THE PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. vs. COMMISSIONER OF INCOME TAX

CIVIL APPEAL No. 1265/2007Supreme Court[2019] 18 S.C.R. 95709 July 2019Bench: 2 JudgesAuthor: R.F. NARIMAN, SANJIV KHANNA PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY OF12 pages
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What did the Supreme Court hold?

The Supreme Court held that the amounts deposited with the assessee-company by way of subscriptions are capital receipts as they are to be repaid with interest to depositors as per the scheme. Treating these subscriptions as income would violate the Companies Act. The Court distinguished the case from those where deposits were forfeited and the company became the full owner. The Court found that the "theoretical" aspect of the transaction, where the assessee treated subscription receipts as income, was superseded by the "business" aspect, which, when viewed as a whole, led to the inevitable conclusion that the receipts were capital in nature. The Court reiterated that mere bookkeeping entries are not decisive of the true nature of receipts and that there can be no estoppel against a settled position in law. The Court set aside the High Court's judgment and restored the order of the Income Tax Appellate Tribunal. The operative direction is that the appeal is allowed, and the subscription amounts are to be treated as capital receipts. The Court expressly noted that any amount/subscription forfeited mid-way would become income, but found no such forfeiture in the impugned assessment years.

What were the facts?

The assessee, The Peerless General Finance and Investment Company Ltd., is in appeal before the Supreme Court against the order of the High Court. The assessment years in question are 1985-86 and 1986-97. The dispute concerns whether subscriptions received from the public under a collective investment scheme should be treated as capital receipts or revenue receipts. The assessee's scheme involved subscribers depositing amounts, which were to be repaid with interest at the scheme's end. The scheme also included forfeiture clauses. The Assessing Officer treated the subscription amounts as income, citing the assessee's own accounting entries. The CIT(A) upheld this. The ITAT, however, allowed the assessee's appeal, relying on a previous Supreme Court judgment in the assessee's own case. The High Court initially dismissed the reference applications, but this was set aside by the Supreme Court, which directed the High Court to decide specific questions of law.

What were the issues?

1. Whether the Supreme Court judgment in Peerless General Finance and Investment Co. Limited and Another vs. Reserve Bank of India (1992) 2 SCC 343 lays down an absolute proposition of law that all subscription receipts in the hands of the assessee for AYs 1985-86 and 1986-97 must necessarily be treated as capital receipts? (Question of law) 2. 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, should the subscription amounts be treated as revenue receipts? (Question of mixed law and fact) Assessee's Contentions: The assessee argued that the subscription amounts are capital receipts, as they are repayable with interest and treating them as income would violate the Companies Act. They relied on the Supreme Court's judgment in their own case (1992) 2 SCC 343, which they contended definitively held such amounts as capital receipts. They also argued that mere bookkeeping entries do not determine the true nature of receipts and that there can be no estoppel against a settled position in law. They cited Peerless General Finance and Investment Co. Limited and Another v. Reserve Bank of India (1992) 2 SCC 343, Poona Electric Supply Co. Ltd., Bombay v. Commissioner of Income-Tax, Bombay AIR 1966 SC 30, 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, and Commissioner of Income Tax v. Sahara Investment India Ltd. Volume 266 ITR 641. Revenue's Contentions: The Revenue contended that the assessee had treated the subscription amounts as income in its books of accounts, and therefore, they should be taxed as revenue receipts. They relied on the judgment in Ram Janki Devi and Another v. M/s. Juggilal Kamlapat (1971) 1 SCC 477, particularly paragraph 12, to argue that the manner in which parties treated the transaction is relevant. They also relied on Poona Electric Supply Co. Ltd., Bombay v. Commissioner of Income-tax, Bombay City I, Bombay, AIR 1966 SC 30.

Which sections of the Income-tax Act were involved?

Section 68

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A B C D E F G H 957 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 p

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