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Income Tax Appellate Tribunal, “C” BENCH, KOLKATA
Before: DR. MANISH BORAD, HON’BLE & SHRI SONJOY SARMA, HON’BLE
O R D E R
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The present appeal is directed at the instance of the assessee against the order of the learned Commissioner of Income Tax (Appeals) (hereinafter the “ld. First Appellate Authority”) dt. 27/07/2023, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2012-13. 2. The assessee has raised the following grounds of appeal:- “1. For that the Ld. CIT(A) was not justified in passing the order exparte without affording reasonable opportunity of hearing.
2. For that the Ld. CIT (A) was not justified in confirming the addition of Rs. 4,81,00,000/- made by the A.O. on account of share capital including share premium by wrongly applying the decision of Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyenger & Sons Ltd. 222 ITR 344. 2 Assessment Year: 2012-13 Tirumala Irons (P) Ltd.
3. For that the Ld. CIT(A) ought to have appreciated the fact that the share capital and share premium was raised in the preceding year and in the instant year, the assessee merely forfeited the shares, as such, the addition to the tune of Rs.4,81,00,000/- was not justifiable and was liable to be deleted.
4. For that the Ld. CIT (A) was not justified in confirming the addition of Rs.5,27,078/- made by the A.O. by wrongly invoking the provisions of section 14A of the Act.
5. The appellant craves leave to add further grounds of appeal or alter the grounds at the time of hearing.”
Facts in brief are that the assessee is a private limited company engaged in investment business. Income of Rs. 1,76,400/- declared in the e-return for Assessment Year 2012-13 furnished on 25/09/2012. Case selected for scrutiny through CASS followed by issuing and serving of notice u/s 143(2) and 142(1) of the Act. One of the reasons for selection of scrutiny was “large share premium received”. During the year, Rs.4,81,00,000/- has been transferred to share forfeited account. This amount was appearing under the head share application money in the preceding financial year. The ld. Assessing Officer observed that the alleged sum transferred to share forfeited account is liable to be treated as income of the assessee as unexplained cash credit because, it is quite improbable that a private limited company has received share application from the known persons and they have not paid some part of the share application money and have accepted to get their amount forfeited. The ld. Assessing Officer also observed that the summons issued u/s 131 of the Act to the directors of the assessee company also remained unserved and, therefore, no clarification can be sought about the alleged credit of Rs.4.81 Crores. The same was accordingly added to the income of the assessee u/s 68 of the Act. The ld. Assessing Officer Assessment Year: 2012-13 Tirumala Irons (P) Ltd. further noticed that the assessee had made investment in equity shares and thus he invoked the provision of Section 14A of the Act and made disallowance of Rs. 5,27,078/-. Income assessed accordingly. 3.1. Aggrieved, the assessee preferred appeal before the ld. CIT(A) challenging the additions made by the ld. Assessing Officer and also filed written submissions but thereafter, for insufficient compliance, the ld. CIT(A) proceeded to dispose off the case ex-parte.
Now, the assessee is in appeal before this Tribunal.
So far as the addition u/s 68 of the Act is concerned, it was submitted that the assessee company has not received the alleged sum during the year. Referring to the documents placed in the paper book and bank statement, it is claimed that the alleged sum was received in the preceding financial year. However, when the assessee was confronted that no such details were filed before the ld. CIT(A), he requested that, a remand report may be called for from the ld. Assessing Officer regarding the evidence filed in support of the claim that alleged sum was not received during the year. To this request, the ld. D/R did not oppose. Accordingly on 06/03/2024, the ld. D/R was directed to obtain the remand report from the jurisdictional Assessing Officer who shall examine the details of bank statements of preceding and current financial year of the assessee along with the ledger account of share applicants. In compliance thereto on 21/03/2024, the ld. Assessing Officer, has filed the report with the ld. CIT D/R and the copy of the same is placed on record. In the remand report of ld. Assessing Officer, it is stated that on going through the bank account statement forwarded by the Income tax Officer, Ward –4(1), Kolkata and ledger account Assessment Year: 2012-13 Tirumala Irons (P) Ltd. copies of share application money for FY 2010-11 and 2011-12 submitted by the assessee on 19/03/2024, the assessee had received Rs.4.81 Crores as share application money during financial year 2010-11 relevant to Assessment Year 2011-12. During the course of hearing, this remand report was confronted to the ld. CIT D/R who also accepted that the alleged sum has not been received during the year. 5.1. Based on these observations of ld. Assessing Officer in the remand report, the ld. A/R submitted that since the alleged sum has not been received during the year, therefore, Section 68 of the Act cannot be invoked. Further regarding the claim of forfeiture of shares treated as capital receipts by the assessee, reliance was placed on the decision of the Co-ordinate Bench ITAT Delhi in the case of Sunita Gupta Share Brokers Limited vs. ACIT in Assessment Year 2007- 08; order dt. 07/12/2011, where it has been held that profit arising out of forfeiture of shares cannot be considered as revenue receipt. On the other hand, the ld. D/R vehemently argued supporting the orders of the lower authorities.
