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income-tax Officer Vs. Omega Bright Steel (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1985)11ITD404(Delhi)
Appellantincome-tax Officer
RespondentOmega Bright Steel (P.) Ltd.
Excerpt:
1. the respondent, omega bright steel (p.) ltd., of new delhi ('obs'), carries on business of processing and sale of bright steel bars. on 29-5-1976, it entered into an agreement with international trade associates of bombay ('ita') for supply of stainless steel bright drawn bars conforming to certain grades and specifications as per terms and conditions of the agreement reproduced below: whereas the first party [omega bright steel (p.) ltd.] is carrying on business as manufacturers of bright drawn steel bars of various specifications including those of stainless steel at their factory and works situated at faridabad (haryana); and whereas the second party (international trade associates) has approached the first party for the supply of stainless steel bright drawn bars and coils.....
Judgment:
1. The respondent, Omega Bright Steel (P.) Ltd., of New Delhi ('OBS'), carries on business of processing and sale of bright steel bars. On 29-5-1976, it entered into an agreement with International Trade Associates of Bombay ('ITA') for supply of stainless steel bright drawn bars conforming to certain grades and specifications as per terms and conditions of the agreement reproduced below: Whereas the first party [Omega Bright Steel (P.) Ltd.] is carrying on business as manufacturers of bright drawn steel bars of various specifications including those of stainless steel at their factory and works situated at Faridabad (Haryana); And whereas the second party (International Trade Associates) has approached the first party for the supply of stainless steel bright drawn bars and coils processed/manufactured out of the imported base raw materials conforming to the grades and specifications to be provided by the second party, and for the import of the raw materials whereof, the first party holds the requisite licences; And whereas the first party has agreed to supply the goods and merchandise referred to hereabove to the second party, to be processed/manufactured by the first party, as per the grades and specifications to be provided by the second party; And, therefore, the first party and the second party are desirous of entering into an agreement for the supply of stainless steel bright drawn bars and coils by the first party to the second party, manufactured/processed from/ out of the imported base raw materials and on the basis of the grades and specifications to be provided by the second party; 1. That the second party shall purchase, either directly or through its nominees, the entire stock valued approximately at Rs. fifty lakhs of finished bright drawn stainless steel bars/coils to be processed/manufactured by the first party from/out of imported base raw materials, as detailed in the annexure.

2. That the first party shall try to ensure that the supplies of the finished goods to the second party and/or its nominees, as the case may be, are made by the scheduled dates to be mutually agreed, provided, however, that the supply of the finished goods will only commence after the full amount of the security deposit provided hereinafter has been paid by the second party to the first party.

Further, the first party shall in no way be held responsible or made liable for any delay in supplies due to reasons beyond their control.

3. That the first party shall take all expeditious steps for import of stainless steel base raw materials (wire rods), which shall be required for processing/manufacturing of finished bright drawn stainless steel bars/coils as per the specifications and grades mentioned in the annexure to this agreement.

4. That the first party shall inform the second party and/or its nominee/s, as the case may be, as and when the finished goods are ready for despatch.

5. That the second party and/or its nominee/s, as the case may be, shall, within fifteen days of the date of receipt of such intimation as mentioned in para 4 above, take delivery of the goods against full payment of the price agreed to and given in the annexure to this agreement.

6. That the second party shall deposit with the first party a sum of Rs. 10,00,000 (Rs. ten lakhs) only by way of security deposit, hereinafter referred to as 'the said security deposit', in the following manner: 7. That the said security deposit shall be refundable by the first party to the second party within fifteen days of the receipt of the sale price in respect of the final supply of the goods under this contract.

8. That the said security deposit shall carry interest at the rate of 12 per cent per annum and the said interest shall accrue and be payable to the second party only at the time of the refund of the said security deposit.

9. That in the event of the second party either neglecting or refusing to take delivery of the finished goods, as stated in para 5 hereinabove, within the period of fifteen days stipulated in that para or failing to deposit the said sum of Rs. ten lakhs as security deposit in the manner provided in para 6 above, the first party shall have the option to terminate this agreement.

10. That in the event of the first party failing or refusing to supply to the second party and/or its nominee/s, as the case may be, the stocks of bright drawn stainless steel bars/coils, as stated in para 1 hereinabove, the second party shall have the option to terminate this agreement.

11. That in the event of this agreement being determined in the manner stated in para 9 above, the entire amount lying on the date of such termination, with the first party as security deposit in terms of para 6 hereinabove, shall stand forfeited and the second party shall have no right whatsoever to claim the said amount or any part thereof from the first party.

12. That in the event of the aforesaid forfeiture of the said security deposit by the first party, no interest as provided in para 8 above shall, for any period of time, either accrue or be payable by the first party to the second party.

13. That in the event of this agreement being determined in the manner stated in para 10 above, the amount of the said security deposit as on date of termination shall be refunded forthwith by the first party to the second party together with interest at the rate of 18 per cent per annum calculated from the time the said security deposit was paid till the time of its refund.

