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Facts
The revenue challenged the CIT(A)'s order deleting an addition of Rs.3,62,27,500 made by the AO under Section 68 of the Income Tax Act. The addition was based on the forfeiture of share application money received from two parties, Ms. Shreya Jain and M/s. Yash Enterprises, by the assessee.
Held
The Tribunal held that the forfeiture of share application money, in this case, constituted a capital receipt and was not taxable. The CIT(A) had correctly deleted the addition made by the AO. The decision was also based on the 'doctrine of binding' precedents, particularly the case of the assessee's sister concern.
Key Issues
Whether the forfeiture of share application money is a capital receipt and not taxable, and if the CIT(A) was justified in deleting the addition made by the AO.
Sections Cited
68, 133(6), 58(2), 56(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “F” BENCH MUMBAI
ITO- 1(3)(4) Vs. Vishwas Rayons Private Room No. 528, 5th Floor, Limited AayakarBhavan, M.K. Road, Room No. 19, 3rd Floor Mumbai- 400020 6 M.K. Amin Marg, Bora Bazar Street, Fort, Mumbai- 400001 PAN/GIR No. AADCV1302N (Applicant) (Respondent) Assesseeby Shri. Rasesh Shah Revenue by Ms. Kavitha Kaushik,Sr.DR. Date of Hearing 13.11.2025 Date of Pronouncement 20.01.2026 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
The present appeal has been filed by the revenue challenging the impugned order 23.12.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the assessment year 2014-15. The following grounds are reproduced below:
1. i) On the facts and circumstances of the case and in law the Ld. CIT(A) erred allowing the appeal of the assessee and deleting the addition of Rs.3,62,27,500/- made by the AO under I the provisions of section 68 of the Income tax Act, 1961 without considering that the amount so received was sought to be examined for its taxability as well as the genuineness of the transactions. ii) On the facts and circumstances of the case and in law the Ld. CIT(A) erred in ignoring the replies of Mis. Yash Enterprises 2 and M/s, Shreya Jain made u/s 133(6) and wherein M/s. Yash Enterprises and Ms. Shreya Jain confirm that their ledger account reflects nature of loans. iii) On the facts and circumstances of the case and in law whether the Ld. CIT(A) was justified in deleting the addition of 3 Rs.3.62,27,500/- by merely relying the Hon'ble Mumbai Tribunal's decision in the case of Prism Cement Ltd Vs. JCIT (101 itd 103) [2006] which relates with issuance of NCDs and not forfeiture of loan. iv) On the facts and circumstances of the case and in law whether the Ld. CIT(A) was justified in deleting the addition of Rs. 3,62,27,500/- without remanding the matter back to the file of AO for making a little probing which was sufficient in the present case to show that the apparent was not the real and the documents produced before them required surrounding circumstances to find the truth in the documents..
On the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the full expenses claimed by the assessee of Rs.3.74,243/- merely treating the same as adhoc disallowance by relying the decision of Sanghi Brothers (India) Pvt Ltd. Vs Department of Income tax without appreciating the facts of Rs.3,24,243/-(3,74,243 minus 50,000) where assessing officer has considered audit and other incidental expenses of Rs.50,000/- for continuity of assessee's business.”
Ground No. 1 to 5 2. All the grounds raised by the revenue are inter related and inter connected and relates to challenging the order of Ld. CIT(A) in deleting the addition made by AO u/s 68 of the Income Tax Act. Therefore, we have decided to adjudicate these grounds through the present consolidated order.
3. At the outset Ld. AR appearing on behalf of the assessee submitted that the issue in question is squarely covered by the decision of the coordinate bench of ITAT in the case of Assesse’s sister concern namely M/s. VatikaRayons Pvt. Ltd. in wherein also the amounts were received from the same parties which were forfeited and the other facts are also same.
4. Apart from that we have heard the counsels for both the parties on merits of the additions, perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities.
5. From the records we notice that the assessee received share application money from Ms. Shreeya Jain of Rs. 1,80,00,000/- and Yash Enterprises of Rs. 2,25,00,000/- aggregating to Rs. 4,05,00,000/-towards share capital and share premium which was forfeited by the assessee. Consequently, the AO made additions of this amount u/s 68 of the Act on the ground that the genuineness of the transaction was not proved. However, on appeal, Ld CIT(A) / NFAC after evaluating the entire facts, circumstances and documentary evidences, had deleted the additions.
