Case Law Details
It is a fairly settled law that forfeiture of share application money which has been duly received by the appellant in terms of prospect and credited to capital reserve account was a capital receipt.
Brief Facts
Briefly stated facts of the case are that assessee is a limited company engaged in the business of manufacturing and export of rubber and textile products. Income-tax return declaring total income at Rs.3,92,98,770/- was filed on 29.09.2010. Case was selected for scrutiny assessment and notice u/s 143(2) of the Act dated 25.8.2011 followed by notice u/s 142(1) of the Act were issued and duly served on the assessee. Necessary information were called for and submitted. During the course of assessment proceedings ld. Assessing Officer observed that assessee filed a letter dated 6.5.2012 requesting to exclude a sum of Rs.94.80 lacs from the total income as it was received for forfeiture of application money received by way of issue of share warrants and claimed it to be a capital receipt. Assessee requested that as the amount received is not from the business activities it cannot be termed as revenue receipt and it should be reduced from the total income. However, the contentions of assessee were not acceptable to the ld. Assessing Officer and he rejected the application of assessee by treating the amount of Rs.94.80 lacs as revenue receipt.
Held by ITAT
We have heard the contentions of ld. Departmental Representative and gone through the records placed before us as well as the decision of the Co-ordinate Bench, Ahmedabad in the case of DCIT(OSD) vs. Brijlaxmi Leasing & Finance Ltd.(supra). Solitary grievance of the Revenue through this appeal is against the order of ld. Commissioner of Income Tax(A) deleting the addition of Rs.94.80 lacs by treating the amount received on account of forfeiture of share application money by way of issue of share warrants as capital receipts as against ld. Assessing Officer ‘s order treating it to be revenue receipt. We observe that there is no dispute from the side of Revenue to the established fact that assessee received the application money of Rs.94.80 lacs for technical textile project as per Security Exchange Board of India and Bombay Stock Exchange guidelines and with the necessary approval for issuing share warrants. This sum of Rs.94.80 lacs has been shown in the audited balance sheet under the head “share-holders fund.” As the shares were to be allotted before 24.2.2009 but the share warrant applicants failed to give the balance amount, the warrant application money had been forfeited during the relevant year.6.1 We further observe that similar issue dealing with similar facts relating to forfeiture of share application money to be treated as capital receipt or revenue receipt came up before the Co-ordinate Bench, Ahmedabad in the case of DCIT(OSD) vs. Brijlaxmi Leasing & Finance Ltd. (supra) and Revenue’s appeal was dismissed by observing as follows :-
“7. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case the assessee was to receive call money in respect of share as per the terms of prospectus and the allotment letters, but the same were not received from some of the shareholders. In this case, the share application money was forfeited as per the terms of the prospectus. The above facts are not in dispute. The short question which fall for our consideration is whether the above forfeiture amount is taxable under the provisions of Income-tax Act, 1961 or not. The learned DR vehemently placed reliance on the decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) for his contention that forfeited amount is taxable as revenue receipt. However, we find that the facts of the case that were before the Hon’ble Supreme Court are distinguishable from the facts before us. In the instant case no security deposit or advance received for performance of the contract was forfeited. In fact, the amount received was against issue of shares and issue of shares is not the business of the assessee. The same cannot be treated as receipt in the normal course of the business of the assessee which is engaged in financing and leasing business. Further, the assessee has also not credited the forfeited amount in its profit & loss account but in contradistinction to that it has credited the same in capital reserve account. In the above facts, in our cons idered opinion the decision of the Tribunal in the case of Prism Cement Ltd. (supra) is more applicable which was rendered by the Tribunal after duly considering the aforesaid decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). The Tribunal in the said case has held as under:
“15. Thus, the earnest money or an advance amount received on account of issuance of NCDs, if forfeited on account of non-payment of call money, the loan liability would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the asses see as evident from the facts of the case. Assessee ‘s main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later, on account of non-payment of call money assumes a character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be a business receipt even then it would not be taxable to tax under the provisions of section 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years.”
In view of the above, respectfully following the aforesaid decision of the Mumbai Bench of the Tribunal we find no reason to interfere with the order of the learned CIT(A). It is confirmed and the ground of appeal of the revenue is dismissed.”
Respectfully following the decision of the Co-ordinate Bench in the above case, we find that the facts dealt in this case are similar to those in the case of assessee and ld. Commissioner of Income Tax(A) has allowed assessee’s appeal in a right perspective by treating the amount of Rs.94.80 lacs received as share application money for issuing of share warrants as capital receipt and not revenue receipt as it was not earned from regular business activities carried on by the assessee. We, therefore, find no reason to interfere with the order of ld. Commissioner of Income Tax(A) and uphold the same. Accordingly the ground of revenue is dismissed.
