2017 (5) TMI 964 - AT - Income Tax

Accrual of income - forfeiture of share warrants - whether treated as capital receipt in nature? - Held that - In the instant case, the share warrant money was forfeited as per the terms of the issue. This fact is not in dispute. It is settled position of law that by charging provisions of section 4 and 5, the general liability to tax is imposed upon income but the Income Tax Act does not provide that whatever is received by the assessee must be regarded as income chargeable to tax. Besides, if the initial receipts of a business are not trading receipts in the hands of the recipient, subsequent operations cannot turn them into trading receipts. Therefore, the addition made by AO on account of forfeiture of share warrants as capital receipt in nature, needs to be deleted. - Decided against revenue

Summary

Issues Involved:
1. Whether the forfeiture of share warrants constitutes a capital receipt or revenue receipt.
2. Application of Section 28(iv) of the Income Tax Act, 1961.
3. Invoking Section 145(3) of the Income Tax Act, 1961.
4. Inclusion of forfeited amount in Book Profit assessable under Section 115JB of the Income Tax Act, 1961.
5. Application of the principle of colorable device as enunciated in McDowell & Company Limited vs. CTO.

Issue-Wise Detailed Analysis:

1. Forfeiture of Share Warrants: Capital Receipt vs. Revenue Receipt
The primary issue in this case was whether the forfeiture of ?12.40 crores from 75,000 share warrants should be treated as a capital receipt or revenue receipt. The assessee argued that the forfeited amount was a capital receipt and not taxable as revenue income. The AO, however, treated this amount as revenue income under Section 28(iv) of the Income Tax Act, 1961. The CIT(A) deleted the addition made by the AO, concluding that the amount did not represent revenue receipt and was not assessable under Section 28(iv). The Tribunal upheld the CIT(A)'s decision, emphasizing that the forfeited amount was part of the capital structure and related to the fixed capital of the company. The Tribunal cited various judicial pronouncements, including the Supreme Court's decision in Hoshiarpur Electric Supply Co. and Kettlewell Bullen & Co. Ltd., to support the view that capital receipts are not taxable as income.

2. Application of Section 28(iv) of the Income Tax Act, 1961
The AO assessed the forfeited amount as income assessable under Section 28(iv) of the Act, which deals with the value of any benefit or perquisite arising from business or profession. The CIT(A) and the Tribunal found that the forfeited amount did not represent a benefit or perquisite arising from business or profession but was a capital receipt. The Tribunal noted that the amount was received as part of the capital contribution and was not related to any trading activity, thus it could not be taxed under Section 28(iv).

3. Invoking Section 145(3) of the Income Tax Act, 1961
The Revenue contended that the CIT(A) erred in holding that the AO was not correct in invoking Section 145(3) of the Act, which allows the AO to reject the books of accounts if they are not correct and complete. However, this issue was not the primary focus of the Tribunal's decision, as the main contention revolved around the nature of the forfeited amount. The Tribunal did not find it necessary to delve into the correctness of invoking Section 145(3) since the primary issue of the nature of the receipt was decided in favor of the assessee.

4. Inclusion of Forfeited Amount in Book Profit Assessable under Section 115JB
The Revenue argued that the forfeited amount should be added to the Book Profit assessable under Section 115JB of the Act, which deals with Minimum Alternate Tax (MAT). The Tribunal, however, did not find merit in this argument as the nature of the receipt was determined to be capital. Since capital receipts are not taxable as income, they do not fall within the scope of Book Profit under Section 115JB.

5. Application of the Principle of Colorable Device
The Revenue also contended that the CIT(A) failed to apply the principle of colorable device as enunciated in McDowell & Company Limited vs. CTO. This principle suggests that tax planning should not be used to evade taxes through artificial or contrived transactions. The Tribunal did not find any evidence that the forfeiture of share warrants was a colorable device. The forfeiture was in line with the terms of the issue and existing regulations, and there was no indication of any artificial or contrived arrangement to evade taxes.

Conclusion
The Tribunal dismissed the appeal filed by the Revenue, confirming the order of the CIT(A) that the forfeited amount of ?12.40 crores was a capital receipt and not taxable as revenue income. The Tribunal emphasized that the burden of proving that the receipt was of revenue nature lay on the Revenue, which it failed to discharge. The decision was based on a thorough analysis of judicial precedents and the nature of the receipt in the hands of the assessee. The Tribunal's order was pronounced in the open court on 03/03/2017.