THE PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. versus COMMISSIONER OF INCOME TAX on 9 July 2019

1. The question raised in this appeal is as to whether receipts ofsubscriptions in the hands of the assessee-Company for the previousyears relevant to the assessment years 1985-86 and 1986-97 should betreated as income and not capital receipts inasmuch as the assessee hasin its books of accounts shown this sum as income.

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2. The assessee-Company has floated various schemes whichrequire subscribers to deposit certain amounts by way of subscriptionsin its hands, and, depending upon the scheme in question, these subscribedamounts at the end of the scheme are ultimately repaid with interest.The scheme at hand also contains forfeiture clauses as a result of whichif, mid-way, a certain amount is forfeited, then the said amount wouldimmediately become income in the hands of the assessee. This is anadmitted position before us.

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3. In the present case, the assessee was asked to bring to taxsuch amounts as income for the two years in question, inasmuch as,according to the Assessing Officer, it had treated the whole amount asincome, 3% of which is not disputed to be income before us for theyears in question. The Assessing Officer treated these amounts as income H

Ainasmuch as under the accounting system followed by the assessee,these amounts were credited to the profit and loss account for the yearsin question as income. The Commissioner of Income Tax (Appeals)dismissed the appeal from the original assessment orders and confirmedthe same. The Income Tax Appellate Tribunal, on the other hand, allowedthe appeals by relying upon the judgment of this Court in PeerlessBGeneral Finance and Investment Co. Limited and Anothervs.Reserve Bank of India, (1992) 2 SCC 343 in which, according to theAppellate Tribunal, this Court finally decided the question in the assessee’sown case stating that such amounts cannot be treated to be income butare in the nature of capital receipts. These were not only because of theCinterpretation of an RBI Circular of 1987, but also because, on generalprinciples, such amounts must be treated to be capital receipts or otherwisethey would violate the provisions of the Companies Act. It further wentthrough the various clauses contained in the scheme at hand, and foundthat in point of fact no subscription certificate had, in fact, been forfeited,

as a result of which it was clear that there would be no income in theDhands of the assessee for these two years. It also dealt with certificatesthat were surrendered prior to the stated time, and stated that in suchcases as well whatever would remain as surplus in the hands of theassessee would be treated as income. It went on to state that therewould be no estoppel in law against the assessee making a claim thatEthese amounts were in the nature of capital receipts and not income, andalso relied upon certain judgments of this Court to buttress the propositionthat this Court had also held that what is the true position in law cannotbe deflected by what the assessee may or may not do in its treatment ofthe matter at hand in its accounts. So doing, the appeal against theCommissioner of Income Tax was allowed by the Income Tax AppellateFTribunal. In the first round, the High Court, by its judgment dated09.09.1999, stated that since no question of law arose, the referenceapplications before it were dismissed. This Court, by an order dated03.12.2002, set aside the High Court judgment and referred the followingquestions to the High Court:G“(a) Whether the judgment of the Supreme Court in PeerlessGeneral Finance and Investment Co. Ltd. vs. Reserve Bankof India (1992) 2 SCC 343 lays down as an absolute propositionof law that all receipts of subscription in the hands of the assesseefor the previous years relevant to the assessment years 1985-86Hand 1986-87 must necessarily be treated as capital receipts?

(b) If the answer to the first question is in the negative, on thefacts and in the circumstances of the case, and having regard tothe fact that the first year’s subscriptions were consciously offeredas revenue receipt for taxation by the assessee in the returns ofincome filed in respect of assessment years 1985-86 and 1986-87, whether the Tribunal was justified in accepting the assessee’scontention that the first years’ subscription was capital receiptsand hence not taxable?

(c) Whether on the facts and in the circumstances of the caseand having regard to the observations of Hon’ble Supreme Courtto the effect that the directions of Reserve Bank of India dated15[th] May, 1987 had been made applicable from 15[th] May, 1987and would only apply to the deposits made on or after 15[th] May,1987, the tribunal was justified in law as well as on the facts inholding that the said directions of the Reserve Bank of India wereretrospective and must be applied in all pending proceedings?”

4. When remanded to the High Court, by the impugned judgmentdated 06.10.2005, the High Court of Calcutta allowed the appeal againstthe Appellate Tribunal holding that a perusal of the subscription schemeof the appellant company would show that since forfeiture of the amountsdeposited is possible, this amount should be treated as income and not asa capital receipt. Further, it relied heavily upon the fact that the assesseehad itself treated such amounts as income and credited them to its profitand loss account for the years in question and would, therefore, beestopped by the same. On going through the judgment of this Court,namely, Peerless General Finance and Investment Co. Limited (supra)it went on to state that since the said judgment dealt with an RBI Circularof 1987, which itself was only prospective, any law declared as to theeffect of Clause 12 of that Circular would be prospective in nature andwould, therefore, not apply to the assessment years in question.

