Provisions of Section 56(2)(ix) of the Act will only be applicable in case where advance given in the course of negotiation for transfer of capital asset is forfeited and not otherwise.

Facts of the Case:

• Mangal Credit and Fincorp Ltd. is non-banking financial company (Assessee). The Assessee had issued share warrants to ten persons and subsequently allotted shares against share warrants issued upon payment of 25% of the value of shares and balance amount due to be paid on later date in order to fully convert the share warrants into shares, however if balance amount was not paid, the initial amount paid is become liable to be forfeited.
• Out of ten persons, six persons failed to pay the balance amount and their initial money was forfeited by the Assessee. Assessing Officer (AO) noticed that the Assessee did not offer the forfeited amount to tax under section 56(2)(ix) of the Income Tax Act, 1961 (Act) during the AY 2018-19 and added the same to the income of the Assessee. CIT(A) also confirmed the addition made by AO and hence, the Assessee was before ITAT.
• Assessee contended that provisions of Section 56(2)(ix) of the Act will only come into play where advance money received in the course of negotiation for transfer of the capital assets, which was subsequently forfeited. However, the Assessee received the money for issuance of share capital and not in respect of transfer of capital asset. For the aforementioned contention, the Assessee relied upon the decision rendered by Delhi Bench of the Tribunal in the case of M/s. R.S. Triveni Foods P. Ltd. Vs. Addl. CIT wherein the plaintiff had issued the fully convertible debentures and the part money collected was forfeited. On the other hand, the AO contended that the share capital shall qualify as “capital asset” and hence the impugned transaction fall within the ambit of Section 56(2)(ix) of the Act. Hence the question for adjudication before ITAT is whether amount so forfeited by the Assessee shall within the ambit of Section 56(2)(ix) of the Act or not?

Observation And Conclusion:

Hon’ble ITAT held that:

• In order to attract the provisions of Section 56(2)(ix) of the Act, the advance money should have been received which was subsequently forfeited. The advance money that has been received and forfeited subsequently, should have been received in the course of “negotiation of transfer of capital asset”. If the money has been received other than in the course of negotiation for transfer of capital asset, then provisions of Section 56(2)(ix) of the Act shall apply.
• In the present case, the Assessee has received the money on issuance of its own share capital and not in the course of negotiation for transfer of capital asset. Issuing share capital doesn’t result in transfer of capital asset and accordingly provisions Section 56(2)(ix) of the Act will not get triggered.

SW Point of View:

ITAT Mumbai has rightly held that provisions of Section 56(2)(ix) will not be applicable where advance forfeited is given for against the issuance of share capital. However, ITAT Delhi in case of M/s. R.S. Triveni Foods P. Ltd. Vs. Addl. CIT (supra) held that “Debenture is debt instrument or is a kind of long-term loan to borrow money at a fixed rate of interest. ITAT Delhi has distinguished instruments falling in capital structure form instruments being part of share capital while upholding the principles of 56(2)(ix) of the Act. It clearly shows that ITAT Delhi, might have a different basis for upholding its judgement. Accordingly, this decision does not seem to the finality on applicability of provision and may see it getting settled at a higher court forum.

Income Tax Appellate Tribunal Mumbai
Mangal Credit and Fincorp Ltd.
v.
DCIT

Lakshay Prakash Jonwal, Direct Tax Associate, SW India