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2016 (7) TMI 257 - ITAT PUNE

2016 (7) TMI 257 - ITAT PUNE - TMI - Allowability of interest on share application money - interest expenditure incurred on share application money received from shareholders - Held that:- We are of the view that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of share are subject to certain regulations .....

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st expenditure on share application money as revenue expenditure deserves to be allowed. AO is directed to delete the addition on merits. See Rohit Exhaust Systems Pvt. Ltd. [2012 (10) TMI 1101 - ITAT PUNE] - Decided in favour of assessee - ITA Nos.1533 to 1537/PN/2014 - Dated:- 20-5-2016 - SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant : Shri Neelesh Khandelwal For The Respondent : Shri D. N. Parakh ORDER PER PRADIP KUMAR KEDIA, AM : The aforesaid captioned five appe .....

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eed to deal with the merits of the case, we shall first dispose of legal objection raised on behalf of the assessee concerning assessment years 2004-05, 2007-08 and 2008-09. The assessee has inter-alia raised preliminarily objections for improper compliance of section 147 of the Act for the assessment years 2004-05, 2007-08 and 2008-09. The Ld. Authorized Representative (AR) for the assessee submitted in the course of hearing that the objections were raised by the assessee against reasons record .....

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d 15.10.2010. As per letter of the assessee dated 18.11.2010, the assessee acknowledged the receipt of reasons recorded under section 148(2) of the Act. The Assessing Officer noted that till 07.12.2011, no legal objections thereof were filed by the assessee. In the circumstances, owing to embargo of limitation for completion of assessment by 31.12.2011, the Assessing Officer observed that no speaking order is needed on the issue. A sequence of events noted above would suggest that the Assessing .....

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e. The Hon ble Supreme Court in the case of G.K.N. Driveshafts India Ltd. vs. ITO, (2003) 259 ITR 19 (SC) directed the Assessing Officers to dispose of the objections by passing a speaking order. These directions are founded on the principles of natural justice. As noted earlier, in the instant case, the assessee has not been able to demonstrate that the objections were filed within reasonable time where the Assessing Officer has failed to adhere to the judicial fiat of the Hon ble Supreme Court .....

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tion for which the assessee itself only has to blame. In the absence of timely response to the notice issued under section 148 and raising the objections within reasonable time after compliance, the assessment process cannot be stifled. The Ld. AR also failed to demonstrate as how the objections disposed of does not meet the requirement of law. Therefore, we find that the legal objections are unsustainable and accordingly decided against the assessee. Following the parity of reasoning in similar .....

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rest expenses of ₹ 23,04,273/- on account of interest paid on share application money received from existing shareholders pending allotment. Similar interest expenses were claimed on the impugned share application money in other assessment years in appeal. The Assessing Officer questioned the allowability of interest expenditure under section 36(1)(iii) as well as under section 37(1) of the Act. The Assessing Officer built-up the case against the assessee on the ground that ingredients of .....

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ceipt of amount of share application money is not for the purpose of business of the assessee as the amount represents receipt against allotment and expansion of its share capital. The Assessing Officer observed that share capital is never borrowed but is subscribed. Therefore, the receipt of share application money which is a source of capital for the assessee can neither be characterized as capital borrowed in terms of section 36(1)(iii) nor can be ascribed to have been incurred for business p .....

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hat expenditure on account of interest paid on share application money is not of a revenue in nature but a capital expenditure in nature and therefore is not allowable under section 37(1) of the Act. As regards the allowability of the interest expenditure under section 36(1)(iii), the Assessing Officer observed that in the absence of any act of borrowing by the assessee per se conditions laid down under section 36(1)(iii) are not fulfilled. He accordingly disallowed the interest claimed to have .....

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be allotted at par value. By 31.03.2003, the appellant had received ₹ 5,95,70,652/- of share application money that was pending allotment. During the F.Y. 2003-04, relevant to the A.Y. 2004-05, the appellant company took a decision that since the shares could not be allotted within a reasonable period of time, the money had to be refunded along with interest thereon. Vide Resolution of the Board of Directors dated 02.02.2004, it was resolved that "subject to the Article of Association .....

