2008 (2) TMI 386 - HC - Income Tax

Loss on account of forfeiture of share application money of the assessee - consequent to the assessee s default in not paying the balance of money on allotment, its right in the shares stood extinguished on its forfeiture - loss suffered by the assessee, i.e, non-recovery of share application money is consequent to the forfeiture of its right in the shares and the same is to be understood to be within the scope and ambit of transfer - Tribunal was justified in holding that it would amount to short-term capital loss to the assessee

Summary

Issues:
1. Whether the loss on account of forfeiture of share application money is a short-term capital loss for the assessment year 1998-99?
2. Whether the forfeited share application money claimed as short-term capital loss is within the meaning of section 2(47) read with section 45 of the Income-tax Act, 1961?

Analysis:
Issue 1:
The appellant, a non-banking financial business, applied for one lakh equity shares of IDBI Limited but received only 89,200 shares. The IDBI Limited demanded a balance sum of Rs. 83,46,000 for the remaining shares. The appellant failed to pay, leading to the forfeiture of the share application money of Rs. 32,50,000. The Assessing Officer disallowed the claimed short-term capital loss as the shares were not allotted to the appellant before forfeiture. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal allowed the appeal, stating that the appellant had acquired rights in the shares upon allotment, even without full payment. The loss due to forfeiture was considered a short-term capital loss.

Issue 2:
The Tribunal's decision was based on the existence of a binding contract between the appellant and IDBI Limited upon allotment. The Tribunal concluded that the appellant acquired rights in the shares upon allotment, regardless of full payment. The extinguishment of these rights due to forfeiture was deemed within the scope of transfer as per section 2(47) of the Act. Citing the Supreme Court's judgment in CIT v. Mrs. Grace Collis, the court emphasized that the definition of 'transfer' in section 2(47) is inclusive and covers events beyond the ordinary sense of transfer. Consequently, the court ruled in favor of the appellant, considering the loss as a short-term capital loss.

In conclusion, the court held that the appellant's loss on forfeiture of share application money constituted a short-term capital loss within the provisions of the Income-tax Act, 1961. The judgment favored the appellant, emphasizing the acquisition of rights upon allotment and the subsequent extinguishment of those rights through forfeiture as falling within the definition of transfer under the Act.