ACIT CEN CIR 8, MUMBAI V. SPANCO LTD, MUMBAI

ITA 1129/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100989 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 03-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 17-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJUNATHA R SWAMY
• Assessee Lawyers: ANUJ KISANDWALA
• Keywords: Depreciation; Capital receipt
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI N.K . BILLAIYA, ACCOUNTANT MEMBER AND RAM L AL NEGI, JUDICIAL MEMBER / I .T.A. NO. 1129/MUM/2012 ( / ASSESSMENT YEAR : 2009 - 10 THE DCIT , CENTRAL CIRCLE - 8, OLD CGO ANNEXE BLDG., MUMBAI - 400 020 / VS. M/S. SPANCO LTD., B - 22, KRISHNA BHAVAN, B.S. DEOSHI MRG, DEONAR, MUMBAI - 400 088 ./ ./ PAN/GIR NO. : AAACK 9555D ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI MANJUNATHA R. SWAMY / RESPONDENT BY: SHRI ANUJ KISANDWALA / DATE OF HEARING : 0 2 .0 9 .2015 / DATE OF PRONOUNCEMENT : 09 .0 9 .2015 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) - 37 , MUMBAI DT. 1 5 .1 1 .201 1 PERTAINING TO ASSESSMENT YEAR 200 9 - 1 0. 2. THE FIRST GRIEVANCE OF THE REVENUE RELATES TO THE DELETION OF THE ADDITION OF RS. 6,05,86,500/ - REPRESENTING FOREFEITURE OF WARRANTS U/S. 28(IV) OF THE ACT. ITA. NO. 1129/M/2012 2 3. THE ASSESSEE IS IN THE BUSINESS OF NETWORKING AND SYSTEM INTEGRATION SOLUTIONS, DEVEL OPMENT AND SALE OF SOFTWARE/TELECOM SOLUTIONS. THE RETURN FOR THE YEAR WAS FILED ON 29.9.2009 DECLARING TOTAL INCOME AT RS. 46,63,20,700/ - . THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING O FFICER NOTICED THAT THE ASSESSEE HAS CREDITED A SUM OF RS. 6,05,86,500/ - TO THE CAPITAL RESERVES ACCOUNT. THE REASONS FOR THE SAME IS MENTIONED HEREUNDER: DURING THE YEAR ENDED 31ST MARCH 2007, THE COMPANY HAD ISSUED ON PRIVATE PLACEMENT AND PREFERENTI AL BASIS28,50,OOO CONVERTIBLE WARRANTS CARRYING AN OPTION/ENTITLEMENT TO SUBSCRIBE TO EQUIVALENT NUMBER OF EQUITY SHARES OF R S .L0 EACH ON A FUTURE DATE TO THE PROMPTERS/ PRIVATE CORPORATE BODY. AS PER THE TERMS, THESE WARRANTS WERE DUE FOR CONVERSION AT TH E OPTION OF INVESTORS ON OR BEFORE THE PERIOD OF 18 MONTHS FROM THE DATE OF ISSUE. THE INVESTORS HAD PAID AN UPFRONT AMOUNT OF RS.6,05 , 86 , 500/ - BEING 10% OF THE TOTAL ISSUE PRICE AT THE TIME OF SUBSCRIBING TO THE WARRANTS. AS PER THE TERMS OF ISSUE THE INV ESTORS WERE REQUIRED TO PAY THE BALANCE 90% AT THE TIME OF CONVERSION OF SAID WARRANTS INTO EQUITY. FURTHER IN CASE THE INVESTOR S DO NOT OPT FOR CONVERSION OF THE WARRANTS, THE UPFRONT AMOUNT SO PAID STANDS FORFEITED BY THE COMPANY AND ALL THE RIGHTS ATT A CH E D TO THE WARRANTS LAPSE AUTOMATICALLY. NONE OF THE WARRANTS HOLDERS EXERCISED THE OPTION TO CONVERT ANY OF THE AFORESAID WARRANTS TILL THE LAST D A TE OF CONVERSION WI T HIN 18 MONTHS FROM THEIR RESPECTIVE ENTITLEMENTS. ACCORDINGLY, DURING THE FINANCIAL YEA R UNDER REVIEW, THE COMPANY FORFEITED THE AMOUNTS OF RS.6,05,86,500/ - PAID ON THE WARRANTS DUE TO NON EXERCISE OF THE OPTION BY THE WARRANT HOLDERS. THIS AMOUNT HAS BEEN CREDI TED TO CAPITAL RESERVE ACCOUNT. 