Interest earned on share application money kept in fixed deposit was liable to be set off against the public issue expenses-Supreme Court
The question for consideration was whether in the facts and circumstances of the case, interest accrued on account of deposit of share application money was taxable income at the hands of the Respondent?
The Revenue has filed the instant appeal against the impugned judgment passed by the Division Bench of High Court of Gujarat whereby appeal filed by the Revenue was dismissed against the order of the Tribunal that the interest income earned out of the share application money was liable to be set off against the public issue expenses.
ABCAUS Case Law Citation:
ABCAUS 2305 (2018) (04) SC
Set off of Interest earned on share application money with public issue expenses
The respondent was a limited company whose case was reopened under section 147 of the Income Tax Act, 1961 (the Act) on the ground that the Assessing Officer had reason to believe that income for the relevant Assessment Year has escaped assessment. The AO completed the reassessment by rejecting the claim of set off of the interest income against the public issue expenses.
CIT (Appeals), partly allowed the appeal filed by the Respondent while affirming the findings of the AO in not allowing set off of interest income from share application money. Being aggrieved by the order of CIT-(A), both the parties filed cross appeals before the Tribunal.
The Tribunal, by a common judgment allowed the claim of the respondent with respect to the deduction on account of interest income and remanded the matter back to the Assessing Officer on other issues.
Against the order of the Tribunal, the Revenue filed an appeal before the High Court which was dismissed on the point of taxability of the interest income. Aggrieved by the order, the Revenue had filed the appeal before Hon’ble Supreme Court.
The Hon’ble Supreme Court observed that 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 was earned which was shown in the return of income originally filed as income from other sources which was also referred to in 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, however, the Respondent 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. As per the respondent the details of interest income on share application money was already furnished at the time of original assessment.
The Hon’ble Supreme Court observed 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.
The Hon’ble High Court opined that the 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. Regarding the contention of the Revenue 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, the Hon’ble Supreme Court opined that this factor would not 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.
The Hon’ble Supreme Court expressed that the common rationale 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.
In the present case, if the share application money that was received was 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.
Accordingly the Hon’ble Supreme Court opined that High Court was right in upholding the decision of the Tribunal
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