5. Mr. S. Ganesh, learned Senior Advocate, appearing for theappellant-Company has argued before us that the High Court is incorrecton all counts. According to him, the fact that forfeiture may take placeunder the clauses of the scheme has to be read with an interim orderwhich he has brought to our notice by way of a supplementary affidavitdated 05.04.2017 in which it is made clear that, post the date of theorder i.e. 03.09.1979, no amount can be forfeited under any of theschemes by the appellant-Company. He stated that, as a matter of fact, AB

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Athe supplementary affidavit states that for the years in question and, inparticular, for every year after 1979, no sum has in fact been forfeitedby the Company under any of the schemes in question. He then arguedthat it was incorrect to go only by the accounting system of the assesseesince it is well settled that the real position in law, qua deposits that aremade by subscriptions, on first principle, would show that they are in theBnature of capital receipts and cannot be possibly be said to be income, asthey would enure to the benefit of the subscribers of the scheme andwould have to be paid back at the end of the scheme together withinterest thereof. He also argued that, in any event, that the judgment inPeerless General Finance and Investment Co. Limited (supra) wasCnot merely grounded on an interpretation of Clause 12 of the RBI Circularof 1987 but it also specifically held that, as a general proposition, receiptsof this nature would be capital and adverted to both the judgments ofN.M. Kasliwal, J and K. Ramaswamy, J. in this behalf. He also arguedthat even for the period in question, this judgment would squarely applyas if such receipts were to be treated as income it would violate theDCompanies Act. He also argued that it would be incorrect to raise anyquestion of estoppel against the appellant-Company and cited judgmentsof this Court to buttress this proposition.

6. On the other hand, Mr. Arijit Prasad, learned Senior Counsel,appearing for the Revenue has countered Mr. Ganesh’s submissions.EHe read copiously from the Commissioner of Income Tax (Appeals)orders in order to buttress his submission that the ground reality of thesituation in the facts of this case is that in point of fact the appellant-Company itself treated these amounts as income. Had it not done so, itwould not have been able to face its subscribers for payments in future.FHe also argued based onRam Janki Devi and Anothervs. M/s JuggilalKamlapat, (1971) 1 SCC 477 that the true form of the transaction mustbe looked at. He also cited Poona Electric Supply Co. Ltd., Bombayvs. Commissioner of Income-tax, BombayAIR 1966 SC 30 to theeffect that the ground reality must govern and not mere theoreticalconsiderations. Also, according to the learned Senior Advocate, the issueGat hand did not arise directly before this Court in the Peerless GeneralFinance and Investment Co. Limited (supra) and, therefore, anyobservations made therein would not bind on the facts of this case.Further, in any event, the Commissioner of Income Tax (Appeals) wascorrect in stating that this judgment dealing only with an RBI circular1987, being prospective in nature, would not apply to the assessmentHyears at hand.

THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.v. COMMISSIONER OF INCOME TAX [R. F. NARIMAN, J.]

7. Having heard the learned counsel for both parties, we mustfirst set out the answers given to the three questions by the High Court,in its judgment under appeal. The answers given are as follows:

“10.1 The questions referred to us, therefore, having regard tothe principles discussed above, are answered in the followingmanner:

(a) that the decision of the Apex Court in Peerless General Financeand Investment Company Ltd. (supra) did not lay down anyabsolute proposition of law that all receipts of subscription atthe hands of the assessee for the previous year relevant tothe assessment years 1985-86 and 1986-87 must necessarilybe treated as capital receipts.

(b) Having regard to the facts and circumstances of the case thelearned Tribunal was wrong in treating the first year’ssubscription relevant to the assessment years 1985-86 and1986-87 as capital receipts and hence not taxable; and

(c) the decision of the Apex Court in the second Peerless casethat the deposits made after 15[th] May 1987 were to be treatedin the manner directed in the 1987 directions are applicable toall pending proceedings so far as such deposits relate to theperiod after 15[th] May 1987, particularly, in relation to theassessee.”

8. What is clear, even on general principle, on the facts of thiscase, is that subscriptions were received in the years in question fromthe public at large under a collective investment scheme, and thesesubscriptions were never at any point of time forfeited. Indeed, thesupplementary affidavit filed before this Court states this as a fact, beingbased on an interim order of the High Court dated 03.09.1979 whichobtained during the assessment years in question. This being the case,and surrendered certificates not being the subject-matter of the appealbefore us, it is clear that even on general principles, deposits by way ofamounts pursuant to these investment schemes made by subscriberswhich have never been forfeited can only be stated to be capital receipts.