14. That subject to paras 9 and 10 hereinabove, this agreement shall remain in force for a period of two years from the date of the signing hereof.

15. That all matters or disputes arising between the parties during the continuance of this agreement shall be referred to arbitration and provisions of the Indian Arbitration Act, 1949, shall, accordingly, apply.

In witness whereof the parties hereto have set their hands on these presents in the presence of witnesses on the day, month and year first abovewritten.

In the annexures to the agreement, the specifications and grades of bright drawn stainless steel bars/coils of 175 tons had been indicated.

It was also mentioned in the annexure that the price of goods to be supplied by OBS to ITA was Rs. 50.05 lakhs as per selling rates mentioned in the annexure.

2. The security deposit of Rs. 10 lakhs which was to be made in four equal instalments of Rs. 2,50,000 each by 31-7-1976, 31-12-1976, 30-6-1977 and 30-9-1977 as per Clause 6 of the agreement had not been made in time by ITA. As against the sum of Rs. 2,50,000 each payable on 31-7-1976 and 31-12-1976, it had been able to deposit only Rs. 2,05,000 till the end of the calendar year 1976. Since ITA was not able to conform to the payment of security deposit as per terms of agreement, a letter was sent by OBS dated 4-2-1977 asking ITA to adhere to the time limit prescribed for making the security deposit which was 30-9-1977.

Thereafter ITA deposited a further sum of Rs. 4 lakhs by cheques drawn on Bank of Baroda dated 9-7-1977, 11-7-1977, 20-7-1977, 10-94977 and 5-9-1977. In other words, it was able to pay in all only an aggregate sum of Rs. 6,05,000 by 30-9-1977 as against Rs. 10 lakhs, which had to be paid by it by way of security deposit as per terms contained in Clause 6 of the agreement. Since ITA had failed to make security deposit of Rs. 10 lakhs by 30-9-1977, a letter had been sent by them to OBS on 20-10-1977. It reads as follows: We are very much pained to inform that as yet, despite our best efforts, we have not been able to make the necessary security deposit as agreed upon by us owing to our financial difficulties and it is our request to keep the imported raw materials with you, as we will be arranging to make the said payment to you shortly. We will fulfil the condition of making the payment and after that you can process the materials to our requirements.

We refer to your letter dated 20-10-1977 and are not satisfied with the contents of the same. As you are aware of the present trend of the market and in the absence of any sound security as well as your continued failure to make the payment uptill now, we are neither in a position to hold the base raw materials at our end nor undertake the processing of the same to your requirements.

In the circumstances, we have no other alternative but to terminate the agreement and apply the condition of forfeiting the amount paid to us as security deposit, which please note.

Finding that the termination of the agreement was impending, ITA once again requested OBS as follows: We are in receipt of your letter of 17th ultimo and noted the contents.

We once again request you not to please force upon the condition of forfeiting our security amount and be kind enough to allow us some more time for making payments of the balance instalments in view of difficult financial position.

However, we assure you that we shall make payments and meanwhile please keep the raw materials till our further advice in the matter.

Ultimately, on 4/5-12-1977, OBS wrote a letter to ITA terminating the agreement as follows: We acknowledge your letter dated 13-11-1977 vide which you have asked us to keep the materials with us till further advice from you; and asked us to allow you some more time for payment of the balance amount against the instalments.

As you are aware, we have imported considerable quantities of stainless steel wire rods as per your instructions and you are asking us at such a belated stage not to process the goods since you are not in a position to make the payment of outstanding security deposit at present. Your previous actions have not been satisfactory and we cannot wait any longer and as such, we are compelled to invoke Clause 9 of the agreement which empowers us to terminate the said agreement since you have failed to make the payment of the security deposit of Rs. 10 lakhs, which you were to pay latest by 30-9-1977 as per agreement of 29-5-1976. Therefore, the agreement dated 29-5-1976 stands terminated and the amount of Rs. 6.05 lakhs lying with us as security deposit is hereby forfeited as per Clause 11 of the agreement. You shall have no right whatsoever to claim the said amount or any part thereof, which please note.

This sum of Rs. 6,05,000 representing the security deposit forfeited was shown by the assessee by credit to a capital reserve account in its books relating to the assessment year 1978-79 for which the relevant accounting year was the calendar year 1977.

3. In the return of income filed for the assessment year 1978-79, the forfeited security deposit of Rs. 6,05,000 had not been shown as income and, therefore, the ITO called upon it to explain as to why the same be not included in its total income. It was submitted on behalf of the respondent on the basis of the facts which have been stated above that it was a capital receipt and that it was not liable to assessment in accordance with the decision of the Hon'ble Delhi High Court in CIT v.Motor & General Finance Ltd. [1974] 94 1TR 582.

