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
September, 10th 2015
IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
AND RAM LAL NEGI, JUDICIAL MEMBER
/ I.T.A. No. 1129/Mum/2012
( / Assessment Year: 2009-10
The DCIT, / M/s. Spanco Ltd.,
Central Circle-8, B-22, Krishna Bhavan,
Old CGO Annexe Bldg., B.S. Deoshi Mrg,
Mumbai-400 020 Deonar,
. / . / PAN/GIR No. : AAACK 9555D
( /Appellant) .. ( / Respondent)
/ Appellant by: Shri Manjunatha R.
/Respondent by: Shri Anuj Kisandwala
/ Date of Hearing
/Date of Pronouncement :09.09.2015
/ 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. 15.11.2011 pertaining to Assessment
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.
2 ITA. No.1129/M/2012
3. The assessee is in the business of Networking and system
integration solutions, development 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 Officer 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 preferential basis28,50,OOO
convertible warrants carrying an option/entitlement to subscribe
to equivalent number of equity shares of Rs.l0 each on a future
date to the Prompters/ private corporate body. As per the terms,
these warrants were due for conversion at the 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 investors were required
to pay the balance 90% at the time of conversion of said
warrants into equity. Further in case the investors do not opt for
conversion of the warrants, the upfront amount so paid stands
forfeited by the company and all the rights attached to the
warrants lapse automatically. None of the warrants holders
exercised the option to convert any of the aforesaid warrants till
the last date of conversion within 18 months from their
respective entitlements. Accordingly, during the financial year
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 credited to
Capital Reserve Account."
4. The AO asked the assessee to explain why these 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 Hon'ble High Courts that
3 ITA. No.1129/M/2012
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 Hon'ble Supreme
Court in the case of CIT Vs T.V. Sundaram Iyengar & Sons Ltd. 122
ITR 344 and Hon'ble High Court of Bombay in the case of Solid
Containers 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 received 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
Ld. 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 Representative relied upon the findings
of the AO.
8. The Ld. Counsel for the assessee reiterated what has been
stated before the lower authorities.
4 ITA. No.1129/M/2012
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 Tribunal
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 Hon'ble
Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra)
and Hon'ble High Court of Bombay in the case of Sold Container
(supra). Respectfully following the decision of the Tribunal, we
confirm the findings of the Ld. CIT(A). Ground No. 1 is accordingly
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 AO
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
5 ITA. No.1129/M/2012
the disallowance as per Rule 8D and computed the same at Rs.
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 Hon'ble High Court of Bombay 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 wherein his predecessor has held that there is no case for the
disallowance of interest therefore disallowance of ½ % of the
average value of investment should meet the ends of justice and
restricted the disallowance to Rs. 82,355/-. Following the decision
given 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 find 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.Yrs. 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
6 ITA. No.1129/M/2012
represented over invoicing of assets as detected during the course of
14. At the very outset, the Ld. Counsel for the assessee stated that
this issue has been decided by the Tribunal in assessee's own case in
A.Yrs. 2004-05, 2005-06 and 2006-07 in ITA Nos. 4036 to
4038/M/2011 and ITA Nos. 4466 and 4467/M/2011. 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-37 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 interfere. 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 9th September, 2015
(RAM LAL NEGI ) (N.K. BILLAIYA)
/JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai; Dated :9th September, 2015
. ../ Rj , Sr. PS
7 ITA. No.1129/M/2012
/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,
, / ITAT, Mumbai