2019 (7) TMI 880 - SC - Income Tax

Characterization of income - subscriptions were received in the years in question from the public at large under a collective investment scheme - receipts of subscriptions in the hands of the assessee -NBFC Company to be treated as income OR capital receipts - assessee has in its books of accounts shown this sum as income - impact of forfeiture clauses of subscription - HELD THAT - It is true that there was no direct focus of the Court on whether subscriptions so received are capital or revenue in nature, we may still advert to the fact that this Court has also, on general principles, held that such subscriptions would be capital receipts, and if they were treated to be income, this would violate the Companies Act. It is, therefore, incorrect to state, as has been stated by the High Court, that the decision in Peerless General Finance and Investment Co. Limited 1992 (1) TMI 337 - SUPREME COURT 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. We reiterate that though the Court s focus was not directly on this, yet, a pronouncement by this Court, even if it cannot be strictly called the ratio decidendi of the judgment, would certainly be binding on the High Court. Even otherwise, as we have stated, it is clear that on general principles also such subscription cannot possibly be treated as income. Mr. Ganesh is right in stating that 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. The theoretical aspect of the present transaction is the fact that the assessee treated subscription receipts as income. The reality of the situation, however, is that the business aspect of the matter, when viewed as a whole, leads inevitably to the conclusion that the receipts in question were capital receipts and not income. In the circumstances, we set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal.

Issues Involved:
1. Whether receipts of subscriptions should be treated as income or capital receipts.
2. The impact of forfeiture clauses on the nature of the receipts.
3. The relevance of the accounting treatment of these receipts by the assessee.
4. The applicability of the Supreme Court judgment in Peerless General Finance and Investment Co. Limited vs. Reserve Bank of India (1992) 2 SCC 343.
5. The role of estoppel in the treatment of these receipts.
6. The retrospective application of RBI directions dated 15th May 1987.

Detailed Analysis:

1. Nature of Receipts:
The primary issue was whether the receipts of subscriptions in the hands of the assessee-Company for the assessment years 1985-86 and 1986-87 should be treated as income or capital receipts. The assessee had shown these amounts as income in its books of accounts, leading the Assessing Officer to tax them as such. However, the Income Tax Appellate Tribunal (ITAT) relied on the Supreme Court's judgment in Peerless General Finance and Investment Co. Limited, which indicated such amounts are capital receipts. The Supreme Court reiterated that subscriptions received under a collective investment scheme, which were not forfeited, should be treated as capital receipts.

2. Forfeiture Clauses:
The scheme contained forfeiture clauses where certain amounts could be forfeited mid-way, making them income in the hands of the assessee. However, the Supreme Court noted that no subscriptions were forfeited during the relevant years, as confirmed by an interim order dated 03.09.1979. Therefore, the potential for forfeiture did not change the nature of the receipts to income.

3. Accounting Treatment:
The High Court had emphasized the fact that the assessee had treated the amounts as income in its profit and loss account. However, the Supreme Court highlighted that the true nature of the receipts should be determined by their inherent characteristics, not merely by their treatment in the accounts. It cited previous judgments to support the principle that book entries are not decisive of the true nature of the receipts.

4. Applicability of Peerless Judgment:
The Supreme Court in Peerless General Finance and Investment Co. Limited had held that such receipts are capital in nature. The High Court had misinterpreted this judgment by stating it did not lay down an absolute proposition of law. The Supreme Court clarified that even though the focus in Peerless was on the RBI directions, the judgment did establish that such receipts are capital receipts, and this principle was binding.

5. Estoppel:
The High Court had argued that the assessee was estopped from claiming the receipts as capital since it had treated them as income. The Supreme Court rejected this, stating there can be no estoppel against a settled position in law. The true nature of the receipts as capital could not be altered by their accounting treatment.

6. Retrospective Application of RBI Directions:
The High Court had held that the RBI directions dated 15th May 1987, which the Peerless judgment interpreted, were prospective and did not apply to the assessment years in question. The Supreme Court clarified that the general principles established in Peerless regarding the nature of such receipts as capital were applicable irrespective of the RBI directions' prospective application.

Conclusion:
The Supreme Court set aside the High Court's judgment and restored the ITAT's decision, confirming that the subscription receipts were capital receipts and not taxable as income. The appeal was allowed with no order as to costs.

← Previous Next →