Tax on application money
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
20 April 2012
Hello
Company had forfeited application money of Rs. 80 lac due to non payment of Allotment money.
Amount taken at Capital Reserve A/c
Now ITO is saying this amount is Income and tax needs to be payed on it.
Can somebody explain me the provisions.
Company had forfeited application money of Rs. 80 lac due to non payment of Allotment money.
Amount taken at Capital Reserve A/c
Now ITO is saying this amount is Income and tax needs to be payed on it.
Can somebody explain me the provisions.
20 April 2012
Profit on Forfeiture of shares cannot be considered as revenue receipt
Sunita Gupta Share Brokers Limited v. ACIT (ITAT Delhi)- In ‘Multan Electric Supply Co. Ltd..’ (supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in “Asiatic Oxygen Ltd.”(supra), it was observed that Schedule VI – Part I of the Companies Actcontains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under the head ”Reserves and Supply” in the liability side of the balance sheet; that the assessee had credited the amount in respect of the forfeited shares under the head “capital reserve”; that thus, the Companies Act itself treats the profit on forfeiture of shares as capital reserve not available for distribution as evidence; that it could not therefore be held that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company; that it is also correct to contend on behalf of the assessee that “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), has wrongly been applied to the instant case. Therein, the amount had admittedly arisen as a result of a trading transaction, having the character of income. In the present case, however, the receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.
INCOME TAX APPELLATE TRIBUNAL, DELHI
ITA NO. 4188(Del)2010
Assessment year: 2007-08
Sunita Gupta Share Brokers Limited
v.
Assistant Commissioner of Income Tax,
ORDER
PER A.D. JAIN, J.M.
This is assessee’s appeal for the assessment year 2007-08 against the order dated 21.06.2010 passed by the learned CIT(A)-XII, New Delhi. The following grounds have been taken:-
1) (A) “That on the facts and circumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming short term capital gain of ` 2405283/- as income from business and denied the concessional rate of tax u/s 111A i.e. 10% for A.Y. 2007-08.
(B) That the ld. CIT has failed to appreciate the treatment by the company and further failed to consider our reply/note on Treatment of Securities as investment, filed during assessment proceedings.
(C) That the CIT(A) has not rendered justice, while treating short term capital gain as Income from Business, because by introduction of sec. 111A and sec. 10(38) by Finance Act, 2004, the legal position becomes crystal clear.
(D) That the two court cases sited by the AO i.e. G. Venkataswami Naidu & Co., vs. CIT (35 ITR 194) and CIT vs. Sutlej Cotton Mills Supply Agency Ltd., (100 ITR 706) have no bearings on our case because sec. 111A, sec. 10(38) and S.T.T. were not in place at that time.
(E) That the court case quoted by us i.e. “CIT vs. N.C.S .Investment (P) Ltd., (2007) 158 TAXMAN 13 (Mad.) has not been considered. This is fit case to accept short term capital gains.
2) (A) That on the facts and circumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming the brought forward “SHARE APPLCIATION FORFEITURE ACCOUNT” as unclaimed credit and thus, confirming addition for ` 25,00,000/- to the declared income fo A.Y. 2007-08.
(B) That the amount of ` 25,00,000/- which was received as SHARE APPLCATION MONEY in F.Y. 2003-04 and forfeited in December,2004 for non payment of Allotment Money is a CAPITAL RECEIPT and cannot be treated as income of A.Y. 2007-08. How can a capital receipt of previous year, be added to income of current year i.e. A.Y. 2007-08, when the money was received in A.Y. 2004-05 and forfeited in A.Y. 2005-06. (C) That the “SHAREAPPLICATION FORFEITURE ACCOUNT” is a capital receipt and not liable to tax, be deleted in full”
2. The assessee company, during the year, was engaged in the business of dealing in trading in shares and securities. Apropos ground No.1, the AO observed that in the computation of income, the assessee had shown short term capital gain of ` 24,05,283/-; that as per the profit and loss account, the profit on trading of shares had been shown at ` 24,48,900/-; that as per the balance sheet, stock in trade as on 31.3.2006 was of ` 1,08,90,734/-, whereas the investment as on 31.3.2006 was only of ` 341/-; that therefore, it was evident that at the start of the year, the assessee had substantial opening stock in trade, but nominal investment; that however, during the year, the assessee had a heavy volume of dealings in shares; that whereas the assessee had declared the profit derived from dealings in some of the shares as business income, the profit from dealings in other shares had been shown as short term capital gain; and that these had, in fact, been done so as to gain the advantage of differential rate of tax on short term capital gain and business income.
3. The AO asked the assessee to show cause as to why the entire profits be not assessed as business income, since as per the details filed, the transactions shown under short term capital gain were actually business transactions.
4. The assessee filed reply dated 5.10.2009. The AO, however, disagreed with the same, observing that therein, the assessee had made only general conditions rather than answering the specific queries raised; that it had not been answered as to how it was decided that a particular transaction was for earning income under the head of business or capital gain; that in the immediately preceding year, profits earned on share transactions had been shown as business income only; that to earn short term capital gain, the investor waits for some time before selling the securities; that however, in the case of the assessee, sales had been made prior to purchase, in the case of securities, the profits whereof had been shown as short term capital gain; that such transactions could not be termed as investments but were business transactions. The AO relied on the decisions of the Hon’ble Supreme Court in “G. Venkataswami Naidu & Co. v. CIT”, 35 ITR 194(SC), which was reiterated in “CIT v. Sutlej Cotton Mills Supply Agency Limited”, 100 ITR 706(SC). It was held that except utilization of the assessee’s own funds, the assessee did not fulfill any condition being treated as a trader or investor; that the assessee was a trader in the past and the transactions were shown as short term capital gain only so as to take a tax rate advantage; that the intention of the assessee was thus questionable; that the volume of the transactions was worth crores of rupees; that the activity was not incidental in nature; and that even the auditor had, in the tax audit report, described the nature of business of the assessee as “share trading” and not as business. The AO thus held that the assessee company had shown business to the extent of ` 24,05,283/- as short term capital gain.
5. Before the ld. CIT(A), the assessee contended that the AO had erred in denying to the assessee, concessional rate of tax u/s 111-A of the I.T. Act.
6. The ld. CIT(A) did not agree with the contention raised by the assessee. It was held that the assessee was not entitled to the concessional rate of tax u/s 111-A of the Act. It was held that the assessee’s argument regarding treatment of securities as investment notwithstanding, since the assessee had no basis to distinguish between investment and business income, nor had separate books of account being maintained, nor were there two DEMAT accounts in existence, the assessee’s claim regarding income from investment and not from business was being rejected.