The ITO did not accept the representation made. According to him, since the facts in the assessee's own case were wholly different from the facts obtaining in the case of Motor & General Finance Ltd. (supra), the decision of the Hon'ble Delhi High Court relied upon did not help the assessee's case. The ITO held that the above-mentioned agreement dated 29-5-1976 was an agreement in the normal course of the assessee's business and since the deposit by way of security was to be made in order to cover up any possible losses on failure of ITA to lift the stocks, the forfeiture of security deposit was a revenue receipt. The ITO also referred to a statement dated 9-9-1981 of one Shri B.H.Gandhi, the partner of ITA, and held that the sum of Rs. 6,05,000 was not a security deposit but was merely an advance receipt by OBS from ITA against the goods to be supplied by the former to the latter. In the last paragraph preceeding the computation of income, the ITO also referred to certain enquiries which had been made through the Deputy Director of Investigation, Bombay, that the sum in question of Rs. 6,05,000 was alternatively liable to be assessed under Section 68 of the Income-tax Act, 1961 ('the Act'), as income from undisclosed sources.

4. Dissatisfied with the order of assessment made by the ITO, the respondent OBS had taken the matter in appeal before the Commissioner (Appeals). The latter held that the ITO had given no material whatsoever in support of its finding that Rs. 6,05,000 was assessable as income under Section 68. According to him, the identity of 1TA, Bombay, was not in dispute and similarly, the fact could not be denied that the sum in question of Rs. 6,05,000 had been given to the assessee by the ITA, Bombay. After rejecting the alternative ground of assessment taken by the ITO, the Commissioner (Appeals) proceeded to consider the nature of the receipt of Rs. 6,05,000. He took into account the terms of agreement entered into between OBS and ITA and then held that the forfeiture of Rs. 6,05,000 was a capital receipt in the hands of the assessee. According to the Commissioner (Appeals), the facts in the case of the assessee were absolutely similar to the facts as prevailed in the case of Motor & General Finance Ltd. (supra), and, therefore, according to him, the decision of the Hon'ble Delhi High Court in Motor & General Finance Ltd.'s case (supra) would squarely apply in favour of the assessee. The assessment of Rs. 6,05,000 was, therefore, deleted.

5. It is in the background of the above-mentioned facts that the revenue is in appeal contending as follows: On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in holding that the amount of Rs. 6,05,000 received as security deposit and, subsequently, forfeited by the assessee-company is a capital receipt and is not taxable and thereby deleting the same from the computation of taxable income for the assessment year 1978-79.

6. Mr. M.K. Chakraborty, the learned senior authorised representative of the department, has vehemently assailed the order of the Commissioner (Appeals). He has taken us through each and every clause of the agreement dated 29-5-1976 and annexures thereto entered into between the respondent, OBS, on the one hand, and the ITA on the other.

After so taking us through the agreement, the learned departmental representative has submitted that the agreement was merely for sale and purchase of bright drawn stainless steel bars and had been entered into with the sole object of having an insured customer, who was to pay an insured price for the goods to be supplied by OBS. The security of Rs. 10 lakhs, which was to be deposited by ITA in pursuance of Clause 6 of the agreement, was, according to the learned departmental representative, merely for ensuring the realisation of price of goods to be supplied by OBS to ITA. This agreement, according to the departmental representative, was one which was entered into as a normal incident of carrying on of the business and that its breach merely resulted in a business profit of Rs. 6,05,000. According to the departmental representative, the agreement whereby Rs. 10 lakhs had to be deposited as per Clause 6, was not an agreement for any loan or borrowing to be made by OBS from ITA and, therefore, the question of applying the ratio of decision in the case of Motor & General Finance Ltd. (supra) did not arise. After referring to the correspondence that passed between OBS and ITA, which stands reproduced in an earlier portion of this order, the learned departmental representative says the real nature of the receipt was 'advance' received by OBS from ITA in respect of purchase of raw material by the former out of which goods had to be processed and supplied to ITA. According to him, the amount of Rs. 6,05,000 was not a security deposit and if at all it was any security, it was merely an insurance or a cushion for realisation of the price of goods to be supplied by OBS to ITA. After so interpreting the agreement and the correspondence between OBS and ITA, the learned departmental representative stated that the Commissioner (Appeals) had erred in holding that the case stood covered by the decision of the Hon'ble Delhi High Court in Motor & General Finance Ltd.'s case (supra). In support of his contention that the forfeiture of security deposit by OBS was a revenue receipt, the departmental representative has relied on the decision of the Hon'ble Supreme Court in the case of Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 and on a decision of the Hon'ble Punjab and Haryana High Court in the case of Atlas Cycle Industries Ltd. v. CIT [1981] 128 ITR 60. Mr. Chakraborty has taken us through these two decisions and then contended that in the present case, the security deposit which was forfeited, resulted in a revenue receipt on account of the fact that the agreement entered into between OBS and ITA was an integral part of the overall business activity of the assessee. It is contended by him that just as the forfeiture of amounts shown in the account styled 'Empty Bottles Return Security Deposit Account' in the case of Punjab Distilling Industries Ltd. (supra) had been held to be a taxable income by the Hon'ble Supreme Court in the present case also the forfeited security deposit was nothing but income. Referring to the decisions of the various Hon'ble High Courts in Narandas Mathuradas & Co. v. CIT [1959] 35 ITR 461 (Bom.), CIT v. Inden Biselers [1973] 91 ITR 427 (Mad.), CIT v.Sugar Dealers [1975] 100 ITR 424 (All.) and Thackers H.P. & Co. v. CIT [1982] 134 ITR 21 (MP), the learned departmental representative contends that since the loss on account of forfeiture of security deposit has been invariably held to be a revenue loss in the hands of the payer, it follows correspondingly that the amount should be assessable as revenue income in the hands of the payee. In any case, the departmental representative says that even if the loss suffered by ITA was to be treated as a capital loss in their hands, so far as receipt by way of forfeiture is concerned, it was nothing but revenue receipt in the hands of the assessee. After so contending, the learned departmental representative has submitted that merely because the receipt of Rs. 6,05,000 had been shown by the assessee in the capital reserve account, the real nature of the receipt could not be said to have been changed. According to him, the entries made in the books of account are not determinative of the question as to whether a particular receipt is of a capital or of revenue nature and that the true nature of the receipt should be found out by looking into the facts of each case. For so contending, reliance has been placed by him on the decisions of the Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 and CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66. In the end, Mr. Chakraborty also laid emphasis on the statement of B.H. Gandhi, the partner of ITA, which had been recorded at Bombay on 9-9-1981. According to the departmental representative, this statement of the partner of ITA clearly shows that the sum of Rs. 6,05,000 was not a security deposit but was an advance made to OBS for the goods to be supplied by them under the agreement.

