1996 (5) TMI 2 - SC - Income Tax

Accrual of income for bank - Bank purchasing property on behalf of its constituents - bank had received margin money from its constituents in respect of these purchases - constituents failed to pay the balance amount by the stipulated date. The bank forfeited the margin money and adjusted the same against the purchase price which the bank had paid for purchasing the securities and showed the balance of the price as the cost of purchasing the bonds - whether bank has right to adjust the margin money to reduce the purchase price of the bonds? - HC held that the profits and gains of the bank would arise only when the bank sold the securities or redeemed them at the time of maturity if it had become the owner of the securities and as the bank became the owner of the securities at the same time when it became the owner of the margin amount also there was nothing unnatural or illegal in the bank taking into account this margin amount which had become its money at that time in arriving at its cost of the securities. HELD THAT - This is not a case of pre-deposit of money for acquisition of licence or business contract which had to be kept deposited with the principal for the entire duration of the period of contract. Each deposit was made for a specific transaction. The bank undertook to purchase the securities for and on behalf of its constituents. The bank s practice was to take a deposit before purchasing the security which was liable to be forfeited in case of default. The money was received and forfeited incidentally and in the course of day-to-day banking business. After the forfeiture the money became the bank s own money. The Income-tax Officer was right in treating this forfeited money as income of the assessee earned in the usual course of banking business. The bank has purchased the securities at face value. Its cost cannot be anything less than the price which was actually paid by the bank. The bank would have handed over the securities to the constituent if he had not defaulted. In that case the bank would have been entitled only to the brokerage. Since the constituent defaulted the deposit amount was forfeited and the end result of the transaction was that the bank became full owner of the securities and the amount lying in deposit with it became its own money. The forfeited amount was the bank s income made in the course of its banking business and had to be assessed accordingly in the year in which it became the bank s money. The accrual of income cannot be deferred by adjusting the deposit amount against the cost of the securities. It may have utilised the deposits although there is no finding of fact to that effect as part payment of the price of the securities. But after its forfeiture the deposit amount became the property of the bank. The money that was utilised for the purchase of the securities was the bank s money. No question of reduction of the cost of the securities by adjustment of the deposit amount can arise in the facts of this case. Decided in favour of revenue.

Summary

Issues:
- Treatment of margin money forfeited by a bank as income for taxation purposes.
- Whether a bank can adjust forfeited margin money against the cost of securities purchased on behalf of constituents.

Analysis:
The case involved the treatment of margin money forfeited by a bank as income for taxation purposes and the permissibility of adjusting forfeited margin money against the cost of securities purchased on behalf of constituents. The bank purchased securities for constituents, receiving margin money as advance payment. If constituents failed to pay the balance amount by the due date, the bank forfeited the margin money and adjusted it against the purchase price of the securities. The Income-tax Officer treated the forfeited margin money as income, but the Tribunal allowed the adjustment. The High Court held that the bank could adjust forfeited margin money against the cost of securities, considering it as part of the profit-making process. It ruled that the bank's income would arise upon selling or redeeming the securities. The Supreme Court disagreed, stating that forfeited margin money should be treated as income earned during normal banking operations. The bank's practice of taking margin money before purchasing securities was integral to its profit-making process. The bank's ownership of securities and forfeited margin money occurred simultaneously, justifying the adjustment. However, the Court emphasized that the cost of securities should not be reduced by forfeited margin money. The bank's income accrued when the margin money became its own, and such income could not be deferred by adjusting it against the cost of securities. The Court allowed the appeal, setting aside the High Court's judgment, and answered the question in the negative, favoring the Revenue.