9911796707
TMI Blog1984 (9) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... d specifications to be provided by the second party, and for the import of the raw materials whereof, the first party holds the requisite licences ; And whereas the first party has agreed to supply the goods and merchandise referred to hereabove to the second party, to be processed/manufactured by the first party, as per the grades and specifications to be provided by the second party ; And, therefore, the first party and the second party are desirous of entering into an agreement for the supply of stainless steel bright drawn bars and coils by the first party to the second party, manufactured/processed from/out of the imported base raw materials and on the basis of the grades and specifications to be provided by the second party; Now this deed witnesseth as under : 1. That the second party shall purchase, either directly or through its nominees, the entire stock valued approximately at Rs. fifty lakhs of finished bright drawn stainless steel bars/coils to be processed/manufactured by the first party from/out of imported base raw materials, as detailed in the annexure. 2. That the first party shall try to ensure that the supplies of the finished goods to the second party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. That in the event of the first party failing or refusing to supply to the second party and/or its nominee/s, as the case may be, the stocks of bright drawn stainless steel bars/coils, as stated in para 1 hereinabove, the second party shall have the option to terminate this agreement. 11. That in the event of this agreement being determined in the manner stated in para 9 above, the entire amount lying on the date of such termination, with the first party as security deposit in terms of para 6 hereinabove, shall stand forfeited and the second party shall have no right whatsoever to claim the said amount or any part thereof from the first party. 12. That in the event of the aforesaid forfeiture of the said security deposit by the first party, no interest as provided in para 8 above shall, for any period of time, either accrue or be payable by the first party to the second party. 13. That in the event of this agreement being determined in the manner stated in para 10 above, the amount of the said security deposit as on date of termination shall be refunded forthwith by the first party to the second party together with interest at the rate of 18 per cent per annum calculated f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the payment and after that you can process the materials to our requirements. " The respondent OBS wrote back to ITA on27-10-1972as follows : " We refer to your letter dated20-10-1977and are not satisfied with the contents of the same. As you are aware of the present trend of the market and in the absence of any sound security as well as your continued failure to make the payment uptill now, we are neither in a position to hold the base raw materials at our end nor undertake the processing of the same to your requirements.In the circumstances, we have no other alternative but to terminate the agreement and apply the condition of forfeiting the amount paid to us as security deposit, which please note. " Finding that the termination of the agreement was impending, ITA once again requested OBS as follows : " We are in receipt of your letter of 17th ultimo and noted the contents. We once again request you not to please force upon the condition of forfeiting our security amount and be kind enough to allow us some more time for making payments of the balance instalments in view of difficult financial position.However, we assure you that we shall make payments and meanwhile, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case. The ITO held that the above-mentioned agreement dated29-5-1976was an agreement in the normal course of the assessee's business and since the deposit by way of security was to be made in order to cover up any possible losses on failure of ITA to lift the stocks, the forfeiture of security deposit was a revenue receipt. The ITO also referred to a statement dated 9-9-1981 of one Shri B.H. Gandhi, the partner of ITA, and held that the sum of Rs. 6,05,000 was not a security deposit but was merely an advance receipt by OBS from ITA against the goods to be supplied by the former to the latter. In the last paragraph preceding the computation of income, the ITO also referred to certain enquiries which had been made through the Deputy Director of Investigation, Bombay, that the sum in question of Rs. 6,05,000 was alternatively liable to be assessed under section 68 of the Income-tax Act, 1961 ('the Act'), as income from undisclosed sources. 