7. Before us, it has been contended that the AO was factually wrong in observing that in the immediately preceding assessment year, the profits earned on transaction of shares was declared as business income rather than short term capital gain; that in fact, in the year ended 31..3.06, as per the profit and loss account (copy at page 5 of the Assessee’s Paper Book, “APB” for short), there was a long term capital gain of ` 52,36,576/- and a short term capital gain of ` 85,334.12; that this apart, in the year ended 31.3.05 also, there was a short term capital gain of ` 6,937.85 (as available from APB 53); that the AO has observed that the assessee was a trader in the past, but as wrongly observed that the transactions have been shown as short term capital gain only in order to take tax advantage; that the assessee is a trader as well as investor in shares since 1995 and has been classifying its investment as investment separately, as evident from the balance sheet (APB 52,54 and 19) for the years ending 31.3.05, 31.3.06 and 31.3.07, respectively; that the AO has wrongly observed that the assessee did not answer the specific queries and did not produce documentary evidence as to how it was decided that a particular transaction was for earning income under the head of business or capital gain; that the assessee had filed a detailed Note (APB 56 – 58), answering the specific query raised by the AO, stating that it was based on the intention at the time of making investment and that such intention was evidenced by the treatment in the books of account; that the recording of the transactions in the books of account was the evidence that it was held as investment; that the books of account were audited books of account, certified as reflecting the correct position; that the books of account and treatment in the balance sheet had been filed with the Department every year and the same had been accepted as such; that the assessee company had earned dividend of ` 2,15,862/- on such investments; that the company had not borrowed any funds for the purpose of such investments; that the AO, while observing that to earn short term capital gain, an investor is one who makes investment or purchase of certain kind of securities and sells the same after waiting for some time, fail to consider that investment is investment, whether it is for a long term or for a short term; that the period is not decisive; that where the Legislature has so intended, it has prescribed that if the investment is made for more than one year, it is long term and if it is held for less than one year, it is short term; that it has also not been considered that its intention as recorded in the books of account has disclosed and reflected in the balance sheet and the accounting treatment of the income arising on such income, which is decisive; that the AO has erred in observing that in the case of the assessee, in respect of some securities, profits of which have been shown as short term capital gain, sales have been made prior to purchase; that this factual inaccuracy is evident from the APB 59-60; that none of the shares were sold before purchase; that in the case of shares of Dena Bank, the purchase was on 23.5.06, as evident from the purchase bill (APB 61), whereas the sale was on 25.5.06, as available from the sale bill (APB 62); that it is only a typographical error; that the total profit on this transaction was merely ` 72/-, the purchase being of ` 1,62,400/- and the sale being for ` 1,62,472/-; that the assessee has invested in 15 scrips; that the total short term capital gain is of ` 24,05,824/-, out of which, a sum of ` 9,06,491/- has been earned on investment in shares of BSEL Infra and a sum of ` 8,08,018/- has been earned on investment in the shares of India Cement; that this is evident from the details of the transactions furnished by the assessee, appended as Annexure to the assessment order by the AO; that the contents of this Annexure clearly show that with regard to the other transactions also, the AO is incorrect in observing that the sales were made prior to the purchase; that the AO has not been able to show that the condition of intention does not stand specified in the present case; that the books of account, the transactions, the balance sheet, the factum of there being filed with the Registrar of Companies and the Income Tax Department and their acceptance along with Income Tax returns clearly depicts the intention of the assessee. Moreover, there was no material to state that the assessee did not fulfill the condition of intention; that it has been wrongly observed that the volume of the transactions is high; that the assessee transacted in total 15 scrips during the entire year. The total transactions have been shown to be 36. The total purchase transactions were 41; that the total purchases were of ` 2,55,53,459/-; that it has not been made out as to how the criterion/condition of volume, frequency and consistency did not stand specified; that the assessee had invested its own funds and the value of transactions entered into out of the assessee’s own funds cannot be an issue against the assessee; that moreover, the AO has himself admitted that the condition of own fund having been utilized by the assessee stood specified; that there is no basis to hold that the activity was not an incidental activity; that admittedly, the assessee had utilized its own funds and had invested its surplus funds; that law does not forbid any assessee not to be a trader as well as an investor; that the assessee has kept classifications; that the activity of investment has been continuing over the years; that such investment in shares has been always duly disclosed and accepted in the past; that the assessee had invested its own funds; that the sales were made after the purchases; and that the investment is clearly evidenced by the balance sheet and the profit and loss account.
8. The learned counsel for the assessee has contended that the ld.CIT(A) has erred in confirming the short term capital gain of ` 24,05,283/- as income from business and denied the concessional rate of tax u/s 111-A, failed to consider “CIT v. N.S.S. Investments (P)Ltd.”, 158 Taxman 13(Mad).
9. The learned counsel for the assessee has further placed reliance on the following case laws:-
1. “Gopal Purohit v. JCIT” , 29 SOT 117(Mum);
2. “CIT v. Gopal Purohit”, 228 CTR (Bom) 582;
3. “CIT v. Gopal Purohit”, CC 16802/2010, order of the Hon’bl Supreme Court dated 15.11.2010 (copy filed);
4. “CIT v. N.S.S. Investments (P)Ltd.”, 158 Taxman 13(Mad); and
5. “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 355(Kol).
10. The learned DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that as rightly observed by the AO, the assessee was a trader in the past and it was only in order to take the advantage of tax rate that the transactions were shown as short term capital gain; that thereby, the intention of the assessee obviously became questionable; that a large number of transactions were entered into during the year; that purchase and sale transactions worth crores of rupees were made and so, the volume of transactions was high; that the activity was not incidental in nature; that so much so that in the audited report, the auditor had also described the nature and business of the assessee company as share trader and not as that of investment; that the ld. CIT(A) has correctly held that the assessee not entitled to the concessional rate of tax u/s 111-A of the Act; that the so called investment has not been established to be so; that the assessee remained unable to distinguish between investment and business income; that separate books of account were not maintained; that the assessee also did not have two DEMAT accounts; that in these facts, the ld. CIT(A) has correctly upheld the order passed by the AO on the point at issue.
11. We have heard the parties and have perused the material on record. The issue is as to whether the ld. CIT(A) has indeed gone wrong in confirming the short term capital gain of ` 24,05,283/- as income from business, denying the concessional rate of tax @ 10% for the year under consideration, u/s 111 A of the Act.
12. To treat the short term capital gain of ` 24,05,283/- as business income, the first observation made by the AO in the assessment order was that in the immediately preceding assessment year, the profits earned on transactions of shares had been declared as business income and not as short term capital gains. This has been alleged on behalf of the assessee to be factually wrong. Attention, in this regard, has been drawn to APB 55. APB 55 contains profit and loss account for the year ending 31.3.06. A perusal of this document shows for the year ending 31.3.06:-`
“By profit on investment a/c short term 85,335.12 By profit on investment a/c long term 52,36,576.08”
13. Further, the profit and loss account for the year ending 31.3.05, (APB 53) shows:-
“By profit on investment a/c short term 6,937.85”
14. The contention of the assessee is, therefore, correct. The AO erred factually in observing that in the immediately preceding assessment year, no profits were declared under the head of short term capital gain.
15. The observation of the AO that the assessee was a trader in the past is correct. However, besides being a trader, the assessee has also been an investor in shares. It has been classifying its investment as investment separately. This is clear from the balance sheet for the years ended 31.3.05, 31.3.06 and 31.3.07, respectively (APB 52, 54 and 19).
Moreover, in the Note on treatment of securities and investment, as for the year under consideration, (APB 56-58) it has, inter alia, been contended as follows:-
“The company since beginning (1995) has dealt in capital markets i.e. securities. Long back the company has resolved that the company shall act as INVESTOR in securities and earn capital gains from capital market. The investment in securities as on 31.03.2007 is ` 6019570/-. During the A.Y. 2007-08 the company has earned divided of ` 215862/-, and short term gain on shares of ` 2405283/-, apart from business income of ` 129596/- being income from trading in shares. In A.Y. 206-07 the long term capital gain was `5236576/-. The treatment of securities as INVESTMENT is based on following: -
1. The paramount thing for treatment of securities as investment OR stock is the INTENTION of the company.
2. The second most important factor is treatment of transaction/ i.e. recording of transactions in the books of accounts which makes difference and act as basis of head of income. In our case the capital gain transactions are all recorded in the investment account.
