GLIMPSES OF SUPREME COURT RULINGS

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 9^th September, 1999 stated that since no question of law arose, the reference applications before it were dismissed.

The Supreme Court, by an order dated 3^rd 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 6^th 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.