ORDER
1. This is an appeal by the Department against the order of the CIT(A), Jammu, dt. 19th March, 1996.
2. In this appeal, the following ground has been raised :
“On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 20 lacs treating the earnest money forfeited by the assessee-company as capital receipts, by holding that the forfeited amount was a capital receipt as the company was holding the shares to manage and control DCM Ltd. and company has not carried on business in shares.”
3. The only issue in this appeal relates to the deletion of addition of Rs. 20 lacs treating the earnest money forfeited by the assessee as capital receipts.
4. The facts of the case, in brief, are that the assessee filed its return of income declaring income of Rs. 54,725 on 30th Dec., 1992. The same was processed under Section 143(1)(a) and the returned income was accepted. Later on, the case was taken up for scrutiny. The AO observed that the assessee was dealing in sale and purchase of shares and securities. He further noted that during the year under consideration, the assessee had traded in the sale and purchase of shares of JP Industries, Orkay Silks and had made total sales of the value of Rs. 14,36,500. Besides that, the assessee also earned dividend income and interest income amounting to Rs. 11,80,392 and Rs. 2,86,521, respectively. The AO further noticed that the assessee during the year under consideration entered into an agreement with M/s Pioneer Distributors Ltd. for the sale of 1 lac equity shares of DCM Ltd. with distinctive Nos. 4125098-4205097 = 80,000, 4780489-4795488. = 15,000 and 2658255-2663254 = 5,000. As per the agreement M/s Pioneer Distributors (P) Ltd. had agreed to purchase the aforesaid 1 lac equity shres on spot delivery basis against full payment at a price of Rs. 270 per share and the sale transaction was to be completed on 29th June, 1991. Towards timely fulfilment of the obligations as envisaged in the agreement, the purchaser deposited earnest money of Rs. 20 lacs with the assessee on 4th June, 1991. One of the clauses in the agreement was that if the purchaser fails to fulfil the terms of agreement within the said period, the amount of earnest money paid shall stand forfeited and M/s Pioneer Distributors (P) Ltd. shall also forfeit all legal rights against the assessee in pursuance to the agreement, since the purchaser i.e. M/s Pioneer Distributors (P) Ltd. failed to fulfil the terms of agreement as agreed upon, therefore, the assessee forfeited Rs. 20 lacs being the earnest money received in terms of the said agreement. The said amount was reflected by the assessee as capital reserve account in the balance sheet and thus the receipt was claimed non-taxable. The AO asked the assessee to explain as to why the said forfeited amount may not be treated as revenue receipt and taxed accordingly. In its reply, the assessee stated that the shares of DCM Ltd. were held as an investment as such sale of 1 lac shares of DCM Ltd. to Pioneer Distributors (P) Ltd. was on capital account and, therefore, the earnest money of Rs. 20 lacs received from the said concern and forfeited by the assessee was a capital receipt not chargeable to tax. However, the AO opined that the earnest money forfeited was of revenue in nature because the other parties could have claimed loss of earnest money as a trading loss in computing commercial profit. He further observed that the loss of security deposit must be considered in relation to the business of the assessee as the deposit is generally made not for the purpose of acquiring any capital asset or acquiring new business but for the purpose of earning profit in the course of business and if such deposit was forfeited, it was a business loss. In that view of the matter, the AO observed that since the assessee had received the amount as a result of agreement to carry out certain obligation as envisaged in the agreement and for failure to carry out the agreement the amount of earnest money forfeited by the assessee was a revenue receipt. He, therefore, considered the receipt in question as a revenue receipt and brought the same to tax.
5. The assessee carried the matter in appeal to the CIT(A) and submitted that an agreement was executed with M/s Pioneer Distributors (P) Ltd. for sale of 1 lac equity shares of DCM Ltd. and in that agreement, it was provided that the purchaser shall purchase the share at the price of Rs. 270 per share for a total consideration of Rs. 2.70 crores. In accordance with the agreement, the aforesaid transaction was to be completed on 29th June, 1991 and the purchaser for timely fulfilment of its obligation and also in consideration of the promises to purchase the shares paid a sum of Rs. 20 lacs as the earnest money. In the return filed, the assessee indicated as under:
“During the year the company forfeited Rs. 20 lacs being the earnest money received in terms of an agreement to sell some of its investments on account of non-fulfilment of the terms of agreement by other party. This amount has been credited to capital reserve and claimed as capital receipt not liable to tax.”
