IMPORTANT POINT
Amounts received by an assessee by way of forfeiture of earnest and advance money in respect of an abortive sale transaction of old and unyielding rubber trees could not be treated as revenue receipts.

Headnote:(i) Income Tax Act, 1961-Section 28-Business income-Capital or revenue receipt-Assessee receiving advance and earnest money under agreement to sell old and unyielding rubber trees-Failure on part of purchasers to pay balance amount in terms of agreement-Forfeiture of advance and earnest money by assessee-Neither earnest money nor advance money forfeited by assessee could be treated as revenue receipt-Amounts received by assessee in respect of abortive sale amounted to capital receipt.
       (ii) Income Tax Act, 1961-Section 51-Capital gains-Computation of-Agreement to sell old and unyielding rubber trees-Forfeiture of earnest and advance money on vendees failure to pay balance amount as per schedule-Forfeited amounts referred to capital asset of assessee-Both earnest money and advance money come within purview of Section 51-Amounts in question retained by assessee could not be treated as revenue receipts.
       Held : The assessee does not carry on the business of selling trees. The question whether the sale proceeds of old and unyielding rubber trees grown and used for obtaining income as latex therefrom are capital receipt and whether the sale proceeds of unyielding trees purchased many years back as yielding trees are capital receipt was answered in the affirmative by the Constitution Bench of this Court in Commissioner of Agricultural Income Tax, Kerala v. Kaildas Rubber & Co. Ltd., 1966 (Vol. 60) ITR 435. When the assessee entered into the three agreements for sale of old and unyieldying rubber trees what was received by way of advance consideration was, therefore, capital receipt. Had the sale gone through there would be no question but that the consideration would be subject to capital gains. The question is does the character of the receipt change because the sale was not subsequently effected? (Paras 9 & 10)
       In given cases amounts which were not received initially as trading receipts could eventually be regarded as business income by reason of subsequent events. The subsequent event must be such that a different quality is imprinted on the receipt. However, in our view, the cancellation of a sale of capital assets would not be such a subsequent event so as to change the nature of the receipt of the forfeited amounts. Provisions of Section 51 fortify this view. Where there is a of transfer of a capital asset, if there was a previous occasion when there were negotiations for its transfer, and if "advance or other money" had been received and retained by the assessee in respect of such negotiations, such amounts will in effect be added to the value of the capital asset impacting on the ultimate assessment of capital gains. For this purpose, no distinction is made between moneys received and retained by way of `advance and `other money . The phrase `other money would cover, for example, deposits made by the purchaser for guaranteeing due performance of the contracts and not forming part of the consideration. The monies received on the previous occasions and retained by the vendor/assessee cannot therefore, be treated as a revenue receipt. (Paras 12, 13 and 15)
       In the case before us there were negotiations for transfer of the rubber trees in question, which did not fructify in sale. The amounts forfeited referred only to the capital asset of the assessee and were directly related to the sale of such capital asset. The Tribunal correctly held that the advance money for sale of the rubber trees formed part of the capital asset of the assessee and that the sale, if materialised, would have resulted in a gain exigible to capital gains tax, provided there is a gain arising out of the same. But the Tribunal erred in overlooking the phrase or other money in Section 51 in holding that the earnest money did not come within the purview of Section 51. No doubt, there is a distinction between earnest money and advance, but that distinction losses its significance in the context of the express language of Section 51 to include other money in addition to advance . (Para 16)
       Further if the agreed sums of money under the agreements had been received by the assessee, they would have been credited in its account as a capital receipt. That being so, the forfeited amounts must also be treated as capital receipt. (Para 20)

JUDGMENT

Ruma Pal, J.-The assessment year in question is 1977-78. The issue is whether the amounts received by the assessee/appellant in respect of an abortive sale transaction of rubber trees are capital or revenue receipts?

2. The assessee is a plantation company engaged in the business of growing rubber and tea. In 1975, it entered into three agreements with three purchasers for sale of old rubber trees. Each of the purchasers paid a certain amount by way of earnest money and another amount by way of advance under their respective agreements. The total amount of earnest money received by the assessee under the three agreements was Rs. 75,000/- and the total amount by way of advance was Rs. 3,56,300/-. All the three purchasers defaulted in payment of the balance amounts. The agreements were accordingly terminated and the amounts of earnest money and advance were forfeited by the assessee. The assessee filed three suits before in Subordinate Judge, Kottayam in this connection. The assessee s right to retain the amounts of earnest money and advance was cofirmed by the Court. In 1979, the assessee was eventually successful in selling the old rubber trees to a third party but at a loss.

3. In the assessee s return for the assessment year in question, the assessee claimed that the amounts forfeited were not taxable as revenue receipts. The Assessing Officer upheld the contention of the assessee. However, the Commissioner of Income Tax sought to revise the assessment under Section 263 of the Act and held that the amounts forfeited were revenue income and assessable to income tax. The assessee preferred an appeal before the Income Tax Tribunal. The Tribunal set aside the order of the Commissioner and restored the finding of the Assessing Officer.

4. At the instance of the Revenue, the Income Tax Tribunal referred the following two questions of law for the decision of the High Court under Section 256(1) of the Act:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 3,95,229 cannot be considered to be a revenue receipt in the hands of the assessee?

(2) Whether on the facts and circumstances of the case, the Tribunal was justified in finding that the sum of Rs. 3,95,299 is not the income of the assessee for this assessment year and directing the Income Tax Officer to modify the assessment?

5. The High Court s decision (which has been subsequently reported in Commissioner of Income Tax. v. Travancore Rubber & Tea Co. Ltd.1 was that the Tribunal should have kept in mind the difference between earnest money and advance while deciding the issues raised. The High Court delineated the difference between the legal character of the two amounts and remanded the matter back to the Income Tax Tribunal to decide the matter afresh.

6. On remand, the Tribunal considered various terms of the agreements and came to the conclusion that the receipt by way of forfeiture of advance was not assessable as a revenue receipt but that the earnest money was so assessable as income under other sources.

7. At the instance of both the assessee as well as the Revenue, the following questions were referred by the Tribunal to the High Court of Kerala for its opinion :

At the instance of the assessee.

(1) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the earnest money deposit of Rs. 75,000 received by the assessee in respect of the agreements for sale of old and uneconomic rubber trees is revenue income assessable to income-tax when forfeited consequent to termination of the said agreements for breach thereof by the purchasers.

At the instance of the Department :

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the receipt by way of forfeiture of advance amount arising to the assessee,-

(a) is a benefit arising to the a

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2000 Supreme(SC) 572

IMPORTANT POINTAmounts received by an assessee by way of forfeiture of earnest and advance money in respect of an abortive sale transaction of old and unyielding rubber trees could not be treated as revenue receipts.

Cases Referred (3)

IMPORTANT POINT
Amounts received by an assessee by way of forfeiture of earnest and advance money in respect of an abortive sale transaction of old and unyielding rubber trees could not be treated as revenue receipts.