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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI SANJAY GARG & SHRI ASHWANI TANEJA
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the Revenue against the order dated 16.05.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2010-11.
The Revenue has taken the following grounds of appeal: "i. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the amount retained by the assessee company or forfeiture of share warrants, as capital receipt not liable to tax, without appreciating the fact that the amount forfeited by the assessee is the option premium received by the assessee at the time of entering into option contract in the form of share warrants and these options were ultimately settled without the actual delivery of shares and therefore, the entire premium forfeited and retained by the assessee constitutes speculation gains liable for tax.?
ii. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the amount forfeited by the assessee
2 M/s. Jayant Agro Organics Ltd. company on share warrants as capital receipt and thus not taxable without appreciating the fact that forfeited shares are available for reissue and thus, forfeited amount is a windfall for company..? ii. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the amount forfeited by the assessee company on share warrants as capital receipt and thus not taxable without appreciating the fact that the amount forfeited by the assessee in the form of option premium is a speculation gain received by the company as the allottees did not exercise the option within the stipulated period of 18 months to purchase equity shares of the assessee company. iv. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of deduction of Rs. 1,11,14,473/- u/s 80IA stating that "Initial assessment Year" will be the year in which claim of deduction was made for the first time without appreciating that the observations of Mumbai ITAT at para 25 in the case of Hercules Hoist Ltd (2013) 022 ITR (trib) 0527 wherein the Hon'ble ITAT has held that the "Initial Assessment Year" will be the year in which the operations have been commenced. ?
V. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs. 1,11,14,473/- u/s 80IA without appreciating that in the assessee's case only for AY 2009-10, on the identical issue, Ld CIT(A) has confirmed the disallowance.?
The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored.”
A perusal of the above grounds of appeal reveals that the Revenue has taken only two effective grounds through the above grounds of appeal. The first issue is relating to the nature of the receipts received on account of forfeiture of warrant/share application money as to whether the same is to be treated as capital in nature or the Revenue income of the assessee. The second issue raised by the Revenue is relating to the carry forward of notional loss under section 80IA of the Act for the purpose of computation of eligible claim/deduction to the assessee under section 80IA of the Act.
So far as the first issue is concerned, the Ld. A.R. of the assessee, at the outset, has stated that the issue is squarely covered in favour of the assessee by various decisions of the Tribunal. He, in this respect, has relied upon the decision of the Kolkata Bench of the Tribunal in the case of “Asiatic Oxygen
3 M/s. Jayant Agro Organics Ltd. Ltd. vs Dy. Commissioner of Income Tax” (1994) 49 ITD 0355 wherein, the Tribunal has held that the amount forfeited from shareholders for default in payment of call moneys is a capital receipt and further that the amount received on reissue of forfeited shares credited to share premium account is also capital receipt. Further, the Ld. A.R. has relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of “DCIT vs. Brijlaxmi Leasing & Finance Ltd.” (2009) 118 ITD 0546 wherein the Tribunal after considering the nature of such receipts has held that forfeiture of share application money which is credited to capital reserve account is capital receipt and is not chargeable to tax. That the issue of shares not being business of the assessee, the amount cannot be treated as receipt in the normal course of business. The relevant findings of the Tribunal in the said case are reproduced as under: “7. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the assessee was to receive call money in respect of shares 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 falls for our consideration is whether the above forfeiture amount is taxable under the provisions of IT Act, 1961 or not. The learned Departmental Representative vehemently placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & 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 P&L a/c 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 Cements Ltd. vs. Jt. CIT (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 Iyengar & 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 4 M/s. Jayant Agro Organics Ltd. 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 s. 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years."
In view of the above, respectfully following the aforesaid decision of the Mumbai Bench of the Tribunal, we find no reason to interfere with the order of the learned CIT(A). It is confirmed and the ground of appeal of the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.”
The Ld. A.R. has further relied upon the decision of the co-ordinate bench of the Tribunal in the case of “Prism Lt. vs. JCIT” (2006) 101 ITD 103 (Mum.) wherein the Tribunal has held that the amount received on account of forfeiture of NCDs for non payment of call money was to be treated as capital in nature as the issuance of NCDs (non convertible debentures) was not a business of the assessee and hence such amount cannot be charged to tax even under section 41(1) of the Act.
We find that the issue in the case in hand is identical to the issue involved in the above cited decisions by the Ld. A.R. In the case in hand also, the assessee had forfeited the advance/application money of Rs.1,78,50,000/- received from the warrant holders after the expiry of the date for converting the same into the shares and the same had been credited to the capital reserve account in the balance sheet. The issue, thus, is squarely covered by the above decisions cited by the Ld. A.R.
The Ld. D.R. has also fairly agreed that the issue is squarely covered in favour of the assessee by the above decisions (supra) cited by the Ld. A.R.
8. So far as the second issue is concerned, the facts relating to the issue are that the Assessing Officer (hereinafter referred to as the AO) observed that the assessee has been permitted by the Gujarat Energy Development Agency to set up a Wind Farm of capacity 1.6 MW (2 No. WTG of 800 Kw= 1.6 MW) at Village Navadra of Taluka Kalyanpur, in District of Jamnagar, Gujarat. Assessee acquired two windmills in the FY 2005-06 from M/s. Enercon India Ltd. for a sum of Rs.7.4 crores and entered into an agreement with Gujarat Energy Transmission Corporation Ltd. on 21.04.2006 for sale of power. During the FY relevant to AY 2010-11, the assessee generated income of Rs.1,33,71,946/- and after deducting expenses under various heads and depreciation, profit had been arrived at Rs.1,11,14,473/-. This profit derived from wind mill unit had been claimed exempt u/s. 80IA(4)(iv)(a) being 100% of its profit derived from the wind mill project. The AO noted that though the project was started in AY 2006-07, the assessee had claimed deduction u/s. 80IA(4)(iv)(a) for the first time in AY 2009-10 and the year under consideration was the second year of such claim of deduction u/s. 80IA(4)(iv)(a) of the Act. The AO observed that as per the provision of section 80IA(5), while quantifying the amount of deduction under section 80IA, it has to be presumed that the eligible business is the only source of income and hence the losses incurred in earlier year has to be first set off with the profits of eligible business and balance profit, if any is only eligible for deduction under section 80IA. He also further observed that since the assessee had incurred huge losses in earlier year, if the same are set-off from the income of the windmill of this year, deduction under section 80IA would not be available. He further observed that as per the provisions of section 80IA(5), a taxpayer has the option to claim deduction for a period of 10 consecutive assessment years out of 15 years and also such provisions mandate that the 6 M/s. Jayant Agro Organics Ltd. eligible business should be fictionally treated as the only source of income of the taxpayer. The AO held that therefore losses incurred in earlier year have to be first set off and balance profit, if any is only eligible for deduction under section 80IA. He further held that the profit from the eligible business for the purpose of determination of the quantum of deduction under section 80IA of the Act has to be computed after deduction of notional brought forward losses and depreciations of eligible units, even though they have been allowed set off against other income in earlier years. He observed that it is the mandate of law that losses of earlier years though already adjusted against income from other sources, the same are once again to be notionally brought forward and set off against profits of the eligible unit to compute eligible deduction.
The Ld. CIT(A) however allowed the claim of the assessee. The Revenue is thus in appeal before us.
At the outset, the Ld. A.R. of the assessee submitted that assessee is eligible for deduction u/s 80IA of the Act in respect of the profits out of the generation of electricity out of windmill activity and the unabsorbed depreciation and losses of the earlier years to the initial year in which the assessee started to claim the benefit under section 80IA, since already set off with the ineligible profits of the assessee from other business, could not be reduced from profits of eligible business for computing deduction u/s 80IA of the Act. The Ld. A.R. of the assessee has further stated that this issue is squarely in favour of the assessee by a series of decisions as mentioned below:
(a) Velayudhaswamy Spinning Mills Pvt. Ltd. vs. ACIT (2010) 231 CTR (Mad) :[2012] 340 ITR 477 (Mad) (High Court) (After considering Special Bench decision). (b) CIT vs. Emrald Jewel Industry P. Ltd. [2011] 53 DTR 263 (Mad) (High Court) (After considering the above decision) (c) M/s prashant Caterers vs. ITO decided on 6.02.2013 (Mumbai Tribunal)
7 M/s. Jayant Agro Organics Ltd. 11. Further, the Ld AR has mentioned that in the decisions of Hon'ble Madras High Court, the Special Bench decision in the case of “ACIT vs. Gold Mine Shares and Finance (P) Ltd.” 113 ITD 209 (SB), has also been considered. The Ld. DR on the other hand has relied upon the findings of the AO on this issue.
We have considered the rival contentions. We find that the Hon'ble Madras High Court in the case of “Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT” (2010) 231 CTR (Mad) 368 (BCAJ) has held that the assessee is entitled to claim deduction u/s 80IA for 10 consecutive years out of 15 years and that initial year of benefit can be opted by the assessee. Losses and depreciation of the years earlier to the initial assessment year which have already been absorbed against profits of other businesses cannot be notionally brought forward and set off against the profits of the eligible business for computing the deduction u/s.80IA. Similar view has been taken in the decision of Hon'ble Madras High Court in the case of “CIT vs. Emerald Jewel Industry P. Ltd.” (supra) and by the Mumbai Tribunal in the case of “M/s Prashant Caterers vs. ITO” (supra). Respectfully following the same, this issue is accordingly decided in favour of the assessee. The AO is directed to allow the claim of deduction in the light of the above stated decisions.
In view of the above, there is no merit in the appeal of the Revenue and the same is accordingly dismissed.
Order pronounced in the open court on 24.02.2016.