It was further stated that the assessee was holding shares of DCM Ltd. numbering 3,59,218 and those shares were held to manage and control the DCM Ltd. It was also stated that the assessee had not carried on the business in shares and, therefore, the amount of Rs. 20 lacs received and forfeited was capital receipt. It was explained that the assessee-company is a closely held belonging to what is known as Bharat Ram group. It was clarified that the transfer of shares, in question, was done by SRF Ltd. to the assessee and a resolution was passed to this effect by the assessee on 23rd Oct., 1990, which proves that the shares were purchased to acquire management and control of DCM Ltd. and there was no intention to trade in these shares. It was explained that Dr. Bharat Ram’s family was controlling the DCM Ltd. with the help of the share-holding held not only by the individual persons but also through the media of various companies including the assessee and the directors of the assessee are none-else but family members of Dr. Bharat Ram. Similarly, the shareholders of the assessee-company are also the members of Dr. Bharat Ram’s family. As such, the members of the Dr. Bharat Ram family were holding the shares of DCM Ltd. to retain the control of the company. It was argued that the AO failed to appreciate that the assessee had purchased those shares to acquire the management and control of the DCM Ltd. and those shares were not acquired with the intention to trade in those and the assessee never treated the shares, in question, as stock-in-trade since the acquisition of those shares. It was submitted that those shares were purchased in bulk and not bit by bit to trade in them by taking the benefit of floating market conditions and there was no evidence on record to show that the shares, in question, were not purchased as an investment. As regards to the selling of the shares the assessee submitted that its action was like the prudent investor and not of a plunger in the waters of trade and in the transaction, in question, there was no element of trading, i.e. buying and selling of the shares. Therefore, the AO wrongly held that the receipt, in question, was a revenue receipt and liable to tax. It was reiterated that the transaction of shares of DCM Ltd. was wrongly considered by the AO as a transaction forming part of the stock-in-trade. It was explained that the assessee was owing the SRF Ltd., a huge sum and the yield from the shares was not commensurate in enabling the assessee to repay the amount and, therefore, it was decided to part with 1 lac shares out of the shares held by the assessee to maintain its liquidity and to discharge its debts. Reliance was also placed on the judgment of the Hon’ble Supreme Court in the case of Escorts Ltd. v. Union of India 59 Comp Gas. 548 (SC). The assessee further referred to Section 50 of the IT Act, which provides that an advance/earnest money forfeited would reduce the cost at the time when the asset is finally sold. Accordingly, it was submitted that the transaction in question was capital in nature and not of the revenue nature. In support of this contention, the assessee furnished a copy of agreement with M/s Pioneer Distributors (P) Ltd., Memorandum & Articles of Association, copies of audited accounts and relevant letters, etc. On the basis of the aforesaid documents, it was contended that although the main object of the assessee was to carry on the business as a holding and an investment company but there were many other objects also. The assessee also relied on various judgments viz.,:
(1) Imperial Chemical Industries Ltd. v. ITO (1978) 111 ITR 614 (Cal)
(2) Oriental Investment. Co. Ltd v. CIT (1957) 32 ITR 664 (SC)
(3) Ramnarain Sons (P) Ltd v. CIT, Bombay (1961) 41 ITR 534 (SC)
(4) Rameshwar Prasad Bagla v. CIT, UP (1973) 87 ITR 421 (SC).
The assessee further stated that the receipt of Rs. 20 lacs from M/s Pioneer Distributors (P) Ltd. in the form of earnest money was a capital receipt in the hands of the assessee and the nature of such payment in the hands of M/s Pioneer Distributors (P) Ltd. was not relevant to determine the character of receipt in the hands of the assessee. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Kamal Behari Lal Sangha (1971) 82 ITR 460 (SC), wherein it has been held that in order to find out whether a receipt is capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. The assessee also furnished a statement of shares held as investment for the last seven financial years and stated that 3,59,418 equity shares of DCM Ltd. were acquired during the financial year 1990-91, out of which 1 lac shares were to be sold to M/s Pioneer Distributors (P) Ltd. On the basis of the aforesaid submission, it was contended that the shares held by the assessee had not been frequently purchased and sold as such the assessee was not dealing in shares. Accordingly, it was submitted that receipt of Rs. 20 lacs forfeited by the assessee was capital receipt and not liable to tax.
