TaxTMI 
TaxTMI 
2016 (7) TMI 257
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 recorded under section 148(2) of the Act, which were not disposed off. 3. To delineate the issue, we shall take the facts concerning the assessment year 2004-05. On perusal of the assessment order, we find that the notice under section 148 of the Act was issued on 08.07.2010 which was duly served on the assessee on 26.10.2010. The assessee vide letter dated 26.11.2010 submitted that original return filed on 21.10.2004 may be taken as return filed in response to notice under section 148 of the Act dated 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the issue are that the assessee is a closely held company. It is engaged in the business of processing of milk and manufacturing of milk products. For the assessment year 2004-05, the assessee claimed interest expenses of Rs. 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 borrowing by the assessee as a positive act of lending by one and expense thereof by the other, coupled with an obligation of refund or repayment thereof are not present when the interest is paid on receipts in the nature of share application money. As per the Assessing Officer, the amount received being in the nature of share application money, the obligation of repayment of alleged borrowing is totally absent. The Assessing Officer also proceeded against the assessee on the premise that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 relevant A.Y. 2004-05, Rs. 28,72,918/- out of the above share application money standing in the books of the appellant was refunded to the share applicants along with interest of Rs. 23,04,273/-. However, the position is reversed when we 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 71,86,490 81,80,578 1,81,05,056 SAM allotted 2,37,05,000 - - ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness purposes or not and whether the appellant intended to allot the shares or not. It is not really relevant to go into the realm of 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 from the A.Y. 2000-2001, certain sums of money from the Directors and their relatives from time to time so that as on 31.03.2003, Rs. 5,95,70,652/- of share application money was still pending allotment. During the F.Y. 2003-04, relevant to the A.Y. 2004-05, during which period, the appellant received a further sum of Rs. 1,06,40,231/-, 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 0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id equity share held by such member as on the said date. Thus, the subscribed and allotted share capital increased from Rs. 2,99,75,000/- to double that figure of Rs. 5,99,50,000/- in the year 2007 and shares to the existing share holders were issued to the tune of Rs. 2,99,75,000/-. Therefore, in the A.Y.2007-08, the share allotment was primarily made by transfer of reserves, i.e. capitalization of profit for issue of the 29,97,500 bonus shares. This act on the part of the 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 capital outlay, even though some part of the same might have been utilized for business purposes, and hence the facts of the present case lie on a different plane than the facts before the Pune ITAT in Western India Forg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut 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 and conditions, the assessee cannot be blamed for making payment of interest thereon at a reasonable market rate. The Ld. AR referred to the final accounts and cash flow statements filed with the Paper Book and submitted that a perusal thereof would show that the entire amount has been deployed for business purposes. The interest expenditure incurred to retain the share application money is thus in the revenue field. Therefore, the contention of the revenue that the expenditure is not allowable 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 inheren....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Enterprises Vs. CIT 260 ITR 341 3. India Cements Ltd. Vs. CIT 60 ITR 52 4. Challapalli Sugard Ltd. Vs. CIT 98 ITR 167 23.1. However, the AO was not satisfied with the explanation given by the assessee. Distinguishing the various decisions cited before him and relying on the various decisions the AO disallowed 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 Forging Ltd. vide ITA No.419/PN/2002 were brought to the notice of the learned CIT(A). 25. Based on the arguments advanced by the assessee and relying on the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. (Supra) the learned CIT(A) deleted the addition by holding as under : "4.3 I have carefully considered facts of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 India Forging Ltd ITA No.419/PN/2002 dated 24-07-2007 has considered this reason stated by the AO that it was not obligatory on the part of the appellant company to pay the interest on share application money pending allotment. The Hon'ble ITAT, Pune has rejected the above contention relying on the decision of Hon'ble Bombay High Court in the case of Sales Magnesite 214 ITR 1, wherein it has been held that even expenditure incurred voluntarily on the ground of commercial expediency to facilitate 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....