9. This Court, in Peerless General Finance and Investment Co.Limited (supra), was faced with a situation in which the RBI had,pursuant to this Court’s earlier judgment in Reserve Bank of Indiavs.Peerless General Finance and Investment Co. Ltd. And Others (1987)

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A1 SCC 424, taken steps to remedy the concerns raised by this Court inthat judgment. The steps taken were under powers conferred by Section45 J & 45 K of the Reserve Bank of India Act, as a result of whichdirections were issued by the RBI dated 15.05.1987. These directions,in turn, were the subject matter of challenge by the Peerless GeneralFinance and Investment Co. Limited (supra) i.e. the second PeerlessBcase. The aforesaid directions are set out in full in para 9 of the saidjudgment. We are concerned with para 12 which states as follows:- “12. Every residuary non-banking company shall disclose asliabilities in its books of accounts and balance sheets the totalamount of deposits received together with interest, bonus, premiumCor other advantage, accrued or payable to the depositors.”It is true that the focus of this Court was a challenge, on variousgrounds, to the aforesaid directions. However, this Court did state,Kasliwal, J., in particular, holding:

D“The amount contributed by the depositors being a capital receiptand not a revenue receipt cannot under any circumstances beshown in the balance sheet otherwise than at its full value.Moreover, being a capital receipt, it cannot be credited to theprofit and loss account since Part II of Schedule VI to theCompanies Act, 1956 requires that the amounts to be shown inEthe profit and loss account should be confined to the income andexpenditure of the company. Thus, crediting a part of the first andsubsequent year’s deposit instalments to the profit and loss accountand not showing them fully as a liability in the balance sheet wouldbe a contravention of the provisions of the Companies Act.”FThe learned Judge further went on to hold:

“The method followed by the companies in carrying on theaforesaid business is that a certain portion of the subscriptionsreceived by it is transferred to the profit and loss account, shownas income, and the same is used to defray inevitable workingGcapital requirements of the company, namely, payment of agent’scommission, management expenses, staff salaries and otheroverheads. However, the balance of the subscriptions (excludingthe appropriated part) is transferred to a fund each year and thecorpus of the fund is invested in turn in interest-bearing investment.The Peerless Company initially used to transfer approximately 95H

per cent of the first year’s subscriptions to the profit and lossaccount and used to invest the subscriptions received from thesecond year onwards.”

K. Ramaswamy, J., in a separate concurring judgment, also turneddown the challenge to the said guidelines and, in doing so, held as follows:

“The deposit or loan is a capital receipt but not a revenue receiptand its full value shall be shown in the account books or balancesheet as liability of the company. It cannot be credited to the profitand loss account. Part II of Schedule VI of the Companies Act,1956 requires that the amount shown in the profit and loss accountshould be confined to the income and expenditure of the company.Para (12) of the Directions is, thus, in consonance with theCompanies Act.”

10. While it is true that there was no direct focus of the Court onwhether subscriptions so received are capital or revenue in nature, wemay still advert to the fact that this Court has also, on general principles,held that such subscriptions would be capital receipts, and if they weretreated to be income, this would violate the Companies Act. It is,therefore, incorrect to state, as has been stated by the High Court, thatthe decision in Peerless General Finance and Investment Co. Limited(supra) must be read as not having laid down any absolute propositionof law that all receipts of subscription at the hands of the assessee forthese years must be treated as capital receipts. We reiterate that thoughthe Court’s focus was not directly on this, yet, a pronouncement by thisCourt, even if it cannot be strictly called the ratio decidendi of thejudgment, would certainly be binding on the High Court. Even otherwise,as we have stated, it is clear that on general principles also suchsubscription cannot possibly be treated as income. Mr. Ganesh is right instating that in cases of this nature it would not be possible to go only bythe treatment of such subscriptions in the hands of accounts of theassessee itself. In this behalf, he cited a decision of the Division Benchof the Allahabad High Court inCommissioner of Income Taxvs.SaharaInvestment India Ltd., reported as Volume 266 ITR page 641 in whichthe Division Bench followed Peerless General Finance and InvestmentCo. Limited (supra), and then held as follows:

“In Peerless General Finance and Investment Co. Ltd. v. ReserveBank of India (1992) 75 Comp Cas 12, the Supreme Court onsimilar facts held that the deposits were capital receipts and not AB

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revenue receipts (vide paragraphs 67 & 68 of the aforesaidjudgment). That case also pertains to a finance company whichused to collect deposits, and credited part of its deposits to theprofit and loss account, as in the present case. Hence, the ratio ofthe said decision, in our opinion, applies to this case also.

It is well settled in income-tax law that book keeping entriesare not decisive or determinative of the true nature of the entriesas held by the Supreme Court in CIT vs. India Discount Co. Ltd.[1970] 75 ITR 191 and in Godhra Electricity Co. Ltd v.CIT [1997]225 ITR 746 (SC). It has been held in those decisions that thecourt has to see the true nature of the receipts and not go only bythe entry in the books of account.

