2017 (3) TMI 1384 - AT - Income Tax

Disallowance on account of forfeiture of shares warrants - loss claimed by assessee has not been offered to tax by ECL - Held that - Firstly, the profit amount was not offered to tax by ECL. Secondly, the demand was raised by ECL to the original allottee of share warrant i.e. MDCPL by ECL. Admittedly, the loss incurred by assessee which was admitted by AO but the same was rejected on the ground that ECL has not offered to tax. Here, it is pertinent to note that what will be the tax treatment of the forfeited amount in the hands of ECL is not the concern of the AO whether it is taxable receipt or revenue receipt. The AO has to see the transactions and its effect in the hands of the assessee. Therefore, the tax treatment in the hands of ECL cannot be a deciding factor for the loss incurred and subsequently claimed by assessee. Therefore, the allegation framed by AO against the assessee is baseless and it was also seen that a notice was issued by the AO u/s 133(6) of the Act to ECL for the verification of loss incurred and claimed by assessee. The ECL in response thereto as clearly submitted that the original allottee was MDCPL but subsequently it was transferred to assessee. The copy of the letter is placed on page 6 and 7 of the paper book. Besides the above, ECL has duly recorded in its record the transfer of 50 lakh convertible warrants from MDCPL to assessee and the confirmation of the same is placed on pages 9 to 10 of the paper book. In view of the above, we are of the view that the impugned finding of Ld. CIT(A) that the letter has not been issued to the assessee but to MDCPL for the balance payment is not a valid reason for the impugned disallowance. Thus, after considering all the facts in totality, we are inclined to reverse the orders of authorities below. The assessee gets the relief accordingly.

Summary

Issues:
Disallowance of ?3.80 crores on account of forfeiture of shares warrants.

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of ?3.80 crores on account of forfeiture of shares warrants. The appellant, a Limited Company, acquired share warrants from another company but chose not to make the full payment, resulting in the forfeiture of the initial amount paid. The appellant claimed this as a Short Term Capital Loss. However, the Assessing Officer disallowed the claim stating that the amount forfeited had not been offered to tax by the issuing company. The Commissioner upheld this decision, questioning the genuineness of the loss. The appellant argued that the forfeited amount was a capital receipt and not taxable, and the tax treatment by the issuing company should not affect the appellant's claim. The Tribunal noted discrepancies in the transactions and found the disallowance unjustified. It emphasized that the tax treatment by the issuing company should not impact the appellant's claim, and reversed the decision, allowing the appeal.

The Tribunal highlighted that the Assessing Officer's concern should be the effect of transactions on the assessee, not the tax treatment by the issuing company. It noted that the issuing company's failure to offer the forfeited amount to tax should not invalidate the appellant's claim. The Tribunal also referenced a notice issued to the issuing company, confirming the transfer of warrants to the appellant. After reviewing all facts, the Tribunal concluded that the disallowance was baseless and reversed the decision, granting relief to the appellant.

The final issue was deemed general and required no specific adjudication. Consequently, the appellant's appeal was allowed, and the order was pronounced in favor of the appellant on 22/03/2017.