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TMI Blog2014 (12) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) by treating the forfeiture of share application money for equity warrants as taxable income, ignoring the claim of the assessee that such forfeiture of application money is in the nature of a capital receipt, lastly, and in ground No. 4, the assessee has challenged the disallowance u/s 14A which has been made while computing book profit u/s 115JB of the act. 3. At the outset, the ld. Counsel for the assessee, Shri Vijay Mehta submitted that ground No. 2, vide which disallowance of Rs. 94,79,290/- u/s 35D of the Act was raised, the same is not pressed. This has been stated vide letter dated 14-10-2013 filed by the assessee. Thus, ground No. 2 of assessee's appeal is treated as dismissed as not pressed. 4. Now, coming to the issue of disallowance u/s 14A, we find that the Revenue is also aggrieved by the order of the ld. CIT(A), insofar as the disallowance relating to interest made u/r 8-D,has been deleted by the ld. CIT(A). Thus, the entire issue of disallowance u/s 14A is being discussed herein below. 5. The assessee company is engaged in the business of hotel, catering and banqueting. It is mainly running a hotel named as "Intercontinental", Marine Drive, Mumbai. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also as on 31-3-2008, the details of availability of such funds were given in the following manner:- Particular 1.3.2009(Rs.) 31.3.2008(Rs.) Net Own Fund Share capital Reserves & Surplus [share capital + Reserves & Surplus] Less: Investments (B) Own funds-Investments(A-B) 17,28,90,120 256,18,19,063 273,47,09,183 54,42,06,259 219,05,02,924 17,28,90,120 239,99,11,579 257,28,01,699 69,15,21,403 188,12,80,296 Thereafter the assessee also gave the details of loan and nature of utilization of loan on interest paid. These were given in the following manner :- Details of Interest paid Nature of utilization of loan Amt (Rs.) Axis Bank Term Loan for construction and renovation of hotel building 24,453 Vijaya Bank VFRL & Term Loan Interest Repairs of Banquets 20,077,332 Vijaya Bank Terms Loan for construction and renovation of hotel building 11,182,836 Kwality Frozen Foods Pvt. Ltd. Loan obtained for capital expenditure 82,464 TML Financial Services Pvt. Ltd. Car Loan 24,115 TATA Capital Car Loan 44,342 Kotak Mahindra Bank Ltd. Car Loan 52,187 ICICI Bank Car loan 21,671 Interest on fixed Deposit Fixed Deposits accepted in earlier years 13,931 IHG Loan Work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also gave what could have been the allocable expenses with regard to the indirect expenses for the purpose of section 14-A. The A.O. without examining the veracity of accounts and also the allocation of expenses, could not resort to disallowance over and above what has allocated. In support of his contention, he relied upon various decisions of the ITAT Mumbai Benches, which has been given in a separate compilation of paper. 9. On the other hand, the ld. D.R., strongly relied upon the order of the A.O. and submitted that the assessee has to establish the nexus between the loan and its utilization. As regards the disallowance on account of indirect expenses by taking 0.5% of average investment, he submitted that Rule 8-D is mandatory and any disallowance which is required to be made has to be made in accordance with the said Rule only. 10. We have heard the rival submissions and also perused the impugned orders of authorities below and also the material placed on record. The assessee is mainly engaged in the hotel business. It has made investment in the shares and mutual funds on which it has earned dividend income of Rs. 4,21,34,042/-. In response to the show cause notice for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) over and above the disallowance made by the assessee is deleted. In the result, ground No. 1 of the Department's appeal is dismissed, whereas the assessee's ground No. 1 is treated as allowed. 12. Ground No. 2 of the Department's appeal and ground No. 4 of the assessee's appeal are common, that is, relating to the disallowance u/s 14A while calculating the book profit u/s 115JB of the Act. 13. As admitted by both the parties, once the disallowance u/s 14A has been made, then the same disallowance shall also form part of the computation while calculating the book profit u/s 115JB of the Act. Thus the disallowance as made by the assessee in its computation of income will be the disallowance while computing the book profit u/s 115JB. Accordingly, ground No. 2 of the Department's appeal as well as ground No. 4 of the assessee's appeal are decided in the aforesaid manner, that is both the grounds are treated as partly allowed. 14. The next major issue in ground No. 3 of the assessee's appeal relates to taxing of share application money for equity warrant of Rs. 8,50,00,889/- as revenue receipt, which was treated by the assessee as capital receipt. 