2001 (4) TMI 197 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest received from bankers on share application monies as income.
2. Allowance of expenditures incurred in the process of issuing shares against the interest received.

Detailed Analysis:

Issue 1: Treatment of Interest Received from Bankers on Share Application Monies as Income

The assessee challenged the authorities' decision to treat the interest received from bankers on share application monies as income. The interest amounts were Rs. 1,38,18,155 for the assessment year 1992-93 and Rs. 13,98,042 for the assessment year 1993-94. The assessee argued that the interest should not be treated as income from other sources since it was capitalized and not related to their business activity. The assessee contended that the share application money, kept in a bank account as per guidelines, acted as trust funds and did not form part of the company's general assets until the allotment of shares. Therefore, the interest accrued during this period should be considered an accretion to the capital and not income of a revenue nature.

The authorities, however, treated the interest earned during the interim period as income from other sources and brought it into tax. The assessee's reliance on the ITAT, Madras Bench decision in Henkel Spic India Ltd. v. Dy. CIT was noted, where it was held that share application money did not form part of the company's general assets until the allotment of shares. The learned DR supported the authorities' decision, citing the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest income is of a revenue nature unless received as damages or compensation.

The Tribunal, after considering the decisions in Henkel Spic India Ltd.'s case and Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, concluded that the interest earned on share application money should be treated as income from other sources. The Tribunal noted that although the share capital contribution money belonged to the expected allottees, the interest earned was received by the assessee-company after the allotment of shares. The interest income thus went to the company's coffers and should be taxed as income from other sources. The Tribunal also referred to the decisions of the A.P. High Court in CIT v. Derco Cooling Coil Ltd. and the Delhi High Court in CIT v. Modi Rubber Ltd., which held that interest earned on deposits of share capital is taxable as income from other sources.

Issue 2: Allowance of Expenditures Incurred in the Process of Issuing Shares Against the Interest Received

The assessee also challenged the authorities' decision not to allow the expenditures incurred in the process of issuing shares to be set off against the interest received. The assessee claimed deductions of Rs. 1,44,40,535 and Rs. 38,54,600 for the assessment years 1992-93 and 1993-94, respectively. The assessee argued that there was a direct nexus between the expenditure and the interest accrued, and both were capital in nature. Therefore, the share-issue expenditure should be set off against the interest, and any balance should be allowed under section 35D of the IT Act, 1961.

The learned DR opposed this argument, citing several decisions, including CIT v. Autokast Ltd., Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, and Derco Cooling Coil Ltd.'s case. The Tribunal reviewed the cited decisions and concluded that the authorities rightly did not allow the assessee to set off the share-issue expenditure against the interest earned. The Tribunal noted that the expenses incurred in the process of issuing shares could not be allowed as deductions before the commencement of business, as there was no provision under the Income-tax Act for such deductions. The Tribunal referred to the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, which held that interest income is of a revenue nature and should be taxed accordingly.

Conclusion:

The Tribunal dismissed both appeals filed by the assessee, upholding the authorities' decisions to treat the interest received on share application monies as income from other sources and not allowing the expenditures incurred in the process of issuing shares to be set off against the interest received.