2008 (4) TMI 234 - HC - Income Tax

Held that interest earned/accrued by the assessee on the share application money lying with the Bank under the mandate of Section 73 of the Companies Act is not taxable as Income from other source and was required to be set off or adjusted against the public issue expenses so as to reduce the amount of public issue expenses for the purpose of enabling the assessee to claim amortization under and in accordance with the provisions of Section 35D

Summary

Issues Involved:
1. Taxability of interest earned on short-term deposits of share application money.
2. Classification of income from interest under the Income Tax Act.
3. Applicability of Section 35D for amortization of public issue expenses.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Short-term Deposits of Share Application Money:

The primary issue in this case was whether the interest earned by the assessee from short-term deposits of the share application amount received is taxable as "income from other sources" or if it should be set off against the expenses incurred for the public issue. The Tribunal held that the interest earned should be set off against the public issue expenses, relying on the Supreme Court's judgment in CIT v. Bokaro Steel Ltd. The Tribunal's decision was challenged by the Revenue, which relied on the Supreme Court's decisions in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax and Commissioner of Income-Tax v. Coromandal Cements Ltd.

2. Classification of Income from Interest under the Income Tax Act:

The relevant legal question was whether the interest earned on the share application money should be classified as "income from other sources" under Section 14F of the Income Tax Act. The Revenue argued that interest is always a revenue receipt unless it is by way of damage or compensation, as held in Tuticorin's case. The assessee contended that the interest earned was not a result of a voluntary act but a compulsion under the Companies Act, and therefore, should not be taxed as income from other sources. The court examined the provisions of Section 56 and the definition of "securities" under the Securities Contracts (Regulation) Act, 1956, concluding that the share application money does not fall within the definition of "securities." Consequently, the interest earned on this money cannot be classified as "income from other sources."

3. Applicability of Section 35D for Amortization of Public Issue Expenses:

The court also addressed whether the interest earned on the share application money should be set off against the public issue expenses for amortization under Section 35D of the Income Tax Act. The Tribunal had allowed this set-off, considering the interest as intrinsically connected with the public issue expenses, similar to the reasoning in Bokaro Steel Ltd.'s case. The court agreed with this view, stating that the interest accrued on the share application money should reduce the public issue expenses, which are to be amortized under Section 35D.

Conclusion:

The court concluded that the Tribunal was correct in holding that the interest earned on the share application money is not taxable as "income from other sources." Instead, it should be set off against the public issue expenses, reducing the amount to be amortized under Section 35D. The appeal by the Revenue was dismissed, affirming the Tribunal's decision. The court clarified that the assessee had not claimed the adjustment of this interest against other liabilities, and it was not to be taxed as income from "Profits and gains of business or profession."

Final Judgment:

The court dismissed the Revenue's appeal, affirming that the interest accrued on the share application money is not taxable as "income from other sources" and should be set off against the public issue expenses for the purpose of amortization under Section 35D.