Case Note & Summary
Background: The dispute involved the Commissioner of Income Tax, Madras, as appellant, and The Lakshmi Vilas Bank Ltd., Karur, as respondent, in an income tax assessment matter. The bank, in its usual business, purchased and sold securities for constituents for commission. During assessment years 1964-65 and 1965-66, the bank purchased Madras State Electricity Board Bonds and Madras State Loan Bonds on behalf of constituents. The bank required margin money as advance; constituents gave undertakings that on failure to pay balance by stipulated date, securities would belong to the bank and margin money would be forfeited. Constituents defaulted, and the bank forfeited the margin money, adjusting it against the purchase price of securities and showing the balance as cost. Facts: The Income Tax Officer treated the forfeited margin money as income of the year of forfeiture, disallowing adjustment against cost. The Appellate Assistant Commissioner affirmed. The Income Tax Appellate Tribunal reversed, holding the bank could adjust margin money against cost of securities. The High Court, on reference, upheld the tribunal, reasoning that on default, margin money and securities simultaneously became bank's property, so adjustment was permissible and profits would arise only on sale or redemption. Legal Issues: The core question was whether forfeited margin money is taxable business income in the year of forfeiture or should reduce the cost of securities. Arguments: The Revenue contended that forfeited amount was income earned in the course of banking business and cost of acquisition must be actual price paid. The assessee bank contended that adjustment was proper because the forfeiture and ownership of securities occurred simultaneously, and profit should be recognised only upon disposal. Court's Analysis: The Supreme Court observed that forfeiture of margin money occurred in the usual course of banking business; after forfeiture, the money became bank's own money. The transaction was part of profit-making process, akin to earnest money liable to forfeiture. The cost of acquisition of securities is the price actually paid, which was face value. There was no justification to reduce the actual cost by forfeited amount. The accrual of income could not be deferred by adjustment against cost. Decision: The Supreme Court allowed the Revenue's appeal, set aside the High Court judgment, answered the referred question in the negative and in favour of the Revenue, and ordered no costs. Thus, forfeited margin money is taxable as business income in the year of forfeiture, and cannot be adjusted against cost of securities.
Headnote
A) Tax Law - Business Income - Forfeiture of Margin Money - Income-tax Act, 1961 (unspecified sections) - The assessee bank received margin money from constituents for purchase of securities on their behalf, which was forfeited upon default. The Income Tax Officer assessed the forfeited amounts as business income. Supreme Court held that the forfeited amount became the bank's own money in the course of its banking business and was taxable as income in the year of forfeiture; no adjustment against cost of securities permissible. Held that accrual of income cannot be deferred by adjusting deposit amount against cost of securities. B) Tax Law - Cost of Acquisition - Actual Cost Principle - Income-tax Act, 1961 (unspecified sections) - The bank purchased securities at face value in its own name; cost of acquisition is the actual price paid. The attempt to reduce cost by forfeited margin money was rejected. Held that cost cannot be less than the price actually paid; the forfeited money is separate business income.
Issue of Consideration
Whether forfeited margin money received by a bank from constituents upon their default is taxable as business income in the year of forfeiture, or should be adjusted against the cost of securities purchased by the bank.
Final Decision
The Supreme Court allowed the appeal, set aside the judgment of the High Court, answered the referred question in the negative and in favour of the Revenue. It held that forfeited margin money is taxable as business income in the year of forfeiture and cannot be adjusted against the cost of securities. No order as to costs.
Law Points
- Forfeited margin money received in course of banking business is income
- cost of acquisition of securities is actual price paid
- no reduction of cost by forfeited deposits
- accrual of income cannot be deferred by adjustment against cost