After perusal of the entire record placed before us we notice that the investors in response to notice u/s. 133(6) of the act is issued by AO, during the assessment proceedings had confirmed the transactions of remitting the money to assessee. But, in their books of accounts, they had shown the transaction as loan instead of investment in the share capital and share premium. In this regard, the assessee vide letter dated 20.12.2016 filed during the course of assessment proceedings had submitted that the parties might have treated the same as loans however the amount was received by the assessee towards share capital and share premium through banking channel. In the course of the assessment proceedings, the assessee also filed his bank statement and the bank statements of the parties. Apart from above, the assessee also filed the Contra ledger account obtained from the parties, where the name of the assessee i.e.Vishwas Rayons Pvt. Ltd. - Loan is appearing. In this regard, it was submitted that parties had shown the amount as loans whereas money was advanced as share application money and final call was still pending to be payable by them.
The assessee also demonstrated that it was in fact a transaction of the share application and forfeiture of share within the four boundaries of articles of association by filing the following documents: Share certificate of partly paid shares Share allotment letter Reminder letter to pay the balance call money Final reminder letter to pay the balance call money Intimation letter intimating about share forfeiture Form no. 208, 23AC and 66 filed with the ROC for allotment and forfeiture of shares Infrastructure cum power supply agreement executed with Surat Super Yam Pvt.Ltd 8. In order to explain the reason for forfeiture, it was submitted that the assessee is engaged in the business of processing of synthetic yarn and textiles. In order to promote the textile markets, the Government of India had formed a scheme to set up integrated textile park to provide sound infrastructure facilities to its participants. Accordingly, a Special Purpose Vehicle of Government of India viz. Surat Super Yarn Park Ltd. (to be referred as "SSYPL") had been incorporated which had agreed to allot a constructed shed in the Textile Park for yam processing along with the Infrastructure and power facility to textile industry in the city of Surat for development of licensee's business. Looking the aforesaid opportunity as prospect of growth and impetus to its business, the assessee had entered into an agreement with SSYPL as "Infrastructure cum Power Supply Agreement on September 28, 2011.
Now, basis this agreement, SSYPL was to provide facilities like uninterrupted and cheap electricity, transportation, canteen, laboratory and technician facility and due to availability of cheap raw-material and skilled labour. Accordingly, in terms of recital C of the agreement and the subscription agreement dated October 12, 2010, the assessee had subscribed to the shares of SSYPL. Contemporaneously, the assessee also tried to raise its share capital by issue of shares. For this purpose, the assessee had also obtained a valuation report of the independent share valuer determining the value of per share at Rs.129.49. (Refer FPB Page No. 109 to 114). The shares were subscribed by two investors ie. Ms. Shreya Jain who had applied for 3,25,000 shares and M/s. Yash Enterprises who had applied for 5,62,500 shares who have paid Rs.40/- per share, (Rs. 5/-towards the share capital partly paid and Rs.35/- towards the share premium). The investors had invested the sum of money in the assessee considering that there is a growth potential and benefit in the project. The assessee has explained the business proposition behind such investment by these investors to the Ld. AO vide submission dated December 16, 2016 and explained about holding license in Surat Super Yarn Park Lid, as well as benefit of the investors due to investment in such project.
However, subsequently, the project did not materialize as there was a delay in the commencement of the project like delay in providing requisite facility like electricity etc. Thus, the project could not kick-off. The investors were aware about this fact and thus, they chose not to pay the final call money. The said fact is evident from the reminder letter sent by the assessee Eventually, the assessee decided to forfeit the money.
As far as the department is concern, the AO had doubted only the genuineness of the transactions, but the genuineness of the transaction had been proved by way of the above documents filed during the course of assessment proceedings and bank statements of the respective parties.
We found that the capacity of the parties was not doubted by AO. In any way, the assessee in order to prove the capacity of the parties had filed copies of Return of Income, bank statements of the parties. In addition, the assessee also filed the financial statements, contra confirmation in response to notice u/s 133(6) of the act.
Now coming to the creditworthiness of the respective parties is concern, in the case of Ms. Shreeya Jain, we notice that she had declared total income of Rs.
