2018 (4) TMI 744 - AT - Income Tax

Revision u/s 263 - allowability of expenditure on forfeiture of shares as capital expenditure and not revenue expenditure - Held that - We find that there is no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of the shares. The assessee has filed the copies of the balance sheets along with the relevant schedules to prove that the assessee has been trading in shares and has been treating the shares as current assets all along. Even before the AO, the assessee had stated to be a trader in shares and therefore, the treatment of the loss on forfeiture of shares is correctly accepted by the AO as revenue loss. Thus, the AO has accepted one of the possible views and there is no erroneous application of law, making the assessment order erroneous and prejudicial to the interest of revenue. We find that the CIT has not considered this issue. We accordingly set aside the order of CIT u/s 263 and restore the order of the AO dated 30.03.2015.

Summary

Issues:
1. Whether the expenditure claimed by the assessee on forfeiture of shares is capital or revenue expenditure.
2. Whether the assessment order passed by the AO was erroneous and prejudicial to the interests of revenue, warranting revision under section 263 of the Income Tax Act, 1961.

Analysis:

Issue 1:
The case involved a non-banking finance company that claimed an amount as revenue expenditure in its Profit & Loss Account, which was allowed by the Assessing Officer (AO). However, the Commissioner of Income Tax (CIT) held that the expenditure was capital in nature and not allowable. The assessee contended that the expenditure was revenue in nature as it forfeited the amount paid for preferential warrants of a company due to a decrease in share price. The CIT set aside the AO's order, leading to the assessee's appeal. The Tribunal analyzed the nature of the expenditure, considering whether it should be treated as capital or revenue. The Tribunal concluded that the loss incurred on the forfeiture of shares by the assessee, a trader in shares, was revenue expenditure as it was in the course of its business activities. The Tribunal found that the AO had considered the issue and adopted a possible view, making the assessment order non-erroneous. The Tribunal referred to relevant legal provisions and case laws to support its decision, ultimately setting aside the CIT's order and restoring the AO's assessment.

Issue 2:
Regarding the second issue of whether the assessment order was erroneous and prejudicial to the interests of revenue, the Tribunal examined the CIT's decision to invoke section 263 of the Act. The Tribunal noted that the CIT had not adequately considered the nature of the assessee's business as a trader in shares and had not acknowledged the AO's assessment based on the assessee's business activities. The Tribunal emphasized that the AO had conducted necessary inquiries and had not made erroneous assumptions. Citing legal precedents, the Tribunal highlighted that as long as the AO's view was a possible one, revision under section 263 was not justified. The Tribunal found that the CIT's order lacked consideration of crucial aspects and, therefore, set aside the CIT's order, reinstating the AO's assessment. As a result, the assessee's appeal was treated as allowed for statistical purposes.

In conclusion, the Tribunal's detailed analysis and interpretation of the legal provisions and case laws led to the decision to set aside the CIT's order and uphold the AO's assessment, determining the expenditure on forfeiture of shares as revenue expenditure for the assessee, a trader in shares.