1976 (4) TMI 41 - HC - Income Tax

Depreciation And Development Rebate Depreciation And Development Rebate Original Assessment Original Assessment Set Off Set Off

Summary

Issues:
1. Whether the margin money forfeited by the banks should be considered as their income liable to tax or can be adjusted against the cost of securities acquired on behalf of their constituents.

Detailed Analysis:
The judgment of the High Court of Madras dealt with two references involving banks, where the Income-tax Appellate Tribunal, Madras Bench, delivered a common order. The central issue in both references was whether the margin money forfeited by the banks, Lakshmi Vilas Bank Ltd. and Karur Vysya Bank Ltd., should be treated as income liable to tax or could be adjusted against the cost of securities acquired. The Income-tax Officer initially viewed the forfeited margin money as income of the banks, but the Tribunal allowed the banks to adjust the forfeited amount against the cost of securities. The High Court analyzed the letters executed by the constituents, which clearly stated that failure to pay the balance would result in the securities belonging to the banks and the margin money being forfeited. The Court concluded that the banks purchased the securities on behalf of their constituents and were entitled to adjust the forfeited margin money against the cost of securities.

The Court emphasized that the banks acted on behalf of their constituents in purchasing the securities and were not acquiring them for their own account. The letters from the constituents indicated that the banks were investing on their behalf. The Court noted that the banks became the owners of both the margin money and the securities simultaneously when the constituents failed to pay the balance. Therefore, there was no legal impediment for the banks to adjust the forfeited margin money against the cost of securities. The Court highlighted that the banks' profits would only arise upon selling or redeeming the securities, at which point the reduced cost would be considered for tax liability. The judgment affirmed the Tribunal's decision, stating that there was no evasion of tax liability in the banks' actions and allowed the adjustment of forfeited margin money against the cost of securities.

In conclusion, the High Court held that the banks were justified in adjusting the forfeited margin money against the cost of securities purchased on behalf of their constituents. The Court found no legal basis to prevent the banks from adopting this procedure, as it did not evade tax liability. The judgment favored the banks, allowing them to consider the forfeited margin money in determining the cost of securities acquired. The Court answered the questions in favor of the banks and awarded costs to the assessees in both cases.