Commissionr Of Income Tax Iv Ahmedabad vs Shree Rama Multi Tech. Ltd.

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6391 of 2013

The Commissioner of Income Tax­IV, Ahmedabad …..Appellant(s)

Versus

M/s. Shree Rama Multi Tech Ltd …..Respondent(s)

WITH CIVIL APPEAL NO. 8336 OF 2013

J U D G M E N T

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 Revenue­the appellant herein against the judgment and

Signature Not Verified order dated 21.10.2011 passed by the Income Tax Appellate Digitally signed by SWETA DHYANI Date: 2018.04.24 17:14:42 IST Reason: Tribunal (in short ‘The Tribunal”) in ITA No.1039/Ahd./2007 and

ITA No. 240/Ahd./2008.

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2) Brief facts:­

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

engaged in the manufacture of multi­layer tubes and other

specialty packaging and plastic products. The dispute in the

present case relates to Assessment Years 1999­2000, 2000­2001

and 2001­2002. The Respondent filed its return of income for the

Assessment Year 2000­2001 declaring a total income of Rs

20,00,59,650/­. 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/­. 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 re­adjudication on certain matters

including that of set­off 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 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

2 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 of Income Tax (Appeals).

Learned CIT (Appeals), vide order dated 09.01.2006, allowed the

appeal filed by the Respondent while directing the Assessing

Officer to grant relief by re­computing the income and modifying

the tax calculation without applying the proviso to Section 240 of

the IT Act. In the meanwhile, re­assessment proceedings were

initiated in accordance with Section 147 of the IT Act on the

ground that 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/­.

(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 deduction of interest income of Rs.

1,71,30,212/­ from public issue expenses, the Respondent went

3 in appeal before the CIT (Appeals) by filing CIT (A) ACITC

8/74/2006­2007. Learned CIT (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 filed cross­appeals 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.

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3) Heard learned counsel for the parties and perused the

factual matrix of the case.

Point(s) for consideration:­

4) Whether in the facts and circumstances of the present case,

interest accrued on account of deposit of share application

money is taxable income at the hands of the Respondent?

Rival contentions:­

5) Learned counsel appearing on behalf of the Appellant

contended that the impugned final order passed by the High

Court is against law and facts of the present case. 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 set­off

against the public issue expenses.

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6) Learned counsel for the appellant finally contended that the

law is well settled that the interest income is always regarded as

of revenue 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:­

8) The Respondent company had come out with initial public

issue during the year under consideration and the amount of

share application money received was deposited with the banks

on which interest of Rs. 1,71,30,202/­ was earned which was

shown in the return of income originally filed as income from

6 other sources which was also referred to in Col. 13(d) of the Tax

Audit report filed under Section 44AB of the IT Act. 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. 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. 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 what portion of interest earned on FDRs was

7 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 for pre­allotment and post­allotment, 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 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 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

8 ultimately be appropriated by the Company, insofar as present

case is concerned, we do not see how this factor would make any

significant 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 machinery let out to contractor,

royalty on stones removed from its land. It was in this

background that this Court held that the amounts were directly

connected to and incidental to construction of plant by the

company, amounts were capital receipts and not income from

any independent source.

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11) Further, the rationale of judgment of Bokaro Steel Ltd.

(supra) was followed in Commissioner of Income Tax vs.

Karnal Co­operative 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 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

10 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 set­off 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.

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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.

14) The appeals are accordingly dismissed. The parties to bear

their own cost.

…….....…………………………………J. (R.K. AGRAWAL)

…….…………….………………………J. (ABHAY MANOHAR SAPRE)

NEW DELHI;

APRIL 24, 2018.

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