Madras High Court
Commissioner Of Income-Tax vs M.Ct.M. Corporation Pvt. Ltd. on 24 January, 1994
Equivalent citations: [1995]217ITR95(MAD)
JUDGMENT
1. In this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instant of the Revenue, the following question of law has been referred to this court for its opinion :
"Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in holding that the sum of Rs. 21,000 being the deposit made by an intending buyer, forfeited and appropriated by the assessee, did not constitute income of the assessee and as such was not liable to be taxed?"
2. The assessee is a private limited company, engaged in trading, investment and money-lending business. It negotiated for the sale of its asset, viz., a house property, and as the sale transaction fell through, an amount of Rs. 21,000, deposited by an intending purchaser with the assessee, was forfeited by it. In the course of the assessment proceedings for the assessment year 1974-75, the assessee claimed that the amount forfeited cannot be treated as income liable to tax; but the Income-tax Officer held that the amount was taxable under section 10(3) of the Act and subjected it to tax. On appeal by the assessee, reiterating that the receipt of Rs. 21,000 was exempt form tax, as the provisions of section 10(3) of the Act would not apply, the Appellate Assistant Commissioner found that in the sale advertisement, there was a provision to the effect that the amount deposited will be forfeited, if the intending buyer did not not complete the transaction and that the amount deposited and forfeited was not capital, but causal in nature and taxable under the head "Other sources". On further appeal by the assessee to the Tribunal, it held that the receipt does not bear the character of income and would not, therefore, fall under section 10(3) of the Act and even if the character of the receipt was income, it was nevertheless not of casual and recurring nature and the provisions of section 10(3) of the Act were inapplicable. In the view so taken, the Tribunal held that the sum of Rs. 21,000 would not constitute income of the assessee liable to be taxed. That is how the question earlier referred to has come up for consideration.
3. There is no dispute that in the advertisement for the sale of the property, apart from the requirement regarding the deposit of a certain amount by the intending purchaser, there was also a further provision to the effect that the deposit made would be forfeited if the intending buyer did not complete the sale. Pursuant to this the amount deposited by an intending buyer came to be forfeited as he did not complete the sale. Though before the authorities below the question was whether this amount would constitute "income" or it was of not" a casual and recurring nature", etc., we are of the view that it is unnecessary to enter into a consideration of those aspects. Even as per the terms of the sale advertisement, the intending buyer has agreed to forfeit the deposit amount in the event of the sale transaction not being put through. The amount so forfeited, in our view, has to be regarded as an estimate of the loss of profits, which the assessee would otherwise have made had the transaction been completed. On other words, by the receipt of the amount, the intending buyer was freed from the obligation to buy and the assessee was also enabled to offer the house for sale to others. The amount forfeited represented compensation for the loss of income or profits to the assessee and has to be regarded as a revenue receipt, as the capital asset continued to exist as before, not in any manner affecting the trading activities of the assessee. It will be useful in this connection to refer to the decision in CIT v. Balaji Chitra Mandir , where it had been pointed out that compensation paid for cancellation of a contract, not affecting the trading structure of the business or resulting in the deprivation of the source of income, leaving the person free to carry on his trade, is a revenue receipt and that where the cancellation of the agreement impaired the trading structure of the assessee or resulted in the deprivation of the source of income, such compensation in respect of the cancellation, is a capital receipt. As pointed out earlier, in this case, the assessee and the intending buyer, by reason of the acceptance of the terms of the sale by the intending buyer, had agreed that the sum of Rs. 21,000 would be in the nature of compensation for the loss of profits of the assessee, arising out of the non-performance of the agreement of sale by the intending buyer. Viewing the matter thus, we answer the question referred to us in the negative and in favour of the Revenue. There will be no order as to costs.