Even though this statement of B.H. Gandhi had been recorded at the back of OBS, it was, according to the departmental representative, a very valuable testimony and that merely because the opportunity of cross-examination had not been granted to the assessee-respondent, the testimony made by B.H. Gandhi could not be ignored by the ITO. Mr.

Chakraborty maintains that technical rules of evidence do not apply to income-tax proceedings and, therefore, the deposition made by B.H.Gandhi was an evidence on which reliance could be placed by the ITO.For so contending, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of C. Vasantlal & Co. v. CIT [1962] 45 ITR 206.

7. On the other hand, Mr. G.C. Sharma, the senior advocate, the learned Counsel of the respondent, has refuted each and every contention taken by Mr. Chakraborty. Like Mr. Chakraborty, Mr. Sharma has also taken us through the agreement dated 29-5-1976 entered into between OBS and ITA and then contended that the amount of security deposit had no connection or nexus with the sale price which was realisable under the agreement and that the security deposit was clearly of the character of loan, which was liable to be repaid with interest if business commenced as stipulated in the agreement and which was liable to be appropriated or forfeited by the OBS if there was breach of the agreement on the part of the ITA or if the full amount of security deposit, as contemplated in Clause 6 of the agreement, had not been paid within the stipulated period by the ITA. According to Mr. Sharma, the terms of the agreement, which were clear and not capable of more than one interpretation, clearly show that a sum of Rs. 10 lakhs was to be deposited by way of security by ITA before any business could commence and that since that security deposit was never made by ITA in accordance with Clause 6, the agreement was still-born and that the forfeiture of security actually resulted into the appropriation of a deposit or a loan which had been made by ITA with OBS. In order to emphasise the point that the sum of Rs. 6,05,000 was nothing but a payment towards security deposit, Mr. Sharma has emphasised on the terms of the agreement and the letters that had passed between OBS and ITA, which stand reproduced in an earlier portion of this order.

According to him, the managing partner of ITA, namely, Elias H. Khapra, had all along admitted that the sum of Rs. 6,05,000 was a security deposit. Referring to Clause 7 of the agreement, Mr. Sharma says that the security deposit was never to be adjusted against the sale of bright steel bars stipulated to be made by OBS to ITA and that the whole of the security deposited was to be refunded to the depositor ITA within 15 days of the receipt of the sale price in respect of final supply of goods by OBS to ITA. Further, referring to Clause 8 of the agreement, Mr. Sharma says that the interest of 12 per cent per annum which was payable by OBS to ITA at the time of refund of the security deposit clearly indicated that the security deposit was of the nature and character of a loan. According to the learned authorised counsel of the assessee, the character of a receipt is determined at the time it is received and that subsequent happenings did not change its character and do not convert a receipt into income if it was initially a loan at the time of receipt. For so contending, reliance has been placed by him on the famous decision in the case of Morley (Inspector of Taxes) v.Tattersall [1939] 7 ITR 316 (CA) and on the decision of the Hon'ble Delhi High Court in the case of Motor & General Finance Ltd. (supra).

According to Mr. Sharma, every gain is not income and everything that goes to augment the coffers of an assessee cannot be unexceptionally described as a trading receipt. According to him, the assessee was not carrying on the business of taking any security deposits and that in the present case, the security deposit which was stipulated under Clause 6 of the agreement was for the due performance of the contract.

