1996 (5) TMI 2

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....e Loan Bonds on behalf of its constituents. The usual practice of the bank in purchasing the securities on behalf of the constituent ; was to require a certain percentage of the face value of the securities to be paid by the constituents in advance and the same was called " margin money in deposit ". On receipt of the said margin money, the bank purchased securities at their face value in its own name. Each one of the constituents gave a letter to the bank undertaking to pay the balance amount on or about the specified date and also undertaking that if they did not pay the balance amount within the stipulated time, the securities would belong to the bank and the margin money deposited by them would stand forfeited to the bank. This was in a....

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....sum of Rs. 1,69,996 and Rs. 62,563 in the assessment years 1964-65 and 1965-66, respectively, received as deposits in the first instance and forfeited at a later stage, was not the income of the assessee liable to tax but that the assessee was entitled to take them into account in arriving at the cost of securities acquired by the assessee when these sums were forfeited ? " The High Court (see [19771 107 ITR 972) held that when the bank purchases the securities in their own name, it was really purchasing them for the benefit and on behalf of the constituents. The constituents defaulted in making payment of the balance amount. The High Court was of the view that three things happened simultaneously : (a) Failure on the part of the cons....

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....e of the bank earned in the course of carrying on its business. The bank undertook to buy the securities on behalf of its constituents. Before purchasing the securities, the bank took from its constituents " margin money deposits ". These deposits served two purposes. In the event of the constituent paying the balance amount, the deposits were to be treated as part payment of the price of the securities. But in the interval between the deposits and the due date of payment of the balance amount, the deposit was to be treated as earnest money liable to be forfeited. In this case, the bank bought the securities on behalf of its constituents in the course of its business and for the purpose of making profit. If the contract was duly executed, t....