1984 (9) TMI 115 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the security deposit: Capital or Revenue receipt.
2. Applicability of Section 68 of the Income-tax Act, 1961.
3. Validity of evidence and testimony used by the Income Tax Officer (ITO).

Detailed Analysis:

1. Nature of the Security Deposit: Capital or Revenue Receipt:

The primary issue was whether the forfeited security deposit of Rs. 6,05,000 by Omega Bright Steel (P.) Ltd. (OBS) should be treated as a capital receipt or a revenue receipt. The agreement between OBS and International Trade Associates (ITA) stipulated a security deposit of Rs. 10 lakhs to ensure the performance of the contract. The security deposit was not to be adjusted against the price of goods, and it bore interest at 12% per annum, payable upon refund. The Commissioner (Appeals) held that the forfeited amount was a capital receipt, relying on the decision of the Hon'ble Delhi High Court in CIT v. Motor & General Finance Ltd. [1974] 94 ITR 582, which was based on the principle that such deposits are in the nature of loans or borrowed funds. The Tribunal agreed, emphasizing that the character of the receipt is determined at the time it is received and does not change upon forfeiture.

2. Applicability of Section 68 of the Income-tax Act, 1961:

The ITO alternatively argued that the sum of Rs. 6,05,000 was assessable under Section 68 of the Income-tax Act, 1961, as income from undisclosed sources. The Commissioner (Appeals) rejected this, stating that the identity of ITA was not in dispute and the amount was clearly received from ITA. The Tribunal upheld this view, noting that the ITO provided no material to support the claim that the amount was undisclosed income.

3. Validity of Evidence and Testimony Used by the Income Tax Officer (ITO):

The ITO referred to a statement by Shri B.H. Gandhi, a partner of ITA, suggesting that the amount was an advance payment for goods rather than a security deposit. The Tribunal found this testimony unreliable and emphasized that it was not put to the assessee for cross-examination. The Tribunal held that the ITO could not use this testimony against the assessee without providing an opportunity for rebuttal, citing the decision of the Hon'ble Supreme Court in C. Vasantlal & Co. v. CIT [1962] 45 ITR 206.

Conclusion:

The Tribunal concluded that the forfeited security deposit of Rs. 6,05,000 was a capital receipt, not a revenue receipt. It upheld the Commissioner (Appeals)'s decision, which was in line with the principles laid down by the Hon'ble Supreme Court and the Hon'ble Delhi High Court. The Tribunal dismissed the departmental appeal, affirming that the security deposit was in the nature of a loan and its forfeiture did not change its character to a revenue receipt.