SC Pronouncement Binding On HCs Even If It Cannot Be Strictly Called 'Ratio Decidendi', Reiterates SC [Read Judgment]

A pronouncement by the Supreme Court, even if it cannot be strictly called the ratio decidendi of the judgment, would certainly be binding on the High Court, the Supreme Court has held.

The bench comprising Justice Rohinton Fali Nariman and Justice Sanjiv Khanna observed that when the character of the transaction is a capital receipt in the hands of the assessee, it cannot possibly be taxed as income in the assessee's hands.

The issue before the High Court was whether receipts of subscriptions in the hands of the assessee-Company should be treated as income and not capital receipts inasmuch as the assessee has in its books of accounts shown this sum as income. The High Court held that a decision of the Apex Court in Peerless General Finance and Investment Company Ltd. Vs. RBI did not lay down any absolute proposition of law that all receipts of subscription at the hands of the assessee for the previous year relevant to the assessment years 1985-86 and 1986-87 must necessarily be treated as capital receipts.

The Apex Court referring to the judgment in Peerless General Finance and Investment Company Ltd. held that, though the direct focus of the judgment was not whether subscriptions so received are capital or revenue in nature, but on general principles, it has been held that such subscriptions would be capital receipts, and if they were treated to be income, this would violate the Companies Act. The bench said:

"It is, therefore, incorrect to state, as has been stated by the High Court, that the decision in Peerless General Finance and Investment Co. Limited (supra) must be read as not having laid down any absolute proposition of law that all receipts of subscription at the hands of the assessee for these years must be treated as capital receipts. We reiterate that though the Court's focus was not directly on this, yet, a pronouncement by this Court, even if it cannot be strictly called the ratio decidendi of the judgment, would certainly be binding on the High Court."

Recently, another bench of the Apex Court had observed that its judgments which are passed in exercise of appellate jurisdiction are binding precedents, even if they are brief.

Setting aside the High Court judgment, the bench said:

"The "theoretical" aspect of the present transaction is the fact that the assessee treated subscription receipts as income. The reality of the situation, however, is that the business aspect of the matter, when viewed as a whole, leads inevitably to the conclusion that the receipts in question were capital receipts and not income." 

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