1,51,18,940/-in her return of income and M/s. Yash Enterprises had declared total income of Rs. 7,00,24,869/- in their return of income. Even the financials of the parties were placed on record and on the perusal of the same, it is clear that M/s. Shreeya Jain was having capital of Rs. 5.86 Cr. and M/s. Yash Enterprises was having capital of Rs. 160.99 Cr.
Although AO had referred the Direct Taxes Code of 2010 where it was provided in clause (t) of Sec. 58(2) as under: "(t) any amount accrued, or received, on account of the cessation, termination or forfeiture in respect of any agreement entered into by the person, if the amount is not included under the head 'income from business." However, this proposal was not incorporated in Income Tax Act, 1961. But similar type of provision was inserted by Finance Act, 2014 by way of clause (ix) of Sec. 56(2), which is read as below: "(ix)any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,- (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset;"
But, the above provision is not applicable in case of forfeiture of shares as held by the coordinate bench of ITAT in the case of Mangal Credit AndFincorp Ltd, Mumbai vs. DCIT- ITA no. 2756/MUM/2022.It was further held by the coordinate benches of ITAT in the following cases that the transaction of forfeiture of share applications is not a revenue receipt and thus not even chargeable to tax u/s. 41 of the Act:
Prism Cement Ltd. vs. JCIT [2006] - 101 ITD 103 (Mum. Trib.), has held as under:
„15. Thus, the earnest money or an advance amount received on account 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 assessee 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 receipts even then it would not be taxable to tax under the provisions of section 41(1) of the Act, in as much as there was no allowance or deduction of this liability in the earlier years. We also do not find any provision in this Act according to which this type of receipts are chargeable to tax. We, therefore, are of the considered view that the revenue was not justified in treating this receipt as revenue receipt. We therefore, set aside the order of CIT(A) and delete the addition."
Brijlaxmi Leasing & Finance Ltd. [2009] - 118 ITD 546 (Ahd. Trib.), has held as under:
"7. .....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 lyengar & 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 considered 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 lyengar & 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 assessee 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, in as much as there was no allowance or deduction of this liability in the earlier years.""
Moreover, reliance has also been placed upon the case of assesse’s sister concern namely M/s. Vatika Rayons Pvt. Ltd. in operative portion of the order of the coordinate bench is reproduce here in below:
“5. The Ld. AR appearing for the assessee submitted that, in order to promote the textile market, the Government of India had framed a scheme for setting up integrated textile parks with the objective of providing robust infrastructure facilities to participants. Pursuant thereto, a Special Purpose Vehicle (SPV) of the Government of India, namely Surat Super Yarn Park Ltd. (hereinafter referred to as "SSYPL"), was incorporated. SSYPL had agreed to allot a constructed shed in the Textile Park at Surat for yarn processing, along with supporting infrastructure and power facilities, to promote the business activities of textile enterprises. The Ld. AR further submitted that the assessee had entered into an Infrastructure-cum-Power Supply Agreement with SSYPL on 28.09.2011. Under the terms of this agreement, SSYPL was to provide facilities such as uninterrupted and low- cost electricity, transportation, canteen, laboratory and technician support, together with the advantage of cheap raw material and skilled labour in the region. In line with the recitals of this agreement, and also in terms of a Subscription Agreement dated 12.10.2010, the assessee subscribed to the shares of SSYPL. To avail this business opportunity, the assessee sought to raise its share capital by issuing shares. For this purpose, it was in search of investors and had also raised funds in earlier years. In support of its valuation, the assessee obtained a report from an independent valuer, who determined the value per share at Rs.769.77. Based on this, two investors subscribed to the assessee's share issue: (i) Ms. Shreya Jain, who applied for 1,25,000 shares, and (ii) M/s. Yash Enterprises, which applied for 6,25,000 shares. Each paid Rs.40 per share, comprising Rs.5 towards partly paid share capital and Rs.35 towards share premium. However, the project did not materialise due to significant delays in the commencement of operations, particularly in providing requisite facilities such as electricity. Consequently, the project failed to take off. The investors, being aware of this development, did not pay the final call money, and the assessee decided to forfeit the money received. The record shows that on 27.08.2013, the assessee received an amount of