THE COMMISSIONER OF INCOME-TAX, MADRASversusTHE LAKSHMI VILAS BANK LTD. KARUR

A            THE COMMISSIONER OF INCOME-TAX, MADRAS
                                            v.
                  THE LAKSHMI VILAS BANK LTD. KARUR

                                     MAY 8, 1996

B
               IB.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.]


          Income Tax Act, 196! :

          Income T(J)t-Business income-AYs 1964-65 and 1965-66-Asses-
C !.'ee-Bank in the course of its usual business purchased and sold securities
    for and on behalf of its constituents in consideration of commission or
    brokerage-As Gil usual practice assessee-Bank received front its constituents
                               11
    ''111argin 111oney in deposit and purchased securities at their face value in its
    own nantl.-flowever, the constituents failed to pay the balance
D amount-Bank foifeited margin money and adjusted it against purchase price
    of secwities mid showed balance as cost of securitieie-Held : margin money
    deposit amount could not be adjusted agmiist cost of securitie!C-Hence,
    margin money deposit f01feited was business income of assessce-bank and
    liable to be taxed.

E         The assessee-Bank in course of its usual business of banking, pur-
    chased and sold securities for and on behalf of its constituents in con-
    sideration of agreed commission/brokerage. The usual practice of the
    Bank in purchasing the securities on behalf of the constituents was to
    require a certain percentage of the face value of the securities to be paid
F   by the constituents in advance and the same was called 'margin money in
    deposit'. On receipt of the said margin money, the Bank purchased
    securities at their face value in its own name. During the accounting
    periods relevant for the assessment years 1964-65 and 1965-66, the asses·
    see-Bank purchased bonds for its constituents at face value of the bonds.
    The Bank had received margin money from its constituents in respect of
G   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
H   and 1965-66, the Income Tax Officer treated the margin money forfeited
                                          522
             COMMR. OF INCOME TAX v. LAKSHMI VILAS BANK LTD.                     523

     by the Bank as income of the year in which the margin money was forfeited A
     and brought the forfeited amount to tax. The Income Tax Officer was of
'f   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 Income-Tax Appellate Tribunal, however, upheld the contention            B   .,
     of the assessee·Bank and the High court answered the reference sought
     by the appellant against him. Being aggrieved, the appellant preferred the
     present appeal.

             Allowing the appeal, this Court                                            c
              HELD : 1. After the forfeiture, the money became Bank's own money.
       The Income Tax Officer was tight in treating this forfeited money as income
       of the. asses see earned in usual course of banking business. The securities
       purchased by the Bank in its own name became the property of the Bank.
       If the securities were ultimately sold, any profit made would be profit          D
       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
      bad 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
                                                                                        E
       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              F
      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. [526-F-H; 527-A-B]
                                                                                        G
             CIVIL APPELLATE JURISDICTION: Civil appeal Nos. 132-33 of
     1979.

          From the Judgment and Order dated 6.4.76 .of the Madras High
     Court in Reference Nos. 104-106 of 1976.                                           H
    524                  SUPREME COURT REPORTS [1996] SUPP. 2 S.C.R.

A         K.N. Shukla, Manoj Arora and S.N. Terdol for the Appellant.

          Ms. Janki Ramachandran for the Respondent.

          The Judgment of the Court was delivered by

B       SEN, J. Lakshmi Vilas Bank, Kanu, 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 period 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
C constituents. The usual practice of the Bank in purchasing the securities
  on behalf of the constituents was to require a certain percentage of the
  face value of the securities to be paid by the constituents in advance and
  the same was called 'margin money in deposit'. On receipt of the said
  margin money, the Bank purchased securities at their face value in its own
D 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 under-
  taking 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
E 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
F   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 assess-
    ments 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
G   amount to tax. The 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 t.o adjust the margin money forfeited by them
H   against the cost of the bonds for arriving at the cost of the securities.
  COMMR. OF INCOME TAX v. LAKSHMI VILAS BANK LTD. [SEN, J.] 525

      At the instance of the Commissioner of Income Tax, the following          A
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   B
        at a later stage was not the income of the assessee liable to tax,
        but that the assessee was entitled lo 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
                                                                                c
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 hap-
pened simultaneously:
                                                                                D
        (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 con-
        stituents became money of the Bank, and
                                                                                E
        (c) At the same time, the bonds also became the property of the
        Bank.

       There was nothing in law to prevent the Bank 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    F
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         G
this margin aniourit 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    H
    526                   SUPREME COURTREJ'ORTS [1996] SUPP. 2 S.C.R.

A 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
B business. The Bank undertook to buy the securities on behalf of its con-
  stituents. Before purchasing the securities, the Bank took from its con-
  stituents 'margin money deposits'. These deposits 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
C amount, the deposit was to be treated as earnest money liable to be
  forfeited. In this case, the Bank bought the securities on behalf of its
  constituents in course of its business and for the purpose of making 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
D 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
E 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 pur-
F chased by the Bank in its own name became the property of the Bank. If
   the securities were ultimately 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
G 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
H that case, the Bank would have been entitled only to the brokerage. Since
  COMMR.OFINCOMETAX v. LAKSHMIVILASBANKLID. (SEN,J.]527

the constituent defaulted, the deposit amount was forfeited and the end         A
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     B
the deposits 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 purchase of the securities was Bank's money. No question of reduction
of costs of the securities by adjustment of the deposit amount can arise in     c
the facts of this case.

      It 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.
                                                                                D
V.S.S.                                                      Appeal allowed.