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e come to the A.Y.s 2008- 09 and 2009-10. In those years the appellant has received fresh share application money. Accordingly, the year wise position of the share application money (SAM) as per books, amount refunded out of SAM or alternatively, shares allotted, interest paid/payable thereon and TDS paid on such interest is tabulated as under: Item A.Y.2004-05 A.Y.2005-06 A.Y.2006-07 A.Y.2007-08 A.Y. 2008-09 A.Y. 2009-10 SAM received pending allotment 5,95,70,652 3,50,61,817 2,66,20,454 71,86,4 .....

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not akin to the act of borrowing. On this issue, it is seen that in the commentary of Ramaiya on Company Law, the learned author has opined that until allotment of shares is made by a company, there is relationship of a debtor and the creditor between the company and the person applying for allotment of shares. It has been further observed that there is no prohibition against the company utilizing share application money. In the event of allotment not being made, the amount will have to be refun .....

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e Assessing Officer has also not disputed the contention of the appellant that the share application money was utilized for business purposes. He has not arrived at the finding of fact that the share application money was utilized for non-business purposes or for the personal benefits of the Directors or shareholders of the appellant company. The factual position that none of the funds received by way of share application money has been siphoned off towards non-business purposes is clear from th .....

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accounting treatment of share application money as per ICAI Compendium of Opinions Vol XII as contended by the appellant as it is not germane to the issue under appeal, which is whether any interest paid on share application money is deductible u/s 36(1)(iii) or alternatively, u/s 37(1) of the Income Tax Act, 1961. 3.6 Accordingly, when the details of share application money and its subsequent allotment and refund were called for and examined, it was revealed that the appellant received, right f .....

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ith interest thereon. Vide Resolution of the Board of Directors dated 02.02.2004, it was resolved that "subject to the Article of Association of the company, maximum interest @12% on the pending allotment on the share application money is hereby allowed and approved on the pending allotment on the share application money received from time to time from the applicant". Consequently, in the A.Y. 2004-05, ₹ 28,72,918/- out of the above share application money standing in the books o .....

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ses does not change the colour of the funds. 3.7. Coming to the relevant A.Y. 2005-06, the appellant refunded ₹ 1,00,36,101/- along with interest of ₹ 17,78,963/-. It seems that the appellant, knowing fully well that the authorized share capital of the company was only ₹ 3,00,00,000/- and that in such a situation, it could not have been in a position to allot the shares to the persons from whom share application money was received, nevertheless accepted the money from sharehold .....

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ps to raise the authorized capital base of the company although it was sitting on share holder funds of substantial amounts. It was only following the Board of Director s resolution dated 20.03.2007, that the appellant company resolved to increase the authorized share capital from ₹ 3,00,00,000/- to ₹ 6,00,00,000/- and simultaneously, decided to allot 29,97,500 equity shares as fully paid bonus shares to existing share holders in the proportion of one bonus share for everyone existin .....

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appellant reinforces the view that despite availability of funds from share holders, it preferred to refund the money along with interest thereon and claim additional expenditure while the fact remains that the appellant intended to allot shares in the very same year through the dubious method of capitalization of reserves. 3.8. When the above facts are brought on record, there is no room left for doubt that the amounts in question were in the nature of equity and received for the purposes of c .....

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ion and high cost of servicing equity, the Board of Directors decided to refund the amount collected. No such facts are there in the present case, wherein the funds have been received from the existing share holders and their family members. Further, admittedly, in the case before the Pune ITAT, there was no increase of capital and the share application money has not been converted into allotment of shares, whereas in the present case, there has been allotment of shares in at least two years und .....

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al by the appellant in order to claim interest expenditure u/s 36(1)(iii). The facts on record are clinching proof that the funds are share application money and partake the colour of equity. The corollary of this finding is that the interest paid on share application money cannot be claimed u/s 37(1) of the Income Tax Act, 1961 in view of the fact that it clearly is in the nature of capital outlay and intended to expand the capital base of the company and the same is settled law by the Hon' .....

