THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
AND
THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY
+ I.T.T.A.Nos.138 of 2004 and 9 of 2005
% Date: 21.09.2022
# Everest Organics Ltd.
... Appellant
v.
$ The Commissioner of Income Tax
... Respondent
! Counsel for the appellant : Ms. K.Neeraja ^ Counsel for respondent : Mr. B.Narasimha Sarma, representing Ms. K.Mamata Chowdary (Standing Counsel for Income Tax Department) < GIST:
HEAD NOTE:
? CASES REFERRED:
1. (1992) 198 ITR 375 (AP)
2. (1994) 208 ITR 379 (DELHI)
3. (2018) 403 ITR 426 (SC) 2 THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY I.T.T.A.Nos.138 of 2004 and 9 of 2005 COMMON JUDGMENT: (Per the Hon'ble the Chief Justice Ujjal Bhuyan) This order will dispose of both I.T.T.A.Nos.138 of 2004 and 9 of 2005.
2. We have heard Ms. K.Neeraja, learned counsel for the appellant/assessee and Mr. B.Narasimha Sarma, learned Standing Counsel for Income Tax Department appearing for Ms. K.Mamata Chowdary, learned counsel for the respondent/revenue.
3. I.T.T.A.No.138 of 2004 arises out of I.T.A.No.1261/Hyd/97 for the assessment year 1995-96, whereas I.T.T.A.No.9 of 2005 arises out of I.T.A.No.1262/Hyd/97 for the same assessment year 1995- 96, both disposed of by the Income Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad (Tribunal), vide the common order dated 09.04.2003.
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4. I.T.A.No.1261/Hyd/97 arises out of the rectification order passed by the assessing officer under Section 154 of the Income Tax Act, 1961 (briefly, 'the Act' hereinafter), whereas I.T.A.No.1262/Hyd/97 arises out of the assessment order passed under Section 143(3) of the Act. However, issue raised in the appeals is one and the same.
5. I.T.T.A.No.138 of 2004 was admitted by this Court on 20.12.2004 on question No.1 as proposed by the appellant. The said question is extracted hereunder:
"Whether on the facts and in the circumstances of the case Tribunal was correct in law in holding that expenditure incurred by the appellant in connection with the public issue of share application was not to be deducted from the interest received on the share application monies from the banks?"
6. I.T.T.A.No.9 of 2005 was admitted by this Court on 06.06.2005.
7. The aforesaid question arises on the following factual background. Appellant is an assessee under the Act having the status of company. It is engaged in the 4 business of manufacturing pharmaceutical drugs. Appellant did not commence commercial production during the previous year relevant to the assessment year under consideration. However, it went public during the said year and the application money received from the public was held in deposit in various banks which resulted in accrual of substantial bank interest. In the assessment proceedings for the said assessment year, appellant contended that interest accrued on share application money was not taxable. However, assessing officer vide the assessment order dated 12.02.1997 negatived such contention of the appellant and took the view that the appellant had incurred various expenses during the construction and pre-operation period to bring the business into existence. Expenses incurred on public issue was one such expenditure. Earning of interest on the money in deposit with the banks was independent of the expenses incurred on public issue. Therefore, setting off the said interest against expenses on public issue was found to be not acceptable. In this regard, assessing officer relied upon the decision of the then composite Andhra 5 Pradesh High Court in CIT v. Derco Cooling Coils Ltd.1, and that of the Delhi High Court in CIT v. Modi Rubber2. In the above two decisions it was held that interest earned on share capital money prior to commencement of business was liable to income tax. Therefore, the aforesaid interest income earned was added to the income of the appellant.
8. Aggrieved by the aforesaid order appeal was preferred by the appellant before the Commissioner of Income Tax (Appeals). First appellate authority confirmed the order of the assessing officer holding that expenditure claimed by the appellant was not for the purpose of making or earning interest income. As such that was not allowed.
