THE COMMISSIONER OF INCOME-TAX, MADRAS versus THE LAKSHMI VILAS BANK LTD. KARUR

Citation: [1996] SUPP. 2 S.C.R. 522 · Decided: 08-05-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
THE COMMISSIONER OF INCOME-TAX, MADRAS 
B 
C 
v. 
THE LAKSHMI VILAS BANK LTD. KARUR 
MAY 8, 1996 
IB.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.] 
Income Tax Act, 196! : 
Income T(J)t-Business income-AYs 1964-65 and 1965-66-Asses-
!.'ee-Bank in the course of its usual business purchased and sold securities 
for and on behalf of its constituents in consideration of commission or 
brokerage-As Gil usual practice assessee-Bank received front its constituents 
''111argin 111oney in deposit
11 and purchased securities at their face value in its 
own nantl.-flowever, the constituents failed to pay the balance 
D amount-Bank foifeited margin money and adjusted it against purchase price 
of secwities mid showed balance as cost of securitieie-Held : margin money 
deposit amount could not be adjusted agmiist cost of securitie!C-Hence, 
margin money deposit f01feited was business income of assessce-bank and 
liable to be taxed. 
E 
The assessee-Bank in course of its usual business of banking, pur-
chased and sold securities for and on behalf of its constituents in con-
sideration of agreed commission/brokerage. The usual practice of the 
Bank in purchasing the securities on behalf of the constituents was to 
require a certain percentage of the face value of the securities to be paid 
F 
by the constituents in advance and the same was called 'margin money in 
deposit'. On receipt of the said margin money, the Bank purchased 
securities at their face value in its own name. During the accounting 
periods relevant for the assessment years 1964-65 and 1965-66, the asses· 
see-Bank purchased bonds for its constituents at face value of the bonds. 
The Bank had received margin money from its constituents in respect of 
G these purchases. The constituents failed to pay the balance amount by the 
stipulated date. The Bank forfeited the margin money and adjusted the 
same against the purchase price which the Bank had paid for purchasing 
the securities and showed the balance of the price as the cost of purchasing_ 
the bonds. In the Income-tax assessments for the assessment years 1964-65 
H 
and 1965-66, the Income Tax Officer treated the margin money forfeited 
522 
' f 
COMMR. OF INCOME TAX v. LAKSHMI VILAS BANK LTD. 
523 
by the Bank as income of the year in which the margin money was forfeited 
and brought the forfeited amount to tax. The Income Tax Officer was of 
the opinion that the Bank had no right to adjust the margin money to 
reduce the purchase price of the bonds. The view taken by him was 
affirmed by the Appellate Assistant Commissioner. 
The Income-Tax Appellate Tribunal, however, upheld the contention 
of the assessee·Bank and the High court answered the reference sought 
by the appellant against him. Being aggrieved, the appellant preferred the 
present appeal. 
Allowing the appeal, this Court 
HELD : 1. After the forfeiture, the money became Bank's own money. 
The Income Tax Officer was tight in treating this forfeited money as income 
of the. asses see earned in usual course of banking business. The securities 
purchased by the Bank in its own name became the property of the Bank. 
If the securities were ultimately sold, any profit made would be profit 
earned by the Bank. The cost of acquisition of the security will be the price 
actually paid for it. In the instant case, the finding of fact is that the Bank 
bad purchased them •at face value. There is no justification in law for 
reducing the price actually paid by the Bank by reducing it by the amount 
·of margin money forfeited by the Bank. This is a straight-forward case. The 
Bank has purchased the securities at face value. Its cost cannot be anything 
less than the price which was actually paid by the Bank. The Bank would 
. have handed over the securities to the constituent if he had not defaulted. 
In that case, the Bank would have been entitled only to the brokerage. Since 
the constituent defaulted, the deposit amount was forfeited and the end 
result of the transaction was that the Bank became full owner of the 
securities and the amount lying in deposit with it became its own money. 
The forfeited amount was Bank's income made in course of its banking 
business and had to be assessed accordingly in the year in which it became 
the Bank's money. The accrual of income cannot be deferred by adjusting 
the deposit amount against the cost of the securities. [526-F-H; 527-A-B] 
CIVIL APPELLATE JURISDICTION: Civil appeal Nos. 132-33 of 
1979. 
From the Judgment and 

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