1.
The Peerless General Finance
and Investment Company Ltd. vs. CIT (2019) 416 ITR 1 (SC)
Capital or revenue receipt – Deposits by
way of subscription pursuant to investment schemes made by subscribers which
have never been forfeited are capital receipts – Nature of receipt cannot be
decided only by the treatment of such subscriptions in the accounts of the
assessee
The assessee company had floated various
schemes which required subscribers to deposit certain amounts by way of
subscriptions in its hands and, depending upon the scheme in question, these
subscribed amounts at the end of the scheme were ultimately repaid with
interest. The schemes also contained forfeiture clauses as a result of which
if, midway, a certain amount was forfeited, then the said amount would
immediately become income in the hands of the assessee.
For the assessment years 1985-86 and
1986-87, the AO treated these amounts as income inasmuch as under the
accounting system followed by the assessee, these amounts were credited to the
profit and loss account for the years in question as income. The Commissioner
of Income Tax (Appeals) dismissed the appeal from the original assessment
orders and confirmed the same. The Income Tax Appellate Tribunal, on the other
hand, allowed the appeals by relying upon the judgement of this Court in Peerless
General Finance and Investment Co. Limited and Anr. vs. Reserve Bank of India,
(1992) 2 SCC 343 in which, according to the Appellate Tribunal, the
Supreme Court finally decided the question in the assessee’s own case stating
that such amounts cannot be treated to be income but are in the nature of
capital receipts. This was not only because of the interpretation of an RBI
circular of 1987, but also because, on general principles, such amounts must be
treated to be capital receipts or otherwise they would violate the provisions
of the Companies Act.
It further went through the various clauses
contained in the scheme and found that in point of fact no subscription
certificate had, in fact, been forfeited as a result of which it was clear that
there would be no income in the hands of the assessee for these two years. It
also dealt with certificates that were surrendered prior to the stated time and
stated that in such cases whatever would remain as surplus in the hands of the
assessee would be treated as income. It went on to state that there would be no
estoppel in law against the assessee making a claim that these amounts
were in the nature of capital receipts and not income, and also relied upon
certain judgements of the Supreme Court to buttress the proposition that the
Supreme Court had also held that what is the true position in law cannot be
deflected by what the assessee may or may not do in its treatment of the matter
at hand in its accounts. The appeal against the order of the Commissioner of
Income Tax (Appeals) was allowed by the Income Tax Appellate Tribunal.
In the first round, the High Court, by its
judgement dated 9th September, 1999 stated that since no question of
law arose, the reference applications before it were dismissed.
The Supreme Court, by an order dated 3rd
December, 2002 set aside the High Court judgement and referred the questions of
law to the High Court.
On remand, the High Court, by the impugned
judgement dated 6th October, 2005, allowed the appeal against the
Appellate Tribunal holding that a perusal of the subscription scheme of the
company showed that since forfeiture of the amounts deposited was possible,
this amount should be treated as income and not as a capital receipt. Further,
it relied heavily upon the fact that the assessee had itself treated such amounts
as income and credited them to its profit and loss account for the years in
question and would, therefore, be estopped by the same. Referring to the
judgement of the Supreme Court in Peerless General Finance and Investment
Co. Limited (Supra), it went on to state that since the said judgement
dealt with an RBI circular of 1987, which itself was only prospective, any law
declared as to the effect of clause 12 of that circular would be prospective in
nature and would, therefore, not apply to the assessment years in question.
On an appeal by the assessee company, the
Supreme Court observed that the question raised in the appeal was as to whether
receipts of subscriptions in the hands of the assessee company for the previous
years relevant to the assessment years 1985-86 and 1986-87 should be treated as
income and not capital receipts inasmuch as the assessee has in its books of
accounts shown this sum as income.
The Supreme Court noted that the
subscriptions were received in the years in question from the public at large
under a collective investment scheme and these subscriptions were never at any
point of time forfeited. It observed that this being the case and surrendered
certificates not being the subject matter of the appeal before it, it was clear
that even on general principles deposits by way of amounts pursuant to these
investment schemes made by subscribers which have never been forfeited could
only be stated to be capital receipts.
The Supreme
Court held that while it was true that there was no direct focus of the Court
on whether subscriptions so
received were capital or revenue in nature, still the Supreme Court had also,
on general principles, held that such subscriptions would be capital receipts
and if they were treated to be income it would violate the Companies Act. It
was, therefore, incorrect to state, as had been stated by the High Court, that
the decision in Peerless General Finance and Investment Co. Limited
(Supra) must be read as not having laid down any absolute proposition
of law that all receipts of subscription at the hands of the assessee for these
years must be treated as capital receipts.
The Supreme Court reiterated that though its
focus was not directly on this, yet, a pronouncement by the Supreme Court, even
if it could not be strictly called the ratio decidendi of the judgement,
would certainly be binding on the High Court. Even otherwise, it was clear that
on general principles also such subscription could not possibly be treated as
income. In cases of this nature it would not be possible to go only by the
treatment of such subscriptions in the hands of accounts of the assessee itself.
In the circumstances, the Supreme Court set
aside the judgement of the High Court and restored that of the Income Tax
Appellate Tribunal. The appeal was allowed.
