Telangana High Court

Everest Organics Ltd vs The Commissioner Of I.T., ... on 21 September, 2022

Bench: Ujjal Bhuyan, C.V. Bhaskar Reddy

       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)

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.

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

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

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

(1992) 198 ITR 375 (AP)

(1994) 208 ITR 379 (DELHI)

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

(2018) 403 ITR 426 (SC)

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

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

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."

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