REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 1265 OF 2007 PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. APPELLANT(S) VERSUS COMMISSIONER OF INCOME TAX RESPONDENT(S) JUDGMENT R.F. Nariman, J. 1) question raised in this appeal is as to whether receipts of subscriptions in hands of assessee-Company for previous years relevant to assessment years 1985-86 and 1986- 97 should be treated as income and not capital receipts inasmuch as assessee has in its books of accounts shown this sum as income. 2) assessee-Company has floated various schemes which require subscribers to deposit certain amounts by way of Signature Not Verified subscriptions in its hands, and, depending upon scheme in Digitally signed by R NATARAJAN question, these subscribed amounts at end of scheme are Date: 2019.07.13 13:18:02 IST Reason: ultimately repaid with interest. scheme at hand also contains 1 forfeiture clauses as result of which if, mid-way, certain amount is forfeited, then said amount would immediately become income in hands of assessee. This is admitted position before us. 3) In present case, assessee was asked to bring to tax such amounts as income for two years in question, inasmuch as, according to Assessing Officer, it had treated whole amount as income, 3% of which is not disputed to be income before us for years in question. Assessing Officer treated these amounts as income inasmuch as under accounting system followed by assessee, these amounts were credited to profit and loss account for years in question as income. Commissioner of Income Tax (Appeals) dismissed appeal from original assessment orders and confirmed same. Income Tax Appellate Tribunal, on other hand, allowed appeals by relying upon 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 Appellate Tribunal, this Court finally decided question in assessee s own case stating that such amounts cannot be treated to be income but are in nature of capital receipts. These were not only because of interpretation of RBI Circular of 1987, but 2 also because, on general principles, such amounts must be treated to be capital receipts or otherwise they would violate provisions of Companies Act. It further went through various clauses contained in scheme at hand, and found that in point of fact no subscription certificate had, in fact, been forfeited, as result of which it was clear that there would be no income in hands of assessee for these two years. It also dealt with certificates that were surrendered prior to stated time, and stated that in such cases as well whatever would remain as surplus in hands of assessee would be treated as income. It went on to state that there would be no estoppel in law against assessee making claim that these amounts were in nature of capital receipts and not income, and also relied upon certain judgments of this Court to buttress proposition that this Court had also held that what is true position in law cannot be deflected by what assessee may or may not do in its treatment of matter at hand in its accounts. So doing, appeal against Commissioner of Income Tax was allowed by Income Tax Appellate Tribunal. In first round, High Court, by its judgment dated 09.09.1999, stated that since no question of law arose, reference applications before it were dismissed. This Court, by order dated 03.12.2002, set aside High Court judgment and referred following questions to 3 High Court: (a) Whether judgment of Supreme Court in Peerless General Finance and Investment Co. Ltd. vs. Reserve Bank of India (1992) 2 SCC 343 lays down as absolute proposition of law that all receipts of subscription in hands of assessee for previous years relevant to assessment years 1985-86 and 1986-87 must necessarily be treated as capital receipts? (b) If answer to first question is in negative, on facts and in circumstances of case, and having regard to fact that first year s subscriptions were consciously offered as revenue receipt for taxation by assessee in returns of income filed in respect of assessment years 1985-86 and 1986-87, whether Tribunal was justified in accepting assessee s contention that first years subscription was capital receipts and hence not taxable? (c) Whether on facts and in circumstances of case and having regard to observations of Hon ble Supreme Court to effect that directions of Reserve Bank of India dated 15 th May, 1987 had been made applicable from 15th May, 1987 and would only apply to deposits made on or after 15th May, 1987, tribunal was justified in law as well as on facts in holding that said directions of Reserve Bank of India were retrospective and must be applied in all pending proceedings? 4) When remanded to High Court, by impugned judgment dated 06.10.2005, High Court of Calcutta allowed appeal against Appellate Tribunal holding that perusal of subscription scheme of appellant company would show that 4 since forfeiture of amounts deposited is possible, this amount should be treated as income and not as capital receipt. Further, it relied heavily upon fact that assessee had itself treated such amounts as income and credited them to its profit and loss account for years in question and would, therefore, be estopped by same. On going through judgment of this Court, namely, Peerless General Finance and Investment Co. Limited (supra) it went on to state that since said judgment dealt with RBI Circular of 1987, which itself was only prospective, any law declared as to effect of Clause 12 of that Circular would be prospective in nature and would, therefore, not apply to assessment years in question. 5) Mr. S. Ganesh, learned Senior Advocate, appearing for appellant-Company has argued before us that High Court is incorrect on all counts. According to him, fact that forfeiture may take place under clauses of scheme has to be read with interim order which he has brought to our notice by way of supplementary affidavit dated 05.04.2017 in which it is made clear that, post date of order i.e. 03.09.1979, no amount can be forfeited under any of schemes by appellant-Company. He stated that, as matter of fact, supplementary affidavit states 5 that for years in question and, in particular, for every year after 1979, no sum has in fact been forfeited by Company under any of schemes in question. He then argued that it was incorrect to go only by accounting system of assessee since it is well settled that real position in law, qua deposits that are made by subscriptions, on first principle, would show that they are in nature of capital receipts and cannot be possibly be said to be income, as they would enure to benefit of subscribers of scheme and would have to be paid back at end of scheme together with interest thereof. He also argued that, in any event, that judgment in Peerless General Finance and Investment Co. Limited (supra) was not merely grounded on interpretation of Clause 12 of RBI Circular of 1987 but it also specifically held that, as general proposition, receipts of this nature would be capital and adverted to both judgments of N.M. Kasliwal, J and K. Ramaswamy, J. in this behalf. He also argued that even for period in question, this judgment would squarely apply as if such receipts were to be treated as income it would violate Companies Act. He also argued that it would be incorrect to raise any question of estoppel against appellant-Company and cited judgments of this Court to buttress this proposition. 6 6) On other hand, Mr. Arijit Prasad, learned Senior Counsel, appearing for Revenue has countered Mr. Ganesh s submissions. He read copiously from Commissioner of Income Tax (Appeals) orders in order to buttress his submission that ground reality of situation in facts of this case is that in point of fact appellant-Company itself treated these amounts as income. Had it not done so, it would not have been able to face its subscribers for payments in future. He also argued based on Ram Janki Devi and Another vs. M/s Juggilal Kamlapat, (1971) 1 SCC 477 that true form of transaction must be looked at. He also cited Poona Electric Supply Co. Ltd., Bombay vs. Commissioner of Income-tax, Bombay AIR 1966 SC 30 to effect that ground reality must govern and not mere theoretical considerations. Also, according to learned Senior Advocate, issue at hand did not arise directly before this Court in Peerless General Finance and Investment Co. Limited (supra) and, therefore, any observations made therein would not bind on facts of this case. Further, in any event, Commissioner of Income Tax (Appeals) was correct in stating that this judgment dealing only with RBI circular 1987, being prospective in nature, would not apply to assessment years at hand. 7 7) Having heard learned counsel for both parties, we must first set out answers given to three questions by High Court, in its judgment under appeal. answers given are as follows: 10.1 questions referred to us, therefore, having regard to principles discussed above, are answered in following manner: (a) that decision of Apex Court in Peerless General Finance and Investment Company Ltd. (supra) did not lay down any absolute proposition of law that all receipts of subscription at hands of assessee for previous year relevant to assessment years 1985-86 and 1986-87 must necessarily be treated as capital receipts. (b) Having regard to facts and circumstances of case learned Tribunal was wrong in treating first year s subscription relevant to assessment years 1985-86 and 1986-87 as capital receipts and hence not taxable; and (c) decision of Apex Court in second Peerless case that deposits made after 15 th May 1987 were to be treated in manner directed in 1987 directions are applicable to all pending proceedings so far as such deposits relate to period after 15 th May 1987, particularly, in relation to assessee. 8) What is clear, even on general principle, on facts of this case, is that subscriptions were received in years in question from public at large under collective investment scheme, and 8 these subscriptions were never at any point of time forfeited. Indeed, supplementary affidavit filed before this Court states this as fact, being based on interim order of High Court dated 03.09.1979 which obtained during assessment years in question. This being case, and surrendered certificates not being subject-matter of appeal before us, it is clear that even on 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. 