6. After considering the above submissions, the learned CIT(A) observed that the question as to whether a particular receipt is a capital or trading has always been a vexed question leading to a divergent judicial opinion. The learned CIT(A) has also discussed various decisions including the decision of the Hon’ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 (SC), wherein it has been held that the intention and the conduct of the assessee were also significant factors for determining the character of transaction. The Hon’ble Supreme Court further observed that “The surplus realised on the sale of shares would be capital gains if the assessee is an investor in respect of those shares, but it will be profit from trade or adventure in the nature of trade, as the case may be, if he held those shares as his stock-in-trade. In this determination, the fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough, but that in conjunction with the conduct of the assessee and other circumstances may point to the trading character of the transaction.”
6.1 In view of the above legal position, the learned CIT(A) held that the transaction in question was of capital nature. He further observed that the assessee had filed complete details of investment and those details had clearly shown that the assessee’s main intention for purchasing the shares of DCM Ltd. was not that of trading but controlling the company, as such, the shares could not be treated as stock-in-trade for the purpose of trading. He, therefore, held that the amount of Rs. 20 lacs was not a trading receipt and hence was not taxable. He further pointed out that the provisions of Section 51 will come into force at the appropriate time. Accordingly, the addition made by the AO amounting to Rs. 20 lacs was deleted.
7. Now, the Department is in appeal.
8. The learned Departmental Representative while strongly supporting the order of the AO submitted that the main object of the assessee was trading in shares and there was no merit in this contention of the assessee that the shares of DCM Ltd. were acquired to control the management since the holding was only of 6.25 per cent of the total shares of DCM Ltd. He further pointed out that at the time of purchase the price of share was only at Rs. 58 per share. However, when the rate increased the shares were sold by the assessee as such the transaction in question was a trading transaction. He further submitted that the purchaser claimed the loss of Rs. 20 lacs suffered by not acquiring the shares in question from its profit, and the assessee, on the other hand, considered the amount of Rs. 20 lacs as capital receipt. As such, the conduct was a colourable device to reduce the tax burden in the hands of the purchaser and not to pay tax in the hands of the assessee. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Sutiej Cotton Mills Supply Agency Ltd, (1975) WO ITR 706 (SC).
9. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and vehemently argued that the shares of the DCM Ltd. were held by the assessee for the purposes of control only and there was no motive to earn the profit by selling the shares. It was submitted that the shares were shown as an investment from the very beginning and mere fact that the assessee to reduce the burden of debts decided to sell some of the shares would not suggest that the assessee was engaged in the trading of the shares. It was also clarified that the assessee being a promoter was holding the shares and there was restriction to transfer the shares during the lock-in-period of three years and since the shares in question, were purchased in the year 1990-91, the same could not be treated as stock-in-trade. He further pointed out that the shares were reflected in the balance-sheet as an investment from the very beginning. As such, the AO without appreciating the facts in right perspective wrongly held that the transaction, in question, was related to the sale of stock-in-trade. As regards to the contention of the learned Departmental Representative that the object of the company was trading in the shares as reflected in the Memorandum of Association, the learned counsel for the assessee submitted that the memorandum is one, of the factor only and not a conclusive evidence that all the transactions of the assessee in those fields were necessary in the performance of those objects in course of trade. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of Travancore Rubber and Tea Co. Ltd. v. CIT (2000) 243 ITR 158 (SC). As regards to the observations of the AO that the forfeiture of the earnest money had been treated by the purchaser as trading loss, the learned counsel for the assessee submitted that a claim by purchaser, i.e. M/s Pioneer Distributors (P) Ltd. would not be relevant to determine the character of receipt in the hands of the assessee-company. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Kamal Behari Lal Singha (supra), wherein it has been held that in order to find out whether a receipt is capital receipt or a revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. Accordingly, it was submitted that the nature of payment in the hands of the purchaser was irrelevant as regards to the nature of receipt in the hands of the assessee. The learned counsel for the assessee further pointed out that the purchaser was not connected with the assessee in any manner, so there was no merit in this contention of the learned Departmental Representative that the transaction, in question, was a colourable device. Furthermore, it was stated that it is also not the case of the AO that the transaction, in question, came into being in order to evade the tax liability. The learned counsel for the assessee further pointed out that being a prudent businessman the assessee considered it essential to dispose of its investment in the shape of shares of DCM Ltd. just to discharge a debt of over Rs. 2 crores from SPF Ltd. since the yield from the shares was not commensurate in enabling it to repay the amount and it was decided to part with 1 lac shares out of the share-holdings to maintain its liquidity and discharge its debts.
