Loss on Forfeiture of Shares is Revenue Expenditure If Assessee is a Trader in Shares: ITAT [Read Order]

Revenue Expenditure

The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of Tanvi Financial Services Private Limited v. Income Tax Officer ruling in favor of the assessee held that a loss on forfeiture of shares of a trader in shares is to be treated as revenue expenditure.

The assessee is a non-banking financial company and is engaged in the business of granting of loans and advances. The assessee purchased a number of preferential warrants of M/s. Sankhya Infotech Ltd to be converted into shares against which 25% of the amount was paid by the assessee. After the share price of the company came down, the assessee company forfeited the amount already paid to M/s Sankhya in spite of converting the warrants into shares. The assessee claimed this amount as revenue expenditure.

The issue before the present Tribunal was that whether the forfeited share consideration amounts to capital expenditure or revenue expenditure as was claimed by the assessee.

The CIT in the proceedings before it observed that an amount claimed by the assessee as revenue expenditure shall be unallowable since it is a capital expenditure contrary to the view of the Assessing Officer. A number of cases were cited to support the view that where a loss on account of forfeiture of share application money has been observed, the same is allowable as a short-term capital loss.

After hearing both the parties, the Court went on to elucidate that there exists no dispute about the loss that was incurred by the assessee, on not subscribing to the full value of shares. It further explained that the assessee is a trader in shares in the present case and not an investor.

“If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expenditure and the loss incurred by the assessee on forfeiture of the initial payment already made by the assessee is capital in nature. But if the assessee is trading in shares and in the course of such business, if it has incurred the loss, it would be revenue expenditure.”

The Tribunal relied on the balance sheets of the assessee company where the assessee has been treating the shares as current assets and held that the loss on forfeiture of shares was correctly accepted by the AO as revenue loss.

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