Capital forfeiture or cessation of capital account liability
In more than one decision forfeiture of share application/call money is held as a capital reciept. The Mumbai bench of ITAT in deptt appeal in Deputy Commissioner of Income-tax Vs. Deepak Fertilizers and Petrochemicals Corporation Ltd (304ITR AT 367) held that the amounts forfeited due to non-payment of call money could not be charged to tax. In this case the assessee had issued partly convertible debentures 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.
The Ahmedabad bench of ITAT in Deputy Commissioner of Income-tax Vs. Brijlaxmi Leasing and Finance Ltd. (309ITR AT 211) held that the share application which had been forfeited as per the terms of the prospectus could not be treated as a receipt in the normal course of the business of the assessee, which was engaged in financing and leasing business. In this case too the assessee had not credited the forfeited amount in its profit and loss account but had credited the amount to capital reserve account. The Mumbai bench of ITAT in Prism Cement Ltd. Vs. Joint Commissioner of Income-tax (285ITR AT 43/101ITD103) held that the amount received by the assessee in lieu of issuance of debentures which were forfeited later on account of non-payment of call money would assume the character of a capital receipt which was shown earlier as a loan liability in the books of account of the assessee.
The Mumbai bench in Jaikishan Dadlani v. ITO (4SOT138) held that there is no, and there cannot be any, dispute about the position that the share capital forfeiture receipts are in the nature of capital receipts. More so the Tribunal held that share forfeiture account is also not available for distribution of dividend hence any lending of money out of such account would not be treated as deemed dividend either.
However in the proposed direct tax code such forfeiture sums may get taxed as income from other sources (residuary head). Clause (v) of section 56 (2) is worded in a manner to rope in forfeited receipts even if they have capital character. It reads as below:
“ (v) any amount accrues, or received , on account of the cessation , termination or forfeiture of any agreement entered by the person, if the amount is not included under the head’ income from business’.”(Unquote)
This is a clear departure from the basic concept of taxation of income. No wonder the new code has done away with the word ‘income’ in its background. In fact it is substituted with the words ‘gross earnings’. And more so gross earnings are defined individually for each head of income in the most exhaustive manner. One would appreciate such attempt to rope in controversial items but one cannot agree to payment of tax on capital items. Hence a clarification is a must.
Gopal Nathani
FCA