4. Dissatisfied with the order of assessment made by the ITO, the respondent OBS had taken the matter in appeal before the Commissioner (Appeals). The latter held that the ITO had given no material whatsoever in support of its finding that Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, according to the departmental representative, was one which was entered into as a normal incident of carrying on of the business and that its breach merely resulted in a business profit of Rs. 6,05,000. According to the departmental representative, the agreement whereby Rs. 10 lakhs had to be deposited as per clause 6, was not an agreement for any loan or borrowing to be made by OBS from ITA and, therefore, the question of applying the ratio of decision in the case of Motor General Finance Ltd. did not arise. After referring to the correspondence that passed between OBS and ITA, which stands reproduced in an earlier portion of this order, the learned departmental representative says the real nature of the receipt was 'advance' received by OBS from ITA in respect of purchase of raw material by the former out of which goods had to be processed and supplied to ITA. According to him, the amount of Rs. 6,05,000 was not a security deposit and if at all it was any security, it was merely an insurance or a cushion for realisation of the price of goods to be supplied by OBS to ITA. After so interpreting the agreement and the correspondence between OBS and ITA, the learned departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of the question as to whether a particular receipt is of a capital or of revenue nature and that the true nature of the receipt should be found out by looking into the facts of each case. For so contending, reliance has been placed by him on the decisions of the Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 and CIT v. Panipat Woollen General Mills Co. Ltd. [1976] 103 ITR 66. In the end, Mr. Chakraborty also laid emphasis on the statement of B.H. Gandhi, the partner of ITA, which had been recorded atBombayon9-9-1981. According to the departmental representative, this statement of the partner of ITA clearly shows that the sum of Rs. 6,05,000 was not a security deposit but was an advance made to OBS for the goods to be supplied by them under the agreement. Even though this statement of B.H. Gandhi had been recorded at the back of OBS, it was, according to the departmental representative, a very valuable testimony and that merely because the opportunity of cross-examination had not been granted to the assessee-respondent, the testimony made by B.H. Gandhi could not be ignored by the ITO. Mr. Chakraborty maintains that technical rules of evidence do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of final supply of goods by OBS to ITA. Further, referring to clause 8 of the agreement, Mr. Sharma says that the interest of 12 per cent per annum which was payable by OBS to ITA at the time of refund of the security deposit clearly indicated that the security deposit was of the nature and character of a loan. According to the learned authorised counsel of the assessee, the character of a receipt is determined at the time it is received and that subsequent happenings did not change its character and do not convert a receipt into income if it was initially a loan at the time of receipt. For so contending, reliance has been placed by him on the famous decision in the case of Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA) and on the decision of the Hon'ble Delhi High Court in the case of Motor General Finance Ltd.. According to Mr. Sharma, every gain is not income and everything that goes to augment the coffers of an assessee cannot be unexceptionally described as a trading receipt. According to him, the assessee was not carrying on the business of taking any security deposits and that in the present case, the security deposit which was stipulated under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case also the security deposited was nothing but a loan. According to Mr. Sharma, the decision of the Hon'ble Delhi High Court in Motor General Finance Ltd.'s case was based on the authority of the decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier Sons and that since the facts in the case of the above-mentioned two decisions of the Hon'ble Supreme Court and the Hon'ble Delhi High Court were akin to the facts in the present case, the Commissioner (Appeals) had every justification in upholding the contention of the assessee that the receipt of Rs. 6,05,000 was on capital account. Referring to the evidence of B.H. Gandhi, the partner of ITA, which had been recorded at the back of the assessee, the learned authorised counsel of the assessee submits that it was a wholly worthless testimony which could not have been utilised by the Income-tax Department as it had never been put to the assessee. In any case, according to Mr. Sharma, evidence of B.H. Gandhi should have been disregarded altogether as it was the evidence of a disgruntled partner of ITA who had absolutely no knowledge about the working of that firm. Referring to the statement, a copy of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the arguments, for and against, very ably canvassed by the learned representatives of the two sides. We have also gone through each and every decision of the Hon'ble. Courts, on which reliance has been placed either by the learned departmental representative, Mr. Chakraborty, or by the learned senior advocate, Mr. G.C. Sharma, appearing for the assessee. We have in particular gone through the agreement and the (sic) ITA before deciding as to whether the receipt was a revenue receipt or a receipt on capital account. After so doing, we would hold as follows. 