1986 (2) TMI 337 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of forfeited earnest money and security deposits.
2. Inclusion of a sum claimed as reimbursement of loss from the government in the income of the assessee.

Issue-wise Detailed Analysis:

1. Taxability of Forfeited Earnest Money and Security Deposits:

The primary issue was whether the sum of Rs. 24,87,847, representing forfeited earnest money and security deposits, should be treated as taxable income of the assessee company. The assessee, a major public sector undertaking, argued that this amount was not liable to be taxed as income, relying on a previous ITAT decision for the assessment year 1972-73, which held that such forfeiture did not constitute income. The Income Tax Officer (ITO), however, treated this sum as income, relying on the Punjab High Court decision in Punjab Steel Scrap Merchant's Association vs. CIT (1961) and the provisions of Section 28(iv) of the Income Tax Act, 1961, which includes the value of any benefit or perquisite arising from business as income.

The Commissioner (A) agreed with the ITO, stating that the forfeiture of earnest money was a benefit arising from business and thus constituted income under Section 28(iv). This view was supported by the Delhi High Court decision in CIT vs. Nar Hari Dalmia (1971), which held that a benefit in cash could be considered income.

However, the assessee argued, citing the Gujarat High Court decision in CIT vs. Alchemic Pvt. Ltd. (1981), that Section 28(iv) applies only to benefits other than cash. The Tribunal agreed with the assessee, stating that the nature of the receipt at the time of its receipt is crucial. The Tribunal's earlier decisions had held that such receipts were capital in nature, as they were deposits to ensure contract execution and not revenue receipts. The Tribunal concluded that Section 28(iv) does not apply to cash receipts, and the forfeited earnest money and security deposits did not constitute income.

2. Inclusion of a Sum Claimed as Reimbursement of Loss from the Government:

The second issue was whether a sum of Rs. 1,59,49,245, claimed as reimbursement of loss from the government, should be included in the income of the assessee. The assessee had imported PVC and sold it at a loss, which the government agreed to subsidize within certain limits. The assessee claimed this amount as income based on the mercantile system of accounting, the minutes of an inter-ministerial meeting, and a letter from the Finance Secretary.

The IAC included this sum as income, but the Commissioner (A) deleted it, stating that there was no unequivocal acceptance by the government to reimburse the claimed amount. The Commissioner (A) held that the correspondence did not create an enforceable right for the assessee to receive the reimbursement, and the mere book entries did not result in income.

The Tribunal agreed with the Commissioner (A), stating that the letters and minutes did not unequivocally promise reimbursement, and the assessee's unilateral claim did not create a right to receive the sum. The Tribunal emphasized that income does not result from mere book entries but must result in law. Therefore, the sum claimed as reimbursement was not includible in the income of the assessee.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the taxability of forfeited earnest money and security deposits, holding that these did not constitute income. The Tribunal dismissed the departmental appeal, upholding the Commissioner (A)'s deletion of the sum claimed as reimbursement of loss from the income of the assessee, as there was no enforceable right to receive the amount from the government.