2023 (5) TMI 829

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....ng 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. 3. 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. 4. The learned CIT(A) also confirmed the same and hence the assessee has filed this appeal. 5. 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....

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.... 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. 8. We heard the rival contentions and perused the record. The fact remains that the assessee had received the impugned amount in connection with the issue of share capital and the same has been forfeited. The question that arises for adjudication is whether the amount so forfeited by the assessee from the share capital amount shall fall within the ambit of sec. 56(2)(ix) of the Act or not? For this purpose, we extract below the provisions of sec.56(2)(ix) of the Act:- 56(2)(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,- (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset. A careful reading of above said section would show that (i) the money should have been received as a....

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....r the terms and conditions the FCD's, the FCD's were to carry interest @15% pa and were unsecured. The amount of Rs 50/- was payable as application money and balance Rs 50/- were payable within 90 days of allotment failing which the company had right to forfeiture. The debentures were fully convertible into equity shares of the company. Each debenture was to be allotted 8 equity shares of the company within 15 months from the date of allotment. During the year the call money received by the assessee company of Rs. 3,00,00,000/- was forfeited as the allottee companies despite various reminders and extension of time failed to submit the balance money and accordingly as per terms and conditions agreed the call money was forfeited. 12. The Ld. AO disallowed the claim of the appellant and held that the said receipt is a revenue receipt and the forfeiture of the same does not change it characteristic as the capital receipt. The ground taken by the Ld AO was that the since the amount raised through allotment of debentures was utilized for acquisition of current assets and in view of the ratio of judgment in Logitronics Ltd. case, the above receipt were held to be of reven....

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....re in this case, the assessee company has issued fully convertible 3,00,000 debentures to two companies, each with face value of Rs. 100/- per FCD and the application money was Rs. 50/- per debenture and balance Rs. 50/- was payable within 90 days of allotment, failing which the company had right to forfeit. "Debenture" is a long term debt instrument used by the companies to borrow money at a fixed rate of interest. It is a type of debt instrument which is not secured by any collateral. The debenture cannot be treated as a capital asset of the issuer company because it is a kind of debt instrument with an obligation to acknowledge the debt and pay interest. It is a capital asset in the hands of the person subscribing to the debenture or the allottee of the debenture, who is entitled to get interest at a stipulated rate and may also get right to equity shares if conditions of subscription prescribes so. The money received as advance as contemplated in section 56(2)(ix) means it should have been received during the course of negotiation for transfer of a capital asset, i.e., the capital asset of the issuer company and not the receiving company. The deeming provision is applicable in ....

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.... negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. Finance (No. 2) Act, 2014 has inserted a proviso in the said section, so as to provide that where any sum of money received as an advance or otherwise in the course of the negotiations for transfer of a capital asset has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of subsection (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. This amendment aims to avoid double taxation of the forfeited advance. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. [Emphasis in bold is ours] Thus, the aforesaid amendment 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 it....