THE TRAVANCORE RUBBER AND TEA CO. LTD. versus COMMISSIONER OF INCOME TAX, TRIVANDRUM

Citation: [2000] 2 S.C.R. 290 · Decided: 14-03-2000 · Supreme Court of India · Bench: D.P. WADHWA · Disposal: Appeal(s) allowed

Judgment (excerpt)

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THE TRAVANCORE RUBBER AND TEA CO. LTD. 
v. 
COMMISSIONER OF INCOME TAX, TRIVANDRUM 
MARCH 14, 2000 
[D.P. WADHWA AND RUMA PAL, JJ.] 
Income Tax Act, 1961-Section SJ-Agreement for sale of old rubber 
trees-Earnest money and advance amount received by assessee-Default in 
payment of balance amounts by purchasers-Forfeiture of amounts by 
assessee as per agreement-Forfeited amounts-Capital or revenue receipt-
Held, the forfeited amounts relate to sale of capital asset and therefore a 
capital receipt-Indian Contract Act, 1872-Section 74. 
Appellant-assessee, a plantation company, is engaged in the business 
of growing rubber and tea. The assessee entered into agreements with 
purchasers for sale of old rubber trees. Earnest money arid advance 
amounts were paid to the assessee by the purchasers as per the agree-
ments. The assessee forfeited the amounts on default in payment of the 
balance amounts by the purchasers as per the agreements. The assessee, in 
its returns, claimed the forfeited amounts as revenue receipts not exigible 
to tax which was upheld by the Assessing Officer. The Commissioner of 
Income Tax, invoking revisionary powers under Section 263 of the Income 
Tax Act, 1961 held that the forfeited amounts as revenue income exigible 
to tax. In appeal by the assessee, the Tribunal set aside the order of the 
Commissioner. On reference, High Court remanded the matter to the 
Tribunal to decide it afresh taking into account the difference between 
earnest money and advance. On remand, the Tribunal concluded that the 
forfeiture of advance amount is a revenue receipt not chargeable to tax 
while the earnest money is assessable under the head "income from other 
sources". On reference, the High Court held that the amounts were 
income chargeable to tax. 
In appeal to this Court, the assessee contended that the quality and 
nature of a receipt for income tax purposes is fixed once and for all which 
cannot be altered on account of subsequent operation. 
Revenue contended that the amounts which were not receiv~d ini-
tially as trading receipts could eventually be regarded as business income 
by reason of subsequent events. 
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Allowing the appeals, the Court 
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TRAVANCORE RUBBER AND TEA CO. v. C.I.T. 
291 
HELD : 1.1. The assessee,does not carry on the business of selling 
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trees. When the assessee entered into agreements for sale of old and 
unyielding rubber trees, the advance consideration received was capital 
receipt. H the sale had gone through, then the consideration would have 
been subject to capital gains. The cancellation of the sale of capital assets 
would not subsequently change the nature of the receipt of the forfeited 
amounts. The specific provisions of Section 51 of the Income Tax Act, 1961 
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which provide for the computation of the cost of acquisition for determin-
ing the capital gains arising from the transfer of a particular asset fortify 
this view. [295-D-F; 296-F] 
1.2 Where there is a transfer of a capital asset, if there was a previous 
occasion when there were negotiations for its transfer, and if "advance or 
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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 deposits made by the purchaser for guaranteeing due performance of 
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the contracts and not forming part of the consideration. The monies re-
ceived on the previous occasions and retained by the vendor/assessee can-
not, therefore, be treated as a revenue receipt. [297-A-B] 
1.3. There were negotiations for transfer of the rubber trees in 
question, between the assessee and the purchasers which did not fructify in 
sale. The amount'! forfeited referred only to the capital asset of the 
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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 saJe, if 
materialised, would have resulted in a gain exigible to capital gains tax, 
provided there is a gain arising out of the same. But the Tribunal erred in 
overlooking the phrase 'or other mony' in Section 51 of the Act in holding 
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that the earnest money did not come with

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