kunal mangal (Chartered Accountant) (160 Points)
10 February 2011Dear All,
A company collects an X amount from a shareholder via share application money and first call. Now the company makes second call but the shareholder doesnot pays. Therefore the company decides to forfeit the amount already collected. Therefore my query is what is the taxability of the forfeited shares in the hands of the company??
Regards,
Kunal Mangal
U S Sharma
(glidor@gmail.com)
(21063 Points)
Replied 10 February 2011
Income Tax Act does not provide any provision for dealing with forfeiture of share or debenture issue application money. Share application money or money received for debentures are common source of money for companies . It appens many time that the share applicant does not subscribe to shares after initial application for issue of shares or debentures . In that case the companies , may forfeit the initial share or debenture money receipt. Is that capital or revenue expenditure ? Is it taxable or not taxable?
Majority decision of tribunal and courts have suggested that such forfeiture of money by company is not taxable as it is capital receipt . Following three judgments are analysed
1. Deepak Fertilisers and Petrochemicals Corpn. Ltd. vs DCIT 116 ITD 372 Download
Facts of the case
The next issue relates to the addition on account of forfeiture of the application money received against issue of partly convertible debentures. The assessee had issued partly convertible debentures in Financial Year 1989-90 against which it received application money. However, after the allotment the applicants could not make the payments as per the terms of the issued debentures. In the Assessment Year 1999 2000, the assessee forfeited the sum of Rs. 87.22 lakhs on account of non-payment of call moneys and credited the sum to the Profit and Loss A/c. Similarly, the sum of Rs. 6,36,949/- was forfeited in Assessment Year 2000-01. This amount was not offered for taxation by the assessee. In the course of assessment proceedings the assessee was asked to show cause why such amount should not be treated as income in view of the Supreme Court judgment in the case of K.V. Sundaram Iyengar and Sons Ltd.. 222 ITR 344. In response to the same, it was submitted before the Assessing Officer that the said judgment is applicable only when the money was initially received from the customers as trading receipt i.e. during the course of carrying on its business. Therefore, the said judgment cannot be applied where the money is not received as a trading receipt. Since, the forfeiture is related to debentures, the amount received was capital in nature and therefore it cannot be treated as Revenue receipt when such amount is forfeited. Not satisfied with the explanation of the assessee, the Assessing Officer made the additions in computing the total income of the above assessment years.
Held as under :
Similar view has been taken by the Tribunal in the case of Prism Cement Ltd.. 101 ITD 103 (Mum.). In that case, the company issued certain non-convertible debentures and some of which were forfeited due to non-payment of call money. The Bench held that forfeiture amounted to capital receipt and the same could not be charged to tax. This case was decided after considering the Supreme Court judgment in the case of T.V. Sunderam Iyer and Sons Ltd..(supra) The facts of the present case are similar to the facts before the Tribunal in the case of Prism Cement Ltd.. Therefore, following the same, the orders of the learned CIT(A) are upheld.
2. DCIT vs Brijlaxmi Leasing and Finance Ltd. Download
I.T.A. No. 515/Ahd/200, Assessment year 1999-2000
The facts
The brief facts of the case are that the assessee-company made public issue of shares against which it received share application money from the shareholders. The allotment money of these shares were to be paid according to the terms of offer of the public issue. Some of the shareholders had not paid the allotment money as stipulated within the time allowed as per the terms of offer and further time offered by the assessee. Subsequently, since no payment against allotment money were received, the assessee forfeited the shares and credited the sum of Rs.1,23,31,000 to the capital reserve account.
The Tribunal held as under
We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case the assessee was to receive call money in respect of share as per the terms of prospectus and the allotment letters, but the same were not received from some of the shareholders. In this case, the share application money was forfeited as per the terms of the prospectus. The above facts are not in dispute. The short question which falls for our consideration is whether the above forfeiture amount is taxable under the provisions of the Income-tax Act, 1961, or not. The learned Departmental representative vehemently placed reliance on the decision of the hon’ble Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 for his contention that forfeited amount is taxable as revenue receipt. However, we find that the facts of the case that were before the hon’ble Supreme Court are distinguishable from the facts before us. In the instant case no security deposit or advance received for performance of the contract was forfeited. In fact, the amount received was against issue of shares and issue of shares is not the business of the assessee. The same cannot be treated as a receipt in the normal course of the business of the assessee which is engaged in financing and leasing business. Further, the assessee has also not credited the forfeited amount in its profit and loss account but in contradistinction to that it has credited the same in capital reserve account. In the above facts, in our considered opinion the decision of the Tribunal in the case of Prism Cement Ltd. v. Joint CIT [2006] 285 ITR (AT) 43; [2006] 103 TTJ (Mum) 63 is more applicable which was rendered by the Tribunal after duly considering the aforesaid decision of the hon’ble Supreme Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344. The Tribunal in the said case has held as under (page 54 of 285 ITR (AT)):
“15. Thus, the earnest money or an advance amount received on account of issuance of NCDs, if forfeited on account of non-payment of call money, the loan liability would only convert into a capital receipt. It would not assume the character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case. The assessee’s main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later on account of non-payment of call money assumes the character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be business receipts even then it would not be taxable to tax under the provisions of section 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years.”
In view of the above, respectfully following the aforesaid decision of the Mumbai Bench of the Tribunal we find no reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). It is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. The order signed, dated and pronounced in the open court on February 29, 2008.
3. Prism Cement Ltd. vs JCIT 285 ITR 43 [ITAT, of Mumbai in] Download complete order
Facts
the assessee has issued 38 lakhs debentures, 13.5 per cent non-convertible debentures of Rs. 150 each. During the previous years relevant to the impugned assessment year, 62,250 non-convertible debentures (NCDs) were forfeited due to non-payment of call money. This can be re-issued at the option of the assessee. On account of forfeiture of debentures, the amount paid earlier on such debentures have been written back. In “Schedule D” of the Audited Accounts, the assessee credited an amount of Rs. 14.19 lakhs being the amount written back on forfeiture of debentures and set it off against the expenditure of Rs. 6,482.59 lakhs. According to the Assessing Officer, though the commercial production had not been commenced by 31-3-1993 the monies were borrowed through non-convertible debentures for the purpose of business. As NCD’s holders defaulted in making payment of the call money, they lost the right to retrieve the amount paid and the forfeited NCDs can be re-issued upon the option of the assessee only. Thus, the benefit has been derived by the assessee-company in monetary terms and the same was liable to be taxed as income of the assessee.
The Tribunal Held as under
Thus, the earnest money or an advance amount received on account issuance of NCDs, if forfeited on account of nonpayment of call money, the loan liability would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case. Assessee’s main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later on account of non-payment of call money assumes a character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be a business receipts even then it would not be taxable to tax under the provisions of sectipn 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years. We also do not find any provision in this Act according to which this type of receipts are chargeable to tax. We, therefore, are of the considered view that the revenue was not justified in treating this receipt as revenue receipt. We therefore, set aside the order of CIT(A) and delete the addition.
In the result, the appeal of the assessee is allowed. This order is announced in the open court on this 23rd day of March, 2006.
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