THE COMMISSIONER OF INCOME TAX-IV, AHMEDABAD versus M/S. SHREE RAMA MULTI TECH LTD. on 24 April 2018

[2018] 3 S.C.R. 927

THE COMMISSIONER OF INCOME TAX-IV, AHMEDABAD

v.

M/S. SHREE RAMA MULTI TECH LTD.

(Civil Appeal No. 6391 of 2013)

APRIL 24, 2018

[R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]

Income Tax Act, 1961 – Deduction – Share application moneydeposited in bank – Interest income earned therefrom – Claim forset off of interest income against the public issue expenses – Held:If the share application money that is received is deposited in thebank in light of the statutory mandatory requirement then theaccrued interest is not liable to be taxed and is eligible for deductionagainst the public issue expenses – Such interest earned isinextricably linked with requirement of company to raise sharecapital and is thus adjustable towards the expenditures involvedfor the share issue.

Income Tax Act, 1961 – Deduction vis-a-vis income from othersources – Distinction between – Held: If there is any surplus moneywhich is lying idle and it has been deposited in the bank for thepurpose of earning interest then it is liable to be taxed as incomefrom other sources but if the income accrued is merely incidentaland not the prime purpose of doing the act in question which resultedinto accrual of some additional income then the income is not liableto be assessed and is eligible to be claimed as deduction.

Dismissing the appeals, the Court

HELD: 1. The Respondent was statutorily required to keepshare application money in the separate account till the allotmentof shares was completed. Interest earned on such separately keptamount was to be adjusted towards expenditure for raising sharecapital. Therefore, interest earned was inextricably linked withrequirement of company to raise share capital and was thusadjustable towards the expenditures involved for the share issue.Interest earned from share application money statutorily requiredto be kept in separate account was being adjusted towards thecost of raising share capital. [Para 9][932-C, E]

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A2. The issue of share relates to capital structure of thecompany and hence expenses incurred in connection with theissue of shares are to be capitalized because the purpose of suchdeposit is not to make some additional income but to complywith the statutory requirement, and interest accrued on suchdeposit is merely incidental. In the instant case, the RespondentBwas statutorily required to keep the share application money inthe bank till the allotment of shares was complete. In that sense,the interest accrued to such deposit of money in the bank is liableto be set-off against the public issue expenses that the companyhas incurred as the interest earned was inextricably linked withCrequirement of the company to raise share capital and was thusadjustable towards the expenditure involved for the share issue.The High Court was right in upholding the decision of the Tribunalthat the interest income earned out of the share application moneyis liable to be set off against the public issue expenses. [Paras12, 13][933-D-F, G]D

Commissioner of Income Tax v. Bokaro Steel Ltd.reported in (1999) 236 ITR 315 (SC); Commissionerof Income Tax v. Karnal Co-operative Sugar Mills Ltd.(2000) 243 ITR 2 (SC) – relied on.

ECase Law Reference

of 2013.F

From the Judgment and Order dated 18.12.2012 of the High Courtof Gujarat at Ahmedabad in Tax Appeal No. 235 of 2012.

WITH

C. A. No. 8336 of 2013.GArijit Prasad, Ms. Gargi Khanna (for Mrs. Anil Katiyar), Advs.for the Appellant.

Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew,Ms. Shruti Jose, Advs. for the Respondent.

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The Judgment of the Court was delivered by

R. K. AGRAWAL, J. 1. The present appeal has been preferredagainst the impugned final judgment and order dated 18.12.2012 passedby the High Court of Gujarat in Tax Appeal No. 235 of 2012 wherebythe Division Bench of the High Court dismissed the appeal filed by theRevenue-the appellant herein against the judgment and order dated21.10.2011 passed by the Income Tax Appellate Tribunal (in short ‘TheTribunal”) in ITA No.1039/Ahd./2007 and ITA No. 240/Ahd./2008.

2. Brief facts:-

a) The Respondent - M/s. Shree Rama Multi Tech Ltd. is engagedin the manufacture of multi-layer tubes and other specialty packagingand plastic products. The dispute in the present case relates to AssessmentYears 1999-2000, 2000-2001 and 2001-2002. The Respondent filed itsreturn of income for the Assessment Year 2000-2001 declaring a totalincome of Rs 20,00,59,650/-. However, the Assessing Officer, vide orderdated 31.03.2003, passed an order of assessment assessing the taxableincome at Rs 27,61,14,254/-. But the same came to be modified in lightof 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 directedfor re-adjudication on certain matters including that of set-off as claimedunder the head of interest on share application money. In pursuance ofthe Order passed by the Tribunal dated 16.12.2004, the total incomewas re-determined at Rs. 17,30,88,691/- by the Assessing Officer videorder dated 29.12.2004 but was restricted to 20,00,59,650/- in view ofproviso to Section 240(b) of Income Tax Act, 1961 (in short ‘the ITAct’).

