TMI Blog1997 (1) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... en that large number of certificates pertained to the interest earned for the periods falling between 1-4-1991 to 31-3-1992. In terms of sections 3 and 5 of the Income-tax Act, interest due and accrued during the financial year ending on 31-3-1992 is assessable for the assessment year 1992-93. However, the assessee has not filed any return for the assessment year 1992-93 and because of that, the interest income had escaped assessment. Hence action under section 147 was initiated and notice under section 148 was issued on 28-10-1994. In response to the said notice, the assessee-company filed a 'nil' return on 28-11-1994. According to the assessee-company, there is no income assessable for the assessment year 1992-93. It was stated that interest earned on the deposits of the share application money in the banks was not income at all to the assessee up to 31-3-1992. The assessee-company had come out with a public issue of shares on 29-1-1992 and the issue closed on 3-2-1992. The proceeds collected from the public issue were deposited with the collecting banks for 46 days. The assessee-company had earned interest on these deposits and the issue involved was regarding the assessability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en allotted on 31-3-1992. This would mean that the assessee is the rightful owner of the monies including interest at least as on 31-3-1992, i.e., before the closing of the accounting year. Accordingly the interest earned on the deposits rightfully belonged to the assessee before the closing of the accounting year as on 31-3-1992 and assessable for this assessment year. " The Assessing Officer observed that during the year ended on 31-3-1992, there was no business activity and hence the interest earned was assessable under "Other sources". In that view of the matter, he brought to tax Rs. 1,83,31,363 being interest under the head "Other sources". Aggrieved by the said action of the Assessing Officer, the assessee preferred an appeal before the CIT(A). 3. The CIT(A) observed in his appellate order that the assessee is a public limited company engaged in the business of manufacturing detergents. The assessee had entered into a collaboration agreement with M/s Henkel KGA, Germany. The agreement for collaboration envisaged the participation by the collaborator in the equity shares to be issued by the assessee subject to the approval of the RBI. Besides, the assessee had also entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was accountable rightfully as its income only in the later assessment year 1993-94. The Assessing Officer negatived the contentions of the assessee. According to him, the shares were already allotted on 31-3-1992 and the assessee was the rightful owner of the money including the interest as on 31-3-1992. 4. Before the CIT(A), the assessee's counsel gave the following sequence of events relevant to the allotment of shares to M/s Henkel KGA, Germany and IFC, Washington : Date of receipt of approval of Government for 15% retention of oversubscription from Henkel 08-04-1992 Receipt of approval from RBI for allotment of shares of 15% retention of oversubscription for Henkel 15-04-1992 Regarding resolution for allotting shares to IFC (Washington) and Henkel for 15% oversubscription 17-04-1992 Receipt of approval from RBI for export of shares certificate to Henkel and IFCI 04-06-1992 The assessee also gave the sequence of events relevant to the public issue as under : Date of Opening Issue 29-01-1992 Date of Closing Issue 03-02-1992 Passing resolution for allotting shares to Public, Employees and Preferential shareholders of TPL 31-03-1992 Filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) and (2A) of section 73 of the Companies Act, held it was clear from them that the assessee was under obligation, in case of non-allotment or any other contingency, to repay the principal amounts only and not the interest. He noted that these provisions make it explicit that interest need not be paid if the money is repaid within 8 days after the company becomes liable to repay it. He further observed that the argument that the subscription money is in the nature of trust money perhaps emanated from the judicial decisions which have held that the money received by a company's banker to the issue for issue of shares cannot be used by the bank for the purpose of its lien and it does not become a part of the winding up of the bank. In those decisions it has been held that the money is in the nature of a trust fund. "But that is as far as the bank is concerned and not as respects the company". With respect to the application money, the restrictions placed by the Companies Act are only that-- (i) the money should be kept in a separate bank account; (ii) it could be used only for the purposes specified in section 73(3A); and (iii) in cases of non-allotment or similar contingenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Resolution of the Board on 17-4-1992 to Henkel and IFC. These Resolutions are filed in the paper book. As mentioned in page 6 of the Prospectus, the member of the public who applied for the shares have to deposit the cash, cheque/draft with the Bankers to the Issue, namely, State Bank of India, Indian Bank, Standard Chartered Bank, Bank of Baroda, American Express Bank Ltd., etc., as mentioned in page 13 of the Prospectus. The payment shall be made for example as "SBI-A/c SFCL Public Issue". The application money is not paid to the assessee-company by the public. According to section 73(3) of the Companies Act, 1956, all money received for the shares to be dealt on Stock Exchange have to be kept in a separate bank account maintained with a Scheduled Bank until the permission has been granted. The banks credited interest on such application money kept as for example "SBI-A/c SFCL Public Issue'. This interest is credited by the banks not only in India but abroad also up to 31-3-1992. Permission to do business in the assessee-company's share was given by the Stock Exchanges at Madras, Delhi, Ahmedabad and Bombay with effect from 27-4-1992, 8-5-1992, 21-5-1992 and 6-7-1992 respectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of Rs. 1,83,31,363 in the total income of the assessee under the head "Other sources" for the assessment year 1992-93 should be deleted. 7. The Departmental Representative supported the orders of the lower authorities and relied on the judgment of the Madras High Court in the case of CIT v. Arasan Aluminium Industries (P.) Ltd. [1996] 220 ITR 476/88 Taxman 515 wherein it was held that interest on advances made from paid up capital before commencement of business was assessable as income. 8. We have considered the rival submissions, case law cited, and perused the papers filed before us. The Assessing Officer in para 4 of his assessment order for the assessment year 1992-93 observed that "the proceed's collected from the public issue were deposited with the collecting banks for 46 days". The Assessing Officer has not brought on record in his assessment order the material on the basis of which he has observed to the said effect. What had happened factually is otherwise. In pursuance of the Prospectus dated 16-2-1991 issued by the assessee-company, the resident Indian public and foreign participants (Henkel and IFC) have paid monies to the Bankers to the Issue mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the share application money does not form part of the general assets of the company or bank and that the money deposited is merely in the custody of the bank and that the capacity in which the company or the bank received the said amount is fiduciary capacity. In the case of Rai Bahadur Seth Jessa Ram Fatechand v. Om Narain Tankha [1967] 37 Comp. Cas. 204 (SC), it was held that the character of the amount in question as trust money is not destroyed merely because the amount is kept in a Fixed Deposit. So it has to be held that the character of the trust fund applies not only to the share application money but also to the interest earned on share application money kept in Short-term Fixed Deposits by the Bankers to the Issue. The share application money along with the interest earned thereon becomes the asset of the Company only after the statutory requirements are complied with. In this case the approval by the RBI for allotment of shares to foreign participants and the permission by the Stock Exchanges etc. were all made after 31-3-1992 only. Therefore, we hold that the Assessing Officer was not at all justified in bringing Rs. 1,83,31,363 as taxable under the head "Other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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