2019 (8) TMI 1674 - AT - Income Tax

Tribunal rules forfeiture of application money on FCDs not taxable income under Income Tax Act

M/s. R.S. Triveni Foods P. Ltd. Versus Addl. CIT, Circle-20 (2) New Delhi.

The Tribunal ruled in favor of the assessee, holding that the forfeiture of application money on Fully Convertible Debentures (FCDs) should not be treated ... Taxability of advance for transfer of a capital asset where advance is forfeited - Addition treating the forfeiture of application money on fully convertible debentures as capital asset by invoking the provision of section 56(2)(ix) - As per assessee said convertible debenture does not fall in definition of ‘capital asset’ in the hands of assessee and Ld. CIT (A) has erred both in law and in facts of the case in making the above addition without providing any opportunity to the appellant to represent his case before himself - HELD THAT:- Amended section 56(2)(ix) by Finance Act 2014 has to be understood in light of section 51 of the Act, which provided that where any capital asset was on any previous occasion, subject matter of negotiations for its transfer and any advance or other money has been received and retained by the assessee in respect of such negotiations, then same was to be deducted from the cost for which the asset was acquired or the written down value or the fair market value, while computing the cost of acquisition. Now, from A.Y. 2015-16, if such sum received as an advance is included in the total income then same is deducted from the cost of acquisition. Section 51 refers to capital asset belonging to the assessee which was a subject matter of negotiation for transfer and assessee receiving any sum as advance from such negotiation. It was not applicable to the transferee. Here in this case the debentures were duly allotted to the subscribing companies and due to non payment of further call money under the agreement had led to the termination of the debentures and, therefore, said sum paid by the debenture holder cannot be held to be on account of transfer of capital asset in the hands of the assessee company. Debenture is debt instrument or is a kind of long term loan to borrow money at a fixed rate of interest. It is not a capital asset although the money raised by way of debenture becomes part of the issuer company’s capital structure, but it does not become share capital. Thus, in our opinion, the forfeiture of the amount is not on account of failure of negotiation of transfer of capital asset of the assessee and thus, is not hit by section 56(2)(ix). The addition sustained by the Ld. CIT (A) is directed to be deleted. - Decided in favour of assessee. Issues Involved:1. Treatment of forfeiture of application money on Fully Convertible Debentures (FCDs) as a capital asset.2. Applicability of Section 56(2)(ix) of the Income Tax Act.3. Nature of receipt (capital or revenue) of the forfeited amount.4. Opportunity to represent the case before CIT(A).Detailed Analysis:1. Treatment of Forfeiture of Application Money on FCDs as a Capital Asset:The assessee challenged the addition of Rs. 3,00,00,000 by treating the forfeiture of application money on FCDs as a capital asset. The assessee argued that FCDs do not fall under the definition of ‘capital asset’ in the hands of the assessee. The CIT(A) held that forfeiture of advance related to capital assets, including shares and securities, is taxable under Section 56(2)(ix) as ‘income from other sources.’2. Applicability of Section 56(2)(ix) of the Income Tax Act:The CIT(A) applied Section 56(2)(ix), which states that any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if forfeited, is taxable as income from other sources. The assessee contended that this provision should not apply as the money was received in the previous assessment year (2014-15) and only forfeited in the current year (2015-16). The Tribunal held that the provision is applicable in the year of forfeiture.3. Nature of Receipt (Capital or Revenue) of the Forfeited Amount:The AO treated the forfeited amount as a revenue receipt, arguing that the funds were used for day-to-day business activities, thus constituting revenue receipts. The CIT(A) changed the nature of the addition, treating it as taxable under Section 56(2)(ix). The Tribunal clarified that debentures are debt instruments and not capital assets of the issuer company. The money received as advance should be in the course of negotiation for transfer of a capital asset belonging to the assessee, which was not the case here. Therefore, the forfeiture of debentures does not fall under Section 56(2)(ix).4. Opportunity to Represent the Case Before CIT(A):The assessee argued that the CIT(A) erred in making the addition without providing an opportunity to represent the case. The Tribunal noted that the CIT(A) confirmed the addition on a different ground without issuing a notice or giving any opportunity to the assessee. This procedural lapse was highlighted as a significant issue in the judgment.Conclusion:The Tribunal concluded that the forfeiture of the FCDs does not fall under the purview of Section 56(2)(ix) and should not be treated as taxable income from other sources. The addition sustained by the CIT(A) was directed to be deleted, allowing the appeal of the assessee. The judgment emphasized the importance of procedural fairness and the correct interpretation of legal provisions related to capital assets and revenue receipts.