REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1265 OF 2007

THE PEERLESS GENERAL FINANCE  AND INVESTMENT COMPANY LTD.                 APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX RESPONDENT(S)

J U D G M E N T

R.F. Nariman, J.

1) The question raised in this appeal is as to whether receipts

of  subscriptions  in  the  hands  of  the  assessee-Company  for  the

previous years relevant to the assessment years 1985-86 and 1986-

97 should be treated as income and not capital receipts inasmuch

as the assessee has in its books of accounts shown this sum as

income.   

2) The assessee-Company has floated various schemes which

require  subscribers  to  deposit  certain  amounts  by  way  of

subscriptions  in  its  hands,  and,  depending  upon  the  scheme  in

question, these subscribed amounts at the end of the scheme are

ultimately repaid with interest.  The scheme at hand also contains

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forfeiture clauses as a result of which if, mid-way, a certain amount

is  forfeited,  then  the  said  amount  would  immediately  become

income in the hands of the  assessee. This is an admitted position

before us.  

3) In the present case, the assessee was asked to bring to tax

such amounts as income for the two years in question, inasmuch

as,  according  to  the  Assessing  Officer,  it  had  treated  the  whole

amount as income, 3% of which is not disputed to be income before

us for the years in question. The Assessing Officer treated these

amounts  as  income  inasmuch  as  under  the  accounting  system

followed by the assessee, these amounts were credited to the profit

and  loss  account  for  the  years  in  question  as  income.  The

Commissioner of Income Tax (Appeals) dismissed the appeal from

the  original  assessment  orders  and  confirmed  the  same.  The

Income  Tax  Appellate  Tribunal,  on  the  other  hand,  allowed  the

appeals  by  relying  upon  the  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 the

Appellate  Tribunal,  this  Court  finally  decided  the  question  in  the

assessee’s own case stating that such amounts cannot be treated

to be income but are in the nature of capital receipts.  These were

not only because of the interpretation of an RBI Circular of 1987, but

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also because, on general principles, such amounts must be treated

to be capital receipts or otherwise they would violate the provisions

of the Companies Act.  It further went through the various clauses

contained in the scheme at hand, and found that 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 the hands of the

assessee for these two years. It also dealt with certificates that were

surrendered prior to the stated time, and stated that in such cases

as  well  whatever  would  remain  as  surplus  in  the  hands  of  the

assessee would be treated as income.  It went on to state that there

would be no estoppel in law against the assessee making a claim

that these amounts were in the nature of capital receipts and not

income,  and  also  relied  upon certain  judgments  of  this  Court  to

buttress the proposition that this Court had also held that what is the

true position in law cannot be deflected by what the assessee may

or may not do in its treatment of the matter at hand in its accounts.

So doing, the appeal against the Commissioner of Income Tax was

allowed by the Income Tax Appellate Tribunal.  In the first round, the

High Court, by its judgment dated 09.09.1999, stated that since no

question  of  law  arose,  the  reference  applications  before  it  were

dismissed.  This Court, by an order dated 03.12.2002, set aside the

High Court  judgment  and referred the  following questions to  the

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High Court:

“(a) Whether the judgment of the Supreme Court in Peerless General Finance and Investment Co. Ltd. vs.  Reserve Bank of India (1992) 2 SCC 343 lays down  as  an  absolute  proposition  of  law  that  all receipts  of  subscription  in  the  hands  of  the assessee  for  the  previous  years  relevant  to  the assessment  years  1985-86  and  1986-87  must necessarily be treated as capital receipts?

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

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

4) When  remanded  to  the  High  Court,  by  the  impugned

judgment dated 06.10.2005, the High Court of Calcutta allowed the

appeal against the Appellate Tribunal holding that a perusal of the

subscription  scheme  of  the  appellant  company  would  show that

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since forfeiture of the amounts deposited is possible, this amount

should be treated as income and not as a capital receipt.  Further, it

relied heavily upon the fact that the assessee had itself treated such

amounts as income and credited them to its profit and loss account

for the years in question and would, therefore, be estopped 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

Circular of 1987, which itself was only prospective, any law declared

as to the effect of Clause 12 of that Circular would be prospective in

nature and would, therefore, not apply to the assessment years in

question.

5) Mr. S. Ganesh, learned Senior Advocate, appearing for the

appellant-Company has  argued before  us  that  the  High Court  is

incorrect on all counts.  According to him, the fact that forfeiture may

take place under the clauses of the scheme has to be read with an

interim  order  which  he  has  brought  to  our  notice  by  way  of  a

supplementary affidavit dated 05.04.2017 in which it is made clear

that, post the date of the order i.e. 03.09.1979, no amount can be

forfeited under any of the schemes by the appellant-Company.  He

stated that, as a matter of fact, the supplementary affidavit states

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that for the years in question and, in particular, for every year after

1979, no sum has in fact been forfeited by the Company under any

of the schemes in question.  He then argued that it was incorrect to

go only by the accounting system of the  assessee since it is well

settled that the real position in law,  qua deposits that are made by

subscriptions,  on  first  principle,  would  show that  they  are  in  the

nature  of  capital  receipts  and  cannot  be  possibly  be  said  to  be

income, as they would enure to the benefit of the subscribers of the

scheme and would have to be paid back at the end of the scheme

together with interest thereof.  He also argued that, in any event,

that the judgment in Peerless General Finance and Investment Co.