3. The accounts are duly audited by independent Chartered Accountants M/s S.K. Bharti & Co., and the long term gain and short term gain and the investments have been duly certified as per books of accounts. The audited balance sheet is already on record.
4. That in the case of CIT vs. N.S.S. Investments Pvt. Ltd., reported in [2007] 158 TAXMANN 13 (Mad.), the Hon’ble Madras High Court has held as under:”
16. Then, the AO’s observation that the assessee did not answer the specific queries raised and did not produce evidence as to how it was decided that a particular transaction was for earning income under the head of business or capital gain, is also found to be incorrect. The aforesaid Note on treatment on securities and investment (APB 56-58) is certified to have been filed before both the AO, as well as the CIT(A). This Note contains the assessee’s answer to the queries raised by the AO. Therein, it was stated, inter alia, that the decision as to what particular transaction was for earning income under the head of business or capital gain, was based on the intention of the assessee at the time of making the investment; that such intention was evidenced by the treatment in the books of account; that the recording of the transactions in the books of account proved the holding of shares as investment. Further, it was stated that the books of account were duly audited and the books of account along with the balance sheet were duly filed with the Department every year and were accepted as such. It was also stated that the assessee had earned a dividend of ` 2,15,862/- on such investment and that the assessee company had not borrowed any funds for making such investment. Therefore, it is not comprehensible as to how the AO observed that the queries raised were not explained with evidence, to show as to how a particular transaction was for earning income under the head of business or capital gain.
17. The AO has also gone wrong in observing that the assessee was not an investor since an investor sells the securities purchased after waiting for some time whereas the assessee had made sales even prior to the purchase, in the case of some securities. In this regard also, the observation of the AO is not correct. The details of short term investments for assessment year 2006-07, as filed before both the Authorities below, are at APB 59-62. In the case of the shares of Dena Bank, the purchase bill (APB 61) is dated 23.5.06, whereas the sale bill (APB 62) is of 25.5.06. The purchase in this case, therefore, obviously, preceded the sale of shares. The transactions of investments were in the following scrips:-
1. Ansal Buildwell
2. Bank of Maharas
3. BSEL Infrastru
4. Dena Bank
5. Hitachi Home
6. India Cements
7. Indusind Bank
8. Lloyds Steel
9. Mahind Ugain
10. Mercator Lines
11. National Steel
12. Indian Oil
13. Sunflag Iron
14. Tata Metalik
15. Tata Steel and
16. UCO Bank
18. The short term capital gain was of ` 24,05,284/-. Out of this, short term capital gain of ` 9,06,491/- was earned on investment in the shares of BSEL Infra, an amount of ` 8,08,018/- was earned on investment in shares of India Cement. A perusal of the chart at APB 59-60 clearly shows that the AO has not been able to make out that the assessee had made sales of scrips prior to the purchases thereof.
19. Apropos the observation of the AO regarding the assessee’s intention, undisputedly, the assessee has been filing its balance sheet before the Registrar of Companies and the Income Tax Department. The balance sheet and the Income Tax returns filed by the assessee have been accepted. Therefore, no aspersion can be cast on the assessee’s intention and it cannot be said that the assessee had no intention of investment. Pertinently, the AO has himself admitted that the funds utilized were the assessee’s own funds. Merely saying that the volume and frequency of the transactions entered into by the assessee was high, does not make it to be so. The transactions in the whole of the year, were of 16 scrips, as available from the chart at APB 59-60. The total transactions have been shown to be 36. The total purchase transactions were 41. In these facts and figures, the factum of the total purchases being of ` 2,55,53,459/- does not render the volume of the transactions to be high. The transactions are not in consistent with the condition in this regard. Moreover, as accepted by the AO himself, the investment was made by the assessee out of its own funds. Thus, there is no basis of the AO’s observation that the activity was not an incidental activity.
20. The assessee company, right from its inception in 1995, has dealt in securities.
21. In “N.S.S. Investments (P)Ltd.”(supra), it has been held that where the company held shares as stock in trade as well as investment, it could invest its money the way it wanted and that it had a right to decide whether it wanted to hold shares as stock in trade for trading or hold it as investment for dividend income. In the present case, the assessee company has earned dividend of ` 2,15,862/- during the year. This amply indicates the purpose of investment. Moreover, the detail of the dividend earned in the prescribed format also shows the company to be an investor. In “Gopal Purohit v. JCIT”, 29 SOT 117(supra), for assessment year 2005-06, the assessee earned income from transactions in shares. Receipts from transactions settled otherwise than by actual delivery were returned by the assessee as business income, whereas receipts from transactions by actual delivery were returned as capital gain. On the basis of the frequency of the transactions, the AO assessed the entire income as business income. This was held to be not justified, on the rule of consistency, where in the earlier year, the claim of income as shown by the assessee was accepted by the Revenue authorities. It was observed that the only apparent reason that prompted the Revenue authorities for taking a different stand in the year under consideration before the Tribunal was the imposition of Securities Transaction Tax by Finance Act, 2004, exemption of long term capital gain u/s 10(38) and concessional rate of tax at 10% of short term capital gains; that there being no change in the modus operandi of the assessee, the benefits conferred by the Legislative changes could not be taken away; that stakes being high these days, dealings in share transactions necessitates various paraphernalia in order to minimize risk, and therefore, employment of necessary infrastructure by itself again convert an investment activity into a business activity.
22. This decision of the Tribunal was upheld by the Hon’ble Bombay High Court in “CIT v. Gopal Purohit”, 34 DTR 52 (supra) as well as by the Hon’ble Supreme Court.
23. In the present case too, since the assessee has been found to be an investor over the years and also for the year under consideration, the action of the Authorities below is not in consistence with the law. The ld. CIT(A) has erred in not accepting the assessee’s claim of concessional rate of tax u/s 111-A of the Act, in keeping with “Gopal Purohit”(supra).
24. Therefore, the grievance of the assessee by way of ground No.1 is found to be justified and is accepted as such.
25. Apropos ground No.2, the AO observed that in the balance sheet an amount of ` 25 lakhs have been shown on the liability side as share application money forfeiture under the head reserve and surplus. On query in this regard, the assessee filed reply dated 14.10.2009, wherein, it was submitted by way of details of Share Application Money Forfeiture Account, that three persons had applied for shares in the assessee company in the fourth quarter in financial year 2003-04 and had paid ` 25 lakhs towards share application money, as per the application in shares; that in April, 2004, the allotment money was called; that they sought extension, which was allowed; that in spite of extensions, all the three persons could not pay the allotment money even upto 31.12.2004; that the Board of Directors of the assessee company, on 31.12.2004, resolved to forfeit the application money of ` 25 lakhs vide Board Resolution; that the money was
forfeited in asstt.year 2004-05 and the money was outstanding since then; and that the forfeiture of the share application money was a capital receipt in the hands of the assessee company.