Such a security deposit, when forfeited, did not result in any gain of income nature and that, therefore, according to Mr. Sharma, the Commissioner (Appeals) was justified in holding that the sum of Rs. 6,05,000 was on capital account. According to Mr. Sharma, the security deposit had no connection with the business carried on by the assessee because as per the agreement, the business was to commence only after the security deposit had been made and since the security deposit was not made as stipulated, the relationship between the deposit and the activity of business could not come into existence. Refuting the argument of the learned departmental representative, Mr. Sharma says that just because the loss suffered by the payer of a security deposit is adjudged as a revenue loss in its hands, it does not follow that the nature of the receipt in the hands of the payee was also of revenue nature. After thus contending that the security deposit was of the nature of a loan and that it had no nexus with the sale price which was to be realised in the event of the commencement of the business, Mr.

Sharma has contended that the agreement dated 29-5-1976 was a profit-making apparatus and that since it was destroyed on account of the non-fulfilment of the conditions by ITA, the forfeiture of Rs. 6,05,000 by OBS was nothing but a capital receipt. Elaborating the point, Mr. Sharma says that the agreement was a source of income to the assessee and since it was breached and brought to an end, the consequential loss suffered was a capital loss in the hands of the payer and similarly, the compensation which the OBS was able to obtain by forfeiting the security deposit was a capital receipt in the hands of the OBS. In support of his earlier contention that the deposit of Rs. 6,05,000 was nothing but a loan, Mr. Sharma has taken us through the authority of the Hon'ble Supreme Court in the case of K.M.S.Lakshmanier & Sons v. CIT [1953] 23 ITR 202. According to Mr. Sharma, the facts in the present case were absolutely similar to those which prevailed in the case of Lakshmanier & Sons (supra) after the latter had issued a circular dated 14-2-1945. According to him just as the deposits in the case of Lakshmanier & Sons (supra) received "after 14-2-1945 had been adjudged as loans or borrowed money by the Hon'ble Supreme Court in the present case also the security deposited was nothing but a loan. According to Mr. Sharma, the decision of the Hon'ble Delhi High Court in Motor & General Finance Ltd.'s case (supra) was based on the authority of the decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier & Sons (supra) and that since the facts in the case of the above-mentioned two decisions of the Hon'ble Supreme Court and the Hon'ble Delhi High Court were akin to the facts in the present case, the Commissioner (Appeals) had every justification in upholding the contention of the assessee that the receipt of Rs. 6,05,000 was on capital account. Referring to the evidence of B.H.Gandhi, the partner of ITA, which had been recorded at the back of the assessee, the learned authorised counsel of the assessee submits that it was a wholly worthless testimony which could not have been utilised by the Income-tax Department as it had never been put to the assessee.

In any case, according to Mr. Sharma, evidence of B.H. Gandhi should have been disregarded altogether as it was the evidence of a disgruntled partner of ITA who had absolutely no knowledge about the working of that firm. Referring to the statement, a copy of which has been supplied and placed at page 58 of the assessee's paper book, Mr.

Sharma says that a partner who did not even know whether the firm was assessed to tax or not and who was completely ignorant about other affairs of firm, could not have been considered as a reliable witness by the department. In any case, according to him, the testimony of B.H.Gandhi ought to have been put to the assessee and an opportunity should have been allowed to the assessee to cross-examine B.H. Gandhi before the evidence could be utilised by the ITO and since, according to him, this was never done, the ITO had no justification in coming to the conclusion that the sum of Rs. 6,05,000 was not a security deposit but was merely an advance towards the sale price to be realised by OBS.Referring to the decisions of the Hon'ble Supreme Court and the Hon'ble Punjab and Haryana High Court, respectively, in Punjab Distilling Industries Ltd.'s case (supra) and Atlas Cycle Industries Ltd.'s case (supra), on which reliance has been placed by the learned departmental representative, Mr. Sharma says that the facts in those cases were entirely different and, therefore, the ratio and decision in those cases were inapplicable to the facts of the present case. As far as the other decisions relied upon by the learned departmental representative are concerned, the learned senior advocate says that even though in those cases the losses suffered by those assessees on forfeiture of security deposit had been held to be revenue losses, it did not follow that in the present case the forfeiture of security deposit had resulted in a revenue receipt on the part of the assessee. According to Mr. Sharma, analogy or the support drawn by the departmental representative from the decisions in Narandas Mathuradas & Co.'s case (supra), Inden Biselers' case (supra), Sugar Dealers' case (supra) and Thacker H.P. & Co.'s case (supra) was too far-fetched. Shri Sharma has also taken us through his written propositions submitted under the signature of his junior, Mr. R.K. Raghwan, and also a paper book submitted on behalf of the assessee consisting of as many as 83 pages.

