TMI Blog2010 (3) TMI 1110X X X X Extracts X X X X X X X X Extracts X X X X ..... ad received SAM of ₹ 75.60 crores from GMR Investments Pvt. Ltd. for allotment of cumulative redeemable preference shares. The company made allotment of preference shares aggregating to ₹ 27.5 crores on 2.3.03 and the un-allotted amount remain as SAM. As the allotment was not made within the specified period as agreed upon, the assessee paid interest @ 8% from the date of receipt of SAM and also for the subsequent period on the balance SAM. TDS, was, perhaps made for the interest paid and the recipient had admitted the same as income. Drawing strength from legal precedents, the assessee had claimed the same as business expenditure u/s 36(1) (iii) of the Act. 4. Brushing aside the assessee's contentions, the AO took a view that- (i) in the case of Winner Estates Pvt. Ltd [272 ITR 144 (AT)] relied on by the assessee, the issue was under Wealth-tax and held that the share application was not a debt under the W.T. Act. If it was not a debt, the provisions of s.36(1) (iii) were not applicable and that no interest was allowable; (ii) In the case of CIT vs. Nirmal Commercial Ltd. (213 ITR 361), the finding was entirely on different facts and had no application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses, the profit above line along is the basis, because, that is the real profit of the year. In the case of Sree Rajendra Mills Ltd. vs. DCIT 63 TTJ 697 (Mad), it was held that the prior period expenses charged to the P and L appropriation account cannot be deducted from the profit of year for the purpose of book profit. Accordingly, the profit above line is considered as the basis. 6. Aggrieved, the assessee took up these issues before the CIT(A) for relief. The submission made by the assessee before the CIT(A) is summarized as under: (i) the assessee had certain negotiation with ING Vysya Insurance Co. Ltd [ING Vysya] for subscribing to the insurance companies' equity capital and, accordingly, the assessee had obtained inter corporate loan of ₹ 27.5 crores in July 2001 from GMR Investments Ltd. and the same amount was invested towards equity capital of ING Vysya. This inter corporate loan was reflected in the books of the assessee as unsecured loan from GMR Investments on which interest was paid to the creditor and call option fees received from ING Vysya; (ii) The assessee had decided in March 2002 to raise further funds through private placement by issui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the amount received transferred to share capital. There is no prohibition against the company utilizing such monies received through private placements towards share capital, in the event of allotment not being made, the amount will have to be refunded back; - on a combined reading of such provisions of the Companies Act and the rules made there-under, it is clear that SAM received by a company has to only be treated as a borrowing in the hands of the company so long as the allotment of shares to the applicant has not been made. The relationship between the share applicant and the recipient continues to be creditor and debtor. The share application money does not instanteously become the capital of the recipient on the date of receipt of the same. Within the provisions of the Companies Act, the recipient can lawfully provide for interest payment from the date of receipt of SAM till the date of allotment of such shares; - thus, under the companies Act, the nature of the SAM being that of borrowing the nature of the same funds for the purpose of applying the provisions of the IT Statute would equally continue to be in the nature of a borrowing. While applying the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest on SAM u/s 36(1) or 37(1) of the Act. Thus, it is clear where the terms and conditions of preference shares issue show that the applicant would be entitled to get interest till the date of allotment and where it is specified that the applicant would have right to withdraw monies, if the allotment is not made before a specified date along with interest thereon, then application money has to be regarded as debt in money terms until the allotment is made. So also where in the letter of invitation of application money the issuing company specifies that it has right to accept or reject the application towards the allotment of shares as its sole discretion and to refund SAM with interest where it decides against the allotment of share; the application money so received by the recipient may to be regarded as a debt in money terms and, accordingly, interest on such share application money could be considered as allowable expenditure u/s 36(1) (iii) of the Act. 6.1. After duly considering the forceful and lengthy submissions of the assessee coupled with various judicial pronouncements, analyzing the issue exhaustively and elaborately in its perception and also perusing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ul to allow interest on SAM towards the proposed issue of preference shares by the assessee during the period in which the SAM was retained by the assessee till the date of allotment of such shares; (iv) Thus, the AO was not justified both in facts and in law to deny the claim of interest on SAM as a deduction in computation of profit and gains of business. 7. Before us, it was contended by the Ld. D R that the interest paid for the delay in allotment of shares also an expenditure like brokerage/commission connected with raising of share capital and thus the Hon'ble Supreme Court in a number of cases held that the expenditure incurred in connection with raising of share capital partakes the character of capital expenditure. The Ld. D R had placed reliance on a number of judicial pronouncements, notably, the finding of the jurisdictional High Court in the case of Kirloskar Elec. Company Ltd. vs. CIT reported in 228 ITR 674 (Kar). It was, further, submitted that in the offer document, it was stated that in case of delay in allotment of shares, interest at 8% is payable. However, there was no provision to allow interest in the case of withdrawal of application before all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of issue (shares) provides that the applicant would be entitled to get interest upto the date of allotment and that the applicant will have a right to withdraw the monies before the allotment and, thus, the SAM received would be regarded as debt until the allotment was made; - in case of a private company, application money in respect of shares which have not been allotted, until allotment of such shares, is a debt and thus, there was relationship of debtor and creditor between the assessee and the applicant, the amount so received towards SAM would be a 'debt'; - until allotment is made by the company, the relationship is one of the debtors and creditors and only on allotment is the amount received transferred to share capital [source: Sixth Edition 2004 - guide to the Companies Act by A Ramaiya on page 898] - relies on the decision of Delhi Tribunal in Winner Estates (P) Ltd. vs. DCIT reported in (2004) 91 ITD 431 and in Dalmia vs. CIT 110 ITR 644 (SC) and 191 ITR 641 (SC). 