26. The AO rejected the assessee’s reply, observing that the amount of ` 25 lakhs shown in the balance sheet as forfeiture of share application money was a revenue receipt which the assessee would be retaining forever; that this amount was apparently unclaimed since long; that had it been debtors, the assessee would have claimed it as bad debts; that in “CIT v. Sundaram Iyengar and Sons Pvt. Ltd.” 222 ITR 344(SC), it has been held that unclaimed balances in deposits are liable to tax, being the claims barred by limitation and that though they did not have the character of income at the time of receipt, the lapse of time might have definite trade surplus; that the details filed by the assessee might prove the genuineness of the receipt of the original share application money, but it did not have
any barring on the taxability of the amount involved, if the same have been forfeited; that further, it was evident from the documents filed by the assessee that the shares have been allotted to the respective share applicants as partly paid up, but due to the non-payment of the allotment money, the shares were forfeited; that in the balance sheet, it was not mentioned that partly paid up shares had ever been issued; that from this, it appeared that the documents filed by the assessee in the assessment proceedings had been created after being confronted by the AO; and that anyhow, the assessee had failed to explain as to how the amount of ` 25 lakhs was not income in the hands of the assessee. It was in this manner that the AO treated the amount of ` 25 lakhs as taxable in the hands of the assessee and added it to the total income of the assessee for the year under consideration.
27. Before the ld. CIT(A), the assessee submitted that part payment of allotment money being 20% of the total commitment made by cheque, as follows:-
`
a) Surinder Kumar Batra 4,00,000/-
b) Veena Bhatia 20,00,000/-
c) Dr. Ravi Kapoor 1,00,000/-
28. The ld. CIT(A) observed that the documents submitted by the assessee showed that all the letters of extension of time for payments were not on letter head and appeared to be in the same fund with similar type of signature, bore no stamp and were apparently self serving documents; that the copy of cheque did not establish the source of the alleged investment by the three concerned people; that it was the assessee’s onus to prove the genuineness and capacity of the investor; that copy of bank account of Surinder Kumar Batra showed that investment of ` 4,00,000/- had been made on 13.3.04 and a sum of rupees an almost equivalent amount had been deposited in his bank account; that no books of account or documentary evidence had been produced to support the capacity of
Surinder Kumar Batra to purchase shares on part payments of `4,00,000/-; that the photo copy of the Income Tax return receipt for the relevant year in the case of Surinder Kumar Batra showed ` 1,68,466/- and a person having salary income and filing return of ` 1,68,466/- surely could not make payment of ` 4,00,000/- and that too a part payment, for share application money; that likewise, Dr. Ravi Kapoor had filed return of salary of ` 1,80,000/- and some house property and capital gain; that since his pass book had not been produced, the source of the amount did not stand established; and that similarly, the bank pass book of Smt. Veena Bhatia had not been filed, due to which, the claim that she had capacity to pay the amount could not be accepted. In this manner, the ld. CIT(A) confirmed the action of the AO.
29. On this issue, it has been contended on behalf of the assessee that it is a case where changing the allegations originally levelled against the assessee, the ld. CIT(A) has upheld the AO’s action on the ground that the assessee has failed to prove the credit worthiness of the share holders,which is unsustainable in law; that more over, addition u/s 68 of the I.T. Act can be made only in the year in which the money is credited in the books of account of the assessee; that undeniably, in the year under consideration, there is no receipt; that the share capital was received in the financial year 2003-04 (attention in this regard has been drawn to APB 52); that further, the assessee had submitted all the evidences in support of the identity, credit worthiness and genuineness of the share applicants; that these comprises copies of application, cheque, confirmation, Income Tax
return, bank statement, PAN and even the request for extension of time for payment of the balance money (APB 28-50); that all these documents duly prove the genuineness of the transactions; that even otherwise, the forfeiture was made in financial year 2004-05, as is evident from the assessee’s balance sheet as on 31.3.2005 (APB 52); that in financial year 2003-04, a sum of ` 75 lakhs was received , against which, shares of ` 6,25,000/- were allotted and a sum of ` 43,75,000/- was adjusted against share premium; that the balance of ` 25,00,000/- was forfeited; that this forfeiture was done in financial year 2004-05; that there was no change in financial year 2005-06, as evident from the balance sheet as on 31.3.2006 (APB 54); that as available from the balance sheet as on 31.3.07 (APB 19), there has been no change in the current financial year, i.e., assessment year 2007-08 also; that even if the forfeiture, which occurred in financial year 2004-05, is alleged as a revenue receipt, which cannot be taxed in the current financial year; that moreover, the forfeiture of shares cannot be considered as revenue receipt, as per “Multan Electric Supply Co. Ltd.,” In Re ,13 ITR 457(Lahore) as discussed in “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 359(Kol); that the decision in “CIT v. Sundaram Iyengar and Sons Pvt. Ltd.” 222 ITR 344(SC) (supra), has wrongly been relied on; that therein, the issue was regarding the amount received from the customers in the case of a trading transaction and so, “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), is not applicable on facts; that herein, the receipts are on capital account, having been received on account of share capital and have no relevance with trade; and that that being so, the receipts cannot be treated as income.
30. The ld. DR has strongly supported the impugned order in this regard also, contending that there is nothing barring the CIT(A) to uphold the assessment order on reasons other than those recorded in the assessment order; that in the present case, the assessee has miserably failed to prove any of the ingredients of section 68 of the I.T. Act in regard to any of the alleged share applicants, i.e., the Surinder Kumar Batra, Veena Bhatia and Dr. Ravi Kapoor; that therefore, there is no force in the grievance sought to be raised by the assessee in this regard.
31. We have considered the rival submissions in the light of the material produced with regard to this issue. Undisputedly, the amount added was not received during the year under consideration. For this short reason itself, the addition is unsustainable. Further, the forfeiture of the share application money came about in financial yearn 2004-05, as is evident from the balance sheet of the assessee as on 31.3.2005 (APB 52). A sum of ` 75 lakhs was received in financial year 2003-04. The allotment of shares of ` 6,25,000/- was made against this receipt. A sum of ` 43,75,000/- was adjusted against share premium. The balance of ` 25,00,000/- was forfeited. The relevant entries in the aforesaid balance sheet are as under:- Liabilities Current Yr. Amount Previous Yr. Amount C RESERVE & SURPLUS
1. Share Application Money
2. Share Premium
3. Share Application Money forfeiture 4,375,000.00 2,500,000.00 7,500,000.00
32. The balance sheet as on 31.3.2006 (APB 54) shows no change in this regard. Similar is the position depicted by the balance sheet as on 31.3.2007 (APB 19). Thus, there has been no change in the current financial year, i.e. financial year 2006-07, relevant to assessment year 2007-08.
33. In the above position, even if the forfeiture is to be taken as a revenue receipt, since it came about in financial year 2004-05, it cannot be taxed in the current financial year.
34. It is, however, entirely another matter, that forfeiture of shares cannot be considered as a revenue receipt. This has been settled by “Multan Electric Supply Co. Ltd.”, 13 ITR 457(Lahore) (supra), which has been considered and discussed by the Tribunal in “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 359(Kol),(supra). In “Multan Electric Supply Co. Ltd..”(supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in “Asiatic Oxygen Ltd.”(supra), it was observed that Schedule VI – Part I of the Companies Act contains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under the head ”Reserves and Supply” in the liability side of the balance sheet; that the assessee had credited the amount in respect of the forfeited shares under the head “capital reserve”; that thus, the Companies Act itself treats the profit on forfeiture of shares as capital reserve not available for distribution as evidence; that it could not therefore be held that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company; that it is also correct to contend on behalf of the assessee that “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), has wrongly been applied to the instant case. Therein, the amount had admittedly arisen as a result of a trading transaction, having the character of income. In the present case, however, the receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.
35. From the above discussion, the grievance of the assessee by way of ground No.2 is also found to be justified and is accepted as such.
36. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 07.12.2011.
