1996 (2) TMI 69 - HC - Income Tax

Forfeited deposit not taxable as business income under Income-tax Act section 10(3)

Commissioner Of Income-Tax Versus Seshasayee Brothers (Private) Limited

Commissioner Of Income-Tax Versus Seshasayee Brothers (Private) Limited - [1996] 222 ITR 818, 138 CTR 330, 89 TAXMANN 13 Issues Involved:1. Whether the forfeited deposit of Rs. 20,000 constituted business income of the assessee and was liable to be taxed.2. Whether the forfeited deposit of Rs. 20,000 could be considered as income u/s 10(3) of the Income-tax Act.Summary of Judgment:Issue 1: Business IncomeThe primary issue was whether the forfeited deposit of Rs. 20,000 by the assessee constituted business income and was taxable. The assessee, a private limited company, had entered into an agreement to sell its land and superstructure for Rs. 4,20,000, receiving Rs. 20,000 as earnest money. The purchaser defaulted, and the amount was forfeited. The Income-tax Officer treated this amount as taxable business income, arguing it was received during the course of business and utilized for declaring dividends. However, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal held that the receipt did not bear the character of income, profits, or gains, and thus, was not taxable. The High Court affirmed this view, stating that the forfeited amount was related to the sale of a capital asset and not part of the assessee's business operations.Issue 2: Income u/s 10(3)The second issue was whether the forfeited deposit could be considered as income u/s 10(3) of the Income-tax Act. The Department argued that the earnest money should be treated as revenue receipt earned during the course of business. They cited various judgments, including CIT v. M. Ct. M. Corporation Pvt. Ltd. and CIT v. Travancore Rubber and Tea Co. Ltd., to support their claim that such receipts are revenue in nature. However, the High Court distinguished these cases, noting that the assessee was not engaged in the business of buying and selling real estate but was doing agency business. The forfeited amount was related to a capital asset and would increase the cost of acquisition, thus not taxable as revenue receipt. The court also referenced section 51 of the Income-tax Act, which supports the view that such forfeited amounts should be deducted from the cost of acquisition of the capital asset.Conclusion:The High Court concluded that the forfeited deposit of Rs. 20,000 did not constitute business income and was not taxable u/s 10(3) of the Income-tax Act. Both questions were answered in the affirmative and against the Department, with no order as to costs.