9. A perusal of the agreement shows that it had been entered into between OBS and ITA in order that the former could supply to the latter bright drawn stainless steel bars and coils of given specifications of the value of approximately Rs. 50 lakhs. The agreement was for a period of two years and the manufacturer-respondent, i.e., OBS, had bound itself under the agreement to ensure the supplies of the finished goods to ITA by the scheduled dates provided the security deposit of Rs. 10 lakhs, as stipulated in clause 6 of the agreement, had been made with OBS by ITA. The agreement further shows that the security deposit s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or a borrowed fund as per decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier Sons. We have gone through the facts of that case very carefully and we find that the deposit received by the assessee-respondent vide clause 6 of the agreement dated29-5-1976, was akin in character to the deposit or deposits that had been received by Lakshmanier Sons after14-2-1945. A circular had been issued by Lakshmanier Sons, who were the sole selling agents of yarn manufactured at Madura Mills Co. Ltd., to its various constituents that with effect from 14-2-1945 it was to receive 'certain sums towards security deposit and to keep the same with us so long as our business connection under the contract will continue with you'. Their Lordships of the Hon'ble Supreme Court considered the impact of the aforesaid circular and held that the amounts deposited by the constituents of Lakshmanier Sons did not have any relation to the price realisable in respect of the goods to be delivered to the various constituents. The price in respect of the goods to be supplied by Lakshmanier Sons had to be paid by the customers in full against delivery of the goods and the security deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines laid down by the Hon'ble Supreme Court in K.M.S. Lakshmanier Sons' case, had been properly applied by the Commissioner (Appeals) to the facts of the present case. As we have stated earlier, the facts in the case of Motor General Finance Ltd. were akin to the facts of the present case and just as there had been forfeiture of deposit by Motor General Finance Ltd. on account of non-performance of contract, in this case also, the forfeiture of security deposit had been made for the non-performance of clause 6 of the agreement. The security deposit in the case of Motor General Finance Ltd., as in the present case, had been obtained in order to ensure the due performance of the contract by the parties. The receipt of Rs. 6,05,000 was, thus, rightly considered to be a loan at the initial stage when it was deposited by way of a refundable security deposit by ITA with OBS. The character of this loan or the deposit did not change into a receipt of income nature when it was subsequently forfeited by the assessee on account of the failure of ITA to make the deposit by30-9-1977. Respectfully abiding by the law as laid down by the Hon'ble Supreme Court in the case of K.M.S. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case. 11. So far as the reliance placed by the learned departmental representative on the Supreme Court decision in the case of Punjab Distilling Industries Ltd. and the decision of the Hon'ble Punjab and Haryana High Court in the case of Atlas Cycle Industries Ltd. is concerned, we find that the facts and circumstances in those cases were entirely distinguishable. In the case of Punjab Distilling Industries Ltd., the assessee was carrying on business of distilling and selling country liquor to licensed wholesalers. In order to relieve the scarcity of bottles, the assessee-distiller was, in accordance with a scheme devised by the Government, entitled to charge the wholesalers a price for the bottles which was refundable as and when the bottles were returned. The receipts on account of the price of bottles had been entered in the books of that assessee under the heading 'Empty Bottles Return Security Deposit Account'. The question that arose for consideration of the Hon'ble Supreme Court in that case was as to whether the assessee was liable to be assessed on the balance of the amounts remaining in the above-mentioned security deposit account after the refund had been made ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time and deposited Rs. 3,348 by way of security. As the employees had left the service of the company before the stipulated period, the security deposits had been forfeited by the assessee-company in that case. Their Lordships of thePunjaband Haryana High Court upheld the assessment of forfeited security deposit on the ground that the assessee had by forfeiting the security recompensed itself in respect of the expenditure which had been incurred by it on the training of the employees and which had been allowed as a business expenditure by the income-tax authorities. The decision of the Hon'ble Punjab and Haryana High Court does not, in any way, help the case sought to be made by the learned departmental representative. 12. Insofar as the testimony of B.H. Gandhi, the partner of ITA, is concerned, we would agree with the representation made by the learned senior advocate, Mr. Sharma, that it was an unreliable testimony and that in any case, it could not have been used against the assessee unless the latter had been confronted with it. On going through the statement of B.H. Gandhi, we find that he did not know anything about the accounts of ITA and he did not even know as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