Sunita Gupta Share Brokers Limited v. ACIT (ITAT Delhi)- In ‘Multan Electric Supply Co. Ltd..’ (supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in “Asiatic Oxygen Ltd.”(supra), it was observed that Schedule VI – Part I of the Companies Actcontains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under the head ”Reserves and Supply” in the liability side of the balance sheet; that the assessee had credited the amount in respect of the forfeited shares under the head “capital reserve”; that thus, the Companies Act itself treats the profit on forfeiture of shares as capital reserve not available for distribution as evidence; that it could not therefore be held that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company; that it is also correct to contend on behalf of the assessee that “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), has wrongly been applied to the instant case. Therein, the amount had admittedly arisen as a result of a trading transaction, having the character of income. In the present case, however, the receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.
INCOME TAX APPELLATE TRIBUNAL, DELHI
ITA NO. 4188(Del)2010
Assessment year: 2007-08
Sunita Gupta Share Brokers Limited
v.
Assistant Commissioner of Income Tax,
ORDER
PER A.D. JAIN, J.M.
This is assessee’s appeal for the assessment year 2007-08 against the order dated 21.06.2010 passed by the learned CIT(A)-XII, New Delhi. The following grounds have been taken:-
1) (A) “That on the facts and circumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming short term capital gain of ` 2405283/- as income from business and denied the concessional rate of tax u/s 111A i.e. 10% for A.Y. 2007-08.
(B) That the ld. CIT has failed to appreciate the treatment by the company and further failed to consider our reply/note on Treatment of Securities as investment, filed during assessment proceedings.
(C) That the CIT(A) has not rendered justice, while treating short term capital gain as Income from Business, because by introduction of sec. 111A and sec. 10(38) by Finance Act, 2004, the legal position becomes crystal clear.
(D) That the two court cases sited by the AO i.e. G. Venkataswami Naidu & Co., vs. CIT (35 ITR 194) and CIT vs. Sutlej Cotton Mills Supply Agency Ltd., (100 ITR 706) have no bearings on our case because sec. 111A, sec. 10(38) and S.T.T. were not in place at that time.
(E) That the court case quoted by us i.e. “CIT vs. N.C.S .Investment (P) Ltd., (2007) 158 TAXMAN 13 (Mad.) has not been considered. This is fit case to accept short term capital gains.
2) (A) That on the facts and circumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming the brought forward “SHARE APPLCIATION FORFEITURE ACCOUNT” as unclaimed credit and thus, confirming addition for ` 25,00,000/- to the declared income fo A.Y. 2007-08.
(B) That the amount of ` 25,00,000/- which was received as SHARE APPLCATION MONEY in F.Y. 2003-04 and forfeited in December,2004 for non payment of Allotment Money is a CAPITAL RECEIPT and cannot be treated as income of A.Y. 2007-08. How can a capital receipt of previous year, be added to income of current year i.e. A.Y. 2007-08, when the money was received in A.Y. 2004-05 and forfeited in A.Y. 2005-06. (C) That the “SHAREAPPLICATION FORFEITURE ACCOUNT” is a capital receipt and not liable to tax, be deleted in full”
2. The assessee company, during the year, was engaged in the business of dealing in trading in shares and securities. Apropos ground No.1, the AO observed that in the computation of income, the assessee had shown short term capital gain of ` 24,05,283/-; that as per the profit and loss account, the profit on trading of shares had been shown at ` 24,48,900/-; that as per the balance sheet, stock in trade as on 31.3.2006 was of ` 1,08,90,734/-, whereas the investment as on 31.3.2006 was only of ` 341/-; that therefore, it was evident that at the start of the year, the assessee had substantial opening stock in trade, but nominal investment; that however, during the year, the assessee had a heavy volume of dealings in shares; that whereas the assessee had declared the profit derived from dealings in some of the shares as business income, the profit from dealings in other shares had been shown as short term capital gain; and that these had, in fact, been done so as to gain the advantage of differential rate of tax on short term capital gain and business income.
3. The AO asked the assessee to show cause as to why the entire profits be not assessed as business income, since as per the details filed, the transactions shown under short term capital gain were actually business transactions.
4. The assessee filed reply dated 5.10.2009. The AO, however, disagreed with the same, observing that therein, the assessee had made only general conditions rather than answering the specific queries raised; that it had not been answered as to how it was decided that a particular transaction was for earning income under the head of business or capital gain; that in the immediately preceding year, profits earned on share transactions had been shown as business income only; that to earn short term capital gain, the investor waits for some time before selling the securities; that however, in the case of the assessee, sales had been made prior to purchase, in the case of securities, the profits whereof had been shown as short term capital gain; that such transactions could not be termed as investments but were business transactions. The AO relied on the decisions of the Hon’ble Supreme Court in “G. Venkataswami Naidu & Co. v. CIT”, 35 ITR 194(SC), which was reiterated in “CIT v. Sutlej Cotton Mills Supply Agency Limited”, 100 ITR 706(SC). It was held that except utilization of the assessee’s own funds, the assessee did not fulfill any condition being treated as a trader or investor; that the assessee was a trader in the past and the transactions were shown as short term capital gain only so as to take a tax rate advantage; that the intention of the assessee was thus questionable; that the volume of the transactions was worth crores of rupees; that the activity was not incidental in nature; and that even the auditor had, in the tax audit report, described the nature of business of the assessee as “share trading” and not as business. The AO thus held that the assessee company had shown business to the extent of ` 24,05,283/- as short term capital gain.
5. Before the ld. CIT(A), the assessee contended that the AO had erred in denying to the assessee, concessional rate of tax u/s 111-A of the I.T. Act.
6. The ld. CIT(A) did not agree with the contention raised by the assessee. It was held that the assessee was not entitled to the concessional rate of tax u/s 111-A of the Act. It was held that the assessee’s argument regarding treatment of securities as investment notwithstanding, since the assessee had no basis to distinguish between investment and business income, nor had separate books of account being maintained, nor were there two DEMAT accounts in existence, the assessee’s claim regarding income from investment and not from business was being rejected.
7. Before us, it has been contended that the AO was factually wrong in observing that in the immediately preceding assessment year, the profits earned on transaction of shares was declared as business income rather than short term capital gain; that in fact, in the year ended 31..3.06, as per the profit and loss account (copy at page 5 of the Assessee’s Paper Book, “APB” for short), there was a long term capital gain of ` 52,36,576/- and a short term capital gain of ` 85,334.12; that this apart, in the year ended 31.3.05 also, there was a short term capital gain of ` 6,937.85 (as available from APB 53); that the AO has observed that the assessee was a trader in the past, but as wrongly observed that the transactions have been shown as short term capital gain only in order to take tax advantage; that the assessee is a trader as well as investor in shares since 1995 and has been classifying its investment as investment separately, as evident from the balance sheet (APB 52,54 and 19) for the years ending 31.3.05, 31.3.06 and 31.3.07, respectively; that the AO has wrongly observed that the assessee did not answer the specific queries and did not produce documentary evidence as to how it was decided that a particular transaction was for earning income under the head of business or capital gain; that the assessee had filed a detailed Note (APB 56 – 58), answering the specific query raised by the AO, stating that it was based on the intention at the time of making investment and that such intention was evidenced by the treatment in the books of account; that the recording of the transactions in the books of account was the evidence that it was held as investment; that the books of account were audited books of account, certified as reflecting the correct position; that the books of account and treatment in the balance sheet had been filed with the Department every year and the same had been accepted as such; that the assessee company had earned dividend of ` 2,15,862/- on such investments; that the company had not borrowed any funds for the purpose of such investments; that the AO, while observing that to earn short term capital gain, an investor is one who makes investment or purchase of certain kind of securities and sells the same after waiting for some time, fail to consider that investment is investment, whether it is for a long term or for a short term; that the period is not decisive; that where the Legislature has so intended, it has prescribed that if the investment is made for more than one year, it is long term and if it is held for less than one year, it is short term; that it has also not been considered that its intention as recorded in the books of account has disclosed and reflected in the balance sheet and the accounting treatment of the income arising on such income, which is decisive; that the AO has erred in observing that in the case of the assessee, in respect of some securities, profits of which have been shown as short term capital gain, sales have been made prior to purchase; that this factual inaccuracy is evident from the APB 59-60; that none of the shares were sold before purchase; that in the case of shares of Dena Bank, the purchase was on 23.5.06, as evident from the purchase bill (APB 61), whereas the sale was on 25.5.06, as available from the sale bill (APB 62); that it is only a typographical error; that the total profit on this transaction was merely ` 72/-, the purchase being of ` 1,62,400/- and the sale being for ` 1,62,472/-; that the assessee has invested in 15 scrips; that the total short term capital gain is of ` 24,05,824/-, out of which, a sum of ` 9,06,491/- has been earned on investment in shares of BSEL Infra and a sum of ` 8,08,018/- has been earned on investment in the shares of India Cement; that this is evident from the details of the transactions furnished by the assessee, appended as Annexure to the assessment order by the AO; that the contents of this Annexure clearly show that with regard to the other transactions also, the AO is incorrect in observing that the sales were made prior to the purchase; that the AO has not been able to show that the condition of intention does not stand specified in the present case; that the books of account, the transactions, the balance sheet, the factum of there being filed with the Registrar of Companies and the Income Tax Department and their acceptance along with Income Tax returns clearly depicts the intention of the assessee. Moreover, there was no material to state that the assessee did not fulfill the condition of intention; that it has been wrongly observed that the volume of the transactions is high; that the assessee transacted in total 15 scrips during the entire year. The total transactions have been shown to be 36. The total purchase transactions were 41; that the total purchases were of ` 2,55,53,459/-; that it has not been made out as to how the criterion/condition of volume, frequency and consistency did not stand specified; that the assessee had invested its own funds and the value of transactions entered into out of the assessee’s own funds cannot be an issue against the assessee; that moreover, the AO has himself admitted that the condition of own fund having been utilized by the assessee stood specified; that there is no basis to hold that the activity was not an incidental activity; that admittedly, the assessee had utilized its own funds and had invested its surplus funds; that law does not forbid any assessee not to be a trader as well as an investor; that the assessee has kept classifications; that the activity of investment has been continuing over the years; that such investment in shares has been always duly disclosed and accepted in the past; that the assessee had invested its own funds; that the sales were made after the purchases; and that the investment is clearly evidenced by the balance sheet and the profit and loss account.
8. The learned counsel for the assessee has contended that the ld.CIT(A) has erred in confirming the short term capital gain of ` 24,05,283/- as income from business and denied the concessional rate of tax u/s 111-A, failed to consider “CIT v. N.S.S. Investments (P)Ltd.”, 158 Taxman 13(Mad).
9. The learned counsel for the assessee has further placed reliance on the following case laws:-
1. “Gopal Purohit v. JCIT” , 29 SOT 117(Mum);
2. “CIT v. Gopal Purohit”, 228 CTR (Bom) 582;
3. “CIT v. Gopal Purohit”, CC 16802/2010, order of the Hon’bl Supreme Court dated 15.11.2010 (copy filed);
4. “CIT v. N.S.S. Investments (P)Ltd.”, 158 Taxman 13(Mad); and
5. “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 355(Kol).
10. The learned DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that as rightly observed by the AO, the assessee was a trader in the past and it was only in order to take the advantage of tax rate that the transactions were shown as short term capital gain; that thereby, the intention of the assessee obviously became questionable; that a large number of transactions were entered into during the year; that purchase and sale transactions worth crores of rupees were made and so, the volume of transactions was high; that the activity was not incidental in nature; that so much so that in the audited report, the auditor had also described the nature and business of the assessee company as share trader and not as that of investment; that the ld. CIT(A) has correctly held that the assessee not entitled to the concessional rate of tax u/s 111-A of the Act; that the so called investment has not been established to be so; that the assessee remained unable to distinguish between investment and business income; that separate books of account were not maintained; that the assessee also did not have two DEMAT accounts; that in these facts, the ld. CIT(A) has correctly upheld the order passed by the AO on the point at issue.
11. We have heard the parties and have perused the material on record. The issue is as to whether the ld. CIT(A) has indeed gone wrong in confirming the short term capital gain of ` 24,05,283/- as income from business, denying the concessional rate of tax @ 10% for the year under consideration, u/s 111 A of the Act.
12. To treat the short term capital gain of ` 24,05,283/- as business income, the first observation made by the AO in the assessment order was that in the immediately preceding assessment year, the profits earned on transactions of shares had been declared as business income and not as short term capital gains. This has been alleged on behalf of the assessee to be factually wrong. Attention, in this regard, has been drawn to APB 55. APB 55 contains profit and loss account for the year ending 31.3.06. A perusal of this document shows for the year ending 31.3.06:-`
“By profit on investment a/c short term 85,335.12 By profit on investment a/c long term 52,36,576.08”
13. Further, the profit and loss account for the year ending 31.3.05, (APB 53) shows:-
“By profit on investment a/c short term 6,937.85”
14. The contention of the assessee is, therefore, correct. The AO erred factually in observing that in the immediately preceding assessment year, no profits were declared under the head of short term capital gain.
15. The observation of the AO that the assessee was a trader in the past is correct. However, besides being a trader, the assessee has also been an investor in shares. It has been classifying its investment as investment separately. This is clear from the balance sheet for the years ended 31.3.05, 31.3.06 and 31.3.07, respectively (APB 52, 54 and 19).
Moreover, in the Note on treatment of securities and investment, as for the year under consideration, (APB 56-58) it has, inter alia, been contended as follows:-
“The company since beginning (1995) has dealt in capital markets i.e. securities. Long back the company has resolved that the company shall act as INVESTOR in securities and earn capital gains from capital market. The investment in securities as on 31.03.2007 is ` 6019570/-. During the A.Y. 2007-08 the company has earned divided of ` 215862/-, and short term gain on shares of ` 2405283/-, apart from business income of ` 129596/- being income from trading in shares. In A.Y. 206-07 the long term capital gain was `5236576/-. The treatment of securities as INVESTMENT is based on following: -
1. The paramount thing for treatment of securities as investment OR stock is the INTENTION of the company.
2. The second most important factor is treatment of transaction/ i.e. recording of transactions in the books of accounts which makes difference and act as basis of head of income. In our case the capital gain transactions are all recorded in the investment account.
3. The accounts are duly audited by independent Chartered Accountants M/s S.K. Bharti & Co., and the long term gain and short term gain and the investments have been duly certified as per books of accounts. The audited balance sheet is already on record.
