THE PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. versus COMMISSIONER OF INCOME TAX
[2019] 18 S.C.R. 957, Supreme Court of India, 2019
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
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THE PEERLESS GENERAL FINANCE
AND INVESTMENT COMPANY LTD.
v.
COMMISSIONER OF INCOME TAX
(Civil Appeal No. 1265 of 2007)
JULY 09, 2019
[R. F. NARIMAN AND SANJIV KHANNA, JJ.]
Income Tax Act, 1961 – AYs 1985-86 and 1986-97 –
Subscriptions received from public at large under collective
investment scheme – Difference between capital receipts and revenue
receipts – Assessee-company floated scheme which required
subscribers to deposit amounts by way of subscriptions, and, at the
end of the scheme, the subscribed amounts were repaid with interest
– Scheme also contained forfeiture clause – Dispute whether receipts
of subscriptions in the hands of assessee-company should be treated
as income or capital receipts – Held: The amount deposited with
the assessee-company by way of subscriptions are capital receipts
as they have to be repaid with interest to depositors as per the scheme
– If such subscriptions were treated to be income, this would violate
the Companies Act – However, the amount/ subscription forfeited
mid-way will become income or revenue receipts in the hands of the
assessee-company.
Income Tax Act, 1961 – AYs 1985-86 and 1986-97 –
Subscriptions received from public at large under collective
investment scheme floated by assessee-company – Treatment of
subscription amounts as revenue receipts for the impugned
assessment years – Held: Not correct – The amounts received on
subscription being capital receipts and there being no forfeiture in
the impugned
assessment years, the amounts in question had to be
treated as capital receipts.
Income Tax – Account books – Nature of receipts – Book
keeping entries, whether decisive or determinative of the true nature
of the entries – Held: Mere book keeping entries will not determine
the true nature of the receipts / transactions – “Theoretical” and
“business” aspects of receipts/ transactions distinguished – On facts,
subscriptions were received from public at large under collective
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investment scheme floated by assessee-company – The “theoretical”
aspect of the transaction was that the assessee treated the
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 – 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 – 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.
Doctrines/Principles – Doctrine of estoppel –  Subscriptions
received from public at large under collective investment scheme
floated by assessee-company – Assessee in its books of accounts
showed this sum as income – However, real position in law, qua
deposits made by subscriptions, is that they are in the nature of
capital receipts – Held: There can be no estoppel against a settled
position in law – In view thereof, assessee company could not be
stopped from making a claim that the subscription amounts were in
the nature of capital receipts – Income Tax.
Peerless General Finance and Investment Co. Limited
and Another v. Reserve Bank of India (Second Peerless
case), (1992) 2 SCC 343 : [1992] 1 SCR 406; Poona
Electric Supply Co. Ltd., Bombay v. Commissioner
of
Income-Tax, Bombay AIR 1966 SC 30 : [1965] 3 SCR
818; Commissioner of Income-Tax, Bombay v. C. Parakh
& Co. (India) Ltd. 29 ITR 661; Commissioner of
Income-Tax, Madras v. V.MR.P. Firm, Muar (1965) 56
ITR 67; Commissioner of Income Tax v. Sahara
Investment India Ltd. Volume 266 ITR 641 –
relied on.
Ram Janki Devi and Another v. M/s Juggilal Kamlapat
(1971) 1 SCC 477 – distinguished.
Reserve Bank of India v. Peerless General Finance and
Investment Co. Ltd. and Others (1987) 1 SCC 424 :
[1987] 2 SCR 1 – referred to.
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Case Law Reference
[1992] 1 SCR 406
relied on
Para 3
(1971) 1 SCC 477
distinguished
Para 6
[1965] 3 SCR 818
relied on
Para 6
[1987] 2 SCR 1
referred to
Para 9
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1265
of 2007.
From the Judgment and Order dated 06.10.2005 of the High Court
at Calcutta in ITR No. 1 of 2005.
S. Ganesh, Abhijit Chatterjee, Sr. Advs., S. Sukumaran, Anand
Sukumar, Sameer Rohatgi, Bhupesh Kumar Pathak, Ms. Meera Mathur,
K. Rajeev, Advs. for the Appellant.
Arijit Prasad, Sr. Adv., S.A. Haseeb, B. V. Balaram Das,
Mrs. Anil Katiyar, Advs. for the Respondent.
The Judgment of the Court was delivered by
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 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
THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.
v. COMMISSIONER OF INCOME TAX
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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 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 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?
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(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
15th 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 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 PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.
v. COMMISSIONER OF INCOME TAX  [R. F. NARIMAN, J.]
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the supplementary affidavit states 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.
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 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)
THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.
v. COMMISSIONER OF INCOME TAX  [R. F. NARIMAN, J.]
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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 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 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
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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 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
THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.
v. COMMISSIONER OF INCOME TAX  [R. F. NARIMAN, J.]
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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.
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 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.”
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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 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,
THE PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD.
v. COMMISSIONER OF INCOME TAX  [R. F. NARIMAN, J.]
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he relied upon a quotation from a Bombay High Court judgment which
was approved by this Court, as follows: -
“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.
Bibhuti Bhushan Bose
Appeal allowed.