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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO, AM & SHRI AMARJIT SINGH, JM
PER AMARJIT SINGH, JM:
The revenue has filed the present appeal against the order dated 21.05.2012 of learned Commissioner of Income Tax (Appeals)-39, Mumbai [hereinafter referred to as the “CIT(A)”] for the assessment year 2009-10. 2. The assessee is in the business of manufacturing of aluminium containers. The assessee filed its return of income for A.Y.2009-10 on 27.08.2010 admitting income at Rs.16,16,04,820/-
I.T.A. No.5022/Mum/12 A.Y. 2009-10
The Assessing Officer disallowed the forfeiture money of Rs.2,54,15,000/- and delayed payment of employees contribution to PF of Rs.39,248/. Feeling aggrieved assessee filed appeal before learned CIT(A) and learned CIT(A) held that an amount of Rs.2,54,15,000/- being forfeited amount on account of shareholder warrant was of the capital receipt. Therefore, the present appeal has been filed before us.
We have heard the arguments advanced by the learned representative of the parties and perused the record carefully. The sole grievance of the revenue is that the learned CIT(A) has treated an amount of Rs.2,54,15,000/- as capital receipt. The assessee is limited company listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and during the year ended on 31.03.2009, the company decided to issue 30,00,000 warrants against exchangeable against equity shares of the company of face value of Rs.10/- each at a premium of Rs.105/- aggregating to Rs.34,50,00,000/- on preferential basis. It was decided that the said warrants will be issued as the provision of preferential issue Q.I.P./A.I.B Guidelines under Chapter XIIIA of SEBI DIP Guidelines with the right to exchange the same within the period of not exceeding 18 months from the date of issue of public allotment. At the time of passing of said resolution the company’s equity share was at Rs.200/- (as on 17.07.2007). The assessee submitted that as per the said scheme following 6 persons applied and paid 10% of the issue price by cross-order cheque.
I.T.A. No.5022/Mum/12 A.Y. 2009-10
Sr. No. Name of the Holder Amount
1 Manish H. Maru 15,41,000.00
2 Arun Parekh 80,50,000.00
3 Whitecity Trading Co. Pvt. Ltd. 1,38,00,000.00
4 Sujatha Sai Krishna Chowdhry 5,86,500.00
5 Sachin Kamath 2,87,500.00
6 Ajitsingh Gakaldas Khijmi 11,50,000.00
1 The assessee submitted that the above said persons alongwith the application form did give their all requisite details including their depository accounts details, which were mandatory. The assessee submitted the certified true copies of all subscribers who have subscribed to the said warrants. The assessee submitted that in the mean time the company’s share started showing declining trend and in the mandatory period, the above said share was fluctuated at Bombay Stock Exchange BSE as well as a National Stock Exchange (NSE) much below the issue price of Rs.115/-. The assessee submitted that all the subscribers decided not to subscribe further within the said mandatory period of 18 months. The company in its Board of Directors meeting dated 18.03.2009 decided to forfeit the said amount of Rs.2,54,15,000/- and transfer it to Reserve and Surplus Account. The assessee
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submitted that in March 2009, the company’s share were between 50/- to Rs.55/- on BSE and NSE and one of the promoter of the company Shri Arun Parekh decided not to subscribe further to the said issue of warrant exchangeable against equity shares. The appellant submitted that the money received by the company from the various persons is capital receipt and the company has rightly forfeited the said amount as the said persons fail to make the balance payments with the mandatory period of 18 months.
2 The Assessing Officer has not accepted the appellant’s submissions. The Assessing Officer observed that the during the year under consideration, the assessee has received an amount of Rs.2.54 crores (approx) as a 10% of the issue price consideration for issuing share warrants at the face value of Rs.10 and at a premium of Rs.105 on preferential basis. The company forfeited this amount paid by six persons as mentioned above on account of the fact that they did not fulfil the terms and conditions of subscription of shares with the mandatory period of 18 months. The Assessing Officer stated that when the company forfeits this amount then it does not have any capital liability to be discharged at a later period. In a normal situation, when the company receives share premium it allots shares to the shareholders. This amount of share premium along with the share price goes to the reserves and surplus account as a capital receipt because the company has to in principle payback to its shareholders in their share holding ration in the eventuality of the liquidation of the company.
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3 The Assessing Officer stated that in the present situation the company has acquired an amount but has not issued any shares against it. Therefore, the company has not created any liability to be paid in future by this transaction. Hence the amount received by this transaction has to be a revenue receipt to be taken to the Profit and Loss account and not a capital receipt directly taken to reserve and surplus. In view of the above an amount of Rs.2,54,15,000/- is treated as revenue receipt and added to the total income of the assessee by the Assessing Officer.
4 Subsequently, the learned CIT(A) has arrived at this conclusion that an amount of Rs.2,54,15,000/- is in nature of capital receipt while arriving at this conclusion the learned CIT(A) has placed reliance upon the order passed by the Income Tax Appellate Tribunal, Mumbai bench in case Prism Cement Ltd. Vs. Joint Commissioner Of Income Tax extract of the said is hereby mentioned below:-
“In the light of the ratio laid down by the Apex Court and the various High Courts, for invoking the provisions of section 41(1) an allowance or deduction must have been granted during the course of assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently, during any previous year, the assessee obtains, whether in cash or in any other manner whatsoever or any amount in respect of such trading liability by way of remission or cessation of such liability. Unless and until the liability, which has been ceased or remitted during the I.T.A. No.5022/Mum/12 A.Y. 2009-10
impugned assessment year, has been debited and claimed to the profit and loss account and allowed in earlier year, it cannot be treated to be an income under section 41(1). If that liability was not allowed or its deduction was not granted in earlier years, it would not assume a character of income chargeable to tax in the year in question by virtue of section 41(1). In the instant case, the NCDs were issued to raise a capital of the assessee before commencement of the business and whatever earnest money or advance was received on account of issuance of NCD’s was kept in separate account and was shown as loan liability upon the assessee and that liability was never debited to the profit and loss account nor was its deduction claimed in the relevant assessment year. Since the NCDs were issued in order to borrow the funds to raise the capital, the amount received in lieu thereof had assumed the character of capital receipt if at all not treated to be a loan liability, in as much as of NCDs was not a business of the assessee.
“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 be 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 was of cement and it was in the process of set up of I.T.A. No.5022/Mum/12 A.Y. 2009-10
cement manufacturing plant during the impugned assessment year. Hence, the amount received by the assessee in lieu of issuance of NCDs, which were forfeited later on account of non-payment of call money, assumed character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If one would consider that receipt to be a business receipts, even then it would not be taxable to tax under the provisions of section 41(1) in as much as there was no allowance or deduction of that liability in the earlier years. There is also no provision in the Act according to which such types of receipts are chargeable to tax. Therefore, the revenue was not justified in treating that receipts as revenue receipt. Therefore, the order of the Commissioner (Appeals) was to be set aside and the impugned addition was to be deleted.
In the result, the appeal of the assessee was to be allowed.
The facts of this case are almost identical to the facts in the case of Prism Cements. Respectfully following the Hon’ble ITAT’s decision, I holds that forfeiture amount is a capital receipt and cannot be taxed as income as per the provisions of the I.T.Act. The AO is directed to delete the addition of Rs.2,54,15,000/-
I.T.A. No.5022/Mum/12 A.Y. 2009-10
6 लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated : 11th March, 2016 MP MP MP MP
I.T.A. No.5022/Mum/12 A.Y. 2009-10
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. आयकर आयु"त(अपील) / The CIT(A)- 4. आयकर आयु"त / CIT
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.