10. In view of the above, the learned counsel for the assessee submitted that the receipt on account of forfeiture of Rs. 20 lacs in the hands of the assessee was capital receipts since the purchaser did not fulfil its obligation although the assessee was ready to give the delivery of 1 lac shares and the reasons not to fulfil the obligation were best known to the purchaser,
10.1 Thus, it was contended by the learned counsel for the assessee that the order of the CIT(A) may not be disturbed since it is based on appreciation of facts and settled law.
11. We have heard the learned representatives of both the parties at length and carefully gone through the material available on record. In the instant case, it is an undisputed fact that the assessee received a sum of Rs. 20 lacs as an earnest money against the sale of 1 lac equity shares of DCM Ltd. from Pioneer Distributors (P) Ltd. and since the purchaser could not fulfil the terms of agreement within the stipulated time, the earnest money received by the assessee was forfeited. The assessee had claimed the said amount as capital in nature while the AO considered the same related to the trading activity of the assessee and treated the amount, in question, as revenue in nature and accordingly made the addition.
11.1 Now the limited issue before us is as to whether the amount of Rs. 20 lacs forfeited by the assessee was a capital receipt or a revenue receipt. It is true that no definition has been provided in the Act for capital and revenue receipt but the receipt related to the trading activity can be considered as a revenue receipt while the receipts on account of assets are to be treated as capital receipts. In the instant case, the claim of the assessee is that the equity shares were held as an investment, to have the control and management of the DCM Ltd. It is also one of the contentions of the assessee that no trading activity was undertaken to dispose of the equity shares of DCM Ltd. which were being held for the purpose of control of DCM Ltd. It is noticed that the AO nowhere pointed out that the assessee had undertaken trading activities in the equity shares of the DCM Ltd. The AO himself admitted that the assessee had traded in the sale and purchase of shares of JP Industries, Orkay Silks, etc. and nowhere it has been brought on record that any trading activity was undertaken by the assessee in respect of equity shares of DCM Ltd. It is true that the shares of a company can be held in two counts, i.e., the shares can be held as an investment which may be treated as asset and also the shares can be held in the shape of stock-in-trade and if any receipt is related to the shares held as an investment, that receipts can be considered as capital in nature while any receipt related to the shares held as stock-in-trade can be treated as revenue in nature. In the present case, it is noticed that the assessee was holding 3,59,418 equity shares of DCM Ltd. from the very beginning and those shares were shown as an investment in the balance sheet. It is also true from the balance sheet for the assessment year under consideration and also for the subsequent years wherein the shares held of DCM Ltd. by the assessee never came down from 3,59,418 equity shares as has been accepted as true and fair by the Department. It seems that one of the observations of the AO was that “The earnest money forfeited is of revenue nature because the other party can claim loss of earnest money”. In our view, the ratio laid down by the Hon’ble Supreme Court in the case of CIT v. Kamal Behari Lal Singha (supra), has to be considered while taking a view as to whether the receipts can be same in nature in the hands of the receiver as well as the payer. The Hon’ble Supreme Court in the aforesaid case held that “in order to find out whether a receipt is a capital receipt or a revenue receipt and not its nature in the hands of the payer”. Keeping in view the aforesaid ratio laid down by the Hon’ble Supreme Court, we are of the firm view that the AO was not justified in presuming that the earnest money forfeited by the assessee was a revenue receipt since the same was being treated by the payer i.e., M/s “Pioneer Distributors (P) Ltd. as a revenue loss.
