2001 (4) TMI 197 - AT - Income Tax

Interest on Share Application Money Taxed as Income; No Deductions for Share-Issue Costs

The Tribunal upheld the authorities' decisions in treating the interest received on share application monies as income from other sources and not allowing ... Income from other sources - interest on share application money - capital accretion versus revenue receipt - set-off of pre-commencement share-issue expenditure - accounting treatment versus taxabilityIncome from other sources - interest on share application money - capital accretion versus revenue receipt - accounting treatment versus taxability - Interest earned on share application monies deposited with banks during the interim period prior to allotment is taxable as income from other sources in the hands of the company. - HELD THAT: - The Tribunal examined the factual position that share application monies were held in bank accounts pursuant to Company Act and related approvals but the interest accrued thereon accrued to the assessee-company's coffers after allotment and was not separately credited or refunded to applicants. Relying on precedents which treat interest as ordinarily revenue in nature and holding that accounting capitalisation cannot override tax provisions, the Tribunal found that the interest earned was not an accretion to capital for tax purposes and, although the company had not commenced business, such receipts fall under the head 'income from other sources' and are taxable. The Tribunal rejected the contention that the monies were trust funds making the interest non-assessable to the company, observing that the interest came into the company's receipt and therefore is taxable. [Paras 4]Interest on the share application money for the interim period is rightly assessed as income from other sources.Set-off of pre-commencement share-issue expenditure - accounting treatment versus taxability - Expenditure incurred in the process of issuing shares cannot be set off against the interest earned on share application monies before commencement of business. - HELD THAT: - The Tribunal considered the assessee's contention that share-issue expenses were directly linked to the generation of the interest and thus should be set off or capitalised (with any balance allowed under the statutory scheme). After reviewing authorities on whether pre-commencement expenditures or receipts linked to setting up business can be mutually adjusted, the Tribunal held that there is no provision in the Income-tax law permitting deduction or set-off of such share-issue expenses against other income before commencement of business. Accounting treatment or capitalisation does not confer a tax deduction; accordingly the claim to set off the share-issue expenditure against the interest was disallowed. [Paras 5]The authorities were correct in refusing to allow set-off of the share-issue expenditure against the interest; the claim fails.Final Conclusion: Both appeals by the assessee were dismissed: the interest on share application monies for the interim period was held taxable as income from other sources, and the claimed set-off of share-issue expenditure against that interest was rejected. Issues Involved:1. Treatment of interest received from bankers on share application monies as income.2. Allowance of expenditures incurred in the process of issuing shares against the interest received.Detailed Analysis:Issue 1: Treatment of Interest Received from Bankers on Share Application Monies as IncomeThe assessee challenged the authorities' decision to treat the interest received from bankers on share application monies as income. The interest amounts were Rs. 1,38,18,155 for the assessment year 1992-93 and Rs. 13,98,042 for the assessment year 1993-94. The assessee argued that the interest should not be treated as income from other sources since it was capitalized and not related to their business activity. The assessee contended that the share application money, kept in a bank account as per guidelines, acted as trust funds and did not form part of the company's general assets until the allotment of shares. Therefore, the interest accrued during this period should be considered an accretion to the capital and not income of a revenue nature.The authorities, however, treated the interest earned during the interim period as income from other sources and brought it into tax. The assessee's reliance on the ITAT, Madras Bench decision in Henkel Spic India Ltd. v. Dy. CIT was noted, where it was held that share application money did not form part of the company's general assets until the allotment of shares. The learned DR supported the authorities' decision, citing the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest income is of a revenue nature unless received as damages or compensation.The Tribunal, after considering the decisions in Henkel Spic India Ltd.'s case and Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, concluded that the interest earned on share application money should be treated as income from other sources. The Tribunal noted that although the share capital contribution money belonged to the expected allottees, the interest earned was received by the assessee-company after the allotment of shares. The interest income thus went to the company's coffers and should be taxed as income from other sources. The Tribunal also referred to the decisions of the A.P. High Court in CIT v. Derco Cooling Coil Ltd. and the Delhi High Court in CIT v. Modi Rubber Ltd., which held that interest earned on deposits of share capital is taxable as income from other sources.Issue 2: Allowance of Expenditures Incurred in the Process of Issuing Shares Against the Interest ReceivedThe assessee also challenged the authorities' decision not to allow the expenditures incurred in the process of issuing shares to be set off against the interest received. The assessee claimed deductions of Rs. 1,44,40,535 and Rs. 38,54,600 for the assessment years 1992-93 and 1993-94, respectively. The assessee argued that there was a direct nexus between the expenditure and the interest accrued, and both were capital in nature. Therefore, the share-issue expenditure should be set off against the interest, and any balance should be allowed under section 35D of the IT Act, 1961.The learned DR opposed this argument, citing several decisions, including CIT v. Autokast Ltd., Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, and Derco Cooling Coil Ltd.'s case. The Tribunal reviewed the cited decisions and concluded that the authorities rightly did not allow the assessee to set off the share-issue expenditure against the interest earned. The Tribunal noted that the expenses incurred in the process of issuing shares could not be allowed as deductions before the commencement of business, as there was no provision under the Income-tax Act for such deductions. The Tribunal referred to the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case, which held that interest income is of a revenue nature and should be taxed accordingly.Conclusion:The Tribunal dismissed both appeals filed by the assessee, upholding the authorities' decisions to treat the interest received on share application monies as income from other sources and not allowing the expenditures incurred in the process of issuing shares to be set off against the interest received.