2003 (5) TMI 192 - AT - Income Tax

Income-Chargeable as - Assessee entered into an agreement with P Ltd. for sale of shares of DCM - - Purchaser deposited earnest money with assessee

Summary

Issues Involved:
1. Whether the forfeited earnest money of Rs. 20 lacs should be treated as a capital receipt or a revenue receipt.

Detailed Analysis:

Issue 1: Treatment of Forfeited Earnest Money as Capital or Revenue Receipt

Facts of the Case:
The assessee filed a return of income declaring Rs. 54,725, which was initially accepted. Upon scrutiny, the AO observed that the assessee was involved in the sale and purchase of shares and securities, earning significant dividend and interest income. The assessee entered into an agreement with M/s Pioneer Distributors Ltd. for the sale of 1 lac equity shares of DCM Ltd. for Rs. 270 per share, with an earnest money deposit of Rs. 20 lacs. The purchaser failed to fulfill the agreement, leading to the forfeiture of the earnest money, which the assessee treated as a capital receipt.

Arguments by the Assessee:
The assessee argued that the shares of DCM Ltd. were held as an investment to manage and control DCM Ltd., not for trading purposes. Thus, the forfeited earnest money should be treated as a capital receipt. The assessee supported this claim with various documents, including the agreement, Memorandum & Articles of Association, audited accounts, and relevant letters. The assessee relied on several judgments, including CIT vs. Kamal Behari Lal Sangha, which emphasized the nature of the receipt in the hands of the receiver.

Arguments by the AO:
The AO contended that the forfeited earnest money was a revenue receipt, as the assessee was involved in trading shares. The AO argued that the other party could claim the forfeited earnest money as a trading loss, indicating its revenue nature. The AO also noted that the assessee's main object was trading in shares, and the transaction was a trading transaction.

CIT(A) Findings:
The CIT(A) held that the transaction was of a capital nature. The CIT(A) observed that the assessee's intention was to control DCM Ltd., not to trade in its shares. The CIT(A) referenced the Supreme Court's decision in Raja Bahadur Kamakhya Narain Singh vs. CIT, which highlighted the importance of the assessee's intention and conduct in determining the nature of the receipt. The CIT(A) concluded that the shares were not stock-in-trade and the forfeited amount was not a trading receipt, thus not taxable.

Department's Appeal:
The Department argued that the assessee's main object was trading in shares and that the forfeited earnest money should be treated as a revenue receipt. The Department also suggested that the transaction was a colorable device to reduce the tax burden.

Tribunal's Analysis:
The Tribunal upheld the CIT(A)'s decision, noting that the assessee held the shares as an investment, not as stock-in-trade. The Tribunal emphasized that the nature of the receipt should be determined in the hands of the receiver, as per the Supreme Court's decision in CIT vs. Kamal Behari Lal Sangha. The Tribunal found no merit in the Department's contention that the transaction was a colorable device or that the assessee's main object was trading in shares.

Conclusion:
The Tribunal concluded that the forfeited earnest money was a capital receipt, as the shares were held as an investment for controlling DCM Ltd., not for trading purposes. The Tribunal dismissed the Department's appeal, confirming the CIT(A)'s decision that the transaction was of a capital nature and the forfeited amount was not taxable as revenue.

Summary:
The Tribunal upheld the CIT(A)'s decision that the forfeited earnest money of Rs. 20 lacs was a capital receipt, not a revenue receipt. The shares of DCM Ltd. were held as an investment for controlling the company, not for trading. The nature of the receipt should be determined in the hands of the receiver, and the forfeited amount was not connected with the trading activity of the assessee. The Department's appeal was dismissed.