Case Law Details
Tanvi Financial Services Private Limited Vs ITO (ITAT Hyderabad)
We find that there is no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of the shares. The distinguishing factor from the case of BPL Sanyo Finance Ltd (cited Supra) and the assessee before us is that BPL Sanyo Finance Ltd was an investor while the assessee before us is a trader in shares and not an investor and was also justified in not making the payment of the balance of the share application money. If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expenditure and the loss incurred by the assessee on forfeiture of the initial payment already made by the assessee is capital in nature. But if the assessee is trading in shares and in the course of such business, if it has incurred loss, it would be revenue expenditure. The assessee has filed the copies of the balance sheets along with the relevant schedules to prove that the assessee has been trading in shares and has been treating the shares as current assets all along. Even before the AO, the assessee had stated to be a trader in shares and therefore, the treatment of the loss on forfeiture of shares is correctly accepted by the AO as revenue loss. Thus, the AO has accepted one of the possible views and there is no erroneous application of law, making the assessment order erroneous and prejudicial to the interest of revenue. We find that the CIT has not considered this issue. We accordingly set aside the order of CIT u/s 263 and restore the order of the AO dated 30.03.2015.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This is assessee’s appeal for the A.Y 2012-13 against the order of the learned Pr. CIT-2, Hyderabad, dated, 22.02.2017 passed u/s 263 of the Act.
2. Brief facts of the case are that the assessee, a non-banking finance company, engaged in the business of granting of loans and advances, has filed its return of income for the A.Y 2012-13 on 21.09.2012 declaring total loss of Rs.45,71,884. During the assessment proceedings u/s 143(3) of the Act, the AO accepted the loss returned by the assessee. Thereafter, the CIT perused the assessment records by invoking the provisions of section 263 of the Act and observed that the assessee has claimed an amount of Rs.8,00,750 as revenue expenditure in the P&L A/c and that the same was allowed by the AO, though it is not allowable because it is capital expenditure.
3. CIT considered this as an error causing prejudice to the interest of revenue. Therefore, a show cause notice u/s 263 was issued to the assessee on 21.12.2016 requiring the assessee to file the details. The assessee filed written submissions on 13.12.2016 and 14.12.2016, stating that the expenditure claimed is revenue in nature. It was submitted that it had purchased 1,00,000 preferential warrants of M/s. Sankhya Infotech Ltd to be converted into shares @ Rs.32.03 per share, against which 25% of the payment amounting to Rs.8,00,750 was paid by the assessee, and subsequently the share price of this company came down to Rs.24.02 and hence the assessee company had not opted for conversion of warrants into shares but has forfeited the amount already paid to M/s. Sankhya Infotech Ltd and claimed it as revenue expenditure. The CIT, however, was not convinced with assessee’s contention and held that such expenditure is capital expenditure and not allowable. He therefore, set aside the order of the AO with a direction to redo the assessment after giving the assessee an opportunity of being heard. Against this order of the CIT, the assessee is in appeal before us by raising the following grounds of appeal:
“A. The learned P. CIT-2 has failed to appreciate that the matter in question has already been considered by the learned AO at the time of scrutiny proceedings and erred in opening the case u/s 263 of the Income Tax Act, 1961 for revision.
B. The learned P.CIT-2 has erred in treating the expenditure of Rs.8,00,750 on forfeiture of shares as capital expenditure and not revenue expenditure”.
4. The learned Counsel for the assessee, while reiterating the submissions made before the authorities below, submitted that the assessee was in the business of granting of loans and advances and in the course of its business, had purchased 1,00,000 preferential warrants of M/s. Sankhya Infotech Ltd to be converted into shares @ Rs.32.03 per share and had paid 25% of the amount and since the share price of M/s. Sankhya Infotech Ltd came down to Rs.24.02 per share subsequently, and in order to avoid further losses, the assessee company had not converted the warrants into shares and Rs.8,00,750 already paid to M/s. Sankhya Infotech Ltd was forfeited and the assessee has claimed it as revenue expenditure. He submitted that all these details were examined by the AO during the assessment proceedings and therefore, there cannot be a case of non- application of mind by the AO. Therefore, according to him, the assessment order is not erroneous and therefore, cannot be revised u/s 263 of the Act. According to him, both the conditions of the assessment, being erroneous and also prejudicial to the interests of the Revenue, have to be satisfied for invoking the provisions of section 263 of the Act. Further, even on merits of the issue, the learned Counsel for the assessee submitted that the assessee company has booked the profit on trading of shares as income and therefore, any loss from similar transactions should also be treated as revenue expenditure.
5. The learned DR, on the other hand, supported the orders of the CIT and placed reliance upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Amitabh Bachchan reported in Civil Appeal No.5009 of 2016 dated 11th May, 2016 to submit that the assessment order is erroneous in the facts and circumstances of the case.
6. She also relied on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. BPL Sanyo Finance Ltd reported in (2009) 312 ITR 63 (Kar.) to submit that the loss on account of forfeiture of share application money because of failure by the assessee to pay balance amount on allotment of shares, is allowable as a short-term capital loss.
7. From the above judgments, it is clear that the loss incurred by an investor assessee on forfeiture of shares is short term capital loss and that if the AO has considered the issue but has erred in understanding the law, such an assessment order is erroneous and amenable to revision u/s 263 of the Act.
