2016 (2) TMI 829 - AT - Income Tax

Assessee wins on tax treatment & deduction computation. Tribunal dismisses Revenue's appeal.

The Tribunal ruled in favor of the assessee on both issues. It held that the forfeited amount from warrant/share application money is a capital receipt ... Nature of the receipts received on account of forfeiture of warrant/share application money - whether the same is to be treated as capital in nature or the Revenue income of the assessee - Held that:- In the case of “Prism Lt. vs. JCIT” (2006 (3) TMI 204 - ITAT BOMBAY-I ) 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. In the case in hand also, the assessee had forfeited the advance/application money of ₹ 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. - Decided in favour of assessee Carry forward of notional loss under section 80IA for the purpose of computation of eligible claim/deduction - Held that: We find that the Hon'ble Madras High Court in the case of “Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT” ( 2010 (3) TMI 860 - Madras High Court)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 - Decided in favour of assessee Issues Involved:1. Nature of receipts from forfeiture of warrant/share application money: capital or revenue income.2. Carry forward of notional loss under section 80IA for computation of eligible deduction.Issue-wise Detailed Analysis:1. Nature of Receipts from Forfeiture of Warrant/Share Application Money:- The Revenue contended that the amount forfeited by the assessee company on share warrants should be treated as a revenue receipt liable to tax, arguing that it constitutes speculation gains.- The CIT(A) treated the amount as a capital receipt, not liable to tax.- The assessee's representative cited multiple Tribunal decisions supporting the view that forfeited amounts are capital receipts. Key cases referenced include:- Asiatic Oxygen Ltd. vs. Dy. Commissioner of Income Tax (1994) 49 ITD 0355: The Tribunal held that forfeited amounts from shareholders for default in payment are capital receipts.- DCIT vs. Brijlaxmi Leasing & Finance Ltd. (2009) 118 ITD 0546: It was held that forfeiture of share application money credited to the capital reserve account is a capital receipt.- Prism Ltd. vs. JCIT (2006) 101 ITD 103 (Mum.): The Tribunal ruled that the amount received on forfeiture of NCDs for non-payment of call money is capital in nature.- The Tribunal in the current case found the issue to be identical to the cited decisions and ruled in favor of the assessee, affirming that the forfeited amount of Rs. 1,78,50,000/- credited to the capital reserve account is a capital receipt and not taxable.- The Revenue's grounds on this issue were dismissed.2. Carry Forward of Notional Loss Under Section 80IA:- The AO observed that the assessee had set up a Wind Farm and claimed deduction under section 80IA for the first time in AY 2009-10. The AO argued that losses from earlier years should be set off against the current year's profits to compute the eligible deduction under section 80IA.- The CIT(A) allowed the assessee's claim, stating that losses and depreciation of earlier years, already set off against other business profits, should not be brought forward for deduction computation under section 80IA.- The assessee's representative cited several decisions supporting this view:- Velayudhaswamy Spinning Mills Pvt. Ltd. vs. ACIT (2010) 231 CTR (Mad) 368: The court held that losses and depreciation of years prior to the initial assessment year, already absorbed against other business profits, cannot be notionally brought forward for computing deduction under section 80IA.- CIT vs. Emerald Jewel Industry P. Ltd.: Similar view as above.- M/s Prashant Caterers vs. ITO: Mumbai Tribunal's decision aligning with the above principles.- The Tribunal, following these precedents, ruled in favor of the assessee, directing the AO to allow the deduction claim as per the cited decisions.- The Revenue's appeal on this issue was dismissed.Conclusion:- The Tribunal dismissed the Revenue's appeal on both issues, affirming the CIT(A)'s decisions that the forfeited amount is a capital receipt and that earlier years' losses should not be brought forward for computing deduction under section 80IA.- The order was pronounced in the open court on 24.02.2016.