out of the

customers default. The transaction was held to have all the essential elements of a

contract of loan and the deposits were considered as borrowed money and not trade

receipt.

( 10 ) IN Punjab Distilling Industries Limited v. Commissioner of Income-tax, Simla,

(1959) 35 ITR 519 [LQ/SC/1958/153] , the assessee sold county liquor to licensed wholesalers. To

relieve difficulty, during the war, of procuring empty bottles the Government devised

a scheme whereby the distiller was entitled to charge the wholesaler a fixed price

for the bottles which he was bound to repay when the empty bottles were returned.

In addition to the fixed price, the assessee took certain further amounts described

as security deposit, without the Governments sanction, but as a condition imposed

by the assessee itself for the sale of its liquor. This security deposit was also

returned as and when the bottles were returned; but the entire sum taken in one

transaction was refunded in this case, when 90 per cent of the bottles covered by it

were returned. The question arose whether the assessee could be assessed to tax

on the balance of the amounts of these additional sums left after the refunds were

made thereout. The Supreme Court held that the additional amount described as

security deposit was really and extra price for the bottles and was actually a part of

the consideration for the sale of liquor. For, what was the consideration for the sale

did not cease to be so by being written up in the books in a particular manner. The

wholesalers were clearly under no obligation to return the bottles and the additional

sums taken was integral part of the commercial transaction of the sale of liquor in

bottles and they were the moneys of the assessee and remained so, as its trading

receipts. The amount paid was held to have a relation to the price of the goods sold

and was, therefore, a part of the price.

( 11 ) IN Punjab Steel Scrap Merchants Association Ltd. v- Commissioner of Incometax, Punjab, (1961) 43 ITR 164, the assessee company received from its

constituents a deposit in round figure in advance for the supply of scrap ordered by

them. If the price of the scrap delivered was more than the amount deposited, the

assesses recovered the excess. If the price was less and a surplus remained with the

assessee, the constituents did not sometimes claim this amount of excess which

remained with the assessee to their credit. Unclaimed credit balances over three

years old were transferred by the company to its profit and loss account and

dividends were declared out of the net profit in the account. The amounts so

transferred were held to be payments towards price of the scrap to be supplied to

the constituents. They were, therefore, held by the Punjab High Court to be

essentially trading receipts of the nature of revenue.

( 12 ) IN Commissioner of Income-tax, West Bengal v. Sandersons and Morgans,

(1970) 75 ITR 433 [LQ/CalHC/1968/91] (^), the assessee a firm of solicitors, credited by transfer to

Profit and Loss Account certain sums, representing the aggregate of the unclaimed

balances in a number of personal ledger accounts of its clients, who had advanced

to it money in connection with cases entrusted to it some years back. The Incometax

officer added the said amount to the assessable income of the assessee. The

Calcutta High Court held that the amount in question was not a revenue receipt.

When the money was received, it was not received as a trading receipt, but was

received by the assessee in its capacity of an agent of the client and that also in a

fiduciary capacity. The assessee remained liable to account for this money to his

client.

( 13 ) THE Bijli Cotton Mill (Private) Limited v. Commissioner o] Income-tax,

Lucknow, (1971) 81 ITR 400 [LQ/AllHC/1970/201] (^), certain quota holders were granted specific quota

of yarn to be supplied by the manufacturers and which they then sold in the market.

Subsequently the manufacturers were required to sell their stocks directly to

wholesalers, excluding the quota holders altogether. In order to prevent the

hardship to the quota holders, the Textile Commissioner required the manufacturers

to recover from the wholesalers controlled price of the yarn; and to pay to the quota

holders to whom they would have originally sold the yarn, a part of the said price,

which represented the excess over the mill price, the sale being for this purpose

deemed to have been made by the manufacturer on behalf of the quota holders.

After a number of years the "quota holder margin account showed unpaid

outstanding balances, which were then transferred to the credit of the assessees

profit and loss account. The question arose whether this balance was the assessees

income liable to tax. The Allahabad High Court held that the said balance was not

the income of the assessee liable to tax as it belonged to the quota holders. From

the outset, this excess was paid to be impressed with the character of trust money,

to be held by the assessee on behalf of the quota holders. The taxability of a

receipt, it was observed, was fixed with reference to its character at the moment it

was received.

( 14 ) THE principles that emerge from the aforesaid authorities, can now be

conveniently summarised: It is clear that the quality and nature of a receipt for the

income-tax purposes is fixed once and for all, when it is received. Receipts of money

or deposits for adjustment in the price of goods to be supplied or services to be

rendered, may be mere advance payments and. therefore, revenue receipts and not

borrowed money. They are an integral part of a commercial transaction of sale or

service and are related to the price of goods or to the charges for services rendered.

They are trade receipts and money of the assessee; and hence his revenue or

income. Receipts in the nature of deposits for making good the defaults, if any, of

the person making the deposit, on the other hand, are simply loans owed by the

assessee to such person, they form a part of the assessees trading structure and

not trade receipts. Such deposits may be made not on account of any goods

supplied or services rendered in the course of trade, but simply in consideration,

say, for example, of such persons appointment as an agent. They have no relation

to the price of goods supplied or the charges for services rendered and are in the

nature of borrowed money and, therefore. capital and not trade receipts; and do not

cease to be so by being written in the assessees books in a particular manner.

