2021 (9) TMI 390 - AT - Income Tax

Tax Tribunal rules forfeited share application money is capital receipt, not taxable under

Income Tax Officer-2 (2), Range-2, Lucknow. Versus M/s Dev Bhoomi Promoters & Developers Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal, confirming that forfeited share application money is a capital receipt not taxable under the Income Tax Act. ... Unsecured loan in the books of investors - Addition in the absence of proper explanation offered by the assessee regarding forfeited - assessee used colourable device to introduce money in its business under the garb of share application money by making private placement and later on forfeiting the money for non-payment of call money - HELD THAT:- On payment of allotment money or call money, the amount already paid will be forfeited and therefore, the assessee company having powers under Article 23 had forfeited the above said money. Now the above said forfeited money is a capital receipt which is not liable to tax as per the provisions of I.T. Act and therefore, was not rightly offered to tax by the assessee company and was rightly credited to reserve and surplus. AO during the assessment proceedings, did not doubt the creditworthiness of investor and his only objection in disallowing the same is that the investors in their books of account had classified investment in the assessee company as unsecured loans. In our opinion, such classification made by the investor company, in their books of account, does not alter the nature of transactions which clearly is share application money as is evident from the copy of share application forms.The explanation of the investor company that since they had not yet received the allotment of shares and therefore, had classified the same as unsecured loans is plausible. - Decided against revenue. Issues Involved:1. Condonation of delay in filing the appeal.2. Legitimacy of the addition of Rs. 2,00,00,000/- made by the Assessing Officer (AO) due to the forfeiture of share application money.3. Classification of the forfeited amount and its tax implications under the Income Tax Act.Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The Revenue filed a petition for condonation of a 158-day delay in filing the appeal, supported by an affidavit from the Assessing Officer. The delay was attributed to the retirement of the previous AO and the inadvertent omission during the handover process. The respondent had no objection to the condonation, and the Tribunal found the reason for the delay plausible, thus condoning it and allowing the Revenue to proceed with its arguments.2. Legitimacy of the Addition of Rs. 2,00,00,000/-:The AO contended that the assessee used a 'colourable device' to introduce money into its business by issuing share capital to four companies at a premium and then forfeiting the share application money. The AO argued that the transactions were sham, as the investors classified the amounts as unsecured loans in their books due to non-receipt of share certificates. The AO thus made an addition of Rs. 2,00,00,000/- to the assessee's income.The CIT(A) and the Tribunal, however, found that the assessee had followed proper procedures as per the Companies Act and the Articles of Association. The share application money was received through banking channels, and the investors were duly notified to pay the balance amount, failing which the money was forfeited. The Tribunal noted that the AO did not doubt the creditworthiness of the investors and that the classification of the amount as unsecured loans by the investors did not alter the nature of the transactions.3. Classification of the Forfeited Amount and Tax Implications:The Tribunal upheld the CIT(A)'s finding that the forfeited share application money is a capital receipt and not taxable under the Income Tax Act. The Tribunal referenced several case laws supporting the view that forfeited share application money is a capital receipt, including:- Asiatic Oxygen Ltd. vs. DCIT (1994) 49 ITD 355 (ITAT, Calcutta)- DCIT vs. Brijlaxmi Leasing & Finance Ltd. (2009) 118 ITD 546 (ITAT, Ahmedabad)- Prism Cement Limited vs. JCIT (2006) 101 ITD 103 (ITAT, Mumbai)- Travancore Rubber & Tea Co. Ltd. vs. CIT (2000) 243 ITR 158 (SC)The Tribunal also emphasized that the forfeited amount was transferred to Reserve and Surplus and was not distributed among shareholders, further supporting its classification as a capital receipt. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s detailed analysis and conclusions.Conclusion:The Tribunal dismissed the Revenue's appeal, confirming that the forfeited share application money is a capital receipt not liable to tax, and upheld the CIT(A)'s order deleting the addition of Rs. 2,00,00,000/- made by the AO.