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Loss on Forfeiture of Shares is Revenue Expenditure If Assessee is a Trader in Shares

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.

ITAT held that 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.

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