Limited (supra)  was not  merely  grounded on an interpretation of

Clause 12 of the RBI Circular of 1987 but it also specifically held

that,  as  a  general  proposition,  receipts  of  this  nature  would  be

capital and adverted to both the judgments of N.M. Kasliwal, J and

K. Ramaswamy, J. in this behalf.  He also argued that even for the

period in question, this judgment would squarely apply as if  such

receipts  were  to  be  treated  as  income  it  would  violate  the

Companies Act.  He also argued that it would be incorrect to raise

any question of estoppel against the appellant-Company and cited

judgments of this Court to buttress this proposition.

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6) On the other hand, Mr. Arijit Prasad, learned Senior Counsel,

appearing  for  the  Revenue  has  countered  Mr.  Ganesh’s

submissions.  He read copiously from the Commissioner of Income

Tax (Appeals)  orders in order to buttress his submission that  the

ground reality of the situation 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, 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 the true form of the 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 the effect that the ground

reality must govern and not mere theoretical considerations.  Also,

according to the learned Senior Advocate, the issue at hand did not

arise directly before this Court in the Peerless General Finance and

Investment  Co.  Limited  (supra)  and,  therefore,  any  observations

made therein would not bind on the facts of this case.  Further, in

any event, the Commissioner of Income Tax (Appeals) was correct

in stating that this judgment dealing only with an RBI circular 1987,

being  prospective  in  nature,  would  not  apply  to  the  assessment

years at hand.

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7) Having heard the learned counsel for both parties, we must

first 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  to  the  principles  discussed above, are answered in the following manner:

(a) that the decision of the 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  the hands of  the assessee for the  previous  year  relevant  to  the  assessment years  1985-86  and  1986-87  must  necessarily be treated as capital receipts.

(b) Having regard to the facts and circumstances of the  case  the  learned  Tribunal  was  wrong  in treating the first year’s subscription relevant to the assessment years 1985-86 and 1986-87 as capital receipts and hence not taxable; and

(c) the decision of  the Apex Court  in  the second Peerless case that the deposits made after 15th

May  1987  were  to  be  treated  in  the  manner directed in the 1987 directions are applicable to all pending proceedings so far as such deposits relate  to  the  period  after  15th May  1987, particularly, in relation to the assessee.”

8) What is clear, even on general principle, on the facts of this

case, is that subscriptions were received in the years in question

from the public at large under a collective investment scheme, and

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these  subscriptions  were  never  at  any  point  of  time  forfeited.

Indeed, the supplementary affidavit filed before this Court states this

as a fact, being based on an interim order of the High Court dated

03.09.1979  which  obtained  during  the  assessment  years  in

question.   This  being  the  case,  and  surrendered  certificates  not

being the subject-matter of the 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 a situation in which the 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 the concerns raised by

this Court in that judgment.  The steps taken were under powers

conferred by Section 45 J & 45 K of the Reserve Bank of India Act,

as  a  result  of  which  directions  were  issued  by  the  RBI  dated

15.05.1987.  These directions, in turn, were the subject matter of

challenge by  the  Peerless  General  Finance  and Investment  Co.

Limited  (supra)  i.e.  the  second  Peerless  case.   The  aforesaid

directions are set out in full in para 9 of the said judgment. We are

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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  the  total  amount  of  deposits received together with interest, bonus, premium or other  advantage,  accrued  or  payable  to  the depositors.”

It is true that the focus of this Court was a challenge, on various

grounds, to the aforesaid directions.  However, this Court did state,

Kasliwal, J., in particular, holding:

“The amount contributed by the depositors being a capital  receipt  and  not  a  revenue  receipt  cannot under any circumstances be shown in the balance sheet  otherwise  than  at  its  full  value.   Moreover, being a capital receipt, it cannot be credited to the profit and loss account since Part II of Schedule VI to  the  Companies  Act,  1956  requires  that  the amounts to be shown in the profit and loss account should be confined to the income and expenditure of the company.  Thus, crediting a part of the first and subsequent  year’s  deposit  instalments  to  the profit and loss account and not showing them fully as  a  liability  in  the  balance  sheet  would  be  a contravention of  the provisions  of  the  Companies Act.”  

The learned Judge further went on to hold:

“The method followed by the companies in carrying on the aforesaid business is that a certain portion of the subscriptions received by it is transferred to the profit and loss account, shown as income, and the same  is  used  to  defray  inevitable  working  capital requirements of  the company,  namely,  payment  of agent’s  commission,  management  expenses,  staff salaries  and  other  overheads.   However,  the balance  of  the  subscriptions  (excluding  the

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appropriated part) is transferred to a fund each year and  the  corpus  of  the  fund  is  invested  in  turn  in interest-bearing investment.  The Peerless Company initially used to transfer approximately 95 per cent of the first  year’s  subscriptions to the profit  and loss account  and  used  to  invest  the  subscriptions received from the second year onwards.”  

