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

2. The assessee is a plantation company engaged in the business of growing rubber and tea. In 1975, it entered into three arguments with three purchasers for sale of old rubber trees. Each of the purchasers paid a certain amount by way of earnest money and another amount by way of advance under their respective agreements. The total amount of earnest money received by the assessee under the three agreements was Rs. 75,000and the total amount by way of advance was Rs.All the three purchasers defaulted in payment of the balance amounts. The agreement were accordingly terminated and the amounts of earnest money and advance were forfeited by the assessee. The assessee filed three suits before the Subordinate Judge, Kottayam in this connection. The assessees right to retain the amounts of earnest money and advance was confirmed by the Court. In 1979, the assessee was eventually successful in selling the old rubber trees to a third party but at a loss.3. In the assessees return for the assessment year in question, the assessee claimed that the amounts forfeited were not taxable as revenue receipts. The Assessing Officer upheld the contention of the assessee. However, the Commissioner of Income Tax sought to revise the assessment under Section 263 of the Act and held that the amounts forfeited were revenue income and assessable to income tax. The assessee preferred an appeal before the Income Tax Tribunal. The Tribunal set aside the order of the Commissioner and restored the finding of the Assessing Officer.The High Courts decision (which has been subsequently reported in 1991 Vol. 190 ITR 509 Commissioner of Income Tax v. Travancore Rubber and Tea Co. Ltd. was that the Tribunal should have kept in mind the difference between earnest money and advance while deciding the issues raised. The High Court delineated the difference between the legal character of the two amounts and remanded the matter back to the Income Tax Tribunal to decide the matter afresh.6. On remand, the Tribunal considered various terms of the agreements and came to the conclusion that the receipt by way of forfeiture of advance was not assessable as a revenue receipt but that the earnest money was a assessable as income under other sources.

Reasoning: 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.