2015 (10) TMI 1011 - HC - Income Tax

Loss incurred through forfeiture of share application money - whether pertained to capital account in disregard of the fact that the acquisition of shares, stocks, bonds, debentures and debenture stock is integral part of the assessee s ordinary business opereation as a non-banking financial company ? - Held that - As we find that none of the authorities the Assessing Officer, CIT(A) and the Tribunal had occasion to deal with the provisions contained in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 which has been relied on behalf of the appellant, the order under challenge cannot be sustained and is set aside and quashed. Accordingly, the matter is remanded before the Assessing Officer who shall pass necessary order within four months from the date of presentation of a copy of the certified copy of this order after giving an opportunity of hearing to the assessee. At the time of hearing, the assessee is at liberty to rely on the provisions contained in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 which shall be dealt with by the Assessing Officer in its order.

Issues:
1. Treatment of loss incurred through forfeiture of share application money by a non-banking financial company as capital loss or business loss.
2. Applicability of provisions contained in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 in determining the nature of the loss.

Analysis:
1. The primary issue in this case was whether the loss incurred by a non-banking financial company through the forfeiture of share application money should be treated as a capital loss or a business loss. The appellant had written off a substantial sum which included part payment for shares of a company that were forfeited due to failure to pay the call money. The assessing officer treated this loss as a capital loss, adding it back to the total income of the company. However, the CIT(A) allowed the appeal, considering the nature of the transaction and the applicability of relevant legal provisions. The CIT(A) directed the assessing officer to treat the loss as bad debt or business loss, emphasizing that the appellant could not acquire any enduring capital asset due to the forfeiture of the payment.

2. The Tribunal, on the other hand, overturned the CIT(A)'s decision and held that the loss should be treated as a capital loss. The Tribunal reasoned that since the investment was made towards the subscription of shares and not in the course of the company's regular business activities of buying and selling shares, it should be considered as an investment rather than a business loss. The Tribunal directed the assessing officer to allow the set off of this loss against any capital gains claimed by the assessee. However, the appellant's advocate argued that the investments made were circulating capital and trading assets, and due to reasons beyond control, the payment could not be made, constituting a trading loss rather than a capital loss.

3. The High Court, after considering the arguments presented, found merit in the appellant's argument regarding the provisions contained in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. The Court noted that none of the authorities involved had considered these provisions, which were crucial in determining the nature of the loss incurred. As a result, the Court set aside the previous orders and remanded the matter back to the assessing officer. The assessing officer was directed to pass a new order within four months, considering the provisions of the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and providing the appellant with an opportunity to present their case based on these provisions.

In conclusion, the High Court's judgment highlighted the importance of considering specific legal provisions and the nature of the transaction in determining the treatment of losses incurred by non-banking financial companies, emphasizing the need for a thorough analysis before classifying such losses as either capital or business losses.

← Previous Next →