These broad principles gathered from the authorities which we have noticed, as

already stated, cannot be regarded as of universal application, as each case has to

depend, in the ultimate analysis, on its own facts. Other circumstances may affect

their applicability. But, they are still useful just to be borne in mind, while examining

any given facts

( 15 ) LET us now examine in some details the facts of the present case. The sum of

Rs. 40,000. 00 deposited by the sub-distributor, under clause 2 of the agreement,

was clearly money for the faithful performance of the terms and conditions of the

agreement and had no relation to the 85 per cent realizations which were

earmarked for the assessee. It had ultimately to be paid back to the sub-distributor

and was a liability of the assessee. This amount cannot be said to be of the nature

of a trade receipt. The sum of Rs. 2,400. 00 outstanding out of this deposit,

therefore, is an item in the capital account and cannot be treated as in the revenue

account.

( 16 ) THE position of the balance of Rs. ll,656. 00 which remained outstanding out

of the advance of Rs. 2,30,000. 00 received under clause 3 of the agreement is,

however, not so easy to determine. The nature and effect of the provision which

allowed the sub-distributor to adjust 85 per cent of the realisation against its

advances has to be examined in the light of other provisions of the agreement and

the surrounding circumstances. Does the said provision mean that the advances are

mere advance payments of such realisation or do the advances have no relation

with realisation and are in the nature of loans The relevant facts found by the

Tribunal are: that the assessee company had paid similar advances to the producers

in respect of these films "for securing distribution rights", that "in its own turn" the

assessee had received these advances under similar circumstances and that this was "a normal feature of such transactions". Clause 5 of the agreement, reproduced in

an earlier part of the judgment, shows that the assessee agreed to allow to the

sub distributor a commission of 15 per cent on the entire realizations for his services

in exploiting the films at his own expense only "in consideration of" the sub distributor

making the aforesaid advances. In other words, the appointment of the

sub-distributor, as such, would not have been made, if it had not advanced the said

amounts. The assessee was not bound to return these advances immediately, if any

picture was found to be incapable of yielding any realizations. Clause 6 of the

agreement, on the other hand, enabled the assessee to retain these advances for

two years from the pictures release in Karachi even though the picture proved to be

a flop. The advances were thus not related to realisations but were independent of

them, and had to be repaid after two years, to the sub-distributor directly, if the

realisations failed. The advances were not the assessees money. They on the other

hand, were its liability. They were loans from the sub-distributor. A part of the

agreement was in reality a financing agreement, to enable the assessee to recoup

through such loans, some of the advances, which it had, in turn, made to the

producers. The stipulation in the agreement allowing the sub-distributor to adjust 85

per cent of the realisations, if any, provided just a mode or the manner for the

return of the loan and did not change its character. The contention of the learned

counsel for the revenue that these were advance payments of the 85 per cent of the

realisations is, thus, not borne out by the facts as placed on record. These amounts

were in the nature of loans and were received by the assessee in capital account

and not in the revenue account.

( 17 ) MR. Kirpal contended that even if the amounts received by the assessee were

treated as capital receipts, as we are inclined to treat them, they were so, only to

begin with. Their nature and character changed subsequently not by any act of the

parties, but by operation of the law of limitation after the expiry of three years. The

assessee became entitled to retain the same as its own money after the expiry of

the period of limitation, as the sub-distributor could not recover it. He tried to

distinguish Tattersalls case (supra) and submitted that in that case there had been

no change whatsoever in the character of the money held, as the statute of

limitation had not commenced to run. But, after the period of limitation had expired,

the balance money in the hands of the assessee, in our case according to him,

assumed a different character and instead of remaining a liability became a trade

receipt. He relied for support on the judgment of the Kings Bench Division in Jays-

The Jewellers Ltd. v. Commissioner of Inland Revenue, 29 TC 274, where

Tattersalls case was distinguished.

( 18 ) THE contention of the learned counsel cannot be accepted. He was unable to

cite any other case in India or in England, where Jays case was followed or

approved. The decision in Jays case was based principally on the special wording of

section 17 of the Pawn Brokers Act, IS72, which provided that a pledge pawned for

10 shillings or under, if not redeemed within the year of redemption and days of

grace, was at the end of the days of grace to become pawn brokers absolute

property. It was mainly for this reason that it was held in that case that a change in

the nature of the money lying with the assessee took place by operation of law. No

such thing has happened in our case. Jays case, therefore, has no relevance for our

present purposes.

( 19 ) IT is not clear in the instant case, as to when the limitation started running.

But, it is not necessary to determine that, as we are of the considered opinion that

the statute of limitation can make no difference. The present case clearly falls within

the ratio decidendi of Tattersalls case. The amount that stood as a liability due to

the sub-distributor, did not at any time cease to be a liability. Statute of limitation,

as is well settled, runs against the remedy and does not discharge the debt or

extinguish or impair the right, obligation or the cause of action. The debt subsites

notwithstanding that its recovery is barred by limitation (see Bombay Dyeing and

Manufacturing Co. Ltd. v. The State of Bombay and others, (1958) SCR 112 at 1135,

and Kohinoor Mills Co. Ltd- v. Commissioner of Income-tax Bombay City, (1964) 49

ITR 878 ). The same view was expressed by the Calcutta High Court in the case of

Sandersons and Morgans (Supra) and by the Allahabad High Court in the case of

Bijli Cotton Mills (Supra), with which we are in respectful agreement. The contention

of Mr. Kirpal, therefore, is untenable.

( 20 ) THE sum of Rs. ll,656. 00 which remained outstanding out of the money

received by the assessee under clause 3 of the agreement like Rs. 2,400. 00

outstanding out of the deposit received under clause 2, was not a trade receipt, but

was borrowed money in the nature of a capital receipt. The Tribunal was, therefore,

justified in holding the amounts in question as capital receipts of the assessee. The

question REFERRED TO to us is accordingly answered in the affirmative,. e. in

favour of the assessee and against the revenue. In the peculiar circumstances of the

case, however, there shall be no order as to costs.