Income Tax Law – Book keeping entries are not decisive or determinative of the true nature of the entries
|Case name:||Peerless General Finance and Investment Company Ltd. V/s. Commissioner of Income Tax|
|Case number:||2019 (6) SCJ 190, (2019) 416 ITR 1 (SC)|
|Court:||Supreme Court Of India|
|Bench:||The Hon’ble Justice Mr. R F Nariman The Hon’ble Justice Mr. Sanjiv Khanna|
|Relevant Act/Sections:||Companies Act, 2013|
BRIEF FACTS AND PROCEDURAL HISTORY:
- The Appellant-Company floated various schemes which required subscribers to deposit certain amounts by way of subscriptions in its hands, and, depending upon the scheme in question, these subscribed amounts at the end of the scheme were ultimately repaid with interest. The scheme also contained forfeiture clauses as a result of which if, mid-way, a certain amount is forfeited, then the said amount would immediately become income in the hands of the assessee.
- In the present case, the assessee was asked to bring to tax such amounts as income for the two years in question, in as much as, according to the Assessing Officer, it had treated the whole amount as income, 3% of which was not disputed to be income before the court for the years in question. These amounts were credited to the profit and loss account for the years in question as income. The Commissioner of Income Tax (Appeals) dismissed the appeal from the original assessment orders and confirmed the same.
- The Income Tax Appellate Tribunal, on the other hand, allowed the appeals by relying upon the judgment of this Court in Peerless General Finance and Investment Co. Limited and Another vs. Reserve Bank of India, (1992) 2 SCC 343 in which, according to the Appellate Tribunal, this Court finally decided the question in the assessee’s own case stating that such amounts cannot be treated to be income but are in the nature of capital receipts.
- These were not only because of the interpretation of an RBI Circular of 1987, but also because, on general principles, such amounts must be treated to be capital receipts or otherwise they would violate the provisions of the Companies Act.
- An appeal went to the high court which was dismissed as the high court held that no question of law had been raised.
- The High Court of Calcutta allowed the appeal against the Appellate Tribunal holding that a perusal of the subscription scheme of the appellant company would show that since forfeiture of the amounts deposited is possible, this amount should be treated as income and not as a capital receipt.
ISSUE BEFORE THE COURT:
- Whether the decision of the did not lay down any absolute proposition of law that all receipts of subscription at the hands of the assessee for the previous year relevant to the assessment years 1985-86 and 1986-87 must necessarily be treated as capital receipts?
- If the answer to the first question is in the negative, on the facts and in the circumstances of the case, and having regard to the fact that the first year’s subscriptions were consciously offered as revenue receipt for taxation by the assessee in the returns of income filed in respect of assessment years 1985-86 and 1986-87, whether the Tribunal was justified in accepting the assessee’s contention that the first years’ subscription was capital receipts and hence not taxable?
- Whether on the facts and in the circumstances of the case and having regard to the observations of Hon’ble Supreme Court to the effect that the directions of Reserve Bank of India dated 15th May,1987 had been made applicable from 15th May,1987 and would only apply to the deposits made onor after 15th May, 1987, the tribunal was justified in law as well as on the facts in holding that the said directions of the Reserve Bank of India were retrospective and must be applied in all pending proceedings?
RATIO OF THE COURT
- Court observed that subscriptions were received in the years in question from the public at large under a collective investment scheme, and these subscriptions were never at any point of time forfeited. This being the case, and surrendered certificates not being the subject-matter of the appeal, it is clear that evenon general principles, deposits by way of amounts pursuant to these investment schemes made by subscribers which have never been forfeited can only be stated to be capital receipts.
- On the first issue court held that while it is true that there was no direct focus of the Court in in Peerless General Finance and Investment Company Ltd. (supra)on whether subscriptions so received are capital or revenue in nature, we may still advert to the fact that this Court has also, on general principles, held that such subscriptions would be capital receipts, and if they were treated to be income, this would violate the Companies Act.
- It was, therefore, incorrect to state, as has been stated by the High Court, that the decision in Peerless General Finance and Investment Co. Limited (supra) must be read as not having laid down any absolute proposition of law that all receipts of subscription at the hands of the assessee for these years must be treated as capital receipts.
- Court agreed with the appellants contention that in cases of this nature it would not be possible to go only by the treatment of such subscriptions in the hands of accounts of the assessee itself. In this behalf, he cited a decision of the Division Bench of the Allahabad High Court in Commissioner of Income Tax vs. Sahara Investment India Ltd., reported as Volume 266 ITR page 641 in which the Division Bench followed Peerless General Finance and Investment Co. Limited(supra), and then held as follows: It is well settled in income-tax law that bookkeeping entries are not decisive or determinative of the true nature of the entries as held by the Supreme Court in CIT vs. India Discount Co. Ltd. 75 ITR 191 and in Godhra Electricity Co. Ltd v. CIT  225 ITR 746 (SC).
- It has been held in those decisions that the court has to see the true nature of the receipts and not go only by the entry in the books of account. Court finally observed the “theoretical” aspect of the present transaction is the fact that the assessee treated subscription receipts as income. The reality of the situation, however, was that the business aspect of the matter, then viewed as a whole, leads inevitably to the conclusion that the receipts in question were capital receipts and not income.
- DECISION HELD BY COURT:
The apex court restored the order of the Income Tax Appellate Tribunal and set aside the judgement of the High court. Appeal was Allowed.