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Share Application Money as transferred by the assessee is ‘Capital Asset’ for the purpose of Income Tax Act, 1961

In DCIT Circle, Mumbai vs. Morarjee Realities Ltd (Now known as Peninsula Land Ltd.) ,  as a part of corporate restructuring undertaken by the assessee group, it was decided that, shares of certain group entities held by the assessee would be transferred to other group entities, with the assessee-company focusing on real estate business. Accordingly, the assessee transferred its investments held in the shape of equity shares, preference shares and rights to apply for shares i.e. share application money held in MBL, to an entity MGM Shareholders Benefit Trust. The assessee similarly transferred equity shares in certain entities as well as share application money held in Morarjee Legler Limited to MBL. While doing so, the assessee suffered Long Term Capital Losses as well as short terms capital losses, the set-off of which was denied by Learned Assessing Officer (AO). However, upon further appeal, learned first appellate authority allows the same against which the revenue was in appeal.

The Tribunal in its order partially allowed the appeal by observing that, though losses arising out of transfer of equity shares and preference shares would be allowable to the assessee but share application money could not be considered as Capital Asset within the meaning of Section 2(14) of the Act.

Against the issue of the share application money in this order of the Tribunal, the appellants approached the Income Tax Appellate Tribunal.

Section 2(14) of the IT Act has defined the word 'capital asset' very widely to mean property of any kind. However, it specifically excludes certain properties from the definition of 'capital asset'. The Revenue has not been able to point out any of the exclusion clauses being applicable to an advancement of a loan. It is also relevant to note that, it is not the case of the Revenue that, this amount of Rs.90 lakhs Euros was a loan/ advance income of its trading activity. 

The Appellate Tribunal observed that the term 'Capital Asset' as defined in Section 2(14) would mean property of any kind held by an assessee, whether or not connected with his business or profession', except those which are specifically excluded in the said section. The only exclusion is only for stock in trade, consumables or raw materials held for purposes of business. Therefore, the word property would have wide connotation to include interest of any kind. The Hon'ble Court in CWT vs. Vidur V. Patel held the word property would be of widest import and signifies every possible interest which a person can hold or enjoy. The term should be given a liberal or wide connotation. Similar view was expressed in the decision titled as Bafna Charitable Trust vs. CIT. 

Loans and share application money as advanced by the assessee would stand on same footing since both are advances in nature. The share application money is nothing but mere advances till the time the shares are allotted and share application money is converted into share capital. This is further fortified by the fact that, the provisions of the Companies Act, 2013 provide for refund of share application money with interest under certain circumstances. Therefore, the ratio of the cited decisions is applicable to the facts of the present case. 

Therefore, in view of binding decision, the Appellate Tribunal held that, the share application money as transferred / assigned by the assessee would constitute a 'Capital Asset' within the meaning of Section 2(14) of the IT Act. It does not fall under any of the exclusions. Consequently, the resultant losses would be allowable to the assessee. The Learned AO is directed to re-compute assessee's income in terms of our above order. Resultantly, the revenue's appeal stands dismissed.

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