1. Both these references raise the same question of law though they relate to two different assessees and the order of the Income-tax Appellate Tribunal, Madras Bench, in respect of these two assessees is a common order. In the first reference the question of law referred to this court for its opinion by the Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, is :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 1,69,996 and Rs. 62,563 in the assessment years 1964-65 and 1965-66, respectively, received as deposits in the first instance and forfeited at a later stage, was not the income of the assessee liable to tax but that the assessee was entitled to take them into account in arriving at the cost of securities acquired by the assessee when these sums were forfeited ?'
2. In the latter reference, the question referred for the opinion of this court is:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 71,866 received as deposits in the first instance and forfeited at a later stage were not the income of the assessee liable to tax but that the assessee was entitled to take them into account in arriving at the cost of securities acquired by the assessee when these sums were forfeited ?'
3. The assessees in both these references are banks, the assessee in the former reference being the Lakshmi Vilas Bank Ltd., Karur, and the assessee in the latter reference being the Karur Vysya Bank Ltd., Karur. Thesebanks on behalf of their constituents purchased certain securities, namely,the Madras State Electricity Board Bonds, 1976. The procedure adoptedby the assessees in purchasing the securities on behalf of their constituentswas as follows:
A certain percentage of the face value of the securities was required to be paid by the constituents and the same was called 'margin money in deposit'. On receipt of the said margin money, the banks purchased securities for their face value in their own name. Each of one of the con-stitutents gave a letter to the bank undertaking to pay the balance of the amount on or before the specified date and also undertaking that if they did not pay the balance of the amount within the stipulated time, the securities shall belong to the bank and the margin money deposited by them also would be forfeited by the banks. This was in addition to the commission and service charges to which the banks were entitled. So far as the first reference is concerned, the face value of the bonds purchased, the purchase price, margin money in deposit which was ultimately forfeited and the cost of the bonds shown in the balance-sheet as reduced by the margin money are as follows:
Assessment yearFace value of the bondsPurchase priceMargin money in deposit forfeitedCost of the bonds shown in the balance sheet as reduced by margin money
4. When the constituents failed to pay the balance, what the bank did was to forfeit, the margin money and adjust the same against the purchase price which the bank paid for purchasing the securities and showed the balance only as their cost of the securities. The same procedure was adopted by the bank in the latter reference also. The Income-tax Officer while assessing the banks took the view that the margin money forfeited to the banks would constitute the income of the banks in the year in which it was forfeited and the banks had no right to adjust the same to reduce the cost of the bonds and consequently assessed the margin money forfeited. This view of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner on appeals preferred by the two banks. However, when the banks preferred further appeals to the Tribunal, the Income-tax Appellate Tribunal, Madras Bench, accepted the contention of the banks that they were entitled to adjust the margin money forfeited by them against the cost of the bonds for arriving at their cost of the securities and hence allowed the appeals preferred by the banks. It is, thereafter, at the instance of the department, these references were asked for and the questions mentioned above have been referred to this court for its opinion.
5. In our opinion, the conclusion of the Tribunal is correct. It is not in dispute that the letters which were executed by the constituents in favour of the banks expressly stated that they undertook to pay the balance of the amount within a stipulated date and if they failed to do so, the bonds shall belong to the banks absolutely and the margin money deposited by the constituents also would belong to the banks. Though the language of the letters written by the constituents is not identical in all the cases, having gone through the letters annexed to the references, we are satisfied that the effect is the same. It is clear that the banks purchased the bonds as securities only on behalf of their constituents, in their names and kept them with them because a major portion of the cost had not been paid by the constituents. The letter of one of the constituents in relation to the Electricity Board Bonds, as referred to in paragraph 8 of the order of the Tribunal, clearly shows that the bank was acting according to the instructions of the constituents and the bank itself was investing the amount in the purchase of securities on behalf of the constituents. Therefore, it is indisputably clear that at the time when the banks purchased the securities, they were not purchasing them on their own account as their securities, though they purchased the same in their names, but they were purchasing the securities for the benefit of and on behalf of their constituents. Therefore, having regard to the terms of the letters written by the various constituents, three things occur simultaneously, namely, (1) the failure on the part of the constituents to pay the balance of the price agreed to be paid for the bonds ; (2) on such failure, the margin money deposited by the constituents became the money of the banks ; and (3) at the same time, the bonds also became the property of the banks. Thus, these three things took place simultaneously at a particular point of time and, therefore, there is nothing in law preventing the bank in adjusting the margin amount forfeited by it, of which it became the owner just then against the amount which it paid on behalf of its constituents for purchasing the securities for the purpose of arriving at its cost of the securities. As a matter of fact, the learned counsel for the department was not able to bring to our notice any principle or provision of law or even any principle of accountancy which prevented the banks from adopting such a procedure. In fact, the profits or gains of the bank will arise only when the bank sold the securities or redeemed them at the time of maturity after it had become the owner of the securities. Since the bank becomes the owner of the securities at the same time when it becomes the owner of the margin amount also, there is nothing unnatural or illegal in the bank taking into account this margin amount which had become its money at that time in arriving at its cost of the securities. That is exactly what the banks have done in the present cases. It is not as if, in doing so, there was any evasion of the tax liability. If and when ultimately the banks sell the securities or redeem them and as a result of such sale or redemption make a profit, the profits will be ascertained by taking into account only the reduced cost as the bank's cost of the securities and certainly the said profits will form part of the profits or gains of their business and, therefore, will be liable to tax. Under these circumstances, we are of the opinion that there was absolutely nothing wrong in the Appellate Tribunal holding that the margin amount forfeited to the bank could be taken into account for arriving at the banks' cost of the securities which they originally purchased on behalf 6f their constituents. In view of this, we answer the questions in the affirmative and against the department. The assessees are entitled to their costs of the reference in the respective cases. Counsel's fee is fixed at Rs. 250 in each case.