2003 (2) TMI 59 - HC - Income Tax

Settlement - Whether the accrual of interest on the amount deposited is to be treated as income from other sources or not and as to whether amortisation granted by the respondent is correct in law? - I cannot but notice and observe that the Assessing Officer has not provided amortisation of expenditure which has been allowed by the Settlement Commissioner. The Settlement Commissioner has granted this benefit to the petitioner in terms of the Act. Therefore the petitioner cannot have any grievance of any substantial injustice to him in the light of the benefit in the given set of facts. question answered in afirmitive

Summary

Issues Involved:

1. Taxability of interest earned on excess share application money.
2. Applicability and interpretation of Section 35D of the Income-tax Act.
3. Jurisdiction of the High Court in interfering with the Settlement Commission's orders.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Excess Share Application Money:

The petitioner, a company involved in manufacturing alkaloids-based medicines, had issued shares that were oversubscribed, resulting in excess share application money. The interest earned on this excess amount was Rs. 2,04,80,212, which the petitioner claimed as capital reserve. The Settlement Commission, however, directed that this interest should be taxed as "income from other sources" for the assessment year 1993-94 and amortized the related expenses over ten years under Section 35D of the Income-tax Act. For the assessment year 1994-95, the gross interest income of Rs. 19,44,425 was similarly assessed and amortized.

The petitioner argued that the excess share application money did not form part of its capital and was temporarily held, thus the interest earned should not be taxed as income. However, the Settlement Commission, referencing the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172, concluded that the interest earned on such investments should be assessed as "income from other sources."

2. Applicability and Interpretation of Section 35D of the Income-tax Act:

The petitioner contended that Section 35D was wrongly applied. The Settlement Commission ruled that the public issue expenses should be amortized over ten years as per Section 35D. The petitioner argued that the expenses should be allowed in the same year they were incurred. The court upheld the Settlement Commission's decision, stating that the amortization of expenses over ten years was in accordance with the law.

3. Jurisdiction of the High Court in Interfering with the Settlement Commission's Orders:

The jurisdiction of the High Court to interfere with the orders of the Settlement Commission is limited. The court referenced the Division Bench decision in N. Krishnan v. Settlement Commission [1989] 180 ITR 585, which stated that interference is warranted only in cases of grave procedural defects or lack of nexus between the reasons given and the decision taken by the Settlement Commission. The court found no such defects in this case and thus upheld the Settlement Commission's order.

Conclusion:

The court dismissed the petition, affirming the Settlement Commission's decision to tax the interest earned on excess share application money as "income from other sources" and to amortize the related expenses over ten years under Section 35D. The court also reiterated its limited jurisdiction in interfering with the Settlement Commission's orders, finding no procedural defects or lack of nexus in the Commission's reasoning.