2004 (6) TMI 270 - AT - Income Tax

Summary

Issues Involved:
1. Claim of liability of Rs. 88,69,000 as a debt owed by the assessee.
2. Nexus between the receipt of share application money and its utilization in acquiring immovable property.
3. Applicability of section 2(m) of the Wealth Tax (W.T.) Act to the share application money.
4. Relationship between the company and the applicants for shares under the Companies Act.

Detailed Analysis:

1. Claim of Liability of Rs. 88,69,000 as a Debt Owed by the Assessee:
The primary issue revolves around whether the share application money received by the assessee could be allowed as a liability under section 2(m) of the W.T. Act. The assessee argued that the share application money received was a debt owed as on the relevant valuation dates since shares had not been allotted. The assessee contended that until the allotment of shares, there existed a debtor-creditor relationship between the company and the applicants, making the share application money a debt owed. The assessee relied on various legal precedents and accounting standards to support this claim.

2. Nexus Between Receipt of Share Application Money and Its Utilization in Acquiring Immovable Property:
The assessee received share application money amounting to Rs. 1,08,18,995 from four parties and utilized it for acquiring immovable property. The Tribunal found a direct nexus between the receipt of the share application money and its utilization in acquiring the property. The factual finding recorded by the lower authorities to the contrary was deemed against the material on record and thus, not accepted. The Tribunal concluded that the assessee had clearly proved the nexus between the receipt of share application money and its utilization in acquiring the immovable property.

3. Applicability of Section 2(m) of the Wealth Tax (W.T.) Act:
The Tribunal had to determine if the share application money could be considered a liability under section 2(m) of the W.T. Act. The assessee argued that share application money was a debt owed until shares were allotted, and thus, should be deductible as a liability when computing net wealth. The Tribunal noted that under the W.T. Act, a liability to be deductible should be clear, ascertained, and defined. The Tribunal referred to the Supreme Court's decision in the case of Lucas T.V.S. Ltd., which held that share application money would become a debt only when shares cannot be allotted and the company is required to return the money. The Tribunal concluded that the share application money in this case did not represent a debt in praesenti, as the company intended to allot shares and the contingency of returning the money never arose.

4. Relationship Between the Company and the Applicants for Shares Under the Companies Act:
The Tribunal examined the stages of share issuance under the Companies Act, which include resolutions by the Board of Directors and General Body Meeting, offer of shares, acceptance of the offer by applicants, allotment of shares, issuance of share certificates, and return of allotment with the Registrar of Companies. The Tribunal noted that the assessee had completed the initial stages and intended to allot shares to the applicants. The Tribunal emphasized that the company had utilized the share application money for acquiring properties, indicating that the money was treated as part of the company's capital and not as a debt owed. The Tribunal concluded that the share application money could not be treated as a debt owed by the company since the company had intended to issue shares and the situation requiring the return of the money did not arise.

Conclusion:
The Tribunal confirmed the order of the CIT(A) for the assessment year 1998-99, disallowing the claim of liability. For the assessment year 1997-98, the Tribunal set aside the order of the CIT(A) and restored the order of the Assessing Officer. Consequently, the revenue's appeal for the assessment year 1997-98 was allowed, and the assessee's appeal for the assessment year 1998-99 was dismissed.