COMMISSIONER OF INCOME-TAX, CENTRAL ZONE-A, KARACHI VS TARIQ MULTIPURPOSE INDUSTRIES LIMITED, KARACHI, 2003 PTD-KARACHI-HIGH-COURT-SINDH 1370 (2003)

(a) Income-tax Act (XI of 1922)---

----S. 4(3)(vii)---Forfeiture of advance money resulting from the failure of the intending purchaser to exercise the option of purchasing the property was not a casual income enjoying the exemption from the chargeability of income-tax.

Alnoor Sugar Mills Ltd., Karachi v. Commissioner of Income Tax. Central Zone `B'. Karachi 2002 PTD 728 ref.

(b) Income-tax---

----Capital receipt----Forfeiture of advance money resulting from the failure of the intending purchaser to exercise the option of purchasing the property was a capital receipt.

Alnoor Sugar Mills Ltd., Karachi v. Commissioner of Income Tax. Central Zone `B'. Karachi, 2002 PTD 728; Travancore Rubber and Tea Co. Ltd. v. Commissioner of Income Tax 2001 PTD 1094; Tattersall's case (1939) 7 ITR 316; CIT v. Travancore Rubber and Tea Co. Ltd. (1991) 190 ITR 508; Maula Bux v. Union of Indian AIR 1970 SC 1955; Shree Hanuman Cotton Mills v. Tata Air Craft Ltd. AIR 1970 SC 1986 and London and Thames Hasven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) (1968) 70 ITR 460 ref.

M. Arif Moton for Appellant.

Rehan Hasan Naqvi for Respondent.

Date of hearing: 21st January, 2003.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUE, J.---The Income Tax Appellate Tribunal Karachi Bench has referred the following question of law under section 136(1) of the Income Tax Ordinance, 1979, for our opinion:--

"Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the forfeiture of advance money resulting from the failure of 'the intending purchaser to- exercise the said option purchasing the factory building was a casual and capital receipt and not a Revenue receipt."

The relevant fats as stated by the learned Tribunal are that the respondent/assessee is a private limited company, which in its Return of total income for the assessment year 1978-79 had shown an amount of Rs.1,00,000 on account of forfeiture of 15% advance money received from another company, a purchaser of the factory building. Earlier the assessee had entered into an agreement of sale and had received advance money of Rs.2,00,000. There was a clause in the sale agreement which read as follows:--

"Upon the exercise of the said option the said sum of Rs. 2,00,000 only shall stand adjusted against by Marmon Lab (Pak.) Ltd., to seller. In case of failure to exercise the said option half of this amount shall stand forfeited in favour of the seller and the balance shall be refunded by the seller to Harmon Lab. (Pakistan) Limited."

The deal for the sale of `factory premises did not materialize and therefore, the assessee/respondent forfeited the amount of Rs.1,00,000 from the advance money. The respondent claimed it as capital receipt but the I.T.O. did not accept the claim and held that it was not a capital gain as no sale, exchange or transfer of capital assets was effected, and included the same in the total income of the respondent. The respondent preferred appeal before the CIT(A) who held that receipt was in the nature of capital gain and deleted the addition. The CIT(A) further held that it was casual income. The department feeling aggrieved preferred second appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal). The Tribunal held that the asset agreed upon to be sold was a fixed asset of the company and pursuant to the Condition agreed in the sale-agreement it was a casual and capital receipt. The department still feeling aggrieved submitted a reference application which was allowed and the question reproduced above was referred for the opinion of this Court.

We have heard Mr. Arif Moton, learned counsel for the Department and Mr. Rehan Hasan Naqvi, learned counsel for the respondent.

Mr. Arif Moton has supported the view taken by the Assessing Officer to the effect that since no sale, exchange or transfer of the capital asset was capitalized, therefore, the receipt on account of forfeiture of advance money was neither a capital gain nor a casual income.

On the other hand, Mr. Rehan Hassan Naqvi, learned counsel for the respondent contended that it was non-recurring receipt and was casual in nature. Mr. Rehan Hassan Naqvi, candidly conceded that in order to claim exemption under section 4(3)(VII) of the Income Tax Act, 1922, which was applicable at the relevant time, the assessee was required to establish that a receipt was non-recurring as well as casual. He further conceded that fulfilment of one condition only, was not sufficient for claiming the exemption. The learned counsel was therefore, asked to show if the receipt being .in pursuance of an agreement between the two persons was casual in nature. The learned counsel sought time to produce the judgment on this point. However, he subsequently, stated very candidly that the issue on the point of casual income already stands decided against the respondent by a Division Bench of this Court in, the case of Alnoor Sugar Mills Ltd., Karachi v. Commissioner of Income Tax. Central Zone `B'. Karachi 2002 PTD 728.

