Sen, J. - (1.) Lakshmi Vilas Bank, Karu, respondent herein in course of its usual business of banking, purchases and sells securities for and on behalf of its constituents in consideration of agreed commission/brokerage. During the accounting periods relevant for the assessment years 1964-65 and 1965-66, the Bank purchased certain securities, namely, Madras State Electricity Board Bonds and Madras State Loan Bonds on behalf of its constituents. 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 by the constituents in advance and the same was called Rs. margin money in deposit'. On receipt of the said margin money, the bank purchased securities at their face value in its own name. Each one of the constituents gave a letter to the Bank undertaking to pay the balance amount on or about the specified date and also undertaking that if they did not pay the balance amount within the stipulated time, the securities would belong to the Bank and the margin money deposited by them would stand forfeited to the Bank. This was in addition to the commission and service charges to which the Bank was entitled.
(2.) During the relevant accounting period, the Bank purchased bonds for its constituents at face value of the Bonds. The Bank had received margin money from its constituents in respect of 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 and 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 and 1965-66, the Income Tax Officer treated the margin money forfeited 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 Tribunal, however, upheld the contention of the Bank that they were entitled to ajust the margin money forfeited by them against the cost of the bonds for arriving at the cost of the securities.
(3.) At the instance of the Commissioner of Income-tax, the following question of law was referred to the High Court ; "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs, 1,69,966/- and Rs. 62,563/-in assessment years 1964-65 and 1965-66 respectively received as deposits in the first instance and forfeited at a later stage was not the income of the assessee liable to tax, but that the assessee was entitled to take them into account in arriving at the cost of securities acquired by the assessee when these sums were forfeited - ;