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PETITIONER: THE COMMISSIONER OF INCOME TAX,MADRAS

       Vs.

RESPONDENT: THE LAKSHMI VILAS BANK LTD.,KARUR

DATE OF JUDGMENT:       08/05/1996

BENCH: SEN, S.C. (J) BENCH: SEN, S.C. (J) JEEVAN REDDY, B.P. (J)

CITATION:  1996 AIR 2060            JT 1996 (5)   141  1996 SCALE  (4)275

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      Lakshmi Vilas  Bank, Karur, respondent herein in course of its  usual  business  of  banking,  purchases  and  sells securities  for   and  on  behalf  of  its  constituents  in consideration of  agreed  commission/brokerage.  During  the accounting periods relevant for the assessment years 1964-65 and 1965-66,  the Bank purchased certain securities, namely, Madras State  Electricity Board  Bonds and Madras State Loan Bonds on  behalf of  its constituents. The usual practice of the Bank  in purchasing  the securities  on  behalf  Sf  the constituents was to require a certain percentage of the face value of  the securities  to be  paid by the constituents in advance-: 2  receipt of  the said  margin  money,  the  Bank purchased securities  at their  face value  in its own name. Each one  of the  constituents gave  a letter  to  the  Bank undertaking to  pay the  balance  amount  on  or  about  the specified date and also undertaking that if they did not pay the  balance   amount  within   the  stipulated   time,  the securities would  belong to  the Bank  and the  margin money deposited by  them would  stand forfeited  to the Bank. This was in  addition to  the commission  and service  charges to which the Bank was entitled.      During  the   relevant  accounting   period,  the  Bank purchased bonds  for its  constituents at  face value of the bonds.  The   Bank  had   received  margin  money  from  its constituents in respect of these purchases. The 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. In the income-tax assessments for  the assessment  years 1964-65  and 1965-66, the Income Tax Officer treated the margin money forfeited by the Bank as income of the year in which the margin money was forfeited and  brought the  forfeited  amount  to  tax.  The

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Income Tax  Officer was  of the opinion that the Bank had no right to  adjust the  margin money  to reduce  the  purchase price of  the bonds.  The view  taken by him was affirmed by the Appellate Assistant Commissioner. The Tribunal, however, upheld the contention of the Bank that they were entitled to adjust the  margin money  forfeited by them against the cost of the bonds for arriving at the cost of the securities.      At the  instance of the Commissioner of Income Tax, the following question of law was referred to the High Court:      "Whether on  the facts  and in  the      circumstances  of   the  case,  the      Appellate Tribunal was right in law      in  holding   that   the   sum   of      Rs.1,69,966/-  and  Rs.62,563/-  in      assessment years  1964-65 and 1965-      66   respectively    received    as      deposits in  the first instance and      forfeited at  a later stage was not      the income  of the  assessee liable      to tax,  but that  the assessee was      entitled to  take them into account      in  arriving   at   the   cost   of      securities acquired by the assessee      when these sums were forfeited?"      The High  Court held  that when  the Bank purchases the securities in  their own name, it was really purchasing them for the  benefit and  on behalf  of  the  constituents.  The constituents defaulted  in making  payment  of  the  balance amount. The  High Court  was of  the view  that three things happened simultaneously: (a} Failure  on the  part of  the constituents  to  pay  the balance of the price agreed to be paid on the bonds. (b) On  such failure,  the margin  money  deposited  by  the constituents became money of the Bank, and (c) At  the same time, the bonds also became the property of the Bank.      There was  nothing in  law to  prevent  the  Sank  from adjusting the  margin money  forfeited by  it and  which had become its  own just  at that point of time against the cost of the  securities. It  was, however,  held that the profits and gains  of the  Bank would  arise only when the Bank sold the securities  or redeem them at the time of maturity if it had become  the owner  of the  securities.  Since  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  for  the  Bank  taking  into account this  margin amount  which had  become its  money at that time,  in arriving  at its  cost of the securities. For these reasons, the High Court answered the question referred to  it  in  affirmative  and  against  the  Department.  The Department has now come up in appeal before this Court.      The facts of this case clearly go to show that when the Bank forfeited  the margin  money deposited by the customers with it, the Bank was doing something which was in course of its usual  banking business.  After the deposits made by the constituents were  forfeited  by  the  Bank,  the  forfeited amount became  Bank’s money.  There is  no reason  why  this amount should not be treated as income of the Bank earned in course of  carrying on  its business.  The Bank undertook to buy the securities on behalf of its constituents, served two purposes. In the event of the constituent paying the balance amount, the  deposits were  to be treated as part payment of the price of the securities. But in the interval between the deposits and  the due date of payment of the balance amount, the deposit  was to be treated as earnest money liable to be

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forfeited. In  this case,  the Bank bought the securities on behalf of its constituents in course of its business and for the purpose  of taking  profit. If  the  contract  was  duly executed, the  Bank  would  have  been  entitled  to  charge brokerage. The  entire transaction  was a part of the profit making process  of the  Bank. 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 Bank’s own  money. The  Income  Tax  Officer  was  right  in treating this  forfeited money  as income  of  the  assessee earned in  usual course  of banking business. The securities purchased by  the Bank  in its own name became the sold, any profit made  would be profit earned by the Bank. The cost of acquisition of  the security will be the price actually paid for it. In the instant case, the finding of fact is that the Bank  had   purchased  them  at  face  value.  There  is  no justification in law for reducing the price actually paid by the Bank  by reducing  it by  the  amount  of  margin  money forfeited by  the Bank. This is a straight-forward case. 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 Bank’s income made in 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 depcsits 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  of reduction of  costs of  the securities  by adjustment of the deposit amount can arise in the facts of this case.      In that view of the matter, we allow the appeal and set aside the  judgment of the High Court. The question referred is answered  in the  negative and  in favour of the Revenue. There will be no order as to costs.