Pasayat, C.J.
At the instance of the revenue, following questions have been referred by the Tribunal, Delhi Bench 'A', under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for opinion of this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 75,000 being forfeited security deposits was not liable to tax under the Income Tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 1,79,547 being the amount guaranteed by the bank was not liable to tax under the Income Tax Act, 1961 ?'
2. Factual position as indicated in the statement of the case is as follows:
For the assessment year 1972-73 corresponding to previous year ending on 31-3-1972, additions were made by the assessing officer in respect of amounts relatable to forfeiture of security deposit, and amount received on encashment of a bank guarantee. The assessed is a Government of India undertaking dealing extensively both inside and outside the country, and one of its activities is to sell imported cars. Procedure followed in this connection is that the buyers in compliance to the advertisement for sale of cars are required to submit tenders offering the price along with an amount of money as security deposit or earnest money which is adjustable against the price of the car or refunded if price is paid in full separately after the car is sold to the buyer. In the tender document, there was a stipulation that if the tenderer resiles from his offer or modifies the terms and conditions thereof, security deposit shall be liable to forfeiture, Some of the buyers resoled from their offers or modified the terms and conditions thereof which resulted in forfeiture of security deposit amounting to Rs. 75,000. The other amount of Rs. 1,79,547 related to encashment of a bank guarantee for failure to carry out the terms of a contract. The assessed had entered into a contract with Exportax Ltd. to supply 4,500 m. tons of Basmati rice for U.K. before 1970. Under the terms of the contract, the buyer had to furnish a bank guarantee for the performance of their obligations under the contract. At the request of buyer, the Bank of India, London Branch, agreed to furnish guarantee for 10,000 which when converted into Indian currency came to Rs. 1,79,547. The assessed accepted the guarantee. Exportax Ltd., London, failed to perform the contract and did not buy the goods from the assessee. In terms of the contract of sale, the assessed received the above amount from the Bank of India on encashment of the bank guarantee. Both the amounts indicated above were claimed to be exempt from tax by the assessee. However, the assessing officer held that the receipts were in the normal course of business and, thereforee, amounted to trading receipts assessable to income-tax. In appeal before the Appellate Assistant Commissioner, the assessor's stand was that both the amounts were capital receipts. The order of' assessment was confirmed by the Appellate Assistant Commissioner who did not accept the assessor's plea. The Tribunal was moved in second appeal. Drawing a distinction between trading receipt and capital receipt so far as the earnest moneys or forfeited security deposits are concerned, the Tribunal concluded that both the amounts were not liable to tax under the Act. On being moved by the revenue under section 256(1), the present reference has been made.
3. Heard the learned counsel for the revenue. There is no appearance on behalf of the assessed in spite of notice. It is to be noted that receipt of a sum by itself is not sufficient to attract levy of tax. It is only a receipt as income which can attract such levy. Receipts of a capital nature do not attract the levy.
Whether a particular receipt is capital or trading income from business has on many occasions engaged the attention of the Apex Court. It was observed by the Apex Court in Kettlewell Bullen & Co. Ltd. v. CIT : [1964]53ITR261(SC) that broadly stated 'what is received for loss of capital is a capital receipt, what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income or profit in a trading transaction.' In Oberoi Hotel (P) Ltd. v. CIT : [1999]236ITR903(SC) , it was held that the amount received by the assessed for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons was in the nature of a 'consideration'. It was not for settlement of rights under a trading contract but the injury was inflicted on the capital asset of the assessed and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessor's income and it was a capital receipt. Whether a payment of compensation for termination of an agency is a capital or revenue receipt has to be considered by finding out whether the agency was in the nature of capital asset in the hands of the assessed or whether it was only part of his stock-in-trade - CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) . Compensation for injury in trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. Such transactions are distinguishable from another class of cases where compensation is paid as a solarium for loss of office. Such compensation may be regarded as capital or revenue. It would be regarded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprives him of what is substance is his source of income, termination of contract being a normal incident of the business, and such cancellation leaving him free to carry on the trade (freed from the contract terminated), the receipt is revenue. Where by the cancellation of an agency the trading structure of the assessed is impaired, or such cancellation results in loss of what may be regarded as the source of the assessor's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. Aforesaid principle, laid down in Kettlewell Bullen & Co. Ltd.'s case (supra), was relied upon in the case of Karam Chand Thapar & Bros. (P) Ltd. v. CIT : [1971]80ITR167(SC) .
4. In Travancore Rubber & Tea Co. Ltd. v. CIT : [2000]243ITR158(SC) , it was observed that :
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 Havel Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) : [1968]70ITR460(Cal) :
'Where, pursuant to a legal right, a trader receives from another person compensation for the trader's 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'.'
Logic of the principle is that the assessor's right to recover the compensation was to place the assessed in the same position as if the breach had not taken place. It all depends upon the factual position whether forfeiture related to a capital asset or was a part of the stock-in-trade encompassed by trading activity.
5. From the factual position as highlighted above in the present case, the inevitable conclusion is that the amount of forfeiture as well as the amount received on encashment of bank guarantee relate to trading activity and were, thus, assessable to tax being trading receipts. Our answer to both the questions, thereforee, is in the negative, in favor of the revenue and against the assessee.
The reference application is disposed of accordingly.