2005 (2) TMI 67 - HC - Income Tax

Computation of capital employed under section 80J - Whether Tribunal was right in law in holding that the share application money of Rs. 3,05,000 received, but pending allotment on the first day of the computation period, i.e., May 13, 1979, is not to be treated as part of the capital for the purposes of computation of capital employed under section 80J? - It is clear that the amount of share application money can only be deducted out of the value of assets, if it were to be treated as borrowed money or debt owed, by the assessee. - The process of allotment of shares was still not over, there was no debt in existence owed by the assessee to any applicant on the first day of the computation period. - We, therefore, answer the question in the negative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues:
1. Interpretation of whether share application money is part of the capital for computation under section 80J of the Income-tax Act, 1961.

Analysis:
The case involved a limited company that received share application money of Rs. 3,05,000, which remained pending allotment at the end of the financial year relevant to the assessment year 1980-81. The main question was whether this share application money should be considered part of the capital employed for the purpose of computation under section 80J of the Income-tax Act, 1961. The Assessing Officer treated the share application money as a debt, reducing it from the total assets for computing capital employed. The Commissioner of Income-tax (Appeals) accepted the company's claim that the share application money was not a loan or borrowing and hence should not be deducted from the total assets. However, the Tribunal reversed the Commissioner's decision, stating that until shares were allotted, the money remained with the company in trust and could not be considered as capital for section 80J deduction.

The Revenue argued that the share application money should be treated as a debt due until shares were issued, citing a decision by the Madras High Court. The court distinguished this case from the Madras High Court decision, emphasizing that the issue in the present case was different. The court also referred to a Karnataka High Court judgment, which held that share application money was not a debt owed by the company for computing capital under section 80J. The court analyzed the relevant provisions of section 80J, highlighting that the share application money could only be deducted if considered "borrowed money" or "debt owed" by the assessee. Since the money was paid for a specific purpose and refundable only if shares were not allotted, it was contingent upon the allotment process, and hence not a debt owed by the company on the first day of the computation period.

In conclusion, the court ruled in favor of the assessee, stating that the share application money was not to be treated as part of the capital for computation under section 80J of the Income-tax Act, 1961. The court emphasized that until the shares were allotted, there was no debt owed by the company to any applicant, and therefore, the share application money could not be considered as borrowed money or debt for the purpose of deduction under section 80J.