2014 (12) TMI 146 - HC - Income Tax

Interest income on share application money - Whether the Tribunal was right in holding that interest income on the share application money deposited in the bank was the income accrued Held that - The Tribunal was rightly of the view that once it is held that the share application money received by the assessee was for all intents and purposes, except the prohibition put by the provision of section 69 of the Companies Act, the assessee s money, the natural corollary follows that the income earned on deposits of such money with the banks, if any, also belonged to the assessee and consequently was liable to be taxed in accordance with the system of accounting followed - though the assessee might have not withdrawn the deposits and interest but the banks had duly credited the interest upto 31.3.95 because it is mandatory for the banks to provide for interest payable or received on Mercantile System and therefore, the assessee cannot say that the interest upto 31.3.95 was not credited bank on such deposits - assessee has not furnished any evidence to the contrary except the claim the interest was offered for taxation in the AY 1996-97 thus, the interest accrued on Fixed Deposits up to 31.3.95 was legally assessable in the hands of the assessee company in AY 1995-96 and AO was quite justified in assessing the same on accrual basis in AY 1995-96 thus, the order of the Tribunal is upheld decided against assessee.

Summary

Issues:
- Interpretation of interest income on share application money deposited in the bank for taxation purposes.

Analysis:
The appellant-assessee challenged an order by the Income Tax Appellate Tribunal regarding the taxation of interest income on share application money deposited in the bank. The appellant company received share application money during the relevant assessment year and kept it in the bank. The Assessing Officer taxed the interest earned on this deposit, which was contested by the appellant. The CIT(A) initially allowed the appeal, but the ITAT reversed this decision. The appellant argued that the Tribunal erred in its judgment and cited relevant case law. The Tribunal held that the interest earned on the deposited share application money belonged to the assessee and was taxable. It rejected the claim that the appellant followed a cash accounting system and reinstated the Assessing Officer's decision to tax the interest income. The High Court agreed with the Tribunal's reasoning and dismissed the appeal, ruling in favor of the revenue authorities.

This case involved the interpretation of whether interest income on share application money deposited in the bank was taxable in the hands of the assessee. The Tribunal determined that the interest earned on such deposits belonged to the assessee and was liable to be taxed based on the accounting system followed. The Tribunal rejected the appellant's claim of following a cash accounting system, citing provisions of the Companies Act mandating maintenance of accounts on a mercantile basis. The Tribunal concluded that the interest accrued on fixed deposits was assessable in the relevant assessment year and upheld the Assessing Officer's decision to tax the interest income.

The High Court concurred with the Tribunal's analysis and upheld the decision to tax the interest income on the deposited share application money. The Court found the Tribunal's reasoning to be sound and dismissed the appellant's appeal. It emphasized that the appellant's argument regarding the accounting system did not hold, as the Companies Act mandated maintaining accounts on a mercantile basis. The Court ruled in favor of the revenue authorities, affirming the taxation of the interest income in question.