11.2 The another reason given by the AO for treating the receipt of Rs. 20 lacs as a revenue receipt was that the assessee was also dealing in the shares and, therefore, the activity of the assessee was trading in the shares and this amount of Rs. 20 lacs was also received by the assessee as an earnest money against the sale of the shares. He, therefore, considered the amount, in question, as a revenue receipt. However, as we have already noted hereinabove that the shares can be held by some persons in two distinctive counts and we have already noted that if the shares are held as an investment the amount received in respect of those cannot be considered as a revenue receipt until and unless the activity of the assessee is solely in trading the shares. As regards this objection of the learned Departmental Representative that the assessee was having only 6.25 per cent share-holdings of DCM Ltd. and with such a meagre figure, it was not possible to control the management of DCM Ltd., we may point out that the assessee from the very beginning took a stand that the shares of DCM Ltd. were held by the family members of Dr. Bharat Ram. In that view of the matter, the share-holdings should not have been taken into consideration individually but by the group as a whole. In other words, the shares held by the assessee as well as other concerns belonging to the same group can be considered for that purpose. It is not the case of the Department that the major share-holding was not in the hands of the group to which the assessee belonged. We, therefore, do not see any merit in the aforesaid contention of the learned Departmental Representative. In the instant case, it is not disputed at any stage that the assessee was owing a huge amount of debt towards SPF Ltd. and to repay the amount, the assessee decided to dispose of 1 lac shares out of the shares of DCM Ltd. held by it since the yield from the shares was not commensurate in enabling the assessee to repay the amount. In other words, the assessee decided to dispose of the equity shares, which were held by it as an investment, but not stock-in-trade and, therefore, earnest money forfeited by it was a capital in nature. It is also noticed that the assessee filed chart showing details of investments made in shares. On perusing the aforesaid chart, it would be clear that the number of shares of DCM Ltd. held by the assessee for the year ending on 31st March, 1991 was at 3,59,418 and for the year ending on 31st March, 1992, the same share-holding was shown by the assessee as an investment. Furthermore, the share-holdings increased to 4,05,018 and 12,23,816 for the years ending on 31st March, 1993 and 31st March, 1994 respectively which shows that the intention of the assessee was never to trade in the equity shares of the DCM Ltd. Therefore, it can safely be held that the equity shares, in question, were not held by the assessee as a stock-in-trade. As such, the earnest money received by the assessee amounting to Rs. 20 lacs was not connected with the trading activity of the assessee.
12. During the course of hearing, one of the objections raised by the learned Departmental Representative was that the main object of the assessee was trading in the shares was recorded in the Memorandum and Articles of the Association and, therefore, the shares held by the assessee-company were stock-in-trade, and, further, amount of Rs. 20 lacs received by the assessee was in the nature of revenue receipt. In our view, there is no merit in the above contention of the learned Departmental Representative because solely on the basis of objects of the company, it cannot be said that a particular amount was in the nature of capital or as a revenue receipt. Moreover, the Memorandum and Articles of Association do not constitute an evidence upon which it could be said that there was a trade being carried on by the assessee. Furthermore, in the instant case, the amount forfeited by the assessee was in terms of one of the clauses of agreement which provided that if the purchaser fails to fulfil the terms of agreement within the stipulated period, the amount of earnest money paid shall stand forfeited and since the purchaser i.e., M/s Pioneer Distributors (P) Ltd. failed to fulfil the terms of agreement the amount was forfeited by the assessee. In similar circumstances, the Hon’ble Supreme Court in the case of Travancore Rubber and Tea Co. Ltd v. CIT (supra) held that the forfeited amounts must also be treated as capital receipts.
13. The net result of the above discussion is that in the instant case, the earnest money amounting to Rs. 20 lacs was forfeited by the assessee because the purchaser could not fulfil the obligation to purchase 1 lac equity shares, Those shares were held by the assessee as an investment. Therefore, the forfeiture of the earnest money cannot be connected in any way with the trading activity of the assessee, as such, the same was not the revenue receipt, as has been held by the AO.
13.1 We, therefore, considering the totality of the facts, are of the view that the learned CIT(A) rightly held that the transaction, in question, was of capital nature since the assessee had filed complete details of investment and those details clearly had shown that the assessee’s main intention for purchasing the shares of DCM Ltd. was not that of trading but controlling the company, as such, the shares could not be treated as stock-in-trade. We do not see any infirmity in the aforesaid observation of the learned CIT(A).
14. We may add here that the learned CIT(A) has correctly observed that the provisions of Section 51 of the Act will come into force at the relevant time. In this manner, we confirm the view of the learned CIT(A) and do not see any merit in this appeal of the Department.
15. In the result, the appeal is dismissed.