15. Brief facts qua the issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warrant application money which was in the nature of capital receipt, the assessee transferred the forfeiture amounts to the capital reserve. Hence, in the notes and accounts of the audited statement for the year ending 31st March, 2009 i.e A.Y. 2009-10, the said amount was not offered to tax in the return of income and it was treated as capital receipt. 17. In the course of assessment proceedings, in response to the show cause as to why the amount received on account of forfeiture should not be treated as income of the assessee, the assessee submitted that equity warrants are issued for the purpose of obtaining finance for the expansion of the business of the assessee. The assessee was not in the business of raising money through issue of share warrants but in the hotel business, therefore, it has not taken the shares forfeiture amount to the P&L account, but in the capital reserve in the balance sheet. The A.O. held that it is an income taxable under the Act because any income received by the assessee, if it is not exempt under any other provisions of the I.T. Act, then the same is taxable income. For arriving this conclusion, he referred to the decision of Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sheet filed by the assessee, he noted that the amount received on forfeiture of shares was not spent to acquire any fixed assets and therefore he came to the conclusion that though the assessee had received forfeiture amount which were in the nature of capital receipt at the time of receipt, however, these amounts were expended on revenue account and therefore they partake the character of revenue receipts. Thus he held that the decision of Hon'ble Bombay High Court in the case of Solid Containers (supra) will squarely apply to the facts of this case and accordingly upheld the order of the A.O. by treating the said amount as revenue expenditure. 19. Before us, the ld. Counsel for the assessee, Shri Vijay Mehta after explaining the entire facts, submitted that what assessee has received on account of forfeiture of share application money, is in the nature of capital receipt only. The share application money is always a capital receipt and any amount forfeited on account of such share application money is again a capital receipt and it cannot partake the character of a revenue receipt. Even under the Companies Act, the forfeiture of share application money is not credited to P&L a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cintentions and perused the relevant finding given by the authorities below and also material placed on record. For the purpose of adjudicating the issue involved, the relevant facts are being reiterated again to understand the nature of controversy. It is an undisputed fact that during the financial year 2007-08, the assessee company had issued equity warrants convertible into equity shares under preferential issue to the public in accordance with SEBI Guidelines, 2000. Such preferred allotment of equity warrants have also been approved by the shareholders of the company and approval was also granted by BSE. Five allottees subscribed to the equity share against each warrant @ Rs. 283.42 per share. At the time of application, allottees had to pay 10% of the value i.e Rs. 28.34 per shares. The balance amount as per the SEBI Guidelines had to be paid within the period of 18 months i.e the warrant holder had to exercise the right for conversion of warrants into equity shares within 18 months from the date of allotment by paying the balance amount. Out of the five allottees, only one allottee had exercised the option to whom equity shares were issued in the financial year 2007-08 itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated its own money and taken the money into P&L account, therefore, it was held that by assessee's own admission it has become income of the assessee. The ratio decindi laid down by the Hon'ble Supreme Court will not be applicable on the present case, firstly, the assessee has not received any deposits during the course of trading transaction from the customers but in the form of warrant convertible into equity share which was a capital account; secondly, the assessee has not forfeited the amount and transferred to the P&L account, but directly to the capital reserve under the head "warrant forfeited account". The assessee is definitely not in the business of raising money through issue of share warrant and it is not a receipt in the normal course of business. If a particular amount is not received as trading receipt or during the course of trading transaction, it cannot be later on treated as arising out of trading transaction so as to hold as revenue receipt. Thus the decision of the Hon'ble Supreme Court cannot be held to be applicable on the facts of the assessee's case. 23. Now coming to the decision of Hon'ble Bombay High Court in the case of Solid Containers (Supra). The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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