TMI Blog2016 (7) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appeals filed by the same assessee are directed against the consolidated order of CIT(A)-III, Pune dated 27.05.2014 relating to A.Ys. 2004-05 and 2007-08 to 2009-10 passed u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short the Act ) and A.Y. 2005-06 passed u/s 143(3) r.w.s. 263 of the Act. Since the issues involved in all these captioned appeals are identical, hence, all these appeals are clubbed together and adjudicated by way of this common order for sake of convenience. 2. Before we proceed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. In order to enable him to discharge these statutory responsibilities, it is expected that reasonable time is left at his disposal. The task of completing assessment cannot be made unenviable with barely few days left. We find that the action of the assessee in filing belated legal objection of reasons recorded has led to the present situation 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 facts, the objections of the assessee concerning the assessment years 2007-08 and 2008-09 are also found unsustainable in law. 4. On merits, the solitary issue involved is disallowance of interest expenditure incurred on share application money received from shareholders. The facts germane to the issue are that the assessee is a closely held compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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 been paid at the rate of 12% per annum and added to the total income of the assessee. 5. The CIT(A) also endorsed the findings of the Assessing Officer. The relevant findings from the order of the CIT(A) are reproduced as under :- 3.3 I have given careful consideration to the submissions made by the appellant. The facts are undisputed. The moneys were received from existing share holders and their associates in the previous years and also during the years under consideration. The shares were to 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 refunded. There is no doubt that if on proved facts, it is established that company has decided not to allot shares, and the fact is established either through direct evidence or by necessary implications, the share application money would be debt owed and therefore the appellant is not unjustified in paying interest on what are debts owed. 3.5 It is a matter of record that the share application money has not been allotted to the applicants but remained unallotted for a substantial period of time. The 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant did not borrow the money for business purposes but intended to allot the same to the share holders, thereby giving the same the colour of equity and not borrowed capital. The fact that part of the money was utilized for business purposes 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 shareholders, directors and their relatives under the garb of share application money. In response to one of the queries raised during the appellate proceedings as to why when the accounts of the share holder and their relatives were being treated as current accounts, the appellant preferred to treat the same as share application money, the learned AR has clarified that this would have diluted the equity holding in the company. This leads to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 under appeal, i.e. in the A.Y.s 2004-05 and 2007-08. In view of the foregoing discussion, I find myself' in agreement with the Assessing Officer's view that when the money had been received with the intention at allotment of shares, it could not subsequently acquire the colour of borrowed funds even though it might have been utilized for business purposes. Accordingly, it is held that the appellant has not satisfied the first and foremost condition that there was borrowing of money or capital 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'ble Supreme Court of India in Brooke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon the orders of the authorities below. 9. We have carefully considered 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 appeal relates to the order of the CIT(A) in allowing the interest on share application money which was disallowed by the AO u/s.37(1) of the Income Tax Act. 23. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee company is a closely held company and only the family members are share holders of this company. The total number of shares of this company is 7,13,752 of the value of ₹ 10/- each. The assessee has received share application many from Vax Infradeveloper Ltd. during A.Y. 2004-05 and 2005-06. However, shares were not allotted and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 638 is in respect of computation of capital employed u/s.80J and hence not relevant for deciding the issue under appeal. The issue decided in the case of Travancore Titanium Products Ltd. Vs. CIT (1978) 114 ITR 626 is Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of ₹ 26.5 lakhs is not monies borrowed within the meaning of sub-rule (v) of r.1 of Schedule II of the Companies (profits) Surtax Act, 1964 ?. The issue decided in the above decision is under Companies (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 India Forging Ltd. ITA No. 419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52). It has been held that following the principle o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Since the learned CIT(A) while deciding the issue has relied on the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. and since nothing contrary was brought to our notice against the order of the Tribunal, therefore, we find no infirmity in the order of the CIT(A) allowing the claim of the assessee. Accordingly the ground raised by the revenue is dismissed. 10. In the light of the decision of the Co-ordinate Bench of ITAT, we find considerable merits in the argument of the assessee. We also find substance in the various contentions raised on behalf of the assessee. We are of the view that the share application money per se cannot be characterized and equated with share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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