(b) Aggrieved by the aforesaid order, the Respondent went inappeal before learned Commissioner of Income Tax (Appeals). LearnedCIT (Appeals), vide order dated 09.01.2006, allowed the appeal filed bythe Respondent while directing the Assessing Officer to grant relief byre-computing the income and modifying the tax calculation withoutapplying the proviso to Section 240 of the IT Act. In the meanwhile, re-assessment proceedings were initiated in accordance with Section 147of the IT Act on the ground that the Assessing Officer has reason tobelieve that income for the said Assessment Year has escapedassessment. Finally, on 21.03.2006, the Assessing Officer determinedthe total income at Rs 20,66,29,165/-.

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A(c) Being aggrieved by the order dated 21.03.2006 in not allowingset off of the interest income against the public issue expenses inaccordance with the directions of the Tribunal while rejecting the claimfor the deduction of interest income of Rs. 1,71,30,212/- from publicissue expenses, the Respondent went in appeal before the CIT (Appeals)by filing CIT (A) ACITC 8/74/2006-2007. Learned CIT (Appeals), videBorder dated 05.01.2007, partly allowed the appeal filed by the Respondentwhile affirming the findings of the Assessing Officer in not allowing setoff of interest income from share application money.

(d) Being aggrieved by the order passed by learned CIT (Appeals),both the parties filed cross-appeals before the Tribunal. The Tribunal, byCa common judgment dated 21.10.2011, allowed the claim of theRespondent with respect to the deduction on account of interest incomeof Rs 1,71,30,212 and remanded the matter back to the Assessing Officeron other issues.

(e) Being aggrieved, the Revenue filed an appeal before the HighDCourt 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 taxabilityof the interest income.

(f) Aggrieved by the order dated 18.12.2012, the appellant hasfiled this appeal before this Court.E3. Heard learned counsel for the parties and perused the factualmatrix of the case.

Point(s) for consideration:-

4. Whether in the facts and circumstances of the present case,Finterest accrued on account of deposit of share application money istaxable income at the hands of the Respondent?

Rival contentions:-

5. Learned counsel appearing on behalf of the Appellant contendedthat the impugned final order passed by the High Court is against lawGand facts of the present case. He further contended that the High Courtgrossly erred in relying on its earlier order dated 26.07.2011 passed inTax Appeal No. 315 of 2010 titled Assistant Commissioner of IncomeTax vs. Panama Petrochem Ltd. and not appreciating the fact that theDepartment could not file a petition for special leave before this Court H

due to low tax effect being Rs. 9,81,541/- wherein it was held that theinterest income occurred by keeping the amount of share applicationmoney in a bank account is liable to be set-off against the public issueexpenses.

6. Learned counsel for the appellant finally contended that thelaw is well settled that the interest income is always regarded as ofrevenue nature unless it is received by way of damages or compensation.The present case is not related either to damages or compensation andthe High Court erred in arriving on such a conclusion which is not inaccordance with law and is liable to be aside.

7. Per contra, learned counsel appearing on behalf of theRespondent submitted that the case is squarely covered under theCommissioner of Income Tax vs. Bokaro Steel Ltd. reported in (1999)236 ITR 315 (SC). Learned counsel finally submitted that the judgmentof the High Court was well within the parameters of law and requires nointerference.

