In the Commissioner of Income Tax vs. M/s. Shree Rama Multi-Tech Ltd. the Supreme Court held that the interest income earned out of the share application money is liable to be set off against the public issue expenses.
The assessee-respondent runs a business of manufacturing multi-layer tubes and other specialty packaging & plastic products. The assessee filed income returns declaring a total income of Rs.20 Crores. However, the Assessing Officer (A.O.) after assessing ordered taxable income to the tune of Rs.27 Crores, which was later modified in light of the decision of the Tribunal. The Tribunal had directed for re-adjudication on certain matters including that of setoff as claimed under the head of interest on share application money.
In pursuance of the Order passed by the Tribunal dated 16.12.2004, the total income was re-determined at Rs. 17.3 Crores by the Assessing Officer but was restricted to Rs.20 Crores in view of proviso to Section 240(b) of Income Tax Act, 1961. Aggrieved, the respondent pleaded before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) directed the A.O. to grant relief by recomputing the income and modify the tax calculation without applying the proviso to Section 240 of the IT Act. In the meanwhile, reassessment proceedings were initiated in accordance with Section 147 of the IT Act on the ground that the Assessing Officer has reason to believe that income for the said Assessment Year has escaped assessment.
Finally, the Assessing Officer (A.O.) determined the total income at Rs 20,66,29,165/. Dissatisfied with the assessment order in not allowing set off of the interest income against the public issue expenses in accordance with the directions of the Tribunal while rejecting the claim for the deduction of interest income of Rs. 1.71 Crores from public issue expenses, the respondent appealed before the CIT(A). the CIT(A) partly allowed the claim of the respondent but affirmed the decision of the A.O. in not allowing set off of interest income from share application money. Both revenue & the assessee-respondent approached the Tribunal for relief. The Tribunal allowed the claim of the respondent. Revenue filed the appeal before High Court, but the High Court upheld the decision of the Tribunal. Finally, the Revenue appealed before the Supreme Court.
The Counsel for the Revenue contended that the law is well settled that the interest income is always regarded as of revenue nature unless it is received by way of damages or compensation and that the case was not related either to damages or compensation and that the High Court had erred in arriving at such conclusion.
The Counsel for the assessee-respondent relying on the case of Commissioner of Income Tax vs. Bokaro Steel Ltd. argued that the judgment of the High Court was well within the parameters of law and required no interference.
The Bench comprising of Justice R.K. Agrawal & Justice Abhay Manohar Sapre observed that the interest earned from the share application money was inextricably linked with the requirement of the company to raise share capital and was thus adjustable towards expenditure involved for the share issue. Relying on the common rationale arising out in the case of Commissioner of Income Tax vs. Karnal Cooperative Sugar Mills Ltd. the bench observed “In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be set off against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue.”
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