TMI Blog1996 (2) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... -75, was completed by the Income-tax Officer determining the total income at Rs. 44,450. The company had earlier entered into an agreement with one Sri K. Periasamy to sell its land and superstructure situate at Trichy for a sum of Rs. 4,20,000. The purchaser was to pay the vendor a sum of Rs. 60,000 as earnest money towards the sale price, which was to be paid in two instalments (i) on the execution of the agreement, i.e., on October 11, 1971, Rs. 20,000 and (ii) Rs. 40,000 on or before December 1, 1971. In the event of default in paying the further sum of Rs. 40,000 on or before December 1, 1971, the vendor, may, at his option, cancel the agreement for the default of the purchaser and thereupon the earnest money of Rs. 20,000 may be taken and retained by the vendor and the purchaser shall not be entitled to recover the same. The Income-tax Officer has treated the amount of Rs. 20,000 as taxable on the ground that the amount of Rs. 20,000 was received by the assessee during the course of the business and also as the company had itself treated the amount as revenue income and also utilised the same for declaration of dividends. On appeal, the Commissioner of Income-tax (Appeals), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t were not applicable to the receipt. On a reference, this court held as under : "The amount forfeited had to be regarded as an estimate of the loss of profits which the assessee would otherwise have made had the sale transaction been completed. By the receipt of the amount by the assessee, 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 for feited represented compensation for the loss of the income or profits to the assessee and had 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." While rendering this judgment, this court relied upon the decision of the Andhra Pradesh High Court in CIT v. Balaji Chitra Mandir [1985] 154 ITR 777, wherein it had been held 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to the facts arising in the decision reported in CIT v. Balaji Chitra Mandir [1985] 154 ITR 777 (AP), the assessee-firm was carrying on the business of exhibition of cinema films. In 1968, it leased its cinema hall to one B for a period of 151 weeks subject to the payment of a weekly rent of Rs. 3,521. A sum of Rs. 40,000 was deposited by the lessee with the assessee as security under the agreement. The lease agreement provided that if the lessee should fail to pay the hire as agreed for any week, the agreement would be cancelled and the amount of Rs. 40,000 would be forfeited. From February 1969, the lessee committed default in the payment of the weekly rent for three weeks continuously and the assessee after notice to the lessee terminated the lease and forfeited the amount of Rs. 40,000. Subsequent to the termination of the lease, the assessee leased the cinema hall to another person. The assessee claimed that the amount of Rs. 40,000 was a capital receipt and not assessable in the assessment year 1973-74. On these facts, on a reference, the High Court of Andhra Pradesh held that the facts showed that the lease agreement was entered into by the assessee-firm in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed capital. It is taxable as a revenue item, when it is referable to circulating capital or stock-in-trade. Reliance was also placed upon a decision of the Andhra Pradesh High Court in CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164. While considering the provisions of sections 2(47) and 45 of the Income-tax Act, 1961, the High Court of Andhra Pradesh held that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. If the payment is received in the ordinary course of the business of the assessee, for loss of stock-in-trade, it is a revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation, partly or fully, of a profit-earning source, such receipt, not being in the ordinary course of the assessee's business, is a capital receipt. Our attention was also drawn to a decision of the Gujarat High Court in CIT v. Hiralal Manilal Mody [1981] 131 ITR 421. According to the facts arising in that case, the total amount of Rs. 24,431 was received by way of damages and the said amount was paid to the assessee on account of the breach of the agreement committed by the vend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors and credited in its accounts for the assessment year in question were not taxable. The Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 while considering the provisions of section 10(1) of the Indian Income-tax Act, 1922, held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profits or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Thus, we have seen in the present case, the assessee entered into a contract to sell an immovable property which is one of the items of its capital assets. Since the sale did not fructify and earnest money paid by the purchaser was forfeited, the contract of sale was not entered into in the course of the business done by the assessee as the assessee was doing agency business. The forfeited amount would go to incre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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