We agree with the Tribunal that these deposits are reallycapital receipts and not revenue receipts. In Chowringhee SalesBureau P. Ltd. V. CIT [1973] 87 ITR 542 (SC) which was followedin Sinclair Murray and Co. P. Ltd. V. CIT [1974] 97 ITR 615,the Supreme Court observed (page 619):

“It is the true nature and quality of the receipt and not the headunder which it is entered in the account books that would provedecisive. If a receipt is a trading receipt, the fact that it is not soshown in the account books of the assessee would not preventthe assessing authority from treating it as trading receipt.

It has been held by the Supreme court that the primary liabilityand onus is on the Department to prove that a certain receipt isliable to be taxed vide Parimisetti Seetharamamma v. CIT [1965]57 ITR 532 (SC).

Sri Chopra then relied on the decision of the Supreme Courtin CIT v. Lakshmi Vilas Bank Ltd. [1996] 220 ITR 305. In ouropinion that decision is also distinguishable because in that casethe deposit was forfeited and the result of the transaction wasthat the bank became full owner of the security and the amountlying in deposit with it became its own money. In the present casethere is no such finding that the deposit was forfeited or that atthe end of the transaction the security deposit became the propertyof the assessee or that changed from a capital receipt to a revenuereceipt. Hence, that decision is clearly distinguishable.”

THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.v. COMMISSIONER OF INCOME TAX [R. F. NARIMAN, J.]

This Court, on 21.07.2015, in appeal against the said judgmentheld as under:

“After reading of the decision of the High Court, we find that theHigh Court has rightly relied upon the judgment of this Court in“Peerless General Finance & Investment Co. Ltd. & Anr. v.Reserve Bank of India” (1992) 2 SCC 343. Since the case issquarely covered by the judgment, we do not find any merit inthese appeals and petitions which are accordingly, dismissed.”

It is also correct to state that there can be no estoppel against asettled position in law [See Commissioner of Income-Tax, Bombayvs.C. Parakh & Co. (India) Ltd.29 ITR 661 at 665 and Commissioner-of IncomeTax, Madras vs. V.MR.P. Firm, Muar(1965) 56 ITR 67].

11. Shri Arijit Prasad, learned senior counsel, appearing on behalfof the Revenue, however, strongly relied upon the observations in RamJanki Devi and another v. M/s. Juggilal Kamlapat, (1971) 1 SCC477. In particular, he relied upon paragraph 12 of the judgment whichreads as follows:- “The case of a deposit is something more than a mere loan ofmoney. It will depend on the facts of each case whether thetransaction is clothed with the character of a deposit of money.The surrounding circumstances, the relationship and character ofthe transaction and the manner in which parties treated thetransaction will throw light on the true form of the transaction.”

12. This judgment has no direct relevance to the facts of the presentcase. The vexed question in that case was as to whether a particulartransaction in question was a loan or a deposit. It was in that contextthat paragraph 12 laid down that whether a loan of money could becalled a deposit, would depend upon the facts of each case, having regardto the surrounding circumstances etc. In the present case, there is nosuch question raised by Revenue. The question raised is completelydifferent, and as has been held by us above, the character of thetransaction being clearly a capital receipt in the hands of the assesseecannot possibly be taxed as income in the assessee’s hands.

13. Shri Prasad then relied upon the judgment of this Court inPoona Electric Supply Co. Ltd., Bombay v. Commissioner ofIncome-tax, Bombay City I, Bombay, AIR 1966 SC 30. In particular,

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Ahe relied upon a quotation from a Bombay High Court judgment whichwas approved by this Court, as follows: - “The principle of real income is not to be subordinated as to amountvirtually to a negation of it when a surrender or concession orrebate in respect of managing agency commission is made, agreedBto or given on grounds of commercial expediency, simply becauseit takes place some time after the close of an accounting year. Inexamining any transaction and situation of this nature the courtwould have more regard to the reality and specialty of the situationrather than the purely theoretical or doctrinaire aspect of it. It willlay greater emphasis on the business aspect of the matter viewedCas a whole when that can be done without disregarding statutory language.”

language.”

The “theoretical” aspect of the present transaction is the fact thatthe assessee treated subscription receipts as income. The reality of thesituation, however, is that the business aspect of the matter, when viewedDas a whole, leads inevitably to the conclusion that the receipts in questionwere capital receipts and not income.

14. In the circumstances, we set aside the judgment of the HighCourt and restore that of the Income Tax Appellate Tribunal. The appealis allowed. There shall be no order as to costs.

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Bibhuti Bhushan Bose

Appeal allowed.

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