Rs.1,00,00,000 from Ms. Shreya Jain for investment in shares. Subsequently, the assessee returned Rs.50,00,000 to her on 22.10.2013, as she opted to reduce her investment. This fact was duly intimated to the Ld. AO vide submission dated 16.12.2016. Along with the submissions dated 28.11.2016, the assessee also produced relevant extracts of bank statements and ledger accounts before the Ld. AO. As per agreed terms, the assessee allotted 1,25,000 shares to Ms. Shreya Jain at Rs.40 per share, comprising Rs.5 per share as partly paid up and Rs.35 towards share premium. The assessee also issued share certificates reflecting that the shares were partly paid up. It was further submitted that the shares were issued at Rs.50 per share (face value Rs.10, with Rs.40 received as call money). In total, the assessee issued 7,50,000 shares, of which 1,25,000 were issued to Ms. Shreya Jain. She was unrelated to the assessee, and this fact was corroborated by her own submissions dated 08.12.2016 filed before the Ld. AO. A subsequent share certificate was also issued and placed on record during the course of hearing vide submission dated 16.12.2016. In respect of forfeiture of shares, the assessee had also filed Form No. 208 (Annual Return) with the Registrar of Companies, wherein the forfeiture was duly disclosed. Despite these facts, the Ld. AO, relying upon extracts of her letter, observed that since the said parties had classified the transactions as loans, the same was liable to be treated as unexplained credits under the Act. The Ld. AR respectfully relied on the impugned appellate order.
We have considered the rival submissions and perused the materials placed on record. We find that the Ld.CIT(A), after a detailed discussion found that the amount of forfeiture of share application money is a capital receipt only and cannot be taxed as income of the appellant. Therefore, I am of the considered view that the addition of Rs 3,00,00,000 u/s 68 of the Act made by the AO is not sustainable, by holding as under: - "5.25 In view of the above facts and discussion and respectfully following the judicial decisions as discussed above, I am of the considered view that the appellant has discharged the anus of providing about the nature and source and provided all necessary information to the AO. The forfeiture is due to non payment of final call money. I find that from a perusal of the return of income filed by the parties, it can be seen that the parties have substantial source of income to make the investments. It is also not the case of the AO that the party is bogus or there is a finding that the shareholder is non-genuine. If the amount of share application money received from the parties are doubtfully, then the AO is free proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. Further, the amount of forfeiture of shore application money is a capital receipt only and cannot be taxed as income of the appellant. Therefore, I am of the considered view that the addition of Rs 3,00,00,000 u/s 68 of the Act made by the AO is not sustainable and is directed to be deleted. The appeal on Ground No 1 is thus treated as allowed." We do not find a reason to come to a different conclusion than the one arrived at by the Ld.CIT(A). The impugned appellate order is upheld. Ground no. 1 of the revenue is rejected.”
After having gone through the contents contained in the case titled M/s. Vatika Rayons Pvt. Ltd. (Supra) wherein also the amounts were received from the same parties which were forfeited and the other facts were also same and in the absence of any contrary authority or distinguishing factual matrix, we are bound to follow the ‘doctrine of binding’ precedents which demands that the decision of Coordinate Bench is binding thus following the consistent line of judicial precedent emanating from the decision of the coordinate bench in assessee’s sister concern and also considering the fact that nothing has been placed on record by Ld. DR in order to demonstrate that the said decision has been stayed, modified or reversed by Hon’ble High Court. Accordingly, the binding decision of the coordinate bench command full precedential authority. Therefore, adhering to the principles of judicial consistency and considering the fact of the present case. We find no reasons to interfere into or to deviate from the lawful findings so recorded by Ld. CIT(A). Hence, these grounds raised by the revenue stands dismissed.
In the result, the appeal filed by the revenue stands dismissed with no order as to cost.
Order pronounced in the open court on 20.01.2026 Sd/- Sd/- (OM PRAKASH KANT) (SANDEEP GOSAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 20/01/2026 Disha Raut, Stenographer आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : अपीलाथी / The Appellant 1. प्रत्यथी / The Respondent. 2. संबंधधत आयकर आयुक्त / The CIT(A) 3. आयकर आयुक्त(अपील) / Concerned CIT 4. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण,मुम्बई/ DR, ITAT, Mumbai 5. 6. गार्ड फाईल / Guard file. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //True Copy//
उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai