The case number ITA 739/DEL/2019 involves the appellant, R S Triveni Foods P. Ltd, Delhi, and the respondent, ACIT, Circle-20(2), New Delhi. This case pertains to the assessment year 2015-16, with the final tribunal order pronounced on August 5, 2019. The appeal was filed on February 1, 2019.
R S Triveni Foods P. Ltd filed an appeal against the order dated December 28, 2018, passed by the Commissioner of Income Tax (Appeals) 7, New Delhi, relating to the assessment year 2015-16. The appeal was heard by the Delhi Bench “F” of the Income Tax Appellate Tribunal (ITAT), comprising Shri Amit Shukla, Judicial Member, and Shri L.P. Sahu, Accountant Member.
The primary issue in this appeal was the addition of Rs. 3,00,00,000/- by treating the forfeiture of application money on Fully Convertible Debentures (FCDs) as a capital asset by invoking the provision of section 56(2)(ix) of the Income Tax Act, 1961. The appellant contended that the said convertible debenture does not fall within the definition of ‘capital asset’ in their hands.
The appellant, R S Triveni Foods P. Ltd, floated Fully Convertible Debentures (FCDs) of Rs. 100/- each, partly paid at Rs. 50 per debenture through private placement to two entities on January 6, 2014, thereby raising Rs. 3,00,00,000/-. These funds were shown in the balance sheet of AY 2014-15 as long-term borrowings. The balance debenture call money of Rs. 50 per debenture was payable within 90 days of allotment. The FCDs were to be fully and compulsorily converted into equity shares before the expiry of 15 months from the date of allotment.
Due to non-payment of the balance call money, the company issued multiple reminders and finally, on April 29, 2014, exercised the right of forfeiture through a board resolution. The forfeited amount was taken to the capital reserve.
The Assessing Officer (AO) treated the forfeited amount as a revenue receipt and taxable income. The AO argued that the funds were used in day-to-day business activities, making them revenue receipts. The AO relied on the judgment of Hon’ble Delhi High Court in the case of Logitronics Ltd. vs CIT, which held that if a loan is taken for trading purposes and waived, it should be treated as a revenue receipt.
Before the CIT(A), the appellant argued that the unsecured FCDs could not be considered a trading liability. The funds raised through FCDs were meant to supplement the capital requirement of the business and were to be converted into share capital. The CIT(A) changed the nature of the addition and held it taxable under section 56(2)(ix), treating the forfeited FCDs as a capital asset.
The tribunal noted that the debentures were allotted to subscribing companies, and due to non-payment of the balance call money, the debentures were forfeited. The tribunal emphasized that debentures are a form of debt instrument, not a capital asset in the hands of the issuer company. The tribunal highlighted that section 56(2)(ix) applies to sums forfeited in the course of negotiations for the transfer of a capital asset, which was not the case here as the debentures were debt instruments.
The tribunal further noted that the legislative intent behind section 56(2)(ix) was to tax forfeited advances related to the transfer of capital assets. Since debentures are not capital assets of the issuer company, the provision of section 56(2)(ix) was not applicable. The tribunal concluded that the forfeiture of the amount was not on account of the failure of negotiation for the transfer of a capital asset and thus should not be taxed under section 56(2)(ix).
In conclusion, the tribunal allowed the appeal of R S Triveni Foods P. Ltd, directing the deletion of the addition made by the CIT(A) under section 56(2)(ix). The tribunal held that the forfeiture of FCDs did not constitute a capital asset in the hands of the issuer company and should not be treated as a revenue receipt.
The tribunal pronounced the order in the open court on August 5, 2019, directing the deletion of the addition and allowing the appeal of the assessee.
Sd/- (L.P. SAHU) Accountant Member
Sd/- (AMIT SHUKLA) Judicial Member
Dated: 05/08/2019
Veena
Copy forwarded to:
ASSISTANT REGISTRAR
ITAT, New Delhi
R S Triveni Foods P. Ltd vs ACIT: Forfeiture of FCDs Deemed as Capital Asset
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