ITO Vs Vatika Rayons Pvt Ltd (ITAT Mumbai)
Share Application Money Forfeiture of ₹3 Cr Held Capital Receipt- Not Taxable u/s 68– Revenue’s Appeal Dismissed ITAT Mumbai
Revenue filed an appeal before ITAT Mumbai against the order of CIT(A) for AY 2014-15. Assessee had filed its return declaring NIL income. AO completed assessment u/s 143(3) on 29.12.2016 & made multiple additions:
- ₹3,00,00,000 – forfeited share application money (including share premium) treated as unexplained cash credit u/s 68.
- ₹3,32,784- business expenditure disallowed, restricting allowable expenses to ₹50,000 on adhoc basis.
- ₹57,334 – interest income on FDs taxed as “income from other sources” instead of “business income”.
CIT(A) deleted all additions & allowed assessee’s appeal. Revenue, aggrieved, carried the matter before Tribunal.
AO’s Observations
- Assessee received substantial share application money with premium. Investors defaulted in paying call money, resulting in forfeiture of ₹3 Cr.
- AO held the forfeiture was non-genuine, a colourable device to introduce unaccounted funds, & taxed the same u/s 68.
- Further, since the company had no active business operations, AO treated interest on FDs as “income from other sources” & disallowed almost entire expenses on adhoc basis.
Assessee’s Submissions
- Funds were received from genuine investors through banking channels against valid allotment of partly paid shares.
- Forfeiture occurred because investors failed to pay the balance call money. The forfeited amount is capital in nature & not taxable.
- Interest income arose from business funds temporarily parked in FDs since the proposed textile project did not take off; hence it was business income.
- Expenses were incurred for maintaining office & infrastructure, & AO could not disallow them on adhoc basis without rejecting books.
CIT(A)’s Findings
- Forfeited share application money is a capital receipt, not taxable.
- Investors were identifiable & had sufficient means. If AO doubted, he could assess investors directly but not tax assessee u/s 68.
- Interest income had nexus with business funds; relying on CIT v. Paramount Premises (Bom HC), such income was rightly “business income”.
- Adhoc disallowance of expenses unsustainable when books were not rejected & no specific defects were pointed out.
- Accordingly, all additions were deleted.
Tribunal’s Decision
- ITAT found no infirmity in CIT(A)’s detailed reasoning.
- Held that share forfeiture is capital in nature & not chargeable as income.
- Confirmed that interest on business funds parked in FDs constitutes business income.
- Deletion of adhoc disallowance upheld, as AO made arbitrary additions without pinpointing defects.
Final Outcome
- Revenue’s appeal dismissed in entirety.
- Assessee fully succeeded; relief of ₹3.57 crore (including ₹3 Cr forfeiture) sustained.
Key Takeaways
- Share forfeiture receipts are capital in nature; cannot be taxed u/s 68 as unexplained cash credit.
- Interest on unutilised business funds kept in deposits is taxable as business income, not under “other sources”.
- Adhoc disallowances without identifying defects in books are unsustainable in law.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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