INCOME TAX ACT, 1961

Section 56(2)(ix)

Income from other sources - Forefeiture of sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset - Taxability - Forfeiture of full convertible debentures

Assessee floated fully convertible debentures (FCDs) of Rs. 100 each, partly paid Rs. 50 per debenture through private placement to two entities. As debenture holder failed to make payment of remaining debenture call money within the stipulated time of 90 days from date of allotment. Assessee-company exercised the right of forfeiture. AO treated the forfeited amount as revenue receipt and held it as taxable income of assessee. Assessee's case was that when assessee was not in the business of borrowing and advancing loans, amount forfeited had to be treated as capital receipt. CIT(A) changed the entire colour of addition and held that forfeiture of advance related to capital asset which included share and securities and hence was taxable as 'income from other sources' under section 56(2)(ix).Held: Debentures were duly allotted to subscribing companies and non payment of further call money under the agreement led termination of debentures and, therefore, said sum paid by debenture holder could not be held to be on account of transfer of capital asset in the hands of assessee company. Debenture was debt instrument or was a kind of long-term loan to borrow money at a fixed rate of interest. It was not a capital asset although money raised by way of debenture became part of the issuer company's capital structure, but it did not become share capital. Thus, forfeiture of the amount was not on account of failure of negotiation of transfer of capital asset of assessee and was not hit by section 56(2)(ix).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

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