According to section 56(2)(ix), forfeited share capital constitutes a capital receipt and is not taxed
The assessee has filed this appeal challenging the order dated 22.10.2022 passed by the learned CIT(A)-47, Mumbai and it relates to A.Y. 2018-19. The assessee is aggrieved by the decision of the learned CIT(A) in confirming the addition of Rs. 1.50 crores made under section 56(2)(ix) of the I.T. Act.
The facts relating to the case are stated in brief. The assessee is non-banking financial company listed in Bombay Stock Exchange. The assessee had issued share warrants to ten persons @ Rs.36.45 per share. The assessee had allotted shares against share warrants issued to them upon payment of 25% of the value of shares. As per the terms of agreement, the balance amount has to be paid on 22.8.2017 / 2.9.2017 in order to fully convert the share warrants into shares, failing which the initial payment of 25% is liable to be forfeited. Out of the ten parties to whom share warrants were issued, six parties did not pay the balance amount of 75% and hence the assessee forfeited the payments of 25% already made by them. The amount so forfeited worked out to Rs. 1,50,35,625/-. The AO noticed that the assessee did not offer the above said amount for taxation and hence the Assessing Officer proposed to assess the same as income of the assessee.
Before the Assessing Officer, the assessee contended that the amount so forfeited is a capital receipt in its hand and hence not liable to tax. In support of this contention, the assessee placed reliance on various case laws. However, the Assessing Officer took the view that the amount so forfeited by the assessee is liable to be taxed under section 56(2) (ix) of the Act. Accordingly he assessed the above said amount as income of the assessee under the above said section.
The learned CIT(A) also confirmed the same and hence the assessee has filed this appeal.
Observation of the court
The Learned AR submitted that the provisions of section 56(2)(ix) of the Act shall have application only in respect of advance money received in the course of transfer of the capital assets, which was subsequently forfeited. He submitted that there should be transfer of capital asset; the assessee should have received advance in connection with transfer of said capital asset and the said advance should have been forfeited in order to get attracted by sec. 56(2)(ix) of the Act. He submitted that, in the instant case, the assessee did not receive money in course of transfer of capital assets, but received the same on issuing share capital. Accordingly, the Ld A.R submitted that the provisions of section 56(2)(ix) of the Act will not apply to the facts of the present case. He further submitted that the amount forfeited by the assessee shall constitute capital receipt and the same is not liable to tax. In support of his contention, the Learned AR placed reliance on the decision rendered by Delhi Bench of the Tribunal in the case of M/s. R.S. Triveni Foods P. Ltd. Vs. Addl. CIT (ITA No. 739/Del/2019 dated 5.8.20 19). He submitted that the Delhi Bench of the Tribunal has considered an identical issue in the above said case. However, in the case before Delhi bench of Tribunal, the assessee had issued fully convertible debentures and the part money collected was forfeited. The question that arose before the Tribunal was whether the provisions of section 56(2)(ix) of the Act will apply in respect of forfeited amount of application money collected on issuing fully convertible debentures. The Tribunal held that the provisions of sec.56(2)(ix) will not apply to the forfeited amount. Accordingly, the Ld A.R submitted that the ratio of the above said decision shall apply to the facts of present case also.
On the contrary, the learned DR supported the orders passed by the tax authorities. The learned DR also invited our attention to the Memorandum of Explaining the provisions of section 56(2)(ix) of the Act, when it was inserted by the Finance Act, 2014. The learned DR further submitted that the share capital shall qualify as “capital asset” and hence money forfeited by the assessee was in the nature of advance received during the course of transfer of capital asset falling within the scope of sec. 56(2)(ix) of the Act.
In the rejoinder, the Ld A.R submitted that the assessee has issued share warrants for raising capital and not in connection with the transfer of any asset belonging to the assessee. The shares issued by the assessee company may constitute capital asset in the hands of subscribers. What is relevant for the purpose of sec. 56(2)(ix) is that the assessee should have received advance amount in connection with the transfer of a capital asset, which is not the case here. Hence, the provisions of sec. 56(2)(ix) of the Act shall not apply.
In view of the foregoing discussions, we hold that the amount of 1,50,35,625/- forfeited by the assessee out share capital issued by it shall not fall within the scope of sec.56(2)(ix) of the Act. Further, the said amount shall constitute a Capital receipt in the hands of the assessee. Accordingly, the above said amount is not taxable in the hands of the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of the above said amount made in the hands of the assessee.
In the result, the appeal filed by the assessee is allowed. Pronounced in the open court on 24.4.2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
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