By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants
fiogf49gjkf0d
Amount received by the assessee-company from its parent company towards its erosion of net worth constitutes capital receipt.
Facts I:
The assessee had received an amount of Rs. 34,511,880 from its promoters which were foreign companies, which was treated as capital receipt and classified under capital reserve in the accounts. It was claimed that the said amount was received to resurrect the financial position and to rejuvenate the company. The amount was received essentially for restoration of its capital structure, i.e, net worth required for the revival of company in. However, the Assessing Officer held that the receipt in question was in the revenue field. Before the ITAT also, it was argued by the Department that the amount is a non-refundable, non-distributable and non-convertible contribution by a shareholder, and was used for the purpose of its current business and hence, was required to be regarded as a revenue receipt. It was further pointed out that the RBI permitted the assessee to receive the amount in question for recoupment of accumulated losses.
Held:
It was held that the amount was received for restoration of the capital structure by recoupment of net worth. The assessee company had incurred accumulated losses and this has resulted in erosion of net worth. It received non refundable financial assistance from its shareholder company. The RBI also approved the same with subjectmatter given as “financial assistance towards erosion of net worth.” Therefore, the ITAT , upholding the factual finding of the CIT (A) that the amount was received towards erosion of net worth of the company, held that it should be regarded as a capital receipt.