9) This Court, in Peerless General Finance and Investment Co. Limited (supra), was faced with situation in which RBI had, pursuant to this Court s earlier judgment in Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd. And Others (1987) 1 SCC 424, taken steps to remedy concerns raised by this Court in that judgment. steps taken were under powers conferred by Section 45 J & 45 K of Reserve Bank of India Act, as result of which directions were issued by RBI dated 15.05.1987. These directions, in turn, were subject matter of challenge by Peerless General Finance and Investment Co. Limited (supra) i.e. second Peerless case. aforesaid directions are set out in full in para 9 of said judgment. We are 9 concerned with para 12 which states as follows:- 12. Every residuary non-banking company shall disclose as liabilities in its books of accounts and balance sheets total amount of deposits received together with interest, bonus, premium or other advantage, accrued or payable to depositors. It is true that focus of this Court was challenge, on various grounds, to aforesaid directions. However, this Court did state, Kasliwal, J., in particular, holding: amount contributed by depositors being capital receipt and not revenue receipt cannot under any circumstances be shown in balance sheet otherwise than at its full value. Moreover, being capital receipt, it cannot be credited to profit and loss account since Part II of Schedule VI to Companies Act, 1956 requires that amounts to be shown in profit and loss account should be confined to income and expenditure of company. Thus, crediting part of first and subsequent year s deposit instalments to profit and loss account and not showing them fully as liability in balance sheet would be contravention of provisions of Companies Act. learned Judge further went on to hold: method followed by companies in carrying on aforesaid business is that certain portion of subscriptions received by it is transferred to profit and loss account, shown as income, and same is used to defray inevitable working capital requirements of company, namely, payment of agent s commission, management expenses, staff salaries and other overheads. However, balance of subscriptions (excluding 10 appropriated part) is transferred to fund each year and corpus of fund is invested in turn in interest-bearing investment. Peerless Company initially used to transfer approximately 95 per cent of first year s subscriptions to profit and loss account and used to invest subscriptions received from second year onwards. K. Ramaswamy, J., in separate concurring judgment, also turned down challenge to said guidelines and, in doing so, held as follows: deposit or loan is capital receipt but not revenue receipt and its full value shall be shown in account books or balance sheet as liability of company. It cannot be credited to profit and loss account. Part II of Schedule VI of Companies Act, 1956 requires that amount shown in profit and loss account should be confined to income and expenditure of company. Para (12) of Directions is, thus, in consonance with Companies Act. 10) While it is true that there was no direct focus of Court on whether subscriptions so received are capital or revenue in nature, we may still advert to 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 Companies Act. It is, therefore, incorrect to state, as has been stated by High Court, that decision in Peerless General Finance and Investment Co. Limited (supra) must be read as not 11 having laid down any absolute proposition of law that all receipts of subscription at hands of assessee for these years must be treated as capital receipts. We reiterate that though Court s focus was not directly on this, yet, pronouncement by this Court, even if it cannot be strictly called ratio decidendi of judgment, would certainly be binding on High Court. Even otherwise, as we have stated, it is clear that on general principles also such subscription cannot possibly be treated as income. Mr. Ganesh is right in stating that in cases of this nature it would not be possible to go only by treatment of such subscriptions in hands of accounts of assessee itself. In this behalf, he cited decision of Division Bench of Allahabad High Court in Commissioner of Income Tax vs. Sahara Investment India Ltd., reported as Volume 266 ITR page 641 in which Division Bench followed Peerless General Finance and Investment Co. Limited (supra), and then held as follows: In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India (1992) 75 Comp Cas 12, Supreme Court on similar facts held that deposits were capital receipts and not revenue receipts (vide paragraphs 67 & 68 of aforesaid judgment). That case also pertains to finance company which used to collect deposits, and