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 number the income of the assessee liable to tax, but that the assessee was entitled to take them into account in arriving at the companyt of securities acquired by the assessee when these sums were forfeited?
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.
Each one of the companystituents 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 number 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.
The usual practice of the Bank in purchasing the securities on behalf Sf the companystituents was to require a certain percentage of the face value of the securities to be paid by the companystituents in advance 2 receipt of the said margin money, the Bank purchased securities at their face value in its own name.
The Income Tax Officer was of the opinion that the Bank had numberright to adjust the margin money to reduce the purchase price of the bonds.
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 companystituents.
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 forfeited.
The Tribunal, however, upheld the companytention of the Bank that they were entitled to adjust the margin money forfeited by them against the companyt of the bonds for arriving at the companyt of the securities.
The Income Tax Officer was right in treating this forfeited money as income of the assessee earned in usual companyrse of banking business.
If the companytract was duly executed, the Bank would have been entitled to charge brokerage.
The securities purchased by the Bank in its own name became the sold, any profit made would be profit earned by the Bank.
The Bank undertook to buy the securities on behalf of its companystituents, served two purposes.
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 companyt of purchasing the bonds.
The Bank had received margin money from its companystituents in respect of these purchases.
The money was received and forfeited incidentally and in the companyrse of day to day banking business.
The companystituents failed to pay the balance amount by the stipulated date.
In this case, the Bank bought the securities on behalf of its companystituents in companyrse of its business and for the purpose of taking profit.
During the relevant accounting period, the Bank purchased bonds for its companystituents at face value of the bonds.
The view taken by him was affirmed by the Appellate Assistant Commissioner.
This was in addition to the companymission and service charges to which the Bank was entitled.
Lakshmi Vilas Bank, Karur, respondent herein in companyrse of its usual business of banking, purchases and sells securities for and on behalf of its companystituents in companysideration of agreed companymission brokerage.
For these reasons, the High Court answered the question referred to it in affirmative and against the Department.
In the event of the companystituent paying the balance amount, the deposits were to be treated as part payment of the price of the securities.
After the forfeiture, the money became Banks own money.
After the deposits made by the companystituents were forfeited by the Bank, the forfeited amount became Banks money.
The Department has number companye up in appeal before this Court.