8. Having regard to the rival contentions and the material on record, we find that the basic objection of the assessee to the order u/s 263 of the Act is that the AO has called for various details and has considered the material on record during the assessment proceedings before accepting the expenditure on forfeiture of shares as revenue expenditure. Therefore, according to him, AO has considered/examined the issue and has adopted one of the possible views and therefore, the assessment order is not erroneous and therefore it could not have been revised. The learned DR has relied upon the above judgment for the proposition that the loss on forfeiture of shares is capital loss. The relevant para is reproduced hereunder:
“6. Record shows that even though the assessee was informed by the IDBI Limited to deposit the balance amount of the share application money from time to time, but it did not take any action in this regard. Ultimately, vide letter dated July 20, 2000, the IDBI Limited cancelled the allotment of shares of the assessee and directed that the amount of the share application money stands forfeited with effect from August 17, 2000, as on or before August 17, 2000, the assessee had failed to deposit the balance amount of Rs. 83,46,000. In this view of the matter, the amount of Rs. 32,50,000 deposited towards share application money is forfeited.
7. To decide the question of law as formulated herein above, it is necessary to look into the definition of transfer as appearing in section 2(47) of the Act, relevant portion thereof is reproduced herein below:
“2.(47) ‘transfer, in relation to a capital asset, includes,-
(i) the sale, ‘exchange’ or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;”
8. The Tribunal has considered the meaning of the word “allotment”, as appeared in the Guide to the Companies Act, 1956. The same is reproduced herein below :
“What is termed ‘allotment is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares or such a less number as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a less number, to be taken by the person who made the offer, This constitutes a binding contract to take that number according to the offer and acceptance. To my mind, there is no magic whatever in the term ‘allotment’ as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. An allotment is an appropriation, not of specific shares, but of a certain number of shares.”
9. The above passage has been quoted in the Commentary of the Companies Act mentioned herein above from a decision in Florence Land and Public Works Co., In re [1885] 29 Ch D 421 at 426.
10. On account of the aforesaid fact that the binding contract existed between the assessee and the investee company, the irresistible conclusion that can be drawn on the aforesaid facts and circumstances is that as soon as the allotment is made, the assessee would be deemed to have acquired a right in such shares even if the call monies or the full face value of the shares has not been paid. Thus, in a case where only share application money is paid and the balance is yet to be paid on actual allotment of shares, the holder of such allotment would be recognised as a member of the investee company. Thus, it cannot be said that the assessee had not acquired right in such shares on account of its failure to deposit the balance amount for allotment of shares. The aforesaid view would attract the provisions of section 2(47) of the Act. The extinguishment of any rights therein as appeared in section 2(47) of the Act, covers every possible transaction resulting in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise of all or any of the bundle of rights whether qualitative or quantitative, which the assessee has in a capital asset whether or not such an asset is corporeal or incorporeal.
11. In the case on hand consequent to the assessee’s default in not paying the balance of money on allotment, its right in the shares stood extinguished on its forfeiture by the investee company. The loss suffered by the assessee, i.e., non-recovery of share application money is consequent to the forfeiture of its right in the shares and the same is to be understood to be within the scope and ambit of transfer. In this view of the matter, the Tribunal was justified in holding that it would amount to short-term capital loss to the assessee. No other point was urged before us”.
9. The learned DR also has relied on the judgment of the Apex Court in the case of CIT vs. Amitabh Bachchan (Supra) that even if the AO made certain enquiries, but if he makes erroneous assumptions and do not carry out the enquiries which are required, the assessment order becomes erroneous. The relevant portion of the judgment is reproduced hereunder:
“20. An argument has been made on behalf of the assessee that notice under Section 69-C was issued by the Assessing Officer and thereafter on withdrawal of the claim by the assessee the Assessing Officerthought that the matter ought not to be investigated any further. This, according to the learned counsel for the assessee, is a possible view and when two views are possible on an issue, exercise of revisional power under Section 263 would not be justified. Reliance in this regard has been placed on a judgment of this Court in Malabar Industrial Co. Ltd. vs. CIT[3] which has been approved in Commissioner of Income-tax vs. Max India Ltd. [4]
21. There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, the above is not the situation in the present case in view of the reasons stated by the learned C.I.T. on the basis of which the said authority felt that the matter needed further investigation, a view with which we wholly agree. Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-Cof the Act could not have been simply dropped on the ground that the claim has been withdrawn. We, therefore, are of the opinion that the learned C.I.T. was perfectly justified in coming to his conclusions insofar as the issue No.(iii) is concerned and in passing the impugned order on that basis. The learned Tribunal as well as the High Court, therefore, ought not to have interfered with the said conclusion”.
10. We find that there is no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of the shares. The distinguishing factor from the case of BPL Sanyo Finance Ltd (cited Supra) and the assessee before us is that BPL Sanyo Finance Ltd was an investor while the assessee before us is a trader in shares and not an investor and was also justified in not making the payment of the balance of the share application money. If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expenditure and the loss incurred by the assessee on forfeiture of the initial payment already made by the assessee is capital in nature. But if the assessee is trading in shares and in the course of such business, if it has incurred loss, it would be revenue expenditure. The assessee has filed the copies of the balance sheets along with the relevant schedules to prove that the assessee has been trading in shares and has been treating the shares as current assets all along. Even before the AO, the assessee had stated to be a trader in shares and therefore, the treatment of the loss on forfeiture of shares is correctly accepted by the AO as revenue loss. Thus, the AO has accepted one of the possible views and there is no erroneous application of law, making the assessment order erroneous and prejudicial to the interest of revenue. We find that the CIT has not considered this issue. We accordingly set aside the order of CIT u/s 263 and restore the order of the AO dated 30.03.2015.
11. In the result, assessee’s appeal is treated as allowed for statistical purposes.
Order pronounced in the Open Court on 13th April, 2018.