8. We have carefully considered the rival submissions, perused the relevant records and also the voluminous paper book containing 1 to 431 pages which consists of inter alia, copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the first appellate authority, the Ld.CIT (A), as highlighted earlier, analyzed the pros and cons of the issue elaborately backed with the legal precedents in favour and also against and finally came to a conclusion that the AO was not justified both in facts and law to deny the claim of interest on SAM as a deduction in computation of profits and gains of the business of the assessee. He drew strength - to come to such a conclusion - on the finding of the Hon'ble I.T.A.T., Bangalore Bench reported in (1997) 61 ITD 49. 8.1.4. Let us now look at the issue in a sequential manner: (i) In the Letter of offer, the assessee had made it clear that interest @ 8% will be paid on the application money from the date of realization of cheques etc. upto the date of allotment; (ii) The assessee was able to allot shares only to the extent of ₹ 27.50 crores as against ₹ 75.60 crores received from GMR Investments as SAM for allotment of preference shares; (iii) In the Sixth Edition 2004 of Guide to the Companies Act by A Ramaiya, it has been unambiguously stated that until allotment is made by the company, the relationship is one of the debtor and creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to return cash? for which, the Hon'ble Tribunal has held Yes . (v) The Hon'ble Apex Court in the case of Seth R Dalmia vs. CIT, Delhi reported in 110 ITR 644 has held that- The assessee agreed to buy share from a bank, but did not take delivery of the shares even after paying the price. The dividends were held by the bank for the assessee's benefit, whether the interest charged on purchase price and the damages for the failure to take delivery of shares are allowable expenditure? The dividends income was assessable in the assessees' hands. The interest was wholly paid by the assessee for earning the dividend income. Therefore it cannot be said that it is of capital nature as the requirements of s. 12(2) of IT Act, 1922 are net; the interest is allowable as deduction. The damage for failure to take delivery was of capital nature. Therefore it cannot be allowed as expenditure. With respects, we are of the firm view that the ratio of the ruling of the Hon'ble Court is applicable to the case on hand. When the Hon'ble Court was magnanimous in its wisdom to rule that the interest paid cannot be said that it is of capital nature, but, at the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration with regard to the shares to be allotted under such a binding contract was in the nature of a debt; (b) in that case, the Hon'ble Court held that the interest expenditure cannot be regarded as expenditure incurred for the purpose of carrying on business, but, it was rather a compensation for the delay in issuing of shares which was agreed upon to be issued whereas in the case on hand the expenditure had a direct nexus with the income by way of SAM and, therefore, it cannot be categorized that the expenditure was not incurred for the purpose of carrying on the business. (viii) The issue before the highest judiciary of the Country - in the case of Kerala Road Lines vs. CIT reported in (2008) 299 ITR 343 was, in brief, that, the assessee entered in an agreement to purchase some land with buildings thereon. It was agreed upon that the sale deed would be executed in favour of the assessee or its nominees. Under the agreement, if the purchase price was not paid within the specified time, the assessee was liable to pay interest @ 75%. The buildings standing on the said land were demolished and the income from scrap material was treated as the business income of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid and legal in terms of the above mentioned provisions of the Companies Act and since such interest payment is being made on borrowed funds (may be from the shareholders themselves), the interest payments are allowable as deductions under section 36(1) (iii) of the Income-tax Act 1961. At the same time again, we find that payment of interest is authorized by the Resolution passed in the General Meeting (sic) General Body Meeting up to the limit of 10% only. Hence, the interest payment in excess of such limit of assessment year 1988-89 cannot be considered to be authorized by the General Body meeting. The interest payment to the extent is, therefore, to be disallowed. Ultimately, for the assessment year 1988-89, we uphold the action of the CIT(A) in allowing the interest payment to the extent of 10% only of the advance call amount of ₹ 7355110. Excess payment to the extent of 2 1/2% is, therefore, required to be disallowed....... On a careful reading of the finding of the jurisdiction Tribunal, we are of the firm view that the ratio of the said decision is applicable to the facts of the case on hand. 8.1.5. In an over consideration of the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds. 10.1.1. On legal front, the Hon'ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT reported in 255 ITR 273 has observed thus- .................. we are of the opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put-it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J. 10.1.2. Yet an another decision, the Hon'ble High Court of Delhi in the case of CIT, Delhi-II vs. Khaitan Chemicals and Fertilizers Ltd. reported in (2008) 175 Taxman 195 had an occasion to consider an identical issue. The issue before the Hon'ble Court was, in brief, that- The assessee-company had calculated the taxes payable by it as per section 115JA and for that purpose, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statement of profit and loss. From this, it is clear that both prior period items as well as 'extraordinary items' are to be included in the determination of net profit or loss. If a prior period item is an expense, it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be incomes or expenses. The conclusion is that prior period items and extraordinary items form part of the net profit or loss. Paragraph 15 of AS-5 makes it clear that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the 'current' profit or loss can be perceived. Two approaches have been indicated in paragraph 19 of the said Accounting Standard (AS-5) The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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