We have heard rival contentions and perused the material placed before us. The first issue for our consideration is addition made u/s 68 of the Act at Rs.4.81 Crores. We observe that during the year, the assessee has transferred the balance appearing in share application money account to share forfeiture account treating it as a capital receipt. The assessee has filed details of name and date of receiving share application money of 28 share applicants. It is claimed that the total sum of Rs.4.81 Crores has been received in the preceding FY 2010-11. Copies of the bank statement of financial year 2010-11 and 2011-12 has been 5 I.T.A. No. 993/Kol/2023 Assessment Year: 2012-13 Tirumala Irons (P) Ltd. filed, copies of the ledger account of all the share applicants has also been filed. All these details were sent to the ld. Assessing Officer to file a remand report. The ld. Assessing Officer vide its report dt. 21/03/2024 has clarified the fact that the alleged sum of Rs.4.81 Crores was not received during the year under consideration and was received during FY 2010-11 relevant to Assessment Year 2011-12. Under these given facts when the alleged sum has not been received during the year nor is it a fresh credit entry from the share applicants during the year, the ld. Assessing Officer was not justified in invoking the provisions of Section 68 of the Act which are applicable only to sum found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation for the nature and source or the explanation offered by him is not found to be satisfactory by the ld. Assessing Officer. However, since the assessee has successfully explained that the sum was not received during the year, therefore, we fail to find any merit in the invocation of Section 68 of the Act.
So far as the treatment of share application money received in the preceding year having been transferred to share forfeiture account and claimed as capital receipt, it has been consistently held that forfeiture of shares is purely a capital receipt. We draw support from the decision of Co-ordinate Bench of ITAT Delhi in the case of Sunita Gupta Share Brokers Limited (supra) and the relevant finding of the Tribunal, reads as follows:- “31. We have considered the rival submissions in the light of the material produced with regard to this issue. Undisputedly, the amount added was not received during the year under consideration. For this short reason itself, the addition is unsustainable. Further, the forfeiture of the share application money came about in financial yearn 2004-05, as is evident from the balance sheet of the assessee as on 6 I.T.A. No. 993/Kol/2023 Assessment Year: 2012-13 Tirumala Irons (P) Ltd. 31.3.2005 (APB 52). A sum of Rs. 75 lakhs was received in financial year 2003-04. The allotment of shares of Rs. 6,25,000/- was made against this receipt. A sum of Rs. 43,75,000/- was adjusted against share premium. The balance of Rs. 25,00,000/- was forfeited. The relevant entries in the aforesaid balance sheet are as under:-Liabilities Current Yr. Amount Previous Yr. Amount C RESERVE & SURPLUS 1. Share Application Money 2. Share Premium 3. Share Application Money forfeiture 4,375,000.00 2,500,000.00 7,500,000.00 32. The balance sheet as on 31.3.2006 (APB 54) shows no change in this regard. Similar is the position depicted by the balance sheet as on 31.3.2007 (APB 19). Thus, there has been no change in the current financial year, i.e. financial year 2006-07, relevant to assessment year 2007-08.
In the above position, even if the forfeiture is to be taken as a revenue receipt, since it came about in financial year 2004-05, it cannot be taxed in the current financial year.
It is, however, entirely another matter, that forfeiture of shares cannot be considered as a revenue receipt. This has been settled by “Multan Electric Supply Co. Ltd.”, 13 ITR 457(Lahore) (supra), which has been considered and discussed by the Tribunal in “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 359 (Kol),(supra). In “Multan Electric Supply Co. Ltd..”(supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in “Asiatic Oxygen Ltd.”(supra), it was observed that Schedule VI – Part I of the Companies Act contains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under the head ”Reserves and Supply” in the liability side of the balance sheet; that the assessee had credited the amount in respect of the forfeited shares under the head “capital reserve”; that thus, the Companies Act itself treats the profit on forfeiture of shares as capital reserve not available for distribution as evidence; that it could not therefore be held that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company; that it is also correct to contend on behalf of the assessee that “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), has wrongly been applied to the instant case. Therein, the amount had admittedly arisen as a result of a trading transaction, having the character of income. In the present case, however, the receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.”
Respectfully following the above decision, we find that the assessee has rightly claimed the alleged sum as a capital receipt shown under the head reserve and surplus which is arising on account of non-