TMI Blog1990 (11) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... der under section 144B of the Income-tax Act by the Inspecting Assistant Commissioner. The Income-tax Officer, in the draft assessment order, proposed to treat a sum of Rs. 3,95,229, representing the amount of earnest money and advance received by the assessee towards sale of old rubber trees which was forfeited, as income of the assessee. The Inspecting Assistant Commissioner, in his order under section 144B of the Act, directed the Income-tax Officer not to include this amount as the income of the assessee, since he took the view that it was not a revenue receipt but a capital receipt, in the hands of the assessee. The Commissioner of Income-tax initiated proceedings under section 263 of the Act and, by order dated August 2, 1982, held that the said sum represented receipt of an income nature in the hands of the assessee. The objection of the assessee to the proposed revision was rejected. Prom the aforesaid order of the Commissioner of Income-tax under section 263 of the Act holding that the said sum of Rs. 3,95,229 is a revenue receipt attracting assessment to tax, the respondent/assessee filed an appeal before the Income-tax Appellate Tribunal and assailed the order. After con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n capital account and not on revenue account. It is seen that the respondent/assessee-company entered into three agreements with one Sri P. M. Joseph dated July 10, 1975, with one Sri George Joseph dated July 19, 1975, and with one Sri, N. Viswam dated August 8, 1975. The assessee-company-agreed with Sri. P. M. Joseph to sell approximately 9,804 trees standing on 163.8 acres of land for a total consideration of Rs. 16,87,500. The purchaser paid the company a sum of Rs. 25,000 towards earnest money and another sum of Rs. 1,03,125 as advance and also agreed to pay the balance of Rs. 15,84,375 in 24 equal monthly instalments on or before the 5th day of each month commencing from August, 1975. By an agreement with the second purchaser, Shri George Joseph, the assessee-company agreed to sell 9,812 old rubber trees standing on 165 acres of land for a total consideration of Rs. 16,87,500. He also paid Rs. 25,000 to the company as earnest money and Rs. 1,03,125 as advance. The balance amount was agreed to be paid in 25 equal monthly instalments commencing from August, 1975. Similarly, as per the agreement with the third purchaser, Shri N. Viswam, the company agreed to sell approximately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnest money and advance forfeited, can only be revenue receipt. Strong reliance was placed on the following decisions : B. M. Kamdar, In re [1946] 14 ITR 10 (Bom) at p. 39 ; Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, 242(SC) ; Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345, 350 (SC) and Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484, 488 (SC). On the other hand, counsel for the assessee contended that a receipt which is not, in the first instance, a trading or revenue receipt cannot become a trading receipt by any subsequent process. In this case, when earnest money and advance were received under the contracts for the sale of old trees which is a capital asset, they cannot be considered to be a trading or revenue receipt. The fact that, by a subsequent event, the purchasers did not carry out the terms of the contract cannot, by any stretch of reasoning, lead to the conclusion that the amount accrued or arose only when the breach occurred. Strong reliance was placed on the decision in Morley (Inspector of Taxes) V. Tattersall [1939] 7 ITR 316 [1938] 22 TC 51 (CA). We considered the rival pleas urged before us by counsel for the Revenue and also counsel for the assessee. On a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during the negotiations for a contract not in fact concluded, prima facie the amount is recoverable by the depositor, unless he acted in such a way as to show his acceptance of the document as a binding contract. Where money is deposited with the other contracting party on the formation of a contract, prima facie it will be interpreted as a security for performance, and hence be forfeited if the depositor in breach of contract fails to perform his side of the bargain though not if he rightfully refuses to perform and the contract is rescinded." In Cheshire and Fifoot's Law of Contract, 9th edition, page 586, the learned authors stated the law thus : "If their intention was that the money should be deposited as an earnest or guarantee for the due performance of the purchaser's obligations, the rule at common law is that it is forfeited to the seller upon the discharge of the contract for the default of the purchaser, notwithstanding that it would have gone in part payment of the price had the contract been completed." In "The Law of Contract" by G. H. Treital, 3rd edition, at page 825, the author has dealt with deposit and part payment. The law, is stated thus : "A contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived for due performance of the contract. Whether the contract is effectuated or not, the amount could and will ordinarily be retained by the seller. If the purchaser commits breach of the agreement, earnest money can be forfeited. If, on the other hand, the transaction goes through, the earnest money received will be given credit to, towards the consideration fixed in the agreement. Either way, once earnest money or deposit is received, it is not a refundable amount. This is a great factor to be reckoned in determining whether the receipt of earnest money is a trading or revenue receipt or a capital receipt. It should also be noticed that the company, in carrying on its business, has entered into the deal for the sale of old trees. As part of the bargain, it has stipulated payment of earnest money or deposit for the due performance of the contract. Prima facie, the earnest money received has got immediate nexus with the "business" carried on by the assesseecompany. It is a part of the bargain in the course of carrying on a business. On the other hand, counsel for the assessee submitted that the earnest money or deposit was received in connection with the sale of old rubber trees o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore it for consideration. The Appellate Tribunal has not acted in accordance with law. This is a patent error. We are of the view that, in so far as the above important aspects have not been borne in mind by the Appellate Tribunal nor considered specifically, the conclusion, that at the time of the receipt of the amounts they did not have the character of trading receipts and so they cannot subsequently assume the character of trading receipts because the contracts have not gone through, has been arrived at perfunctorily and arbitrarily. We, therefore, decline to answer the questions referred to this court by the Income-tax Appellate Tribunal at the instance of the Revenue. But, at the same time, we direct the Income-tax Appellate Tribunal to restore the appeal to file and decide the matter afresh in accordance with law. We may incidentally observe that the observations in Kanga and Palkhivala's "The Law and Practice of Income Tax", 8th Edition, volume 1, pages 123 and 179, as also the decisions in CIT v. Motor and General Finance Ltd. [1974] 94 ITR 582 (Delhi) CIT v. Surendra Overseas Ltd. [1982] 136 ITR 553 (Cal) ; CIT v. A. V. M. Ltd. [1984] 146 ITR 355 (Mad) and CIT v. Bala ..... X X X X Extracts X X X X X X X X Extracts X X X X
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