2023 (5) TMI 829 - AT - Income Tax

Addition u/s 56(2)(ix) - forfeited amount of application money collected on issuing shares against share warrants - six parties did not pay the balance amount of 75% and hence the assessee forfeited the payments of 25% already made by them - HELD THAT - In the instant case, the assessee has received money on issuing share capital in the form of exercise of rights in share warrants. Share capital so collected by the assessee is not in the course of negotiations for transfer of capital asset. Shares so issued may constitute Capital asset in the hands of the persons, who purchased the shares, but that is not relevant here. Issuing share capital does not result in transfer any capital asset. Accordingly, since the money was not received in the course of negotiations for transfer of capital asset, the provisions of sec.56(2)(ix) will not apply to the facts of the present case. As decided in M/S. R.S. TRIVENI FOODS P. LTD. case 2019 (8) TMI 1674 - ITAT DELHI forfeiture of the amount is not on account of failure of negotiation of transfer of capital asset of the assessee and thus, is not hit by section 56(2)(ix). The addition sustained by the Ld. CIT (A) is directed to be deleted. Thus we hold that the amount forfeited by the assessee out share capital issued by it shall not fall within the scope of sec.56(2)(ix) - Further, the said amount shall constitute a Capital receipt in the hands of the assessee. Accordingly, the above said amount is not taxable in the hands of the assessee. Appeal of assessee allowed.

Summary

Issues Involved:
1. Whether the amount forfeited by the assessee from share capital falls within the ambit of section 56(2)(ix) of the Income Tax Act.
2. Whether the forfeited amount constitutes a capital receipt and is thus not liable to tax.

Summary:

Issue 1: Applicability of Section 56(2)(ix) of the Income Tax Act

The assessee, a non-banking financial company, issued share warrants to ten persons, receiving 25% of the share value upfront. Six parties failed to pay the remaining 75%, leading to the forfeiture of the initial payments amounting to Rs. 1,50,35,625/-. The Assessing Officer (AO) proposed to tax this forfeited amount under section 56(2)(ix) of the Income Tax Act, which was confirmed by the CIT(A). The assessee argued that section 56(2)(ix) applies only to advance money received in the course of transfer of capital assets, not to share capital. The Tribunal examined the provision, noting that it requires money to be received as an advance in the course of negotiations for the transfer of a capital asset. Since the money in this case was received for issuing share capital and not in the course of negotiations for transfer of a capital asset, section 56(2)(ix) does not apply.

Issue 2: Nature of the Forfeited Amount

The assessee contended that the forfeited amount is a capital receipt and thus not taxable. The Tribunal agreed, referencing the Delhi Bench Tribunal's decision in M/s. R.S. Triveni Foods P. Ltd. Vs. Addl. CIT, which held that forfeited amounts related to fully convertible debentures are not taxable under section 56(2)(ix). The Tribunal concluded that since the forfeited amount was received for issuing share capital and not for the transfer of a capital asset, it constitutes a capital receipt and is not liable to tax.

Conclusion:

The Tribunal held that the forfeited amount of Rs. 1,50,35,625/- does not fall within the scope of section 56(2)(ix) and constitutes a capital receipt. Therefore, it is not taxable in the hands of the assessee. The order of the CIT(A) was set aside, and the AO was directed to delete the addition. The appeal filed by the assessee was allowed.