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IN THE HIGH COURT OF JAMMU AND KASHMIR AT JAMMU
N. Paul Vasantha Kumar, Bansi Lal Bhat, JJ.
Commissioner of Income Tax - Appellant
Vs.
Lotus Finance and Investment (Pvt.) Ltd. - Respondent
ITA No. 16 of 2003
Decided On : 06-10-2015
forfeited earnest money - Taxation - [Income Tax Act, 1961, Section 51] - The court discussed the nature of receipt in the form of earnest money deposit subjected to forfeiture for failure of purchaser in guarantying due performance of contract. It held that the forfeited amount of earnest money must be treated as a capital receipt and not as a revenue receipt as it was not connected with the trading activity of the assessee. The court referred to the principles of distinguishing between capital receipt and revenue receipt and emphasized that the nature of receipt is determined entirely by its character in the hands of the receiver.
Fact of the Case:
The respondent-assessee forfeited earnest money amounting to Rs. 20.00 lacs received from M/s. Pioneer Distributors Pvt. Ltd. for failure to fulfill the terms of the agreement relating to the purchase of 1.00 lac equity shares. The Revenue contended that the forfeited amount should be treated as income in the hands of the respondent-assessee and taxed accordingly.
Finding of the Court:
The court found that the forfeited amount of earnest money must be treated as a capital receipt and not as a revenue receipt as it was not connected with the trading activity of the assessee. The court upheld the concurrent findings of CIT (Appeals) and ITAT, confirming that the forfeiture of earnest money did not amount to a profit in trading activity.
Issues: The main issue was whether the forfeited earnest money is a Revenue receipt liable to be charged to tax.
Ratio Decidendi: The court emphasized that the nature of receipt is determined entirely by its character in the hands of the receiver and referred to the principles of distinguishing between capital receipt and revenue receipt. It held that the forfeited amount of earnest money must be treated as a capital receipt and not as a revenue receipt as it was not connected with the trading activity of the assessee.
Final Decision: The appeal by the Revenue was dismissed, and the court upheld the concurrent findings of CIT (Appeals) and ITAT, confirming that the forfeiture of earnest money did not amount to a profit in trading activity.
Bansi Lal Bhat, J.
1. This appeal has been preferred by the Revenue against order dated 30.05.2003 passed by the ITAT, Amritsar Bench in Appeal No. 500(ASR) of 1996 for the assessment year 1992-93 in terms whereof appeal filed by the Revenue against the order of CIT(A) Jammu dated 19.03.1996 was dismissed on the ground that the earnest money amounting to Rs. 20.00 lacs was forfeited by the respondent-assessee for failure of purchaser to fulfill contractual obligation to purchase 1.00 lac equity shares and such shares being held by respondent-assessee as an investment, forfeiture of earnest money could not be connected with trading activity of assessee and such amount did not fall in the category of revenue receipts as held by the Assessing Officer. The impugned order has been assailed on the ground that the amount of Rs. 20.00 lacs deposited as earnest money by M/s. Pioneer Distributors Pvt. Ltd. which had been forfeited by respondent-assessee for failure to fulfill the terms of the agreement relating to purchase of 1.00 lac equity shares had to be treated as income in the hands of respondent-assessee and not as capital reserve account in the balance sheet which the respondent-assessee claimed as receipt not liable to tax.
2. Heard.
3. It is not in controversy that the respondent-assessee Company was trading in securities. It had made a total sale of the value of Rs. 14,36,500/- during the relevant period and earned dividend income and interest income at Rs. 11,80,392/- and Rs. 2,86,521/- respectively. The Assessing Officer found that the respondent-assessee had entered into an agreement with M/s. Pioneer Distributors Pvt. Ltd. for sale of 1.00 lac equity shares of DCM Limited which M/s. Pioneer Distributors Pvt. Ltd. had agreed to purchase on spot delivery basis against full payment at a price of Rs. 270A per share. The transaction was to be completed on 29.06.1991. Earnest money of Rs. 20.00 lacs was deposited by M/s. Pioneer Distributors Pvt. Ltd. with the respondent-assessee on 04.06.1991. In terms of agreement, failure on the part of M/s. Pioneer Distributors Pvt. Ltd. to carry out the terms of agreement within the stipulated period would entail consequences of forfeiture of earnest money. Admittedly M/s. Pioneer Distributors Pvt. Ltd. failed to adhere to the contractual terms and the earnest money of Rs. 20.00 lacs stood forfeited. The respondent-assessee reflected the same to the capital reserve account in the balance sheet claiming the same as receipt not liable to pay tax. On being asked by the Assessing Officer to explain as to why the forfeited amount be not treated as Revenue receipt in the hands of respondent-assessee and taxed accordingly, the respondent-assessee maintained that the shares of DCM Limited were held as investment as such sale of 1.00 lac shares of DCM Limited to M/s. Pioneer Distributors Pvt. Ltd. was on capital account and, therefore, the forfeited deposit of Rs. 20.00 lacs was capital receipt not chargeable to tax. However, the assessing Officer made an addition of Rs. 20.00 lacs treating the forfeited earnest money of Rs. 20.00 lacs as Revenue Receipt in the hands of respondent-assessee. The respondent-assessee assailed the order of assessment dated 23.03.1995 in appeal before CIT (Appeals) who deleted the addition holding that the transaction in question was of a capital nature. It was further held that the respondent-assessee's intention behind purchase of shares of DCM Limited was for controlling the Company and not for trading and as such, such shares could not be treated as stock in trade for purposes of trading. Revenue filed appeal before ITAT, Amritsar assailing the order of deletion of addition passed by CIT(A). The appeal was dismissed in terms of the impugned order assailed in the instant appeal.
4. The issue raised for consideration is whether the amount of forfeited earnest money is a Revenue receipt liable to be charged to tax. According to Assessing Officer, once earnest mon
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