The Income Tax Appellate Tribunal (ITAT) Delhi Bench held that the loss arising from forfeiture of the advance paid on convertible warrants is a business loss.
The ruling was made by a bench of ITAT consisting of Shri R.K. Panda, Accountant Member and Ms. Suchitra Kamble, Judicial Member, in the case of Lustre Merchants Pvt. Ltd., Vs DCIT.
The assessee was a non-banking finance company engaged in the business of dealing in shares and securities. It applied for 750000 convertible warrants. On a later date, the assessee company opted for the conversion of 1 lakh share warrants into equity shares. However, the assessee failed to remit the balance amount before the due date. Consequently, the listed company forfeited application money.
The dispute in the instant appeal was regarding the treatment of the loss on account of forfeiture of share application money as a business loss or a capital loss. The assessee argued that the loss is business loss whereas according to the Revenue it is a capital loss.
The Assessing Officer argued that if the assessee had remitted the amount it would have incurred a loss and by not making the payment it incurred a loss and, therefore, it is not a commercial decision but is a colorable device to avoid its tax. The AO also argued that the transaction would attract the provision of section 2(47) of the Act and the extinguishment of any right therein is a capital loss and cannot be held as a business loss.
The Tribunal observed that , “the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that ‘where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income”. The Tribunal also held that the Circular is clarificatory in nature and is retrospective.
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