Discussion:-

8. The Respondent company had come out with initial public issueduring the year under consideration and the amount of share applicationmoney received was deposited with the banks on which interest of Rs.1,71,30,202/- was earned which was shown in the return of incomeoriginally filed as income from other sources which was also referred toin Col. 13(d) of the Tax Audit report filed under Section 44AB of the ITAct. Even though initially the income from the interest was shown asincome from other sources in the return of income, however, theRespondent had raised an additional ground before the Tribunal to allowthe set off of such interest against the public issue expenses. The issuewas examined by the Tribunal and was set aside for fresh adjudicationby the Assessing Officer. During the course of fresh proceedings, anopportunity was given to the Respondent to file the details of interest onshare application money. The Respondent stated that the details ofinterest income on share application money was already furnished atAnnexure No. 7 of their letter dated 11.03.2003 at the time of originalassessment. The verification of the said Annexure reveals that theRespondent had earned the interest income on FDRs placed with thebank, however, the period for which such FDRs were placed and thespecific period of the interest earned was not found to have been A

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Amentioned. Under the circumstances, it was not possible to identify asto what portion of interest earned on FDRs was relating to the periodprior to the allotment of shares or after the allotment of shares. Keepingin view the specific guidelines of the Tribunal in this regard and in theabsence of specific working of interest for pre-allotment and post-allotment, the claim of the Respondent was not allowed and added to theBtotal income under the head income from the other sources as wasdeclared in the original return of income filed by the Respondent.

9. Coming back to the facts of the case, we may reiterate that theRespondent was statutorily required to keep share application money inthe separate account till the allotment of shares was completed. InterestCearned on such separately kept amount was to be adjusted towardsexpenditure for raising share capital. We are, therefore, of the opinionthat interest earned was inextricably linked with requirement of companyto raise share capital and was thus adjustable towards the expendituresinvolved for the share issue. Though learned counsel for the AppellantDcontended that part of the share application money would normally haveto be returned to unsuccessful applicants, and therefore, the entire shareapplication money would not ultimately be appropriated by the Company,insofar as present case is concerned, we do not see how this factorwould make any significant difference. Interest earned from shareapplication money statutorily required to be kept in separate accountEwas being adjusted towards the cost of raising share capital. In thatview of the matter, we are of the opinion that the High Court was rightin allowing such deduction.

10. In light of the above developments in the case, the question oflaw has been decided by this Court in case in Bokaro Steel Ltd. (supra),Fwherein the company was set up to produce steel. When the constructionof plant was yet not completed, company earned interest on advances tocontractor, rent from quarters let out to employees of the contractor aswell as other income such as hire charges on plant and machinery let outto contractor, royalty on stones removed from its land. It was in thisGbackground that this Court held that the amounts were directly connectedto and incidental to construction of plant by the company, amounts werecapital receipts and not income from any independent source.

11. Further, the rationale of judgment of Bokaro Steel Ltd. (supra)was followed in Commissioner of Income Tax vs. Karnal Co-operativeHSugar 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 purchaseof machinery for setting up plant. On the money so deposited, it earnedinterest. In that background, this Court observed that this is not a casewhere any surplus shares capital money which was lying idle had beendeposited in the bank for the purpose of earning interest. The deposit ofmoney is directly linked with the purchase of plant and machinery.

12. The common rationale that is followed in all these judgment isthat if there is any surplus money which is lying idle and it has beendeposited in the bank for the purpose of earning interest then it is liableto be taxed as income from other sources but if the income accrued ismerely incidental and not the prime purpose of doing the act in questionwhich resulted into accrual of some additional income then the income isnot liable to be assessed and is eligible to be claimed as deduction. Puttingthe above rationale in terms of the present case, if the share applicationmoney that is received is deposited in the bank in light of the statutorymandatory requirement then the accrued interest is not liable to be taxedand is eligible for deduction against the public issue expenses. The issueof share relates to capital structure of the company and hence expensesincurred in connection with the issue of shares are to be capitalizedbecause the purpose of such deposit is not to make some additionalincome but to comply with the statutory requirement, and interest accruedon such deposit is merely incidental. In the present case, the Respondentwas statutorily required to keep the share application money in the banktill the allotment of shares was complete. In that sense, we are of theview that the High Court was right in holding that the interest accrued tosuch deposit of money in the bank is liable to be set-off against thepublic issue expenses that the company has incurred as the interest earnedwas inextricably linked with requirement of the company to raise sharecapital and was thus adjustable towards the expenditure involved for theshare issue.

13. In view of the forgoing discussion, we are of the view that theHigh Court was right in upholding the decision of the Tribunal dated21.10.2011 that the interest income earned out of the share applicationmoney is liable to be set off against the public issue expenses. Thejudgment passed by the Division Bench of the High Court in remandingthe matter to the Tribunal on other issues requires no interference.

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934SUPREME COURT REPORTS

[2018] 3 S.C.R.

A14. The appeals are accordingly dismissed. The parties to beartheir own cost.

Devika Gujral

Appeals dismissed.

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