Case: The Travencore Rubber &amp; Tea Co.Ltd Vs. C.I.T., Trivandrum

asset could come into existence automatically by operation of law. When no demand for payment was made common sense requires that such amount should be entered into profit and loss account for the year and be treated as taxable." 13. However, in our view, the cancellation of a sale of capital assets would not be such a subsequent event so as to change the nature of the receipt of the forfeited amounts. 14. The specific provisions of Section 51 of the Income Tax Act, 1961 which provide for the computation of the cost of acquisition for determining the capital gains arising from the transfer of a particular asset fortify this view. Section 51 reads : "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." (emphasis added) 15. Thus where there is a of transfer of a capital asset, if there was a 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 vendorassessee cannot therefore, be treated as a revenue receipt. Section 51 to the extent states thus preserves the rule in Tattersalls case. 16. 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 sale, if materialised, would have resulted in a gain eligible 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 1990 Vol. 190 ITR 509 (supra), there is a distinction between earnest money and advance, but that distinction looses its significance in the context of the express language of Section 51 to include `other money in addition to `advance. 17. 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 realise 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 be claim from the Vendor the earnest money deposit or the instalments paid till date." (emphasis added) 18. Such a clause has been construed as providing for compensation for breach of contract under Section 74 of the Indian Contract Act, 1872. [See Maula Bux v. Union of India, AIR 1970 SC 1955 and Shree Hanuman Cotton Mills and another v. Tata Air Craft Ltd., AIR 1970 SC 1986 .] 19. In determining whether compensation received for breach of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock L., J. in London and Thames Haven Oil Wharves Ltd. v. Attweell (Inspector of Taxes) 1968(70) ITR 460 at p. 488 as :"Where, pursuant to a legal right, a trader receives from another person compensation for the traders 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."20. The logic of the principle is that the assessees 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.21. Finally, the High Court erred in proceeding on the basis that the agreement in question were agreements for sale but did not effect a sale. The terms of the agreements clearly show that they were agreement of sale where both payment of the price and delivery were deferred. Had the purchasers paid the purchase price in the agreed instalments their right to take delivery of the trees under the agreement was complete.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. We are, unfortunately, unable to accept the reasoning or the conclusion of the High Court. The assessee does not carry on the business of selling trees. The question whether the sale proceeds of old and unyielding rubber trees grown and used for obtaining income as latex therefrom are capital receipt and whether the sale proceeds of unyielding trees purchased many years back as yielding trees are capital receipt was answered in the affirmative by the Constitution Bench of this Court in Commissioner of Agricultural Income Tax, Kerala v. Kailas Rubber & Co. Ltd., 1966 (Vol. 60) ITR 435. See also AKTM Vishnudatta Anantharajanam v. Commissioner of Agricultural Income Tax, Trivandrum, 1970(78) ITR 58.However, in our view, the cancellation of a sale of capital assets would not be such a subsequent event so as to change the nature of the receipt of the forfeited amounts.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 sale, if materialised, would have resulted in a gain eligible 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 1990 Vol. 190 ITR 509 (supra), there is a distinction between earnest money and advance, but that distinction looses its significance in the context of the express language of Section 51 to include `other money in addition to `advance.In determining whether compensation received for breach of a contract is a capital or trading receipt, the relevant rule has been formulated by Diplock L., J. in London and Thames Haven Oil Wharves Ltd. v. Attweell (Inspector of Taxes) 1968(70) ITR 460 at p. 488 as :"Where, pursuant to a legal right, a trader receives from another person compensation for the traders 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."20. The logic of the principle is that the assessees 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.21. Finally, the High Court erred in proceeding on the basis that the agreement in question were agreements for sale but did not effect a sale. The terms of the agreements clearly show that they were agreement of sale where both payment of the price and delivery were deferred. Had the purchasers paid the purchase price in the agreed instalments their right to take delivery of the trees under the agreement was complete.