4. That in the case of CIT vs. N.S.S. Investments Pvt. Ltd., reported in [2007] 158 TAXMANN 13 (Mad.), the Hon’ble Madras High Court has held as under:”
16. Then, the AO’s observation that the assessee did not answer the specific queries raised and did not produce evidence as to how it was decided that a particular transaction was for earning income under the head of business or capital gain, is also found to be incorrect. The aforesaid Note on treatment on securities and investment (APB 56-58) is certified to have been filed before both the AO, as well as the CIT(A). This Note contains the assessee’s answer to the queries raised by the AO. Therein, it was stated, inter alia, that the decision as to what particular transaction was for earning income under the head of business or capital gain, was based on the intention of the assessee at the time of making the investment; that such intention was evidenced by the treatment in the books of account; that the recording of the transactions in the books of account proved the holding of shares as investment. Further, it was stated that the books of account were duly audited and the books of account along with the balance sheet were duly filed with the Department every year and were accepted as such. It was also stated that the assessee had earned a dividend of ` 2,15,862/- on such investment and that the assessee company had not borrowed any funds for making such investment. Therefore, it is not comprehensible as to how the AO observed that the queries raised were not explained with evidence, to show as to how a particular transaction was for earning income under the head of business or capital gain.
17. The AO has also gone wrong in observing that the assessee was not an investor since an investor sells the securities purchased after waiting for some time whereas the assessee had made sales even prior to the purchase, in the case of some securities. In this regard also, the observation of the AO is not correct. The details of short term investments for assessment year 2006-07, as filed before both the Authorities below, are at APB 59-62. In the case of the shares of Dena Bank, the purchase bill (APB 61) is dated 23.5.06, whereas the sale bill (APB 62) is of 25.5.06. The purchase in this case, therefore, obviously, preceded the sale of shares. The transactions of investments were in the following scrips:-
1. Ansal Buildwell
2. Bank of Maharas
3. BSEL Infrastru
4. Dena Bank
5. Hitachi Home
6. India Cements
7. Indusind Bank
8. Lloyds Steel
9. Mahind Ugain
10. Mercator Lines
11. National Steel
12. Indian Oil
13. Sunflag Iron
14. Tata Metalik
15. Tata Steel and
16. UCO Bank
18. The short term capital gain was of ` 24,05,284/-. Out of this, short term capital gain of ` 9,06,491/- was earned on investment in the shares of BSEL Infra, an amount of ` 8,08,018/- was earned on investment in shares of India Cement. A perusal of the chart at APB 59-60 clearly shows that the AO has not been able to make out that the assessee had made sales of scrips prior to the purchases thereof.
19. Apropos the observation of the AO regarding the assessee’s intention, undisputedly, the assessee has been filing its balance sheet before the Registrar of Companies and the Income Tax Department. The balance sheet and the Income Tax returns filed by the assessee have been accepted. Therefore, no aspersion can be cast on the assessee’s intention and it cannot be said that the assessee had no intention of investment. Pertinently, the AO has himself admitted that the funds utilized were the assessee’s own funds. Merely saying that the volume and frequency of the transactions entered into by the assessee was high, does not make it to be so. The transactions in the whole of the year, were of 16 scrips, as available from the chart at APB 59-60. The total transactions have been shown to be 36. The total purchase transactions were 41. In these facts and figures, the factum of the total purchases being of ` 2,55,53,459/- does not render the volume of the transactions to be high. The transactions are not in consistent with the condition in this regard. Moreover, as accepted by the AO himself, the investment was made by the assessee out of its own funds. Thus, there is no basis of the AO’s observation that the activity was not an incidental activity.
20. The assessee company, right from its inception in 1995, has dealt in securities.
21. In “N.S.S. Investments (P)Ltd.”(supra), it has been held that where the company held shares as stock in trade as well as investment, it could invest its money the way it wanted and that it had a right to decide whether it wanted to hold shares as stock in trade for trading or hold it as investment for dividend income. In the present case, the assessee company has earned dividend of ` 2,15,862/- during the year. This amply indicates the purpose of investment. Moreover, the detail of the dividend earned in the prescribed format also shows the company to be an investor. In “Gopal Purohit v. JCIT”, 29 SOT 117(supra), for assessment year 2005-06, the assessee earned income from transactions in shares. Receipts from transactions settled otherwise than by actual delivery were returned by the assessee as business income, whereas receipts from transactions by actual delivery were returned as capital gain. On the basis of the frequency of the transactions, the AO assessed the entire income as business income. This was held to be not justified, on the rule of consistency, where in the earlier year, the claim of income as shown by the assessee was accepted by the Revenue authorities. It was observed that the only apparent reason that prompted the Revenue authorities for taking a different stand in the year under consideration before the Tribunal was the imposition of Securities Transaction Tax by Finance Act, 2004, exemption of long term capital gain u/s 10(38) and concessional rate of tax at 10% of short term capital gains; that there being no change in the modus operandi of the assessee, the benefits conferred by the Legislative changes could not be taken away; that stakes being high these days, dealings in share transactions necessitates various paraphernalia in order to minimize risk, and therefore, employment of necessary infrastructure by itself again convert an investment activity into a business activity.
22. This decision of the Tribunal was upheld by the Hon’ble Bombay High Court in “CIT v. Gopal Purohit”, 34 DTR 52 (supra) as well as by the Hon’ble Supreme Court.
23. In the present case too, since the assessee has been found to be an investor over the years and also for the year under consideration, the action of the Authorities below is not in consistence with the law. The ld. CIT(A) has erred in not accepting the assessee’s claim of concessional rate of tax u/s 111-A of the Act, in keeping with “Gopal Purohit”(supra).
24. Therefore, the grievance of the assessee by way of ground No.1 is found to be justified and is accepted as such.
25. Apropos ground No.2, the AO observed that in the balance sheet an amount of ` 25 lakhs have been shown on the liability side as share application money forfeiture under the head reserve and surplus. On query in this regard, the assessee filed reply dated 14.10.2009, wherein, it was submitted by way of details of Share Application Money Forfeiture Account, that three persons had applied for shares in the assessee company in the fourth quarter in financial year 2003-04 and had paid ` 25 lakhs towards share application money, as per the application in shares; that in April, 2004, the allotment money was called; that they sought extension, which was allowed; that in spite of extensions, all the three persons could not pay the allotment money even upto 31.12.2004; that the Board of Directors of the assessee company, on 31.12.2004, resolved to forfeit the application money of ` 25 lakhs vide Board Resolution; that the money was
forfeited in asstt.year 2004-05 and the money was outstanding since then; and that the forfeiture of the share application money was a capital receipt in the hands of the assessee company.
26. The AO rejected the assessee’s reply, observing that the amount of ` 25 lakhs shown in the balance sheet as forfeiture of share application money was a revenue receipt which the assessee would be retaining forever; that this amount was apparently unclaimed since long; that had it been debtors, the assessee would have claimed it as bad debts; that in “CIT v. Sundaram Iyengar and Sons Pvt. Ltd.” 222 ITR 344(SC), it has been held that unclaimed balances in deposits are liable to tax, being the claims barred by limitation and that though they did not have the character of income at the time of receipt, the lapse of time might have definite trade surplus; that the details filed by the assessee might prove the genuineness of the receipt of the original share application money, but it did not have
any barring on the taxability of the amount involved, if the same have been forfeited; that further, it was evident from the documents filed by the assessee that the shares have been allotted to the respective share applicants as partly paid up, but due to the non-payment of the allotment money, the shares were forfeited; that in the balance sheet, it was not mentioned that partly paid up shares had ever been issued; that from this, it appeared that the documents filed by the assessee in the assessment proceedings had been created after being confronted by the AO; and that anyhow, the assessee had failed to explain as to how the amount of ` 25 lakhs was not income in the hands of the assessee. It was in this manner that the AO treated the amount of ` 25 lakhs as taxable in the hands of the assessee and added it to the total income of the assessee for the year under consideration.