8. We have given our very anxious consideration to the controversy as to whether the forfeiture of deposit of Rs. 6,05,000 by respondent OBS was a capital or revenue receipt. We have carefully gone through the decisions of the ITO and the Commissioner (Appeals) and we have equally carefully considered the arguments, for and against, very ably canvassed by the learned representatives of the two sides. We have also gone through each and every decision of the Hon'ble Courts, on which reliance has been placed either by the learned departmental representative, Mr. Chakraborty, or by the learned senior advocate, Mr.

G.C. Sharma, appearing for the assessee. We have in particular gone through the agreement and the (sic) ITA before deciding as to whether the receipt was a revenue receipt or a receipt on capital account.

After so doing, we would hold as follows.

9. A perusal of the agreement shows that it had been entered into between OBS and ITA in order that the former could supply to the latter bright drawn stainless steel bars and coils of given specifications of the value of approximately Rs. 50 lakhs. The agreement was for a period of two years and the manufacturer-respondent, i.e., OBS, had bound itself under the agreement to ensure the supplies of the finished goods to ITA by the scheduled dates provided the security deposit of Rs. 10 lakhs, as stipulated in Clause 6 of the agreement, had been made with OBS by ITA. The agreement further shows that the security deposit so made in terms of Clause 6 of the agreement was not to be adjusted by OBS against the price of goods which it had to supply to ITA under the agreement. Clause 7 of the agreement makes it explicit that after the supplies had been finally made by OBS to ITA and the price thereof had been received, the security deposit had to be refunded by OBS to ITA within 15 days of the final supply of the goods. This clause shows to us that the security deposit was for the purposes of ensuring due performance of the contract on the part of ITA. Clause 8 of the agreement shows to us that the security deposit was a sum in the nature of a refundable loan which was to bear interest at 12 per cent per annum payable by OBS to ITA at the time of the refund of the said security deposit. After having noticed these and other relevant clauses of the agreement, we have carefully perused the correspondence that passed between OBS, on the one hand, and ITA, on the other. It becomes quite clear from the correspondence that the ITA had to deposit Rs. 10 lakhs by way of security deposit with OBS before any business under the agreement could commence and that since ITA had failed to deposit Rs. 10 lakhs by the stipulated date, i.e., 30-7-1977, and that since it had been able to pay only Rs. 6,05,000, the OBS, i.e., the assessee-respondent, was entitled to terminate the agreement in accordance with Clause 9 of the agreement. Option to terminate the agreement was exercised by OBS as per its letter dated 4-12-1977/5-12-1977 addressed to ITA. In other words, what, in fact, happened in the present case was that a business which was supposed to commence as per the terms of the agreement did not commence at all as the prerequisite condition of making security deposit of Rs. 10 lakhs with OBS by ITA was not fulfilled. Applying the principles of law as laid down by the Hon'ble Supreme Court in the case of K.M.S.Lakshmanier & Sons (supra) and by the Hon'ble Delhi High Court in the case of Motor & General Finance Ltd. (supra), it appears to us that in the present case what the assessee-respondent had demanded from ITA was a certain sum of money by way of security deposit which was to be so held for the due and faithful performance of the contract so long as it remained in force. This security deposit, which was refundable with interest after the contract had been faithfully executed, fell within the meaning of a loan or a borrowed fund as per decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier & Sons (supra). We have gone through the facts of that case very carefully and we fine chat the deposit received by the assessee-respondent vide Clause 6 of the agreement dated 29-5-1976, was akin in character to the deposit or deposits that had been received by Lakshmanier & Sons after 14-2-1945.

A circular had been issued by Lakshmanier & Sons, who were the sole selling agents of yarn manufactured at Madura Mills Co. Ltd., to its various constituents that with effect from 14-2-1945 it was to receive 'certain sums towards security deposit and to keep the same with us so long as our business connection under the contract will continue with you'. Their Lordships of the Hon'ble Supreme Court considered the impact of the aforesaid circular and held that the amounts deposited by the constituents of Lakshmanier & Sons did not have any relation to the price realisable in respect of the goods to be delivered to the various constituents. The price in respect of the goods to be supplied by Lakshmanier & Sons had to be paid by the customers in full against delivery of the goods and the security deposit was not to be adjusted against the price realisable. Having had regard to these facts and also having taken into account the fact that the security depositors had to be paid an interest of 3 per cent per annum by Lakshmanier & Sons, their Lordships came to the conclusion that such deposits were of the nature of loans or borrowed funds. We find that there is a striking similarity between the facts as prevailed in the case of K.M.S.Lakshmanier & Sons (supra) and the facts that prevail in the appeal under consideration. The facts in the present case have also a great similarity with the facts which prevailed in the case of Davies (H.M.Inspector of Taxes) v. Shell Co. of China Ltd. [1952] 22 ITR (Suppl.) 1 (CA). Their Lordships of the Hon'ble Supreme Court had taken into account the above-mentioned English decision and then came to the conclusion that the deposits received by Lakshmanier & Sons from its constituents after 14-2-1945 were nothing but in the nature of loan or borrowed money. The above decision of the Hon'ble Supreme Court had been taken due note of by the Hon'ble Delhi High Court in the case of Motor & General Finance Ltd. (supra). Their Lordships of the Delhi High Court had also taken into account the other relevant decisions and in particular the decision of Punjab Distilling Industries Ltd.'s case (supra) and then observed as follows: The principles that emerge from the aforesaid authorities can now be conveniently summarised. It is clear that the quality and nature of a receipt for income-tax purposes is fixed once and for all, when it is received. Receipts of money or deposits for adjustment in the price of goods to be supplied or services to be rendered, may be mere advance payments and, therefore, revenue receipts and not borrowed money. They are an integral part of a commercial transaction of sale or service and are related to the price of goods or to the charges for services rendered. They are trade receipts and money of the assessee, and hence his revenue or income. Receipts in the nature of deposits for making good the defaults, if any, of the person making the deposit, on the other hand, are simply loans owed by the assessee to such person, and they form a part of the assessee's trading structure and not trade receipts....