4. THE AO ASKED THE ASSESSEE TO EXPLAIN WHY THES E SUM OF RS. 6,05,86,500/ - ON ACCOUNT OF FOREFEITURE OF CONVERTIBLE WARRANTS SHOULD NOT BE INCLUDED IN THE TOTAL INCOME. THE ASSESSEE FILED A DETAILED REPLY DATED 22.2.2010 STRONGLY CONTENDED THAT THERE ARE VARIOUS JUDICIAL PRONOUNCEMENTS BY HONBLE HIGH COURTS THAT ITA. NO. 1129/M/2012 3 FOREFEITURE OF SHARE APPLICATION MONEY CANNOT BE TREATED AS RECEIPTS IN NORMAL COURSE OF BUSINESS AND THEREFORE CANNOT BE TAXED IN THE HANDS OF THE ISSUING COMPANY. 4.1. THE EXPLANATION FURNISHED BY THE ASSESSEE DID NOT FIND FAVOUR WITH THE AO. THE AO TREATED THE SUM OF RS. 6,05,86,500/ - AS INCOME OF THE ASSESSEE BY RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS T.V. SUNDARAM IYENGAR & SONS LTD. 122 ITR 344 AND HONBLE HIGH COURT OF BOMBAY IN THE CASE OF SOLID C ONTAINERS LTD. VS DCIT 308 ITR 417. 5. THE ASSESSEE STRONGLY AGITATED THIS ADDITION BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS CONSIDERED THIS ISSUE AT PARA - 9.3.1 OF HIS ORDER AND AT PARA 9.4.3 THE LD. CIT(A) WAS CONVINCED THAT THE APPLICATION MONEY RE CEIVED ON ISSUE OF CONVERTIBLE SHARE WARRANTS CANNOT BE CHARACTERIZED AS A LOAN OR A DEPOSIT AND THEREFORE THE FACTS ARE DISTINGUISHABLE FROM THE FACTS IN THE CASE OF T.V. SUNDARAM IYENGAR (SUPRA) AND AFTER CONSIDERING VARIOUS JUDICIAL DECISIONS, THE L D. CIT(A) AT PARA - 9.4.11 FINALLY HELD THAT THE FOREFEITURE OF APPLICATION MONEY ON WARRANTS IS A CAPITAL RECEIPT AND THEREFORE NOT CHARGEABLE TO TAX U/S. 28(IV) OF THE ACT. 6. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. 7. THE LD. DEPARTMENTAL REPRESEN TATIVE RELIED UPON THE FINDINGS OF THE AO. 8. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. ITA. NO. 1129/M/2012 4 9. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE FACTUAL MATRIX QUA THE ASSESSEE. AN IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ITA NOS. 3542 AND 4801/M/2013 VIDE ORDER DATED 21.11.2014 WHEREIN ON IDENTICAL SET OF FACTS THE TRI BUNAL HAS HELD THAT THE AMOUNT OF FOREFEITED SHARE APPLICATION MONEY TRANSFERRED TO WARRANT FOREFEITURE ACCOUNT IN THE CAPITAL RESERVE , IS A CAPITAL RECEIPT ONLY AND CANNOT BE TAXED AS INCOME OF THE ASSESSEE , EITHER U/S. 28(IV) OR U/S. 41(1) OF THE ACT. WE FIND THAT WHILE DECIDING THIS ISSUE, THE TRIBUNAL HAS CONSIDERED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) AND HONBLE HIGH COURT OF BOMBAY IN THE CASE OF SOLD CONTAINER (SUPRA). RESPECTFULLY FOLLOWI NG THE DECISION OF THE TRIBUNAL, WE CONFIRM THE FINDINGS OF THE LD. CIT(A). GROUND NO. 1 IS ACCORDINGLY DISMISSED. 10. GROUND NO. 2 RELATES TO THE DELETION OF ADDITION MADE U/S.14A OF THE ACT. 11. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE A O NOTICED THAT THE ASSESSEE HAS MADE SUBSTANTIAL INVESTMENTS. THE ASSESSEE WAS THEREFORE ASKED TO EXPLAIN WHY THE EXPENSES INCURRED IN RELATION TO DIVIDEND SHOULD NOT BE DISALLOWED. THE ASSESSEE EXPLAINED THAT IT HAS NOT RECEIVED ANY DIVIDEND DURING THE YEAR UNDER CONSIDERATION AND FURTHER STATED THAT IT HAS NOT INCURRED ANY EXPENDITURE IN MAKING SUCH INVESTMENTS IN THE SHARES OF THE SUBSIDIARY COMPANY. THE AO DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT THE BALANCE INVESTMENTS IN SHARES HAVE BEEN FINANCED ONLY FROM INTEREST - FREE FUNDS. THE AO THEREAFTER PROCEEDED TO COMPUTE ITA. NO. 1129/M/2012 5 THE DISALLOWANCE AS PER RULE 8D AND COMPUTED THE SAME AT RS. 2,31,13,114/ - . 12.1. BEFORE THE LD. CIT(A) IT WAS STRONGLY CONTENDED THAT THE ENTIRE INVESTMENTS WERE MADE OUT OF OWN CAPITAL AND OWN FUNDS ARE SUFFICIENT FOR THE PURPOSE OF INVESTMENTS IN THE SHARES OF THE SUBSIDIARY COMPANY. STRONG RELIANCE WAS PLACED IN THE DECISION OF THE HONBLE HIGH COURT OF B OMBAY IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD., IN ITA NO. 1398 OF 2008 . AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS THE LD. CIT(A) OBSERVED THAT IN EARLIER ASSESSMENT YEARS I.E. A.YRS 2005 - 06 AND 2006 - 07, THE SAME ISSUE HAD ARISEN WHER EIN HIS PREDECESSOR HAS HELD THAT THERE IS NO CASE FOR THE DISALLOWANCE OF INTEREST THEREFORE DISALLOWANCE OF % OF THE AVERAGE VALUE OF INVESTMENT SHOULD MEET THE ENDS OF JUSTICE AND RESTRICTED THE DISALLOWANCE TO RS. 82,355/ - . FOLLOWING THE DECISION G IVEN BY HIS PREDECESSOR, THE LD. CIT(A) HELD THAT INTEREST OF RS. 1,94,25,496/ - CANNOT BE DISALLOWED U/S. 14A OF THE ACT AND DIRECTED TO RECOMPUTE THE AVERAGE INVESTMENTS. 12.2. WE HAVE CAREFULLY PERUSED THE FACTS FOR THE YEAR UNDER CONSIDERATION. WE FI ND THAT THE FACTS ARE IDENTICAL TO THE FACTS CONSIDERED IN EARLIER ASSESSMENT YEARS. WE, THEREFORE, DIRECT THE AO TO RECOMPUTE THE AVERAGE INVESTMENTS IN THE LINE OF A.Y RS . 2005 - 06 & 2006 - 07. WE, THEREFORE, DO NOT FIND ANY ERROR/INFIRMITY IN THE FINDINGS OF THE LD. CIT(A). GROUND NO. 2 IS ACCORDINGLY DISMISSED. 13. GROUND NO. 3 RELATES TO THE DELETION OF THE DISALLOWANCE OF DEPRECIATION IN RESPECT OF PORTION OF VALUE SHOWN IN THE BOOKS WHICH ITA. NO. 1129/M/2012 6 REPRESENTED OVER INVOICING OF ASSETS AS DETECTED DURING THE C OURSE OF SURVEY. 14. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y RS . 2004 - 05, 2005 - 06 AND 2006 - 07 IN ITA NOS. 4036 TO 4038/M/2011 AND ITA NOS. 4466 AND 4467/M/2 011. THE LD. COUNSEL SUPPLIED THE COPIES OF THE DECISION OF THE TRIBUNAL. 15. THE LD. DR FAIRLY CONCEDED TO THIS. 16. WE FIND THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ITA NOS. 4466 AND 4467/M/2011 AT PARA - 32 OF ITS ORDER AND AT PARA - 3 7 HELD THAT THE DISALLOWANCE OF DEPRECIATION MADE BY THE AO IS NOT SUSTAINABLE IN LAW. THIS DECISION OF THE TRIBUNAL WAS FOLLOWED IN A.Y. 2007 - 08 IN ITA NO. 1128/M/2012. RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH, WE DECLINE TO INTERFER E. GROUND NO. 3 IS ACCORDINGLY DISMISSED. 17. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER , 2015 SD/ - SD/ - ( RAM L AL NEGI ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 9 TH SEPTEMBER , 2015 . . ./ RJ , SR. PS ITA. NO. 1129/M/2012 7 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI