COMMISSIONR OF INCOME TAX IV AHMEDABAD vs SHREE RAMA MULTI TECH. LTD.

 R.K. Agrawal, J.

1) The  present  appeal  has  been  preferred  against  the impugned final judgment and order dated 18.12.2012 passed

by the High Court of Gujarat in Tax Appeal No. 235 of 2012 whereby the Division Bench of the High Court dismissed the appeal filed by the

RevenueÂthe appellant herein against the judgment and order  dated  21.10.2011  passed  by  the  Income  Tax Â

Appellate Digitally Tribunal (in short ‘The Tribunalâ€​) in ITA No.1039/Ahd./2007 and ITA No. 240/Ahd./2008.

2)Â Â Â Brief facts:Â​Â

a)   The  Respondent  Â​  M/s.  Shree  Rama  Multi  Tech  Ltd.  is

engaged  in  the  manufacture  of  multiÂlayer  tubes  and  other specialty  packaging  and Â

plastic  products.  The  dispute  in  the present case relates to Assessment Years 1999Â2000, 2000Â2001 and 2001Â2002. The

Respondent filed its return of income for the Assessment  Year  2000Â2001  declaring  a  total  income  of  Rs

20,00,59,650/Â. However, the Assessing Officer, vide order dated 31.03.2003, passed an order of assessment assessing the taxable income at Rs

27,61,14,254/Â. But the same came to be modified in light of the decision given by the Tribunal dated 16.12.2004 in ITA No. 1481/Ahd./2004 and ITA

No. 1685/Ahd./2004 wherein the Tribunal has directed for reÂadjudication on certain matters including that of setÂoff as claimed under the head of

interest on share application money.  In pursuance of the Order passed by the  Tribunal  dated  16.12.2004,  the  total Â

income  was  re determined at Rs. 17,30,88,691/ by the Assessing Officer vide order dated 29.12.2004 but was restricted to

20,00,59,650/ in view  of  proviso  to  Section  240(b)  of  Income  Tax  Act,  1961  (in short ‘the

IT Act’).

(b) Aggrieved  by  the  aforesaid order, the Respondent went in appeal  before  learned  Commissioner Â

of  Income  Tax  (Appeals). Learned CIT (Appeals), vide order dated 09.01.2006, allowed the appeal  filed  by  the Â

Respondent  while   directing  the  Assessing Officer to grant relief by reÂcomputing the income and modifying the tax calculation

without applying the proviso to Section 240 of the  IT  Act.  In  the  meanwhile,  reÂassessment  proceedings Â

were initiated  in  accordance  with  Section  147  of  the  IT  Act  on  the ground  that Â

the  Assessing  Officer  has  reason  to  believe  that income for the said Assessment Year has escaped

assessment. Finally,  on  21.03.2006,  the  Assessing  Officer  determined  the total income at Rs 20,66,29,165/Â​.

(c) Being  aggrieved  by  the  order  dated  21.03.2006  in  not allowing set off of  the interest income

against the public issue expenses in accordance with the directions of the Tribunal while rejecting  the  claim  for  the Â

deduction  of  interest  income  of  Rs. 1,71,30,212/ from public issue expenses, the Respondent went  in  appeal Â

before  the  CIT  (Appeals)  by  filing  CIT  (A)  ACITC 8/74/2006Â2007.  Learned  CIT Â

(Appeals),  vide  order  dated 05.01.2007,  partly  allowed  the  appeal  filed  by  the  Respondent

while  affirming  the  findings  of  the  Assessing  Officer  in  not allowing set off of interest income from

share application money.

(d) Being  aggrieved  by  the  order  passed  by  learned  CIT (Appeals),  both  the  parties Â

filed  crossÂappeals  before  the Tribunal.  The  Tribunal,  by  a  common  judgment  dated 21.10.2011,

allowed the claim of the Respondent with respect to the deduction on account of interest income of Rs 1,71,30,212 and remanded the matter back to

the Assessing Officer on other issues.

(e) Being  aggrieved,  the  Revenue  filed  an  appeal  before  the High Court being ITA No. 235 of 2012. A

Division Bench of the High Court, vide order dated 18.12.2012, dismissed the appeal on the point of taxability of the interest income.

(f) Aggrieved by the order dated 18.12.2012, the appellant has filed this appeal before this Court.

3) Heard  learned  counsel  for  the  parties  and  perused  the factual matrix of the case.

Point(s) for consideration:Â​

4) Whether in the facts and circumstances of the present case, interest  accrued  on  account  of  deposit  of Â

share  application money is taxable income at the hands of the Respondent? Rival contentions:Â​

5) Learned  counsel  appearing  on  behalf  of  the  Appellant contended  that  the  impugned Â

final  order  passed  by  the  High Court  is  against  law  and facts of the present  case.Â

He further contended  that  the  High  Court  grossly  erred  in  relying  on  its earlier order dated

26.07.2011 passed in Tax Appeal No. 315 of 2010  titled Assistant  Commissioner  of  Income  Tax vs. Panama

Petrochem Ltd. and not appreciating the fact that the Department could not file a petition for special leave before this Court due to low tax effect

being Rs. 9,81,541/ wherein it was held that the interest income occurred by keeping the amount of share application money in a bank account is

liable to be setÂ​off against the public issue expenses.

6) Learned counsel for the appellant finally contended that the law is well settled that the interest income is always regarded as of  revenue Â

nature  unless  it  is  received  by  way  of  damages  or compensation. The present case is not related either

to damages or compensation and the High Court erred in arriving on such a conclusion which is not in accordance with law and is liable to be aside.

7) Per  contra,  learned  counsel  appearing  on  behalf  of  the Respondent submitted that the case is

squarely covered under the Commissioner  of  Income  Tax vs. Bokaro  Steel  Ltd. reported  in  (1999)

  236  ITR  315  (SC).  Learned  counsel  finally submitted that the judgment of the High Court was well within the

parameters of law and requires no interference.

Discussion:Â​

8)  The Respondent company had come out with initial public issue  during  the  year  under  consideration  and Â

the  amount  of share application money received was deposited with the banks on  which  interest  of  Rs. Â

1,71,30,202/  was  earned  which  was shown  in  the  return  of  income  originally  filed Â

as  income  from other sources which was also referred to in Col. 13(d) of the Tax Audit report filed under Section 44AB of the IT Act.Â

Even though initially the income from the interest was shown as income from other sources in the return of income, however, the Respondent had

raised an additional ground before the Tribunal to allow the set  off  of  such  interest against  the public issue expenses.Â

The issue was examined by the Tribunal and was set aside for fresh adjudication by the Assessing Officer. During the course of fresh proceedings,

an opportunity was given to the Respondent to file the  details  of  interest  on  share  application  money.   Â

The Respondent stated that the details of interest income on share application money was already furnished at Annexure No. 7 of their letter dated

11.03.2003 at the time of original assessment. The verification of the said Annexure reveals that the Respondent had earned the interest income on

FDRs placed with the bank, however, the period for which such FDRs were placed and the specific period of the interest earned was not found to

have been mentioned.    Under  the  circumstances,  it  was  not  possible  to identify  as  to Â

what  portion  of  interest  earned  on  FDRs  was relating to the period prior to the allotment of shares or after the

allotment of shares. Keeping in view the specific guidelines of the Tribunal in this regard and in the absence of specific working of interest Â

for  preÂallotment   and  postÂallotment,  the  claim  of  the Respondent was not allowed and added to the total income

under the head income from the other sources as was declared in the original return of income filed by the Respondent.

9) Coming back to the facts of the case, we may reiterate that the  Respondent  was  statutorily  required  to  keep Â

share application money in the separate account till the allotment of shares was completed. Interest earned on such separately kept amount was to

be adjusted towards expenditure for raising share capital.    We  are,  therefore, of  the  opinion  that Â

interest  earned was  inextricably  linked  with  requirement  of  company  to  raise share capital and was thus

adjustable towards the expenditures involved  for  the  share  issue.    Though  learned  counsel  for  the

Appellant  contended  that  part  of  the  share  application  money would normally have to be returned to

unsuccessful applicants, and  therefore,  the  entire   share  application  money  would  not  ultimately be

appropriated by the Company, insofar as present case is concerned, we do not see how this factor would make any significant Â

difference.    Interest  earned  from  share  application money statutorily required to be kept in separate account was

being adjusted towards the cost of raising share capital. In that view of the matter, we are of the opinion that the High Court was right in allowing

such deduction.

10) In light of the above developments in the case, the question of law has been decided by this Court in case in Bokaro Steel Ltd. (supra), wherein

the company was set up to produce steel. When the construction of plant was yet not completed, company earned interest on advances to contractor,

rent from quarters let out to employees of the contractor as well as other income such as  hire  charges  on  plant  and Â

machinery  let  out  to  contractor, royalty  on  stones  removed  from  its  land.  It  was Â

in  this background that this Court held that the amounts were directly connected  to  and  incidental  to  construction Â

of  plant  by  the company,  amounts  were  capital  receipts  and  not  income  from any independent

source.

11) Further,  the  rationale  of  judgment  of Bokaro  Steel  Ltd. (supra) was  followed  inÂ

Commissioner  of  Income  Tax vs. Karnal CoÂoperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). In this case, the company had

deposited certain amount with the bank to open letter of credit for purchase of machinery for setting up plant. On the money so deposited, it earned

interest. In that background, this Court observed that this is not a case where any surplus shares capital money which was lying idle had been

deposited  in the  bank  for the purpose of earning interest. The deposit of money is directly linked with the purchase of plant and

machinery.

12) The common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has  been Â

deposited  in  the  bank  for  the  purpose  of  earning interest then it is liable to be taxed as income from other

sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of Â

some  additional  income  then  the  income  is  not  liable  to  be assessed and is eligible to be claimed as

deduction. Putting the above  rationale  in  terms  of  the  present  case,  if  the  share application Â

money  that is received is deposited in the bank in light of the  statutory mandatory requirement then the accrued

interest  is  not  liable  to  be  taxed  and  is  eligible  for  deduction against the public issue expenses.

The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized

because the  purpose  of  such  deposit  is  not  to  make  some  additional income  but  to Â

comply  with  the  statutory  requirement,  and interest  accrued  on  such  deposit  is  merely Â

incidental.  In  the present  case,  the  Respondent  was  statutorily  required  to  keep the  share Â

application  money  in  the  bank  till  the  allotment  of shares was complete. In that sense, we are of the view that

the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be setÂoff against the public Â

issue  expenses  that  the  company  has  incurred  as  the interest earned was inextricably linked with requirement

of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue.

13) In view of the forgoing discussion, we are of the view that the  High  Court  was  right  in  upholding  the Â

decision  of  the Tribunal dated 21.10.2011 that the interest income earned out of the  share  application  money  is Â

liable  to  be  set  off  against  the public  issue  expenses.  The  judgment  passed  by Â

the  Division Bench of the High Court in remanding the matter to the Tribunal on other issues requires no interference.

14) The appeals are accordingly dismissed. The parties to bear their own cost.