We are of the considered view that the above guidelines laid down by the Hon'ble Delhi High Court which were in turn based on the guidelines laid down by the Hon'ble Supreme Court in K.M.S. Lakshmanier & Sons' case (supra), had been properly applied by the Commissioner (Appeals) to the facts of the present case. As we have stated earlier, the facts in the case of Motor & General Finance Ltd. (supra) were akin to the facts of the present case and just as there had been forfeiture of deposit by Motor & General Finance Ltd. on account of non-performance of contract, in this case also, the forfeiture of security deposit had been made for the non-performance of Clause 6 of the agreement. The security deposit in the case of Motor & General Finance Ltd. (supra), as in the present case, had been obtained in order to ensure the due performance of the contract by the parties. The receipt of Rs. 6,05,000 was, thus, rightly considered to be a loan at the initial stage when it was deposited by way of a refundable security deposit by ITA with OBS.The character of this loan or the deposit did not change into a receipt of income nature when it was subsequently forfeited by the assessee on account of the failure of ITA to make the deposit by 30-9-1977.

Respectfully abiding by the law as laid down by the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier & Sons (supra) and the Hon'ble Delhi High Court in the case of Motor & General Finance Ltd. (supra), we would hold that the deposit of Rs. 6,05,000 was of the nature of a loan on which interest was payable by the assessee at 12 per cent per annum if the contract had been fulfilled by the ITA. Further, abiding by the law as laid down by the Hon'ble Delhi High Court in the above-mentioned case, we would hold that the character of a receipt is determined at the time when it is received, and since in the present case when the refundable deposit was made, it was of the nature of loan it did not change its character when the forfeiture had been made by the assessee-respondent.

10. Apart from what we have held above, we also find that in fact the security deposit had no nexus with the actual business which was to be carried on between OBS and ITA in respect of the supply of bright steel bars by the former to the latter. The security deposit was not at all to be adjusted against the sale price realisable by OBS from ITA. If at all there was a connection between the security deposit and the business to be commenced, it was only to the effect that the deposit had been obtained for the due performance of the contract only. The learned departmental representative was, therefore, according to us, not correct when he said that the deposit was an integral part of the business carried on by the assessee. The other arguments of the learned departmental representative are also not acceptable to us. The mere fact that the forfeiture is held to be a business loss in the hands of a payer, it does not mean that correspondingly the receipt in the hands of payee should always be a revenue receipt. It is now a well settled law that in order to find out as to whether a receipt is a capital receipt or a revenue receipt, one has to see merely as to what is its nature in the hands of the receiver and one has not to bother about its nature in the hands of the payer. According to us, this is a trite law but in case any authority was to be needed, we would refer to the decision of the Hon'ble Supreme Court in the case of CIT v. Kamal Behari Lal Singha [1971] 82 ITR 460. The learned departmental representative is, therefore, according to us, not entitled to take any support from the decisions in Narandas Mathuradas & Co.'s case (supra), Inden Biselers' case (supra), Sugar Dealers' case (supra) and Thackers H.P. & Co.'s case (supra).

11. So far as the reliance placed by the learned departmental representative on the Supreme Court decision in the case of Punjab Distilling Industries Ltd. (supra) and the decision of the Hon'ble Punjab and Haryana High Court in the case of Atlas Cycle Industries Ltd. (supra) is concerned, we find that the facts and circumstances in those cases were entirely distinguishable. In the case of Punjab Distilling Industries Ltd. (supra), the assessee was carrying on business of distilling and selling country liquor to licensed wholesalers. In order to relieve the scarcity of bottles, the assessee-distiller was, in accordance with a scheme devised by the Government, entitled to charge the wholesalers a price for the bottles which was refundable as and when the bottles were returned. The receipts on account of the price of bottles had been entered in the books of that assessee under the heading 'Empty Bottles Return Security Deposit Account'. The question that arose for consideration of the Hon'ble Supreme Court in that case was as to whether the assessee was liable to be assessed on the balance of the amounts remaining in the above-mentioned security deposit account after the refund had been made therefrom. Their Lordships of the Supreme Court held that as the wholesalers were under no obligation to return the bottles, the amounts charged by the assessee in respect of the prices of bottles were not security deposits and the fact that these amounts had been described as such was not sufficient to create an obligation to return the bottles.