K. Ramaswamy, J., in a separate concurring judgment, also turned

down 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 receipt and its full value shall be shown in the account books or balance sheet as liability  of the company.  It cannot be credited to the profit and loss  account.   Part  II  of  Schedule  VI  of  the Companies  Act,  1956  requires  that  the  amount shown  in  the  profit  and  loss  account  should  be confined  to  the  income  and  expenditure  of  the company.   Para (12) of  the Directions is,  thus,  in consonance with the Companies Act.”  

10) While it is true that there was no direct focus of the Court on

whether subscriptions so received are capital or revenue in nature,

we may still advert to the 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  the

Companies Act.   It  is,  therefore,  incorrect  to  state,  as  has been

stated  by  the  High  Court,  that  the  decision  in  Peerless  General

Finance and Investment Co. Limited (supra) must be read as not

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having laid down any absolute proposition of law that all receipts of

subscription at the hands of the assessee for these years must be

treated as capital  receipts.   We reiterate that  though the Court’s

focus was not directly on this, yet, a pronouncement by this Court,

even  if  it  cannot  be  strictly  called  the  ratio  decidendi of  the

judgment,  would  certainly  be  binding  on  the  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 the treatment of such subscriptions in the

hands of accounts of the assessee itself.  In this behalf, he cited a

decision  of  the  Division  Bench  of  the  Allahabad  High  Court  in

Commissioner  of  Income  Tax vs.  Sahara  Investment  India  Ltd.,

reported as Volume 266 ITR page 641 in which the 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,  the  Supreme  Court  on  similar facts held that the deposits were capital receipts and not revenue receipts (vide paragraphs 67 & 68 of the aforesaid judgment).   That case also pertains  to  a  finance  company  which  used  to collect deposits, and credited part of its deposits to the profit and loss account, as in the present case.  Hence, the ratio of the said decision, in our opinion, applies to this case also.

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It is well settled in income-tax law that book keeping entries are not decisive or determinative of the true nature of the entries as 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 the court has to see the true nature of the receipts and not go only by the entry in the books of account.

We  agree  with  the  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, the Supreme Court observed (page 619):

“It  is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive.  If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt.

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

Sri Chopra then relied on the decision of the 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 the deposit was forfeited and the result of the transaction was that  the bank became full owner  of  the security  and the amount  lying in deposit  with it  became its own money.   In  the present  case there is  no such finding that  the deposit  was forfeited or  that  at  the end of  the

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transaction  the  security  deposit  became  the property of the assessee or that changed from a capital receipt to a revenue receipt.  Hence, that decision is clearly distinguishable.”

This Court, on 21.07.2015, in appeal against the said judgment held

as under:

“After reading of the decision of the High Court, we find that the High 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 is squarely covered by the 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 a

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  the  Revenue,  however,  strongly  relied  upon  the

observations in  Ram Janki Devi and another v.  M/s. Juggilal

Kamlapat, (1971)  1  SCC  477.  In  particular,  he  relied  upon

paragraph 12 of the judgment which reads as follows:-

“The case of a deposit is something more than a

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mere loan of money.  It will depend on the facts of each case whether the transaction is clothed with the  character  of  a  deposit  of  money.   The surrounding  circumstances,  the  relationship  and character  of  the  transaction  and  the  manner  in which  parties  treated  the  transaction  will  throw light on the true form of the transaction.”

12)     This judgment has no direct relevance to the facts of the

present case.  The vexed question in that case was as to whether

a particular transaction in question was a loan or a deposit. It was

in that context that paragraph 12 laid down that whether a loan of

money could be called a deposit, would depend upon the facts of

each case, having regard to the surrounding circumstances etc.

In the present case, there is no such question raised by Revenue.

The question raised is completely different, and as has been held

by  us  above,  the  character  of  the  transaction  being  clearly  a

capital receipt in the hands of the assessee cannot possibly be

taxed as income in the assessee’s hands.  

13)     Shri Prasad then relied upon the 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 a quotation from a Bombay High Court

judgment which was approved by this Court, as follows: -

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“The  principle  of  real  income  is  not  to  be subordinated  as  to  amount  virtually  to  a negation of it when a 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  the close of an accounting year.  In examining any transaction and situation of this nature the court would  have  more  regard  to  the  reality  and specialty of the situation rather than the purely theoretical or doctrinaire aspect of it.  It will lay greater emphasis on the business aspect of the matter  viewed  as  a  whole  when  that  can  be done without disregarding statutory language.”

 The “theoretical” aspect of the present transaction is the fact that

the assessee treated subscription receipts as income.  The reality

of the situation, however, is that the business aspect of the matter,

when viewed as a whole, leads inevitably to the conclusion that

the receipts in question were capital receipts and not income.  

14) In the circumstances, we set aside the judgment of the High

Court and restore that of the Income Tax Appellate Tribunal.  The

appeal is allowed.  There shall be no order as to costs.

…..………….......................... J. (ROHINTON FALI NARIMAN)

.............................................. J.              (SANJIV KHANNA)

New Delhi; July 09, 2019.

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