Loss from Forfeiture of advance against Convertible Warrants held as stock in trade is Business Loss

Lustre Merchants Pvt. Ltd. Vs DCIT (ITAT Delhi)

The only dispute in the instant appeal is regarding the treatment of the loss on account of forfeiture of share application money amounting to Rs. 41,61,000/- as business loss or capital loss. While the loss is not in dispute, according to the assessee it is a business loss whereas according to the Revenue it is a capital loss. Thus, the genuineness of the said loss is not doubted and the only question is whether it is a capital loss or business loss. As mentioned by the Assessing Officer in the assessment order itself, the assessee is a non-banking finance company engaged in the business of dealing in shares and securities. It had applied for 750000 convertible warrants @ 64 per warrant of a listed company on 16^th January, 2006 and remitted the application money of Rs. 48 lakhs. We find, on 23^rd March, 2006, the assessee company opted for conversion of 1 lakh share warrants into equity shares by making a payment of Rs.57,60,000/- being 90% value of share warrants and adjusting an amount of Rs.6,40,000/- out of the amount of Rs.48 lakhs paid earlier at the time of making the application for 750000 share warrants. The assessee did not remit the balance amount of Rs.41,60,000/- before the due date of 15^th July, 2007 for which the said listed company forfeited the application money of Rs.41,60,000/-. According to the Assessing Officer, if the assessee would have remitted the amount it would have incurred a loss of Rs.5 lakh only and by not making the payment it incurred a loss of Rs.41,60,000/- and, therefore, it is not a commercial decision but is a colourable device to avoid its tax. Further, such a transaction would attract the provision of section 2(47) of the Act and the extinguishment of any right therein is a capital loss and cannot be held as a business loss. We do not find any merit in the action of the Revenue authorities especially in view of the direction of the Tribunal in the original proceedings while setting aside the issue to the file of the Assessing Officer. There is no finding by the Assessing Officer to the direction by the Tribunal that the lower authorities have not adverted to the crucial fact i.e., assessee’s investment in Surya Roshni Ltd., a group company by way of subscription to the convertible debentures being held as stock-in-trade not only in this year, but, in earlier year also. Once the shares are held as stock-in-trade as argued before the Tribunal on the earlier occasion for which the Tribunal had restored the issue to the file of the Assessing Officer for verification of this crucial fact and since there is no material to controvert the above submission of the assessee before the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal.

CBDT, vide Circular No. 6/2016 dated 29^th February, 2016 had categorically held that ‘where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.

Respectfully following the decisions cited , we hold the loss amounting to Rs.41,60,000/- is a business loss.

FULL TEXT OF THE ITAT JUDGEMENT

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