TMI Blog2008 (4) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the judgment of Hon'ble the Supreme Court, in CIT v. Bokaro Steel Ltd., reported in [1999] 236 ITR 315. 2. The appeal was admitted vide order dated 10.8.2005, by framing the following substantial question of law:- "Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that interest earned by the assessee from short term deposits of the share application amount received is not taxable as income from other sources, but is income from profit and gains of business and was liable to be set off against the other liability of the assessee to pay interest on borrowed money?" 3. The necessary facts are, that the assessee filed a return which was processed under Section 143 (1)(a). Thereafter the case was selected for scrutiny, and notices were issued under Section 143(2) and 142 (1), from time to time, and query letters were also issued. In response whereto, the assessee appeared through authorised representative, and produced the relevant books of accounts, and fresh assessment order was passed under Section 143(3). By this assessment, fresh computation of income was made. However, since the controversy relates only to one item, bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the learned counsel for the appellant, it is not in dispute, that the amount of the share application money was lying deposit with the bank, and it earned interest in the sum of Rs. 1210286/-, and as held in Tuticorin's case [1997] 227 ITR 172 (SC), that interest is always a revenue receipt, unless of course, it is by way of damage or compensation. It was also contended, that the assessee is entitled to amortize expenses of public issue under Section 35D of the Act, which clearly specifies the various heads under which the expenses incurred is permitted to be amortized, in terms of that section, and that section does not provide, for any setting off, of the amount received by way of interest. It is contended, that the matter is required to be examined, as if there were two channels for flow of funds; one being entry channel, and the other being exit channel, the money coming from entry channel is liable to be taxed, and money flowing out from exit channel is required to be considered for amortized under Section 35D, and then, there is no provision for setting off. With this it was contended, that in Tuticorin's [1997] 227 ITR 172 (SC) case it was held by Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent case it was not a voluntary act on the part of the assessee, in putting the amount in short term deposits, rather it was an act of compulsion against the assessee, that the amount was required to be deposited by the applicants in the bank, as required under the Companies Act, in an account which is popularly known as escrow account, and that by virtue of provisions of Section 73(3) and (3A) the amount cannot be utilised for any purpose, other than the purpose mentioned in sub-section 3A, at the pain of the penalty provisions. In that view of the matter, since the interest accrued on this amount was not a result of any voluntary act of the assessee, the principle propounded in Tuticorin's [1997] 227 ITR 172 (SC) case cannot apply. On the basis of this reasoning, it was contended, that the nearest case applicable to the controversy is, Bokaro Steel's case [1999] 236 ITR 315 as it is not in dispute, that the assessee is entitled to amortize public issue expenses, and since the interest accrued was in the nature of "essential bye-product" of the exercise of public issue, and therefore was, within the meaning of principle propounded in Bokaro Steel's case [1999] 236 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted in accordance with the provisions of the Income-tax Act, Section 14 whereof lays down, that for the purpose of computation, income of an assessee has to be classified under the six heads, and then it was found, that such income falls under head 'F', being "Income from other sources". The argument about accountancy methods, not only of the company, but of the association of Chartered Accountants, was also considered. Challapally Sugars case was explained, and was found to be different. It has been observed, that the phrase "actual cost" has not been defined in the Act, therefore, it has to be explained in the common parlance, and to find that out, the normal rules of accountancy, prevalent in the commercial and industrial circles were noted, but then the Hon'ble Supreme Court found, in Tuticorin's case [1997] 227 ITR 172 (SC)., that it ( Challapally Sugars' case [1975] 98 ITR 167(SC)) is clearly a different case, inasmuch as the question required to be decided is, as to whether a particular receipt is of the nature of the income, which is a question of law, required to be decided by the Court, on the basis of the provisions of the Act, and the interpretation of the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r these five heads can be treated as income of the assessee for the relevant assessment years. The Tribunal has held that all these amounts (under items Nos.1 to 4) received by the assessee have gone to reduce the cost of construction. These are in the nature of capital receipts which can be set off against the capital expenditure incurred by the assessee during the relevant assessment years." 12. Thus, with this finding, the Hon'ble Supreme Court concluded, with respect to the amounts, which had been borrowed by the assessee for construction of work, which were not immediately required, were put in short term deposits, and earned interest, which was held to be taxable, and that, the question is concluded by the decision in Tuticorin's case [1997] 227 ITR 172 (SC). However, while proceeding further, the Hon'ble Supreme Court at page 323, after recapitulating again the conclusions in Tuticorin's case [1997] 227 ITR 172 (SC) held as under:- "However, while interest earned by investing borrowed capital in short term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent sections comprised in certain parts, or groups, deal with the details of the different heads of the income, and in that process, the head "Income from other sources" is dealt with by the provisions of Section 56 onwards. Section 56(1) and (2) are relevant provisions in this regard, which may be reproduced for convenience, and they read as under:- 56. Income from other sources. - (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :- (i) dividends ; (ia) income referred to in sub-clause (viii) of clause (24) of section 2 ; (ib) income referred to in sub-clause (ix) of clause (24) of section 2 ; (ic) income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n "security" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). This Section 2(h) of the Securities Contracts (Regulation) Act, 1956, hereafter referred to as the Act of 1956, defines "securities" as under:- "(h)"securities" include- (i)shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities'." 19. With quoting the above provision we would not be blamed to be hastening, in coming to the conclusion, that the amount of applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation money, could not be used by the assessee, for any purpose whatever, other than those mentioned in Section 73(3) and (3A), and obviously on the allotment of the shares, the assessee was to take stock of the things, about the expenditure incurred by it, being the public issue expenses, and the interest accrued, obviously did reduce that expenditure, and in our view, it is rightly required to be adjusted against the expenditure, i.e. the assessee is entitled to claim amortization of the public issue expenses only, on the figure so reduced, after setting off, or adjusting, the interest accrued on the share application money lying with the bank, as mandated by Section 73 of the Companies Act. 24. The net result of the aforesaid discussion is, that the question as framed is answered in the manner, that the Tribunal was right in law in holding, that interest accrued on the share application money, lying with the Bank, under the mandate of Section 73 of the Companies Act, is not taxable as "Income from other source", and was required to be set off or adjusted, against the public issue expenses, so as to reduce the amount of public issue expenses, for the purpose of enabling the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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