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allotment of shares are made, it is in the nature of ordinary fund similar to a borrowed fund. It was pointed out that before the allotment is crystallized in favour of the applicants, no right accrues in the capacity of shareholders. Hence, mere receipt of share application money pending allotment thereof cannot be seen differently from ordinary borrowed capital. Till the time, the decision to allot shares against the share application money and subject to fulfillment of other attendant terms .....

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is not justified. The obligation to refund or repayment of principal amount received is always inherent in such share application money unless there is a positive act on the part of the assessee to convert the share application money into share capital. The Ld. AR submitted that one has to look into the inherent nature of the receipt kept as share application money which is pending allotment. He, therefore, submitted that the revenue has proceeded on an entirely wrong premise and has made wrongf .....

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red the rival submissions and perused the orders of the authorities below and case laws cited. The only issue involved is the allowability of interest on share application money under the provisions of the Income-tax Act. We find that the issue is squarely covered by the order of the Co-ordinate Bench of ITAT in the case of Rohit Exhaust Systems Pvt. Ltd. (supra). The relevant paras concerning the issue are reproduced hereunder :- 22. The only effective ground raised by the revenue in this appea .....

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many from Vax Infradeveloper Ltd. during A.Y. 2004-05 and 2005-06. However, shares were not allotted and the share application money pending allotment for the impugned assessment year as on 31-03-2007 was shown at ₹ 1,43,74,942/-. The assessee for the impugned assessment year has paid interest of ₹ 14,59,440/- being interest @8% per annum on share application money pending allotment. The assessee claimed the same as business expenditure treating it as borrowed capital/loan on the gr .....

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owed the interest so paid on share application money. 24. Before the CIT(A) it was submitted that the assessee has utilised the share application money pending allotment for the day-to-day business which includes payments to suppliers of materials, labour etc. thereby reducing working capital exposures from banks. The decision of the Hon ble Bombay High Court in the case of Hindustan Conductors Pvt. Ltd. 240 ITR 762 and the decision of the Pune Bench of the Tribunal in the case of Western India .....

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r the reason that the same cannot be treated as a loan or amount borrowed. In support of this proposition, the AO has relied on the decisions in the cases of Shivalik Fuel (P) Ltd. Vs. CIT (2005) 276 ITR 638, Travancore Titanium Products Ltd. Vs. CIT (1978) 114 ITR 626 and Addl. CIT Vs. Bangalore Soft Drinks (P) Ltd. (1980) 126 ITR 38. On perusal of the decisions it has been noticed that the decision in the case of Shivalik Fuel (P) Ltd. Vs. CIT (2005) 276 ITR 638 is in respect of computation of .....

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(Profits) Surtax Act, 1964 and the same is not relevant for deciding the issue under appeal. In the case of Addl. CIT Vs. Bangalore Soft Drinks (P) Ltd. (1980) 126 ITR 38 the issue decided was in respect of deduction u/s.80J and computation of capital employed for the said deduction u/s.80J and applicability of Rule-19A(3) etc. The issue decided in this case is also not relevant for deciding the issue under appeal. The identical issue has been decided by Hon ble ITAT, Pune in the case of Western .....

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per provisions of section 73(2) of the Companies Act, the maximum interest rate prescribed is 15% on return of share application money in the circumstances cited u/s.73 of the Companies Act. The appellant has paid interest @8% per annum which cannot be regarded as excessive. Another reason stated by the AO for disallowance of interest is that it was not obligatory for the appellant company to pay interest on share application money pending allotment. The Hon ble ITAT Pune, in the case of Western .....

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e carrying on of the business would be deductible u/s.37. In view of the above facts and discussion and the ratio laid down by the decisions relied on by the appellant and particularly following the decision of Hon ble Jurisdictional Tribunal on identical issue, the addition made by the AO on account of disallowance of interest on share application money pending allotment is deleted. The AO is, therefore, directed to delete the addition of ₹ 14,59,440/-. Ground No. 1&2 stands allowed. .....

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on such share application money pending allotment which according to the assessee should be allowed u/s.36(1) (iii) of the Income Tax Act and which according to the AO is not an allowable expenditure. We find in appeal the CIT(A) following the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. (Supra) allowed the claim of the assessee wherein it has been held that interest on share application money is allowable on the principles of commercial expediency. 27. Si .....

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