1979 (2) TMI 19 - HC - Income Tax

Assessee denied capital loss claim on forfeiture of earnest money under Income Tax Act

The court held that the assessee-company did not suffer a capital loss within the meaning of Section 12B of the Indian Income Tax Act, 1922. The court ... Capital Loss, Earnest Money, Relinquishment Of Capital Asset Issues Involved:1. Whether the assessee-company suffered a capital loss of Rs. 2,90,000 within the meaning of Section 12B of the Indian Income Tax Act, 1922.Issue-Wise Detailed Analysis:1. Capital Loss under Section 12B:The primary issue was whether the assessee-company, an investment company, suffered a capital loss of Rs. 2,90,000 within the meaning of Section 12B of the Indian Income Tax Act, 1922. The assessee-company entered into an agreement on 19th September 1946 to purchase properties for Rs. 11,50,000 and paid Rs. 3,00,000 as earnest money. Due to disputes over the vendor's title to the properties, the sale was not completed, and after protracted correspondence, the agreement was mutually canceled in 1958 with Rs. 2,90,000 of the earnest money being forfeited by the vendor.2. Tribunal's Findings:The Tribunal held that the assessee had acquired a valuable contractual right to purchase the properties, which was considered a capital asset. It was concluded that by consenting to the mutual cancellation of the agreement, the assessee relinquished this capital asset, resulting in a capital loss. The Tribunal determined the cost of acquiring this capital asset to be Rs. 3,00,000, and since Rs. 10,000 was returned, the capital loss was Rs. 2,90,000.3. Revenue's Argument:The revenue argued that the requirements of Section 12B were not satisfied. They contended that there was no capital asset, no relinquishment by the assessee, and the loss did not arise from relinquishment of a capital asset. They also argued that the forfeiture of earnest money was due to the assessee's failure to perform contractual obligations, not due to relinquishment of a capital asset.4. Court's Analysis:The court agreed with the Tribunal that the contractual right to purchase the properties was a valuable right and a capital asset. However, the court found that the forfeiture of Rs. 2,90,000 was not due to the relinquishment of a capital asset but due to the assessee's failure to perform contractual obligations. The court held that forfeiture arises from default or failure to perform, not from relinquishment of a capital asset.5. Relevant Legal Principles:The court referred to the Supreme Court's principles regarding earnest money, which state that it is forfeited when the transaction falls through due to the purchaser's default. The court also noted that forfeiture does not amount to relinquishment of a capital asset as required under Section 12B.6. Final Judgment:The court concluded that the assessee-company did not suffer a capital loss within the meaning of Section 12B of the Indian Income Tax Act, 1922. The question was answered in the negative and against the assessee. The court also noted the poor quality of the paperbooks prepared on behalf of the revenue and decided that each party should bear its own costs.In summary, the court held that the forfeiture of earnest money by the vendor did not constitute a capital loss arising from the relinquishment of a capital asset under Section 12B. The assessee's claim for capital loss was rejected, and the question was answered against the assessee.