27. Before the ld. CIT(A), the assessee submitted that part payment of allotment money being 20% of the total commitment made by cheque, as follows:-
`
a) Surinder Kumar Batra 4,00,000/-
b) Veena Bhatia 20,00,000/-
c) Dr. Ravi Kapoor 1,00,000/-
28. The ld. CIT(A) observed that the documents submitted by the assessee showed that all the letters of extension of time for payments were not on letter head and appeared to be in the same fund with similar type of signature, bore no stamp and were apparently self serving documents; that the copy of cheque did not establish the source of the alleged investment by the three concerned people; that it was the assessee’s onus to prove the genuineness and capacity of the investor; that copy of bank account of Surinder Kumar Batra showed that investment of ` 4,00,000/- had been made on 13.3.04 and a sum of rupees an almost equivalent amount had been deposited in his bank account; that no books of account or documentary evidence had been produced to support the capacity of
Surinder Kumar Batra to purchase shares on part payments of `4,00,000/-; that the photo copy of the Income Tax return receipt for the relevant year in the case of Surinder Kumar Batra showed ` 1,68,466/- and a person having salary income and filing return of ` 1,68,466/- surely could not make payment of ` 4,00,000/- and that too a part payment, for share application money; that likewise, Dr. Ravi Kapoor had filed return of salary of ` 1,80,000/- and some house property and capital gain; that since his pass book had not been produced, the source of the amount did not stand established; and that similarly, the bank pass book of Smt. Veena Bhatia had not been filed, due to which, the claim that she had capacity to pay the amount could not be accepted. In this manner, the ld. CIT(A) confirmed the action of the AO.
29. On this issue, it has been contended on behalf of the assessee that it is a case where changing the allegations originally levelled against the assessee, the ld. CIT(A) has upheld the AO’s action on the ground that the assessee has failed to prove the credit worthiness of the share holders,which is unsustainable in law; that more over, addition u/s 68 of the I.T. Act can be made only in the year in which the money is credited in the books of account of the assessee; that undeniably, in the year under consideration, there is no receipt; that the share capital was received in the financial year 2003-04 (attention in this regard has been drawn to APB 52); that further, the assessee had submitted all the evidences in support of the identity, credit worthiness and genuineness of the share applicants; that these comprises copies of application, cheque, confirmation, Income Tax
return, bank statement, PAN and even the request for extension of time for payment of the balance money (APB 28-50); that all these documents duly prove the genuineness of the transactions; that even otherwise, the forfeiture was made in financial year 2004-05, as is evident from the assessee’s balance sheet as on 31.3.2005 (APB 52); that in financial year 2003-04, a sum of ` 75 lakhs was received , against which, shares of ` 6,25,000/- were allotted and a sum of ` 43,75,000/- was adjusted against share premium; that the balance of ` 25,00,000/- was forfeited; that this forfeiture was done in financial year 2004-05; that there was no change in financial year 2005-06, as evident from the balance sheet as on 31.3.2006 (APB 54); that as available from the balance sheet as on 31.3.07 (APB 19), there has been no change in the current financial year, i.e., assessment year 2007-08 also; that even if the forfeiture, which occurred in financial year 2004-05, is alleged as a revenue receipt, which cannot be taxed in the current financial year; that moreover, the forfeiture of shares cannot be considered as revenue receipt, as per “Multan Electric Supply Co. Ltd.,” In Re ,13 ITR 457(Lahore) as discussed in “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 359(Kol); that the decision in “CIT v. Sundaram Iyengar and Sons Pvt. Ltd.” 222 ITR 344(SC) (supra), has wrongly been relied on; that therein, the issue was regarding the amount received from the customers in the case of a trading transaction and so, “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), is not applicable on facts; that herein, the receipts are on capital account, having been received on account of share capital and have no relevance with trade; and that that being so, the receipts cannot be treated as income.
30. The ld. DR has strongly supported the impugned order in this regard also, contending that there is nothing barring the CIT(A) to uphold the assessment order on reasons other than those recorded in the assessment order; that in the present case, the assessee has miserably failed to prove any of the ingredients of section 68 of the I.T. Act in regard to any of the alleged share applicants, i.e., the Surinder Kumar Batra, Veena Bhatia and Dr. Ravi Kapoor; that therefore, there is no force in the grievance sought to be raised by the assessee in this regard.
31. We have considered the rival submissions in the light of the material produced with regard to this issue. Undisputedly, the amount added was not received during the year under consideration. For this short reason itself, the addition is unsustainable. Further, the forfeiture of the share application money came about in financial yearn 2004-05, as is evident from the balance sheet of the assessee as on 31.3.2005 (APB 52). A sum of ` 75 lakhs was received in financial year 2003-04. The allotment of shares of ` 6,25,000/- was made against this receipt. A sum of ` 43,75,000/- was adjusted against share premium. The balance of ` 25,00,000/- was forfeited. The relevant entries in the aforesaid balance sheet are as under:- Liabilities Current Yr. Amount Previous Yr. Amount C RESERVE & SURPLUS
1. Share Application Money
2. Share Premium
3. Share Application Money forfeiture 4,375,000.00 2,500,000.00 7,500,000.00
32. The balance sheet as on 31.3.2006 (APB 54) shows no change in this regard. Similar is the position depicted by the balance sheet as on 31.3.2007 (APB 19). Thus, there has been no change in the current financial year, i.e. financial year 2006-07, relevant to assessment year 2007-08.
33. In the above position, even if the forfeiture is to be taken as a revenue receipt, since it came about in financial year 2004-05, it cannot be taxed in the current financial year.
34. It is, however, entirely another matter, that forfeiture of shares cannot be considered as a revenue receipt. This has been settled by “Multan Electric Supply Co. Ltd.”, 13 ITR 457(Lahore) (supra), which has been considered and discussed by the Tribunal in “Asiatic Oxygen Ltd. V. DCIT”, 49 ITD 359(Kol),(supra). In “Multan Electric Supply Co. Ltd..”(supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in “Asiatic Oxygen Ltd.”(supra), it was observed that Schedule VI – Part I of the Companies Act contains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under the head ”Reserves and Supply” in the liability side of the balance sheet; that the assessee had credited the amount in respect of the forfeited shares under the head “capital reserve”; that thus, the Companies Act itself treats the profit on forfeiture of shares as capital reserve not available for distribution as evidence; that it could not therefore be held that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company; that it is also correct to contend on behalf of the assessee that “Sundaram Iyengar and Sons Pvt. Ltd.”(supra), has wrongly been applied to the instant case. Therein, the amount had admittedly arisen as a result of a trading transaction, having the character of income. In the present case, however, the receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.
35. From the above discussion, the grievance of the assessee by way of ground No.2 is also found to be justified and is accepted as such.
36. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 07.12.2011.
20 April 2012
Its a capital receipt and cannot be sujected to tax.
However, after budget coming to effect, if any shares are allotted at a premium wihtout justification, it will be treated as income in the hands of the company. Also, onus is placed on the company to demonstrate source of income of the investor investing shares in the company, else it will be treated as income of the company.
However, after budget coming to effect, if any shares are allotted at a premium wihtout justification, it will be treated as income in the hands of the company. Also, onus is placed on the company to demonstrate source of income of the investor investing shares in the company, else it will be treated as income of the company.
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