2019 (11) TMI 87 - AT - Income Tax

Expenditure on account of forfeiture of shares - allowable business expenditure - HELD THAT - Transaction would attract the provision of section 2(47) of the Act and the extinguishment of any right therein is a capital loss and cannot be held as a business loss. No merit in the action of the Revenue authorities especially in view of the direction of the Tribunal in the original proceedings while setting aside the issue to the file of the AO. There is no finding by the AO to the direction by the Tribunal that the lower authorities have not adverted to the crucial fact i.e., assessee s investment in Surya Roshni Ltd., a group company by way of subscription to the convertible debentures being held as stock-in-trade not only in this year, but, in earlier year also. Once the shares are held as stock-in-trade as argued before the Tribunal on the earlier occasion for which the Tribunal had restored the issue to the file of the AO for verification of this crucial fact and since there is no material to controvert the above submission of the assessee before the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal. We find the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. In our opinion, the above Circular being clarificatory in nature is retrospective and cannot be held as prospective as argued by the ld. DR. We further find the coordinate Bench of the Tribunal in the case of Cosmos Industries Ltd. 2019 (1) TMI 268 - ITAT DELHI while deciding somewhat identical issue has held that the loss incurred on sale of shares of a subsidiary company is a business loss. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of loss arising from forfeiture of advance paid on convertible warrants (business or capital field).

Issue-Wise Detailed Analysis:

1. Classification of Loss Arising from Forfeiture of Advance Paid on Convertible Warrants (Business or Capital Field):

The assessee, a company engaged in the business of dealing in shares and securities, filed its return of income for the assessment year 2008-09 declaring a loss of ?64,34,736/-. The Assessing Officer (AO) disallowed a claimed business loss of ?41,60,000/- arising from the forfeiture of application money for convertible warrants, treating it instead as a capital loss. The AO's decision was based on several judicial precedents, including CIT vs. Mrs. Grace Collis, DCIT vs. BPL Sanyo Finance Ltd., CIT vs. Chand Ratan Bagri, and Vania Silk Mills Pvt. Ltd. vs. CIT.

The Tribunal had earlier restored the issue to the AO for fresh adjudication, emphasizing the need to consider whether the investment was a business asset held as stock-in-trade. In the set-aside proceedings, the AO distinguished the case from CIT vs. Tainwala Trading & Investment Company Ltd., arguing that the forfeiture was not a commercial decision but a colorable device to avoid tax liability, thus treating it as a capital loss.

The CIT(A) upheld the AO's decision, noting that the treatment in the books of account is not determinative of the real nature of the transaction. The CIT(A) also observed that the investment in Surya Roshni Ltd. was out of the assessee's own funds, indicating an intention to hold the shares as a capital asset. The CIT(A) relied on various decisions to support the view that the forfeiture should be treated as a capital loss.

The assessee appealed, arguing that it was consistently engaged in the business of dealing in shares and securities and that the forfeiture should be treated as a business loss. The assessee relied on CBDT Circular No.6/2016, which clarifies that income from shares treated as stock-in-trade should be considered business income. The assessee also cited several judicial decisions, including Tanvi Financial Services Private Limited vs. ITO, Sakar Lal Balabai vs. ITO, Cosmos Industries Ltd. vs. DCIT, and Hero Cycles Pvt. Ltd. vs. CIT, to support its claim.

The Tribunal found merit in the assessee's arguments, noting that the AO had not followed the Tribunal's earlier directions to verify whether the shares were held as stock-in-trade. The Tribunal also referred to the CBDT Circular No.6/2016, which supports the assessee's claim that the forfeiture should be treated as a business loss. The Tribunal cited the decision in Cosmos Industries Ltd., where the loss on sale of shares of a subsidiary company was held to be a business loss, and other judicial precedents supporting the treatment of such losses as business expenses.

Based on these findings, the Tribunal held that the loss of ?41,60,000/- should be treated as a business loss and allowed the appeal filed by the assessee.

Conclusion:

The Tribunal concluded that the loss arising from the forfeiture of application money for convertible warrants should be treated as a business loss, not a capital loss, as the shares were held as stock-in-trade. The decision of the CIT(A) was set aside, and the assessee's appeal was allowed.