credited part of its deposits to profit and loss account, as in present case. Hence, ratio of said decision, in our opinion, applies to this case also. 12 It is well settled in income-tax law that book keeping entries are not decisive or determinative of true nature of entries as held by 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 court has to see true nature of receipts and not go only by entry in books of account. We agree with Tribunal that these deposits are really capital receipts and not revenue receipts. In Chowringhee Sales Bureau P. Ltd. V. CIT [1973] 87 ITR 542 (SC) which was followed in Sinclair Murray and Co. P. Ltd. V. CIT [1974] 97 ITR 615, Supreme Court observed (page 619): It is true nature and quality of receipt and not head under which it is entered in account books that would prove decisive. If receipt is trading receipt, fact that it is not so shown in account books of assessee would not prevent assessing authority from treating it as trading receipt. It has been held by Supreme court that primary liability and onus is on Department to prove that certain receipt is liable to be taxed vide Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC). Sri Chopra then relied on decision of Supreme Court in CIT v. Lakshmi Vilas Bank Ltd. [1996] 220 ITR 305. In our opinion that decision is also distinguishable because in that case deposit was forfeited and result of transaction was that bank became full owner of security and amount lying in deposit with it became its own money. In present case there is no such finding that deposit was forfeited or that at end of 13 transaction security deposit became property of assessee or that changed from capital receipt to revenue receipt. Hence, that decision is clearly distinguishable. This Court, on 21.07.2015, in appeal against said judgment held as under: After reading of decision of High Court, we find that High Court has rightly relied upon judgment of this Court in Peerless General Finance & Investment Co. Ltd. & Anr. v. Reserve Bank of India (1992) 2 SCC 343. Since case is squarely covered by judgment, we do not find any merit in these appeals and petitions which are accordingly, dismissed. It is also correct to state that there can be no estoppel against settled position in law [See Commissioner of Income-Tax, Bombay vs. C. Parakh & Co. (India) Ltd. 29 ITR 661 at 665 and Commissioner of Income-Tax, Madras vs. V.MR.P. Firm, Muar (1965) 56 ITR 67. 11) Shri Arijit Prasad, learned senior counsel, appearing on behalf of Revenue, however, strongly relied upon observations in Ram Janki Devi and another v. M/s. Juggilal Kamlapat, (1971) 1 SCC 477. In particular, he relied upon paragraph 12 of judgment which reads as follows:- case of deposit is something more than 14 mere loan of money. It will depend on facts of each case whether transaction is clothed with character of deposit of money. surrounding circumstances, relationship and character of transaction and manner in which parties treated transaction will throw light on true form of transaction. 12) This judgment has no direct relevance to facts of present case. vexed question in that case was as to whether particular transaction in question was loan or deposit. It was in that context that paragraph 12 laid down that whether loan of money could be called deposit, would depend upon facts of each case, having regard to surrounding circumstances etc. In present case, there is no such question raised by Revenue. question raised is completely different, and as has been held by us above, character of transaction being clearly capital receipt in hands of assessee cannot possibly be taxed as income in assessee s hands. 13) Shri Prasad then relied upon judgment of this Court in Poona Electric Supply Co. Ltd., Bombay v. Commissioner of Income-tax, Bombay City I, Bombay, AIR 1966 SC 30. In particular, he relied upon quotation from Bombay High Court judgment which was approved by this Court, as follows: - 15 principle of real income is not to be subordinated as to amount virtually to negation of it when surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after close of accounting year. In examining any transaction and situation of this nature court would have more regard to reality and specialty of situation rather than purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on business aspect of matter viewed as whole when that can be done without disregarding statutory language. theoretical aspect of present transaction is fact that assessee treated subscription receipts as income. reality of situation, however, is that business aspect of matter, when viewed as whole, leads inevitably to conclusion that receipts in question were capital receipts and not income. 14) In circumstances, we set aside judgment of High Court and restore that of Income Tax Appellate Tribunal. appeal is allowed. There shall be no order as to costs. J. (ROHINTON FALI NARIMAN) J. (SANJIV KHANNA) New Delhi; July 09, 2019. 16 Peerless General Finance And Investment Company Ltd. v. Commissioner of Income-tax