The receipt was though non-recurring in nature but was not casual, therefore, it is held that the learned Tribunal was not right in holding that it was a casual income enjoying exemption from the chargeability of income-tax.

Mr. Rehan Hassan Naqvi, next contended that the receipt is capital in nature.

In support of his contention he has produced a, judgment of the Supreme. Court of India, in the case of Travancore Rubber and Tea Co. Ltd. v. Commissioner of Income Tax 2001 84 Tax 52.

In the above judgment the Supreme Court of India, in similar circumstances, held with reference to the provisions contained in section 51 of the Indian Income Tax Act, 1961, that .the receipt was capital in nature.

Section 51 of the Indian Income Tax Act, 1961, reads as follows:-

"(51) Advance money received. ---Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition."

In 4th Proviso to section 12-B of the repealed Income Tax Act, 1922, it is provided as follows:--

"Provided further that where the capital asset was on any previous occasion the subject .of negotiations for its sale, exchange or transfer, any option or other money received and retained by the assessee in respect of such negotiations shall be deducted in computing the actual cost to him of such asset. "

A perusal of the above provisions of law shows that they are pari meteria to each other. The purport and intent of the two provisions is same. The Supreme Court of India, while interpreting the provisions contained in section 51 of the Indian Act, held as follows:-

"Thus where there is a transfer of a capital asset, if there was previous occasion when there were negotiations for its transfer, and if `advance or other money' had been received and retained by the assessee in respect of such negotiations, such amounts will, in effect be added to the value of the capital asset impacting on the ultimate assessment of capital gains. For this purpose, no distinction is made between moneys received and retained by way of 'advance' and `other money'. The phrase `other money' would cover, for example, deposits made, by the purchaser for guaranteeing due performance of the contracts and not forming part of the consideration. The monies received on the previous occasions and retained by the vendor/assessee cannot, therefore, be treated as a Revenue receipt. Section 51 to the extent it states thus preserves the rule in Tattersall's case (1939) 7 ITR 316(CA).

In the case before us there were negotiations for transfer of the rubber trees in question, which did not fructify in sale. The amounts forfeited referred only to the capital asset of the assessee and were directly related to the sale of such capital asset. The Tribunal correctly held that the advance money for sale of the rubber trees formed part of the capital asset of the assessee and that the sake, if it materialized, would have resulted in a gain exigible to capital gains tax, provided there is a gain arising out of the same. But the Tribunal erred in overlooking the phrase or other money' in section 51 in holding that the earnest money did not come within the purview of section 51. No doubt, as held by the High Court in the decision reported in CIT v. Travancore Rubber and Tea Co. Ltd. (1991) 190 ITR 508, there is a distinction between earnest money and advance, but that distinction, loses its significance in the context of the express language of section 51 to include `other money' in addition to `advance'."

The matter may be considered from another aspect. The amount forfeited by the assessee was in terms of clause 16 of the agreement which reads:--

"In the event of the purchaser failing to pay any of the instalments hereby agreed to be paid by him on the date specified or violating any of the terms on its part to be performed, the vendor shall have the right and liberty to cancel all rights hereby granted to the purchaser any time after such violation and to realize from the purchaser forthwith in a lump the entire balance amount then remaining to be paid. In the event of the balance amount remaining unpaid on demand the `purchaser will not have any claim or right over the rubber trees standing or cut nor can he claim from the vendor the earnest money deposit or the instalments paid till date."

Such a clause has been construed as providing for compensation for breach of contract under section 74 of the Indian Contract Act, 1872 (See Maula4 Bux v. Union of India, AIR 1970 SC 1955 and Shree Hanuman Cotton Mills v. Tata Air Craft Ltd. AIR 1970 SC 1986).

In determining whether compensation received for breach of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock LJ in London and Thames Hasven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) (1968) 70 ITR 460 (CA) at page 488 as:

"Whether, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income-tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation."

The logic of the principle is that the assessee's right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. Applying the rule to this case if the agreed sums of money under the agreements had been received by the assessee, they would have been credited in its account as a capital receipt. That being so the forfeited amounts must also be treated as capital receipt.

We are in respectful agreement with the findings of the Supreme Court of India, and hold that the Tribunal was justified in holding that the forfeiture of advance money resulting from the failure of the intending purchaser to exercise the option of purchasing factory building, was, capital receipt.

The question referred to us, is partly replied in negative on the point of the receipt being casual in nature and partly in affirmative regarding the receipt being capital in nature.

The reference application stands disposed of as above. A copy of this judgment be sent under the signature of the Registrar and seal of this Court to the Registrar Income Tax- Appellate Tribunal, Karachi. The Income Tax Appellate Tribunal, shall dispose of the appeal conformably to the opinion contained in this judgment.

M.B.A./C-72/KOrder accordingly.