Their Lordships further held that the amounts entered in by that assessee in the Empty Bottles Return Security Deposit Account were an integral part of the commercial transaction of the sale of country liquor in bottles and that, therefore, the amounts remaining as balance in the aforesaid account were rightly assessable to tax. While so deciding the case, their Lordships had taken into account the earlier decision of the Supreme Court in K.M.S. Lakshmanier & Sons' case (supra) and the English decision in the case of Davies (H.M. Inspector of Taxes) (supra). Their Lordships had also taken into account the other English decision in the case of Tattersall (supra). Their Lordships held that the deposits received by Punjab Distilling Industries Ltd. fall into the category of the deposits which had been received in the case of K.M.S. Lakshmanier & Sons (supra) before 14-2-1945. In other words, if the deposits which had been received by the Punjab Distilling Industries Ltd. (supra) had fallen into the category of deposits which had been received in the case of K.M.S.Lakshmanier & Sons (supra) after 14-2-1945, the decision of the Hon'ble Supreme Court in the case of Punjab Distilling Industries Ltd. (supra) would have been different. So far as the other two English decisions are concerned, their Lordships of the Supreme Court had not disagreed with the ratio decidendi of those cases but had merely observed that the facts in those cases were distinguishable so far as the facts in the case of Punjab Distilling Industries Ltd. (supra) were concerned.

According to us, the decision of the Hon'ble Supreme Court in the case of Punjab Distilling Industries Ltd. (supra), in fact, supports the view that we have taken in accordance with the earlier decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier & Sons (supra).

The facts in the case of Atlas Cycle Industries Ltd. (supra) had no similarity whatsoever with the facts prevailing in the present case. In the case of Atlas Cycle Industries Ltd. (supra), three new employees of that company had entered into an agreement for serving the company for an agreed period of time and deposited Rs. 3,348 by way of security. As the employees had left the service of the company before the stipulated period, the security deposits had been forfeited by the assessee-company in that case. Their Lordships of the Punjab and Haryana High Court upheld the assessment of forfeited security deposit on the ground that the assessee had by forfeiting the security recompensed itself in respect of the expenditure which had been incurred by it on the training of the employees and which had been allowed as a business expenditure by the income-tax authorities. The decision of the Hon'ble Punjab and Haryana High Court does not, in any way, help the case sought to be made by the learned departmental representative.

12. Insofar as the testimony of B.H. Gandhi, the partner of ITA, is concerned, we would agree with the representation made by the learned senior advocate, Mr. Sharma, that it was an unreliable testimony and that in any case, it could not have been used against the assessee unless the latter had been confronted with it. On going through the statement of B.H. Gandhi, we find that he did not know anything about the accounts of ITA and he did not even know as to whether ITA had been assessed to tax. The testimony of such an ignorant partner could not be given preference over the documentary evidence which is available in the form of correspondence between OBS and ITA, in which it has been clearly admitted that the sum of Rs. 6,05,000 was nothing but a part of the security deposit which was to be paid by ITA to the extent of Rs. 10 lakhs in accordance with Clause 6 of the agreement dated 29-5-1976.

The ITO is certainly not bound by any technical rules of evidence and it is undoubtedly open to him to collect materials and evidence which would facilitate assessment. But in case he desires to use that material against the assessee, the latter must be informed of the evidence gathered against it and must be given an adequate opportunity of explaining it. That was the ratio of the decision of the Hon'ble Supreme Court in the case of C. Vasantlal & Co. (supra). This decision, on which the learned departmental representative has placed reliance, in fact supports the contention taken by the learned advocate of the opposite side.

13. While we have held as above that the forfeiture of security deposit of Rs. 6,05,000 did not result in any income on revenue account, we must make it clear that we do not agree with the representation made on behalf of the assessee-respondent that as a result of the breach of the agreement dated 29-5-1976, a profit-making apparatus had been destroyed, and, therefore, for that reason, the receipt of Rs. 6,05,000 was a capital receipt. According to us, the impact of the termination of contract was not such as could amount to destruction of a profit-earning apparatus. It did not amount to a loss of an enduring asset. It also did not amount to any unabsorbed shock dislocating the business structure.

14. In the result, we agree with the finding of the Commissioner (Appeals), which was in accordance with the law laid down by the Hon'ble Supreme Court in K.M.S. Lakshmanier & Sons' case (supra) and by the Hon'ble Delhi High Court in the case of Motor & General Finance Ltd. (supra). We, accordingly, uphold the order of the Commissioner (Appeals) and dismiss the departmental appeal.


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