9. Thereafter matter came up before the Tribunal. Tribunal agreed with the view expressed by the assessing officer as affirmed by the Commissioner of Income Tax (Appeals) further noting that the issue stood covered in favour of the revenue by a decision of the Tribunal itself in the case of DCIT (Assts) SR-4 v. Midwest Iron and Steel 1 (1992) 198 ITR 375 (AP) 2 (1994) 208 ITR 379 (DELHI) 6 Co. Ltd (ITA No.1754/Hyd/95, dated 16.12.1996). Therefore, upholding the order of the Commissioner of Income Tax (Appeals), the two appeals of the appellant were dismissed.
10. In the hearing today, learned counsel for the appellant submits that issue raised in the two appeals has been answered by the Supreme Court in the recent decision in CIT v. Shree Rama Multi Tech Ltd.3.
11. However, learned counsel for the respondent submits that the facts in Shree Rama Multi Tech Ltd., (supra) and in the present appeals are distinguishable.
12. We have heard learned counsel for the parties and perused the materials on record as well as the decision of the Supreme Court in Shree Rama Multi Tech Ltd., (supra).
13. The question before the Supreme Court for consideration was whether interest accrued on account of 3 (2018) 403 ITR 426 (SC) 7 deposit of share application money is taxable income at the hands of the assessee?
14. The above question was framed on the following factual background. Respondent/assessee is engaged in the manufacture of multi-layer tubes and other specialty packaging and plastic products. For the assessment years under consideration, respondent/assessee claimed set off under the head of interest on share application money. This was partly allowed by the assessing officer whereafter respondent/assessee went in appeal before the Commissioner of Income Tax (Appeals), which was allowed by the first appellate authority by directing the assessing officer to grant certain reliefs. In the meanwhile, reassessment proceedings were initiated under Section 147 of the Act on the ground that assessing officer had reason to believe that income chargeable to tax for the said assessment year had escaped assessment. On re- assessment, assessing officer passed an order on 21.03.2006 determining the total income of the respondent/assessee at a much higher figure. This order 8 dated 21.03.2006 came to be challenged before the Commissioner of Income Tax (Appeals). One of the grounds urged was that in the order dated 21.03.2006, the interest accrued on public issue of share applications was not allowed to be set off. Commissioner of Income Tax (Appeals) though had partly allowed the appeal, however, affirmed the finding of the assessing officer in not allowing set off of interest income from share application money. It was thereafter that appeals and cross appeals were filed before the Tribunal. Tribunal agreed with the contention of the respondent/assessee and allowed its claim with respect to deduction on account of interest income.
15. It was in the above factual backdrop that the question as framed above came up for consideration before the Supreme Court. After referring to the material facts and relevant case laws, Supreme Court held as follows:
"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 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 some 9 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 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 comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the respondent was statutorily required to keep the share 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 set-off against the public 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 decision of the Tribunal dated 21.10.2011 that the interest income earned out of the share application money is liable to be set off against the public issue expenses. The judgment passed by the Division Bench of the High Court in remanding the matter to the Tribunal on other issues requires no interference." 10
16. From a careful analysis of the decision of the Supreme Court as extracted above, what is deducible is that according to the Supreme Court, if money is deposited in the bank for the purpose of earning interest and accordingly interest is earned, then it is liable to be taxed as income from other sources. But, if the interest income accrued is merely incidental and not the prime purpose of earning interest income which resulted into accrual of some additional income, then such income is not liable to be assessed; eligible to be claimed as deduction. Applying the above ratio, Supreme Court held that if the share application money received is deposited in the bank in the light of statutory mandatory requirement then the accrued interest is not liable to be taxed and would be eligible for deduction against public issue expenses. On the above basis, Supreme Court held that interest income earned out of the share application money is liable to be set off against the public issue expenses.
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17. On thorough consideration of all aspects of the matter, we are of the view that the above decision of the Supreme Court in Shree Rama Multi Tech Ltd., (supra) is squarely applicable to the facts of the present case.
18. Accordingly, we answer the substantial question of law framed in favour of the assessee and against the revenue. Consequently, order of the Tribunal is set aside.
19. Both the appeals are accordingly allowed.
Miscellaneous applications pending, if any, shall stand closed. However, there shall be no order as to costs.
______________________________________ UJJAL BHUYAN, CJ ______________________________________ C.V.BHASKAR REDDY, J 21.09.2022 Note: LR copy to be marked.
B/o.
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