Taxability in case of Forfeiture of Application Money on Issue of Debentures

Facts of the case
1. The taxpayer issued Fully Convertible Debentures (FCD) of INR 100 each, partly paid up INR50 each through private placement and raised INR 30 million.
2. As per the terms, directors had a right to forfeit FCD’s in case the holder fails to make the payment of remaining call money within the stipulated time.
3. The initial call money of INR 30 million was forfeited since the holders failed to submit the balance money. Subsequently, the forfeiture money was transferred to capital reserve.
4. The AO disallowed the claim of taxpayer and held that the receipt was of revenue in nature and forfeiture does not change its characteristic as the capital receipt.
5. The Commissioner of Income Tax (Appeals) [CIT(A)] held that forfeiture of advance related to capital asset which includes shares and securities is taxable as income from other sources under section 56(2)(ix) of the Act.

Taxpayer’s contention
1. The provisions of Section 56(2)(ix) of the Act would not be applicable because the said section has come into effect from 1^st April 2015 and the forfeited sum was received prior to April 2015.

Tribunal observations and order
1. The forfeiture of FCDs took place during AY 2015-16, therefore, taxability on forfeiture has to be seen in the year of forfeiture.
2. The debenture cannot be treated as a capital asset of the issuer company because it is a kind of debt instrument with an obligation to acknowledge the debt and pay the interest. It is a capital asset in the hands of the person subscribing the same.
3. Therefore, the forfeited call money cannot be held to be received by the issuer company on account of transfer of capital asset in the hands of taxpayer. Accordingly, the forfeiture amount will not be hit by Section 56(2)(ix).

R.S. Triveni Foods P. Ltd v ADIT

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